- The FBI Considers The IRS & DOJ, Domestic Terrorists
Submitted by Thad Beversdorf via FirstRebuttal.com,
Eventually it was bound to happen. The ever increasing ambiguous laws that allow the government to prosecute, or worse, simply negate all Constitutional protections of its citizens would come back to hang them. In an unusual circumstance, what is essentially one party in D.C. when it comes to matters of covering up governmental criminality, has split into a two party system. Specifically, a sect of the Republican party known as Tea Partiers pushed unrelentingly to expose the criminality acted upon members of its own tribe by various government agencies.
The Tea Party was formed by a group of individuals around the country who wanted to get back to the ideals of the Constitution i.e freedom. But the Constitution is kryptonite to the system. And so those who organize to promote the Constitution were targeted by the highest levels of government. What better weapon to attack those whose intention is to defend the Constitution than an unconstitutional agency that has essentially unquestioned authority. After all it is always unclear who watches the watchman. Well in this particular case, the FBI and DOJ would seem to have jurisdiction over actions consistent with those of the IRS.
Under the FBI’s own definition of a ‘Domestic Terrorist’ one MUST consider the IRS to be a terrorist organization as evidenced by the very recent discoveries surrounding the IRS’s own actions.
“Domestic terrorism” means activities with the following three characteristics:
- Involve acts dangerous to human life that violate federal or state law;
- Appear intended (i) to intimidate or coerce a civilian population; (ii) to influence the policy of a government by intimidation or coercion; or (iii) to affect the conduct of a government by mass destruction, assassination. or kidnapping; and
- Occur primarily within the territorial jurisdiction of the U.S. …”
While the first characteristic seems to imply violence is necessary it should be noted that under the FBI’s definition of ‘International Terrorism’ they explicitly include ‘Violent acts’ within the definition.
“International terrorism” means activities with the following three characteristics:
- Involve violent acts or acts dangerous to human life that violate federal or state law;
- Appear to be intended (i) to intimidate or coerce a civilian population; (ii) to influence the policy of a government by intimidation or coercion; or (iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping; and
- Occur primarily outside the territorial jurisdiction of the U.S., or transcend national boundaries in terms of the means by which they are accomplished, the persons they appear intended to intimidate or coerce, or the locale in which their perpetrators operate or seek asylum.*
The distinction of violence within the international but not domestic definition is surely not an oversight. But by doing so it leaves open the opportunity to define a non violent act to be construed as indirectly dangerous to human life (e.g. Snowden’s actions). But certainly wrongfully putting someone inside a federal prison for tax evasion would be considered dangerous to human life. According to the following revelations through emails obtained via court orders by Judicial Watch (a nonpartisan government watchdog), that is exactly what the IRS, DOJ and FBI were conspiring to do.
“These new documents show that the Obama IRS scandal is also an Obama DOJ and FBI scandal,” said Judicial Watch President Tom Fitton. “The FBI and Justice Department worked with Lois Lerner and the IRS to concoct some reason to put President Obama’s opponents in jail before his reelection. And this abuse resulted in the FBI’s illegally obtaining confidential taxpayer information. How can the Justice Department and FBI investigate the very scandal in which they are implicated?”
On April 16, 2014, Judicial Watch forced the IRS to release documents revealing for the first time that Lerner communicated with the DOJ in May 2013 about whether it was possible to launch criminal prosecutions against targeted tax-exempt entities. The documents were obtained due to court order in an October 2013 Judicial Watch FOIA lawsuit filed against the IRS.
Those documents contained an email exchange between Lerner and Nikole C. Flax, then-chief of staff to then-Acting IRS Commissioner Steven T. Miller discussing plans to work with the DOJ to prosecute nonprofit groups that “lied” (Lerner’s quotation marks) about political activities…”
But it begs the question then again, if the DOJ and FBI are also implicated in the domestic terrorism (according to the FBI’s own definition) who is left to prosecute?
Well it is we the people. It shouldn’t matter if you are Democrat or Republican. We have a clear and identifiable gross abuse of government at the highest levels. The abuse falls under the FBI’s own definition of domestic terrorism, a definition they would not hesitate to use against you or your family if it suited their objectives. And so call it the Golden Rule or Kantian Categorical Imperatives or simple justice, but it is imperative to the people’s rule over its representative governing body to prosecute all involved to the highest levels and to the maximum penalty of the law.
The abuse by those who have been granted incredible powers under the trust of the nation need to be dealt the most severe consequences. Our very response to this matter will underpin the relationship between the people and its government for generations.
If we allow such astonishing government abuses, which have now been overtly evidenced and confessed by at least some of the guilty parties, to be lightly dealt with then we blatantly fail to defend every subsequent generation of Americans from ever worse abuses. We fail as Americans. The result of this investigation over the coming months will likely show that we the people have lost all sense of what it means to be an American. That said, I remain doubtingly hopeful that I am proven wrong.
- Mapping 1083 People Killed By Cops In The Last Year
One year ago, an 18-year old black man was fatally shot in Ferguson, Missouri by a police officer. Michael Brown’s death ignited a country-wide debate about the excessive amount of violence that occurs at the hand of police – particularly to African-Americans. Since then, at least 1,083 people have been killed by police in America…
California has been at the forefront of police violence, with at least 176 deaths alone. Five cities in the United States have had more than ten deaths over this time period: New York, Houston, Oklahoma City, Phoenix, and Los Angeles.
All but two states (Vermont and Rhode Island) have had fatal incidents involving police.
- John Kerry Warns "Dollar Will Cease To Be Reserve Currency Of The World" If Iran Deal Rejected
Scaremongery… or maybe the whole point, as Obama's former chief economist noted, is to lose reserve status. Take That China!!
As Jared Bernstein previously explained…
There are few truisms about the world economy, but for decades, one has been the role of the United States dollar as the world’s reserve currency. It’s a core principle of American economic policy. After all, who wouldn’t want their currency to be the one that foreign banks and governments want to hold in reserve?
But new research reveals that what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.
The reasons are best articulated by Kenneth Austin, a Treasury Department economist, in the latest issue of The Journal of Post Keynesian Economics (needless to say, it’s his opinion, not necessarily the department’s). On the assumption that you don’t have the journal on your coffee table, allow me to summarize.
It is widely recognized that various countries, including China, Singapore and South Korea, suppress the value of their currency relative to the dollar to boost their exports to the United States and reduce its exports to them. They buy lots of dollars, which increases the dollar’s value relative to their own currencies, thus making their exports to us cheaper and our exports to them more expensive.
In 2013, America’s trade deficit was about $475 billion. Its deficit with China alone was $318 billion.
Though Mr. Austin doesn’t say it explicitly, his work shows that, far from being a victim of managed trade, the United States is a willing participant through its efforts to keep the dollar as the world’s most prominent reserve currency.
When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).
This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment.
Note that as long as the dollar is the reserve currency, America’s trade deficit can worsen even when we’re not directly in on the trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus export revenues in Treasury bonds, South Korea nudges up the relative value of the dollar against our competitors’ currencies, and our trade deficit increases, even though the original transaction had nothing to do with the United States.
This isn’t just a matter of one academic writing one article. Mr. Austin’s analysis builds off work by the economist Michael Pettis and, notably, by the former Federal Reserve chairman Ben S. Bernanke.
A result of this dance, as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market. Mr. Austin argues convincingly that the correct metric for estimating the cost in jobs is the dollar value of reserve sales to foreign buyers. By his estimation, that amounted to six million jobs in 2008, and these would tend to be the sort of high-wage manufacturing jobs that are most vulnerable to changes in exports.
Dethroning “king dollar” would be easier than people think. America could, for example, enforce rules to prevent other countries from accumulating too much of our currency. In fact, others do just that precisely to avoid exporting jobs. The most recent example is Japan’s intervention to hold down the value of the yen when central banks in Asia and Latin America started buying Japanese debt.
Of course, if fewer people demanded dollars, interest rates – i.e., what America would pay people to hold its debt – might rise, especially if stronger domestic manufacturers demanded more investment. But there’s no clear empirical, negative relationship between interest rates and trade deficits, and in the long run, as Mr. Pettis observes, “Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits, which are handicapped by slower growth and higher debt.”
Others worry that higher import prices would increase inflation. But consider the results when we “pay” to keep price growth so low through artificially cheap exports and large trade deficits: weakened manufacturing, wage stagnation (even with low inflation) and deficits and bubbles to offset the imbalanced trade.
But while more balanced trade might raise prices, there’s no reason it should persistently increase the inflation rate. We might settle into a norm of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a price worth paying for more and higher-quality jobs, more stable recoveries and a revitalized manufacturing sector. The privilege of having the world’s reserve currency is one America can no longer afford.
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In the global race to debase, Reserve currency status is a curse!
- An Economic Earthquake Is Rumbling
Submitted by Bob Livingston Via Personal Liberty Digest,
While the people sleep, an economic earthquake rumbles underneath. The day that they begin to feel the quake draws near.
History will record that in this decade more people will lose more money (forget about the trillions of dollars already lost) than at any time in our history, including during the Great Depression.
At the same time, a very small group has made and will make huge sums of money.
During the Y2K scare (a real hoax) many people stored food. Then, after Y2K, many people wanted to dump their cache; and some did.
We advised readers at the time to store food simply because of the crisis world we live in, but to store those foods that you could rotate and consume. Stored food is a hedge against inflation. It’s a hedge against natural disaster. It’s a hedge against economic collapse. It was our advice before, and it has been our advice since.
This advice is still valid. People who don’t have some stored food don’t realize how dependent they are on the system and government. Of course, the system was designed and created to make the people dependent on government. That makes them easier to control.
Many people have been in hard times since 2008, thanks to bursting housing and derivatives bubbles — both fueled by the Federal Reserve’s money printing and both predicted by meand by many other writers. For those of us who are not well-connected (those of us who are not in the 1 percent), there has been no relief. While the banksters got bailouts and Wall Street and the banksters benefited from the money printers, the middle class was impoverished. Savings were wiped out.
More working-age people than ever before are not working. More young workers than ever before are still living with their parents because they are either out of work or working at low-paying jobs. More people than ever before are on the government dole. Welfare pays more than most jobs. Retirement funds have been cashed out and spent on living expenses.
Wages have not kept up with inflation — not the phony inflation numbers peddled by the Fed and the propaganda media, but real inflation.
Printing-press money is fertile ground for expanding world crisis. Crisis is excellent cover for national and international chicanery. Boy, we have it!
How can anyone who is paying attention not recognize these tremors for what they are?
The default rate of companies with the lowest credit rating is at its highest level since 2013.
The auto loan debt bubble is at $900 billion, fueled by easy credit and long-term loans (more than 60 months on even used cars) that put the car buyer upside down as he drives off the lot and keeps him there. U.S. mortgage holders are carrying the most non-mortgage debt they’ve had in more than 10 years; 81 percent of that is automobile debt. Student-loan debt held by mortgage holders is the highest it’s ever been, with the average balance owed at nearly $35,000. Almost 5.7 million homeowners remain underwater on their mortgages.
We see bad inflation in the immediate future. Inflation in housing and consumer goods exceeds the Fed’s stated inflation goal of 2 percent, but Fed Chair Janet Yellen is talking about raising interest rates to kick-start more inflation. But a deflationary collapse has started in commodities, oil and gold. The dollar is rising. Today’s dollar index chart mirrors the dollar index chart pre-2008 collapse.
U.S. dollar assets are in a slow-motion crash. A financial asset is any paper asset, such as CDs, bank accounts, U.S. government bonds, etc. While we sleep, we are losing our savings. The U.S. stock market is in a QE-driven bubble that will soon burst.
Inflation and deflation are both forms of wealth destruction and impoverishment. Now think about this: The U.S. government has an official and stated policy of currency destruction through inflation. This is voluntary destruction of the currency. If instead we have deflation because of the collapse of debt, we still have currency destruction.
Besides, the U.S. dollar and U.S. financial assets pay almost no interest. Plus, it’s now official U.S. and World Bank policy to take your money in the event of another collapse as we saw in 2008. They call it a “bail in.” That is a code word for “what’s yours is really theirs.”
Wisdom dictates getting out of dollar assets ASAP! I long ago, way before the 2008 crash, cashed out my IRA and took the penalty. Many of the readers of my Letter did, too. It was well worth it. The government is also eyeballing your IRA, 401(k) and pension even now. Stealing it from you and replacing it with government paper would knock a big hole in the so-called “government debt” and prop up the system for a while longer.
The Greeks ignored the warning signs of their failing economy to their detriment. They were left standing in long lines, waiting to withdraw meager amounts of their own rationed cash, and diving in dumpsters for food because the shelves were bare.
Sooner or later, inflation skyrockets. Paper money economies always crash in the end, and their currencies end up worthless.
At some point, there will be a panic. Many people will realize that the debt pyramid is collapsing. Most who see what’s happening will not act. The herd instinct suggests that only a few will bail out in time; but the majority will act in panic, too late. We saw it in Greece. We saw it in Cyprus.
“Oh, yes,” you say. “It cannot happen here in the U.S.; or if it does, it won’t be for some time.” But it has awesome potential at any time. Why in the world take the chance? Prudent and wise people always plan for eventualities that the crowd can’t see.
In hyperinflation, there is actually a shortage of paper money. The paper money production cannot keep up with prices. Now that we have electronic money, prices and inflation can go higher than the mind can imagine. The Fed is manipulating the consumer price index to cover inflation. This allows them to maintain zero interest rates on U.S. debt, but it also means zero interest on savings.
Things are in place for huge inflation now. They think the people won’t know if they just kill the indicators. This is really a fantasy world. Since the money creators own the mass media, it seems that they can make the people believe anything, more fiction than fact.
When we tell you to buy gold and silver coins and gold stocks; to store some food, water and ammo; and to buy Swiss annuities in Swiss francs, we are talking preservation of your assets, as well as survival financially and physically.
Don’t trust the banks. Most are bankrupt. Don’t put your gold and silver coins in the safe deposit box. Keep them at home and keep them secret. Don’t keep more cash in the bank than is necessary to cover about a month’s worth of bills. This is a flashing red alert.
Many tens of thousands of people who have their trust in the government system (U.S. currency) are headed dead ahead into impoverishment.
- Global Markets Turmoil After China Extends Currency War To 2nd Day – Devalues Yuan To 4 Year Lows
Chinese stocks opened lower, extending yesterday's losses, after The PBOC weakened its Yuan FIX dramatically for the 2nd consecutive day (from 6.1162 Monday to 6.2298 last night to 6.3306). Offshore Yuan fell another 9 handles against the USD after China closed but was hovering at 6.40 as the market opens (now at 11 hnadles weaker at 6.51). Bear in mind the utter devastation in Chinese credit markets that data showed occurred in July, it remains ironic that for the 3rd days in a row, Chinese margin debt balances grew. Before the real fun and games started, Chinese officials once again exclaimed that their data is real (denying any mismatches between GDP Deflator and CPI) as China CDS spiked to 2 year highs. US equity futures are tumbling, bonds bid, and gold bouncing off the initial jerk lower.
PBOC makes some comments (like last night's)…
- *PBOC SAYS NO ECONOMIC BASIS FOR YUAN'S CONSTANT DEVALUATION
- *PBOC SAYS YUAN WON'T CONTINUOUSLY DEVALUE
- *PBOC SAYS MOVE OF YUAN REFERENCE PRICE IS NORMAL
- *CHINA YUAN MECHANISM CHANGE MAKES FIXING RATES MORE REASONABLE
And then there is this (from Xinhua):
China's state-owned news 4-year lowsagency Xinhua said: "China is not waging a currency war; merely fixing a discrepancy."
"The central parity rate revision was designed to make the yuan more market-driven and in line with market expectations," it said in a comment piece published on its web site.
"The lower exchange rate was just a byproduct, not the goal."
The "one-off" adjustment has now become two… some context for the size of this move…
- *MNI: CHINA PBOC WED YUAN FIXING LOWEST SINCE OCT 11, 2012
Onshore Yuan breaks above 6.41 – trades to 4 years lows against the USD…
US markets are reacting dramatically…
US Treasury yields are collapsing…
Offshore Yuan is collapsing…
- *CHINA SETS YUAN REFERENCE RATE AT 6.3306 AGAINST U.S. DOLLAR
- *OFFSHORE YUAN TUMBLES 1.6% AFTER PBOC SETS FIXING LOWER
War is begun… (via Ransquawk)
Offshore Yuan has been leaking lower since China closed…
Yesterday was mixed with the broadest indices all ending in the red…
- *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.8% TO 3,982.8
- *CHINA FTSE A50 STOCK-INDEX FUTURES EXTEND LOSSES TO 2.6%
But…
- *SHANGHAI EXCHANGE MARGIN DEBT RISES FOR THIRD DAY (will they never learn?)
- *CHINA STATS OFFICIAL DENIES MISMATCH OF GDP DEFLATOR AND CPI (if you just keep saying evcentually everyone will believe)
GDP deflator index reflects prices of all final goods and services produced in China, much broader than that of CPI which only reflects consumer prices, Xu Xianchun, a deputy head at National Bureau of Statistics, writes in an article in People’s Daily.
We think they do protest too much.
China Credit Risk surged to 2 year highs…
* * *
There’s been plenty of talk about what China’s "unexpected" (to everyone but us, apparently) move to devalue the yuan will mean for the country’s flagging economy and for Beijing’s efforts to promote the internationalization of the renminbi via a bid for SDR inclusion, but as Chinese stocks open for trading on the "day after" (so to speak) we thought it worth previewing what the move might mean for Chinese equities.
We present the following breakdown from Goldman with the obvious caveat that, as Tuesday’s farcical data from the PBoC on loan growth in July made abundantly clear, when it comes to China’s equity markets, one must always factor in the plunge protection "national team."
* * *
From Goldman
Our framework to think about FX depreciation on equities – Three main transmission mechanisms
We try to assess the potential impact of RMB depreciation on the equity markets through various micro and macro channels. In general, we think the macro-to-market transmission mechanisms (especially an unexpected one as in this case) could be summarized as follows:
Translation exposure—Universally, offshore-listed Chinese companies’ book values and earnings (if CNY-denominated) will be deflated when they are being converted into HKD or USD for financial reporting purposes. Lower book values and earnings would increase the P/B and P/E ratios, effectively making Chinese companies less attractively valued to USD-based investors.
Transaction and economic exposure— Assuming other non-USD currencies did not move along with the CNY, export-oriented companies would likely benefit due to a more competitive exchange rate and a mostly RMB cost base.
Impact on equity risk premium (ERP)—Using the exchange rate as a policy tool to manage the cycle should render a higher level of domestic monetary policy independence for policymakers and should partly ease investor concern about further domestic imbalances (e.g. over-investment, overcapacity, debt buildup, etc). Barring an abrupt depreciation case, the higher FX flexibility may shore up investor confidence on China's short-term growth outlook, thereby helping to suppress the currently-high equity risk premium, which seems to have priced in significant macro and micro growth risks, in our view.
That said, the consequential uncertainty regarding capital outflows could offset some of the positives.
Impact on equities: Not all depreciations are created equal
The abovementioned transmission mechanisms do not take into account the magnitude of and the speed at which the depreciation may take place. We aim to better quantify the market ramifications based on the following hypothetical scenario:
– One-off reset for now, and moderate depreciation leading up to and post the SDR decision: Assuming the RMB doesn't significantly further depreciate by the end of this year, we believe the macro growth impact will be modest, and the ramifications will likely manifest primarily in the stock markets through the translation and transaction/ economic channels.
At the stock level, we identify stocks which may be disproportionately impacted from a few different angles and approaches:
1) GS/GH covered stocks for which our analysts see highest positive and negative earnings sensitivity to 1% of RMB depreciation vs. the USD
2) Export-oriented companies (not only GS covered names) which have high US revenue exposure
3) Stocks (not only GS covered names) which have relatively high USD-denominated debt and financial leverage
(ZH: And here's a look at the bigger picture based on historical episodes of depreciation):
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And by the look of it, FX carry traders are expecting more volatility to remain the norm… Last time we saw this – in 2011, it too a year for vol to normalize…
- *VOLATILITY OF YUAN FIXING COULD RISE TEMPORARILY: PBOC
As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.
Charts: Bloomberg and Goldman Sachs
- How Much More Faith In Central Banks Is Left?
Carry traders just got their fingers burnt by central bankers, again.
As Bloomberg reports,
The People’s Bank of China’s decision to cut its daily reference rate by 1.9 percent triggered the yuan’s biggest one-day drop since the nation ended a dual-currency system in January 1994. That’s bad news for carry traders, drawn to the yuan by its stability. Until Tuesday’s surprise move, the central bank kept it in a tight range of 6.1887 to 6.2205 against the dollar since the start of April, according to prices compiled by Bloomberg.
The PBOC’s decision is just the latest misfortune for these traders.
A Deutsche Bank index of carry trades had already dropped to 510.31 Monday, from 546.71 at the end of last year, after the Swiss National Bank ditched its exchange-rate cap in January, sending the franc soaring and wiping out returns.
“There are people who have seen the implausibility of China devaluing — because they said they wanted stability — as justifying owning the currency in one form or another, simply for carry,” said Kit Juckes, a London-based strategist at Societe Generale SA. “It’s another domino that has fallen.”
Investors in carry trades borrow in one currency to invest in another where interest rates are higher. They profit both from the rate differential and any appreciation in the purchased asset. Higher volatility can hurt returns because adverse price moves can wipe out the benefit from the pick-up in rates.
Twice in eight months is enough to shatter anyone's illusion that central banks really have control. But perhaps just as worrisome for the central-bank-omnipotence meme, is how last night's action was translated to the masses (as Epsilon Theory's Ben Hunt explains)
Everything under heaven is in chaos; the situation is excellent.
? Mao Zedong (1893 – 1976)A quick email on China’s currency devaluation last night. The news itself is big enough, but it’s the Narrative that’s developing around the devaluation that has my risk antennae quivering like crazy. What do I mean? I mean that initial media efforts to portray the devaluation as a one-time “adjustment” that’s in-line with prior policy have been overrun by stories of “shock” and disjuncture. This is true even within Rupert Murdoch’s various media microphones, which tend strongly to toe the Beijing party line. Moreover, the devaluation is not being described in Western media as Chinese “stimulus”, which it surely is and would send markets higher if portrayed in this light, but as Chinese “currency competition” and as a sign that the growth problems in China are more severe than Western central bankers would like to believe. Or more precisely, would like to have YOU believe.
What’s the Truth with a capital T about Chinese growth, Fed intentions, and the future price of growth-sensitive assets like oil? I have no idea and neither does anyone else. Seriously.
But what I do know is that the Common Knowledge about Chinese growth – what everyone thinks that everyone thinks about Chinese growth – is dramatically changed for the worse today, and it’s a change that will accelerate unless the Narrative shifts. That could happen. I still have nightmares about how the Narrative around the ECB’s OMT program shifted from “Draghi’s Blunder” to “Draghi’s Bold Move” within a single day in the pages of the Financial Times in the summer of 2012. But unless and until that Narrative shifts, the path forward for the Fed just got much more perilous.
And that’s why the 10-year US Treasury is at 2.12% as I write this note. Unless and until that Narrative shifts, the path forward for oil and any other global growth-sensitive asset or security just got much more perilous. And that’s why oil is at $43 as I write this note.
One last point, focused on what’s next for China. As with everything else here in the Golden Age of the Central Banker, my crystal ball is broken. But I think that I’ve got the right lens for viewing China and its political dynamics, and you can read about it in two Epsilon Theory notes: “The Dude Abides: China in the Golden Age of the Central Banker” and “Rosebud”.
As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.
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Change is afoot.
- The Fed Is Out Of Options, "QE Is All It Can Do Here" Art Cashin Predicts
Weakness in commodities "is not transitory," Art Cashin tells CNBC, if you look at things like copper, "this is really a deflationary push… where things can get a little out of control." The Fed says they must get off zero interest rates because,, as Cashin notes, "they can't do anything else." However, as the venerable floorman who has seen it all explains, "they're in a kind of silly loop where they did QE expecting a reaction… didn't get it.. and then they did QE again because it didn't live up to their expectations… but I think they have no other options, if things get negative on the economy, QE is all they can do."
Which is exactly what we said a month ago…
GUNDLACH SAYS IF FED TIGHTENS, WILL HAVE TO CUT AGAIN. Actually it will have to do QE4 which is the whole point
— zerohedge (@zerohedge) July 15, 2015
Even the CNBC anchors realize the folly of Fed ways now, noting "but aren't they just pushing on a string?" Indeed they are and as Scotiabank's Guy Haselmann noted earlier, it will cost us…
Fed policy today and over the past several years may prove to be counter-productive in the long-run.
Sustainable growth is best served by an interest rate where capital is deployed efficiently. The long-run consequences of policy during the past few years could easily mean lower long-run potential growth and inflation. Today’s consumption and market speculation was paid for with huge amounts of accumulated debt.
Tomorrow’s revenues will have to be steered toward servicing that debt. Future revenue will also have to replenish the deficient levels of R&D and infrastructure investment of the past few years.
Cashin explains The Fed's bind…
h/t Lesley M
- The Cable Industry's Scariest Chart
Recent price volatility in the media sector got us wondering: is “Cord cutting” the home cable box in favor of online entertainment really hitting critical mass? To answer that question, ConvergEx's Nick Colas turned to our old friend Google Trends.
This resource allows you to track how many Americans are searching the Internet for terms like “Cancel cable” or “Netflix” and see multiyear trends in such activity. In a representative cross section of 9 key searches we find that yes, consumers are exploring their options but it is early days yet. “Cancel cable” is hitting new highs in terms of search volume, but “Get cable” searches still outnumbers it by 9.9x. The bad news: 5 years ago the ratio was 14x.
As for content searches, the search data shows a mixed bag. “HBO” searches are ramping higher, but “ESPN” and “Nickelodeon” are solidly lower.
The big three traditional networks – ABC, NBC, and CBS – are all lower as well. The upshot is that the media landscape has been in flux for several years – Wall Street is only beginning to catch up now. That means more volatility to come as investors begin to discount a distinctly more uncertain future for these names.
You can date the modern era for entertainment to a very specific date: October 23, 2001. That is when Steve Jobs announced the launch of the iPod to a cluster of obviously skeptical (and occasionally bored) journalists. The presentation is vintage Jobs, but without the fanboy hype and spontaneously raucous applause that would be hallmarks of later Apple product launches. Indeed, Jobs sounds at times to be a tad uncomfortable, even as he walks through the merits of a hard drive based music player. Customer acceptance was slow. It took Apple three years to sell 3 million units. Things finally started to click in 2004, with Jobs making it to the cover of Newsweek flashing a fourth generation iPod with the words “iPod, Therefore i Am”.
The rest is pretty much history. The iPod led to the iPhone – that launch presentation was a good deal better received – in 2007 and the iPad in 2010. The point here is that even in the supposedly fast-paced world of consumer technology, mass adoption takes time. Years, not days or months. But when the momentum starts to build, you know it.
Such is the case with the seemingly sudden consumer interest in “Cord cutting” – shorthand for people cancelling their cable TV subscriptions in favor of online entertainment resources. For the better part of the last 30 years, cable has been one of the “Stickiest” items in a household budget. During recessions, cable TV companies barely skipped a beat as customers would – if necessary – delay a mortgage payment or a credit card bill in favor of keeping uninterrupted access to television entertainment. The stability of those cash flows allowed many cable companies to grow with debt-financed capital, giving shareholders outsized returns. Now the news that some cable companies are losing customers is forcing capital markets to reconsider just how loyal cable customers might be and what that means for every company in the entertainment industry ecosystem.
To analyze some of the underlying consumer behaviors, we turn to Google Trends. This tool, available for free online, allows you to track how many times Google users have searched for a specific term over time. For example, enter “Get a dog” into Trends and specify US users, and you’ll see that interest in dog ownership is on the rise in the U.S. and the most pooch-friendly states are West Virginia, Kentucky, and Arkansas. The search term “Get a cat” is only about half as popular on Google, in case you were wondering…
Turning back to cable TV and entertainment trends, here are 9 sample Google Trends analyses that seem to tell the story…
1. “Cancel cable”. As you would expect, Google search interest in this term is rising rapidly. Indexed to the number of such searches in July 2010, for example, there are 1.6x more such queries now. One noticeable seasonal factor: searches for cancelling cable peak at this time of year since households tend to move during the summer. Also worth noting: the search “Get cable” still outnumbers “cancel cable” by 89:9, or 9.9x. Still, “Get cable” as a search query hasn’t grown in 2 years, where “cancel cable” certainly has. Also worrisome: New York and California, two large markets, are also in the top 5 states where “Cancel cable” is most popular.
2. “Cable TV”. Overall interest in cable tv is on the wane, according to the Google Trends data. The graph of search volumes looks like a gentle range of hills, with each peak through time slightly lower than the previous one. Over the last decade, searches for “Cable TV” are down 24%.
3. “Netflix”. On a global basis, Google searches for Netflix continue to climb and have doubled since 2011. In the U.S. the story is different, with searches for the company flat since 2011. Interestingly, the domestic markets that search the most for the online entertainment company are predominantly rural: Idaho, Maine, Montana, New Mexico and Utah.
4. “HBO”. This granddaddy of cable content has seen dramatic growth in search volumes since 2011. Since that time, four times the number of Google search users have queried for “HBO”. We suspect the April 2011 launch of “Game of Thrones” might have something to do with that pickup and highlights what desirable content can do for interest in a given distribution channel.
5. DirecTV and Dish TV. Satellite TV still seems to be a growth business according to the Trend data. DirecTV gets roughly 4x the number of searches as Dish and is seeing more growth in Google searches of late. Search interest in Dish is, however, stable to up modestly.
6. The Big Three Networks – ABC, NBC, and CBS. The long term trend lines for all three major networks are slowly moving lower, as you would expect. ABC still has the lead, with NBC and CBS currently even. Interestingly, “HBO” searches now tie those for NBC and CBS.
7. ESPN and Nickelodeon. Google search interest in ESPN peaked in September 2012 and was down 16% from those highs two years later in September 2014. Measure from July 2014 to July 2015, the drop is 34%. Nickelodeon’s drop in Google search volumes over the last year is 29%.
8. “Buy TV” versus “Buy iPhone”. A phone screen and earbuds is now as viable a video system as an old wooden console television was to the Baby Boom generation. The Google Trend data shows this well, with searches related to TV purchases now as numerous as those related to iPhone purchases. Layer in the other smartphone makers and more people search for purchase information about phones than televisions.
9. “HDMI”. OK, this one is a little nerdy, but it really tells the whole story. In order to take advantage of online entertainment while still using your regular television, chances are you’ll need an HDMI (High Definition Multimedia Interface) plug and a device like Apple TV or Google Chromecast. The number of Google searches for HDMI in the U.S. climbed steadily through 2012 and have leveled off since. That means that consumers already knew about (and had likely purchased a TV with) the necessary hardware to take advantage of online offerings long before the recent “Cord cutting” concerns. When the cable tv cord gets cut physically, it is the HDMI port that takes up the virtual slack.
The upshot of these results is clear: the change in consumer attention away from cable and to other sources of entertainment has been a long time in the making. Interest in everything from ESPN to broadcast channels has been on the wane for years. Compelling content like HBO’s Game of Thrones drives search eyeballs and, it seems, viewers as well. And consumers were upgrading their hardware long before they knew they wanted to watch Netflix or Amazon original programming streaming on the Internet.
Does this mean cable TV is doomed or no one will watch broadcast TV again? Of course not. Consumers largely stopped buying Compact Discs when iTunes really hit, but they didn’t stop listening to music. Even the “Original” iPod design that Jobs showed back in 2001 wasn’t exactly new, with inspirations from a 1950s transistor radio and a more modern land line phone. And that worked out pretty well…
- "It's A Friggin' Mess": The Pentagon Sums Up Syria Fight
On Monday, nine people were killed across Turkey in a wave of attacks that included a shooting at the US Consulate, a bombing at a police station, a gun battle at the same police station, an attack on a military helicopter by “Kurdish rebels”, and a roadside bombing.
The violence is the latest escalation in hostilities between Ankara and various “extremist” groups and for President Tayyip Erdogan, each new attack serves as still more evidence of the incipient threat posed by the PKK and other “terrorists” he says are operating within and around the country’s borders.
Of course what Erdogan really cares about is undermining the pro-Kurdish HDP prior to snap elections which he hopes will restore his absolute majority in parliament. Lumping the PKK in with ISIS has allowed Ankara to obtain NATO’s blessing for an offensive which has so far been focused on the Kurds but which Foreign Minister Mevlut Cavusoglu swears will shift towards ISIS as soon as newly-arrived US F-16s are prepared to fly missions from Incirlik which, as noted here last week, will supposedly serve as the hub for a new comprehensive fight against Islamic State. It’s been suggested that Saudi Arabia, Qatar, and Jordan may contribute to the effort.
All of this is of course designed to provide everyone involved (the US, Turkey, Qatar, and Saudi Arabia) with an excuse to remove Bashar al-Assad from Damascus. Russia isn’t so keen on this, as removing Assad threatens to undermine Moscow’s influence in the region but more importantly, could clear the way for the long-delayed Turkey-Qatar natural gas pipeline which would be an outright disaster for Gazprom and could serve to break the Kremlin’s leverage over Europe by freeing it from its dependence on Russian energy.
Realizing that Assad’s badly depleted forces are likely to face defeat sooner or later, either at the hands of the various militants “freedom fighters” vying for control of the country or else at the hands of the US military which we imagine could “accidentally” end up engaging Assad’s forces directly once the air campaign against ISIS picks up, Moscow has gone back and forth between suggesting that it’s willing to negotiate for an “alternative” to Assad and saying that Russia is willing to lend military support to Damascus if it means helping to eradicate “terrorists.” Again we see that both sides are prepared to use ISIS as an excuse to turn what has so far been a thinly-veiled proxy war into an actual confrontation between East and West and although Russia may be willing to “go there” if all options are exhausted, the economic realities of collapsing crude and Western sanctions are all too real which is presumably why the Kremlin entertained Saudi foreign minister Adel al-Jubeir in Moscow on Tuesday to discuss next steps for Syria. In the end, it all came down to the fate of Assad and both sides are apparently willing to stand their ground – for now. Here’s Al Jazeera:
Russia and Saudi Arabia have failed in talks held in Moscow to overcome their differences on the fate of Syrian President Bashar al-Assad, a central dispute in Syria’s civil war that shows no sign of abating despite renewed diplomacy.
Moscow has called for coordination between the Syrian government and members of an international coalition fighting the Islamic State of Iraq and the Levant (ISIL), which controls swaths of territory in Syria and Iraq.
Speaking after talks in Moscow on Tuesday, Saudi Foreign Minister Adel al-Jubeir reiterated Riyadh’s stance that Assad must go.
“A key reason behind the emergence of Islamic State was the actions of Assad who directed his arms at his nation, not Islamic State,” Jubeir told a news conference after talks with Russia’s Foreign Minister Sergei Lavrov.
“Assad is part of the problem, not part of the solution to the Syrian crisis. There is no place for Assad in the future of Syria,” he said.
Russia’s Foreign Minister Sergei Lavrov said anti-ISIL forces united on the ground should have wide international backing. But Jubeir specifically ruled out any coalition with Assad and tension between the ministers was often visible during the conference.
Here’s Lavrov (translated):
For anyone not willing to sit through the audio, here is the operative quote: “I would not want any powerful state involved in attempts to solve the Syrian crisis to believe that Assad issue may be solved militarily, because the only way of such a military solution is the seizure of power [in Syria] by Islamic State and other terrorists.”
Of course Lavrov surely realizes that ISIS seizing power in Syria would likely be just fine with the US and its regional allies. After all, when it comes to “boots on the ground” excuses that will fly with the American voter, “ISIS captures entire country” has to be right near the top of the list.
Meanwhile, the US and Turkey are pressing ahead with efforts to establish a so-called “ISIS-free zone” along what is virtually the only stretch of the latter’s border with Syria not under the control of the Kurdish YPG. As we discussed at length in “Why Turkey’s ‘ISIS-Free Zone’ Is The Most Ridiculous US Foreign Policy Outcome In History,” this swath of territory would likely fall under the control of the Syrian Kurds in relatiely short order (which, at least in the context of fighting ISIS, would be a good thing), were it not for the fact that they are affiliated with the PKK which means that Turkey (and by extension, the US) will have no part of it.
Another group who won’t be helping to rout ISIS in the north is al-Qaeda affiliate al-Nusra, which apparently thinks the effort to prevent the Kurds from capturing the remaining terriroty along the northern border with Turkey is just as absurd as we do. Here’s The New York Times:
The Syrian affiliate of Al Qaeda has announced its withdrawal from front-line positions against the Islamic State extremist group in northern Syria, saying that it disagrees with plans by Turkey and the United States to clear the extremists from an area along the Turkish border.
In a statement on Monday, the Qaeda group, the Nusra Front, said the proposed plan was intended primarily to protect “Turkish national security” and not to advance the Syrian rebel cause.
Syrian activists in the area reported the withdrawal of the Nusra Front in recent days, saying that other rebel groups had taken up their vacated positions to prevent an advance by Islamic State forces.
The Nusra Front’s withdrawal from rural positions northeast of the Syrian city of Aleppo came amid newly announced steps by Turkey and the United States to fight the Islamic State in Syria.
American and Turkish officials last month described plans to provide military support to Syrian rebels to clear the Islamic State, also known as ISIS or ISIL, from a roughly 60-mile strip of territory along the Turkish border. Nusra said that Turkey was interested in what its officials call a “safe zone” because it was worried about Kurdish forces that have seized much of the land across its border in Syria.
As The Times goes on to note, one thing Nusra did not mention in the purported statement is whatever happened to all of the US-trained “freedom fighters” the group has captured over the past month or so, including those form Division 30 and, more recently, the commander and deputy of the newest group of Pentagon trainees. On that note, we’ll close with the following bit from CBS because … well … because it underscores how comically absurd this has all become.
Late last month, the Nusra Front battled the U.S.-backed rebel faction known as Division 30 and killed, wounded or captured dozens of its fighters.
Last week, U.S. officials said five Pentagon-trained fighters had been captured, probably by the Nusra Front branch in Syria. The Pentagon has lost track of some of the fighters who apparently have scattered, reported CBS News’ David Martin.
“It’s a friggin’ mess,” one official said.
* * *
Bonus: summing up the above in four seconds
- Families Of 9/11 Victims On Verge Of Proving Government Cover-Up In Court
Submitted by SM Gibson via TheAntiMedia.org,
For many years, rumors have circulated regarding the U.S. government’s involvement in an active cover-up of a sinister connection between Saudi Arabia and the terrorist attacks of 9/11. In fact, 28 redacted pages from a congressional intelligence report are said to contain damning information that implicates the Saudis in the 2001 mass murder of American citizens. Despite a bipartisan effort to release the information, the now notorious 28 pages are still being withheld from the public under the predictable guise of “national security.”
Now, thanks to a federal lawsuit in a Manhattan court, there may be a light at the end of the tunnel.
Two authors of the concealed pages may soon be called to testify in a court case currently pending against the kingdom of Saudi Arabia. Former FBI investigator Michael Jacobson and former Justice Department attorney Dana Lesemann, both of whom investigated the terror strikes for the FBI, were given the assignment to track down possible leads connecting Saudi officials to the hijackers and then document their findings. The evidence they compiled was recorded in the infamous 28 pages.
The duo also went on to work with the independent 9/11 Commission, where they unveiled even more corroboration. They uncovered an association between the Saudi Consulate in Los Angeles, the Saudi Embassy in Washington D.C., and the the tragic events in 2001.
At a court hearing on July 30, lawyers for the victims’ families stated that the most major of allegations against the Saudis were purposefully left out of the final draft of the 9/11 Commission report.
“They were removed at the 11th hour by the senior staff,” said attorney Sean Carter, who called the decision a “political matter.”
“[T]hey had documented a direct link between the Saudi government and the Sept. 11 plot based on the explosive material they had uncovered concerning the activities of Fahad al-Thumairy and Omar al-Bayoumi,” explained Carter.
Thumairy worked as a religious cleric and Saudi diplomat in Los Angeles at the time, while Bayoumi was employed by the Saudi Arabian Civil Aviation Authority in San Diego.
The judge presiding over the case now has a 60-90 day window to either dismiss the case or proceed on behalf of the victims’ families.
Jerry Goldman, an attorney for the plaintiffs, feels good about the future of the proceedings.
“(The Judge) wasn’t buying their spin,” Goldman said. “The burden is on the kingdom to prove we are wrong, and they didn’t do that.”
With so many unanswered questions surrounding 9/11, there is no telling what may be disclosed if the case is allowed to move forward.
The terrifying reality is that if the Saudis are found guilty of involvement in the events of 9/11, such a conclusion would only raise more questions than it would answer. Who inside the United States government would be covering for the kingdom of Saudi Arabia for so many years— and more importantly, why?
- Wendy's Explains What Happens When Fry Cooks Make $15/Hour
By now, it should be abundantly clear – even to the most vocal proponents of a higher minimum wage – that across-the-board raises have very real, and sometimes unpredictable consequences.
At Wal-Mart for instance, a move to hike the pay floor for the retailer’s lowest paid workers hurt morale among higher paid employees, may have led to discussions to cut up to 1,000 jobs at the company’s home office in Bentonville, and quite possibly contributed to a decision to close five stores for “plumbing problems.”
Meanwhile, at Seattle-based payments processor Gravity Payments, one CEO’s quest to create a better life for his 120 employees backfired when a move to raise the company-wide pay floor to $70,000 was accompanied by a myriad of far-reaching and unintended consequences.
At the most basic level, the argument against hastily construed wage hikes is that forcing employers to pay everyone more will simply prompt companies to fire people or at the very least, curtail hiring. As one Burger King franchisee recently told CBS, “[fast food] businesses are not going to pay $15 dollars an hour [because] the economics don’t work in this industry. There is a limit to what you’re going to pay for a hamburger.”
With that in mind, we present the following commentary from Wendy’s most recent conference call with no comment:
Todd A. Penegor – Chief Financial Officer & Senior Vice President
Yeah. So we continue to see pressure on wages two fronts, one is minimum wages at the state level continue to increase, and as there is a war on talent to make sure that we’re competitive in certain markets. So we’ve made some adjustments to that starting wage in certain markets. The impact hasn’t been material at the moment, but we continue to look at initiatives on how we do work to offset any impact to future wage inflation through technology initiatives, whether that’s customer self-order kiosks, whether that’s automating more in the back of the house in the restaurant, and you’ll see a lot more coming on that front later this year from us.
John William Ivankoe – JPMorgan Securities LLC
Okay, understood. I mean there is obviously a lot of discussion of wage prices, wage costs and that there would be increased pricing at the franchise level to offset those increased wages, especially in markets like New York for example that are going to see some very severe increases in wage costs. So can you juxtapose the franchisees’ desire and/or need to take pricing at the store level with what sounds like an increased focus overall for the brand on value, can those two things be achieved simultaneously?
Emil J. Brolick – President, Chief Executive Officer & Director
Yeah, John, this is Emil. And our franchisees, I find them to be very astute business people, and they have a great sense of their trade areas where their restaurants are and a great I think understanding of what the competitive environment is in terms of their capacity to price. I think the reality is that what you will see in like some of these markets, the New Yorks, where there is these very significant increases, is that they will be – our franchisee will slightly likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and any other cost reduction opportunities, not just price. There are some people out there who naively say that these wages can simply be passed along in terms of price increases. I don’t think that the average franchisee believes that, and there will have to be other consequences, which is why we have pointed out that unfortunately we believe the some of these increases will clearly end up hurting the people that they are intended to help.
- How Economic Growth Fails
Submitted by Gail Tverberg via Our Finite World blog,
We all know generally how today’s economy works:
Figure 1
Our economy is a networked system. I have illustrated it as being similar to a child’s building toy. Ever-larger structures can be built by adding more businesses and consumers, and by using resources of various kinds to produce an increasing quantity of goods and services.
Figure 2. Dome constructed using Leonardo Sticks
There is no overall direction to the system, so the system is said to be “self-organizing.”
The economy operates within a finite world, so at some point, a problem of diminishing returns develops. In other words, it takes more and more effort (human labor and use of resources) to produce a given quantity of oil or food, or fresh water, or other desirable products. The problem of slowing economic growth is very closely related to the question: How can the limits we are reaching be expected to play out in a finite world? Many people imagine that we will “run out” of some necessary resource, such as oil, but I see the situation differently. Let me explain a few issues that may not be obvious.
1. Our economy is like a pump that works increasingly slowly over time, as diminishing returns and other adverse influences affect its operation. Eventually, it is likely to stop.
As nearly as I can tell, the way economic growth occurs (and stops taking place) is as summarized in Figure 3.
Figure 3. Overview of our economic predicament
As long as (a) energy and other resources are cheap, (2) debt is readily available, and (3) “overhead” in the form of payments for government services, business overhead, and interest payments on debt are low, the pump can continue working as normal. As various parts of the pump “gum up,” the economic growth pump slows down. It is likely to eventually stop, once it becomes too difficult to repay debt with interest with the meager level of economic growth achieved.
Commodity prices are also likely to drop too low. This happens because the wages of workers drop so low that they cannot afford to buy expensive products such as cars and new homes. Growing purchases of products such as these are a big part of what keep the economic pump operating.
Let me explain some of the pieces of the problem that give rise to the slowing economic growth pump, and the difficulties it encounters as it slows down.
2. “Promises,” such as government pension programs for the elderly, and promises to repair existing roads, tend to get bigger and bigger over time.
We can understand how promises tend to grow by looking at an example I constructed:
Figure 4
Suppose a pension program begins in 2010 and gradually adds more retirees. Or suppose a road repair program starts out in 2010 with more roads gradually being added.
The payments made each calendar year, whether for the pensions or the road repairs, are the totals at the bottom of the column. These totals keep growing, even if each retiree gets the same amount each year, and even if each road costs the same amount to repair each year. Admittedly, using 100 for all amounts is unrealistic–this is done to keep the math simple–but regardless of what numbers are used, the sum of the payments each calendar year tends to rise.
If we look at US government expenditures as a percentage of wages, the pattern is as we might expect: government spending rises significantly faster than wages.
Figure 5
3. At least partly because of growing “promises,” it is very difficult for an economy to shrink in size without collapsing.
We can think of many kinds of promises in addition to pensions and road repairs. One such promise is the promise by banks that they will allow depositors to withdraw funds held on deposit in the bank. Another kind of promise is the promise of debtors to repay debt with interest. All of these promises tend to grow in total quantity over time, at least in part because population grows.
If an economy shrinks, all of these promises become very difficult to fulfill. This is the problem that Greece and other countries in financial difficulty are encountering. There is a need to reduce some program or to sell something so that the calendar year payments are not too high, relative to revenue for the year. These payments really represent a flow of goods and services to the individuals to whom the promises were made. “Printing money” does not really substitute for goods and services: pensioners expect that they will be able to buy food, medicine and housing with their pensions; those withdrawing money from a bank expect that the money will actually buy goods and services needed to live on.
If there is a major problem with “making good” on promises, it is difficult to have an economy. It is hard to operate an economy without functioning bank accounts. Even cutting off pensions or road repairs becomes a problem.
4. The over-arching problem as we reach diminishing returns is that workers become less and less efficient at producing desired end products.
When an economy starts hitting diminishing returns, we find that the economy produces goods less and less efficiently. It takes more worker-hours and more resources of various kinds (for example, fracking sand and deep sea drilling equipment) to produce a barrel of oil, causing the cost of producing a barrel of oil to rise. Usually this trend is expressed as a rising cost of oil production:
Figure 6
Looked at a different way, the number of barrels of oil produced per worker starts decreasing (Figure 7). It is as if the worker is becoming less efficient. His wages should be reduced, based on his new lack of productivity.
Figure 7. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 6.
There are many types of diminishing returns. They tend to lead to a smaller quantity of end product per worker. For example, if the population of a country increases, but arable land stays the same, adding more and more farmers to a plot of arable land eventually leads to less food produced on average per farmer. (Some might say that each additional farmer adds less marginal production.) Similarly, mining ores of lower and lower concentration leads to a need to separate more and more waste material from the desired mineral, leading to less mineral production per worker.
As another example, if a community finds itself short of fresh water, it may need to begin using desalination to produce water, instead of simply using relatively inexpensive wells. The result is a steep rise in the cost of water produced, not too different from the steep rise in the cost of oil in Figure 6. Viewed in terms of the amount of fresh water produced by each worker, the return per worker falls, as happens in Figure 7.
If workers get paid for their work, the logical result of diminishing returns is that after a point, workers should get paid less, because what they are producing as an end product is diminishing in quantity. Workers may be making more intermediate products (such as desalination plants or fracking sand), but these are not the end products people want (such as fresh water, electricity, or oil).
In some sense, fighting pollution leads to another form of diminishing returns with respect to human labor. In this case, increasing human effort and other resources are used to produce pollution control equipment and to produce workarounds, such as alternative higher-priced fuels. Again, wages per worker are expected to decline. This happens because, on average, each worker produces less of the desired end product, such as electricity.
Admittedly, less pollution, such as less smog, is desired as well. However, if it is necessary to pay extra for this service, the effect is recessionary because workers must cut back on purchasing discretionary goods and services in order to have sufficient funds available to purchase the higher-priced electricity. Thus, fighting pollution using approaches that raise the price of end products is part of what slows the world’s economic growth pump.
5. When civilizations collapsed in the past, a major cause was diminishing returns leading to declining wages for non-elite workers.
We know how diminishing returns played out in a number of past civilizations based on the analysis conducted by Peter Turchin and Surgey Nefedov for their book Secular Cycles. They found that typically a period of rapid population growth took place after some change occurred that increased the total amount of food an economy could provide. Perhaps trees were cut down on a large plot of land, or irrigation was introduced, or a war led to the availability of land previously farmed by others. When the original small population encountered the newly available arable land, rapid growth became possible for a while–very often, for well over 100 years.
At some point, the carrying capacity of the land was reached. Then the familiar problem of diminishing returns on human labor occurred: adding more farmers to the plot of land didn’t increase food production proportionately. Instead, the arable land needed to be subdivided into smaller plots to accommodate more farmers. Or the new farmers could only be “assistants,” without ownership of land, and received much lower wages, or went to work for the church, again at low wages. The net result was that at least part of the workers started receiving much lower wages.
One contributing factor to collapses was the fact that required tax levels tended to grow over time. Some reasons for this growth in tax levels are described in Items (2) and (3) above. Furthermore, the pressure of growing population meant that groups needed access to more arable land–a problem that might be overcome by a larger army. Paying for such an army would require higher taxes. Joseph Tainter in The Collapse of Complex Societies writes about the problem of “growing complexity,” with rising population. This, too, might give rise to the need for more government services.
Raising taxes became a problem when wages for much of the population were stagnating or falling because of diminishing returns. If taxes were raised too much, low-paid workers found themselves unable to buy enough food. In their weakened condition, they tended to succumb to epidemics. If taxes couldn’t be raised enough, governments had different problems, such as not being able to support a large enough army to fend off attacks by neighboring armies.
6. The United States now has a problem with declining wages of non-elite workers, not too different from the problem experienced by civilizations that collapsed in the past.
Figure 8 shows that on an inflation-adjusted basis, US Median Family Income has been falling in recent years. In fact, the latest value is between the 1996 and 1997 value. In a sense, this represents diminishing returns on human labor, just as has occurred with agricultural civilizations that collapsed.
Figure 8
Wages have been falling to a much greater extent among young people in the United States. Figure 9 from a report by Dettling and Hsu in the Federal Reserve Bank of St. Louis Review shows that median wages have dropped dramatically since 1989, both for young people living with parents and for young people living independently. To make matters worse, the report also indicates that the share of young people living with parents has risen during the same period.
Figure 9
In some sense, the loss of efficiency of the economy (or diminishing returns) outlined in Item 4 is making its way through to wages. The wages of young people are especially affected.
7. Demand for goods and services comes from what workers can afford. If their wages are low, demand for goods of many kinds, including commodities, is likely to fall.
There are many rich people in the world, but most of their wealth sits around in bank accounts, or in ownership of shares of stock, or in ownership of land, or in other kinds of investments. They use only a small share of their wealth to buy food, cars, and homes. Their wealth has relatively little impact on commodity prices. In contrast, the many non-elite workers in the world tend to spend a much larger share of their incomes on food, homes, and cars. When non-elite workers cut back on major purchases, it is likely to affect total purchases of goods like homes and cars. Other related goods, such as gasoline, home heating fuel, and the building of new roads, are likely to be affected as well.
When the demand for finished goods falls, the demand for the commodities to produce these finished goods falls. Because of these issues, when the wages of non-elite workers fall, we should expect downward pressure on commodity prices. Commodity prices may fall back to a more affordable range, after they have spent several years at higher levels, as has happened recently.
There is a common belief that as we approach limits, the price of oil and other commodities will spike. I doubt that this can happen for any extended period. Instead, the low wages of non-elite workers will tend to hold commodity prices down. Because of this issue, we should expect predominately low oil prices ahead, despite the continuing pressure of rising costs of production because of diminishing returns.
The mismatch between the rising cost of commodity production and continued low commodity prices is likely to lead to a sharp drop in the supply of many types of commodities. Thus, the slowing operation of our economic growth “pump” is likely to lead to a situation where the production of commodities, including oil, falls because of low prices, not high prices.
8. What is needed to raise the productivity of workers is a rising quantity of energy to leverage human labor. Such energy supplies are affordable only if the price of energy products is very low.
The amount a person can produce reflects a combination of his own labor and the resource he has to work with. If energy products are available, they act like energy slaves. With their assistance, humans can do things that they could not do otherwise–move goods long distances, quickly; operate machines (including computers) that can help a worker do tasks better and more quickly; and communicate long distance by means of the telephone or Internet. While technology plays a major role in making energy products useful, the ultimate benefit comes from the energy products themselves.
We have been using a rising amount of energy products since our hunter-gatherer days (Figure 10). In fact, the use of energy products seems to distinguish humans from other animals.
Figure 10
Clearly, cheaper is better when it comes to the affordability of energy products since available money goes further. If gasoline costs $5 per gallon, a worker with $100 can buy 20 gallons. If gasoline costs $2 per gallon, a worker with $100 can buy 50 gallons.
In recent years, with the high prices of energy products, world growth in energy consumption has lagged. It should not be surprising that world economic growth seems to be lagging during the same period.
Figure 11. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.
In fact, Figure 11 seems to indicate that changes in energy consumption precede changes in world economic growth, strongly suggesting that growth in energy consumption is instrumental in raising economic growth. The recent steep drop in energy consumption suggests that the world is approaching another major recession, but this has not yet been recognized in international data.
9. One way of describing our current problem is by saying that the economy cannot live with the high commodity prices we have been experiencing in recent years and is resetting to a lower level that is affordable. This reset is related to low net energy production.
If oil and other commodities could be produced more cheaply, they would be more affordable. We would not have the economic problems we have today. Energy use in Figure 11 could be rising more quickly, and that would help GDP grow faster. If GDP were growing faster, we would have more funds available for many purposes, including funding government programs, repaying debt with interest, and paying the wages of non-elite workers. We perhaps would not have the problem of falling wages of non-elite workers.
The current “fad” for solving our energy problem is to mandate the use of intermittent renewables, such as wind and solar PV. A major problem with this approach is that such renewables make the cost of electricity production rise even faster, exacerbating our problems, instead of making them better.
Figure 12 by Euan Means. Installed capacity is in Watts (W) per capita.
To make matters worse:
- The way our economy works, energy flows in a given year (not on a net present value basis) are what are important, because this is the way we use energy to make goods such as foods, metals, and homes. The energy flows of renewables are very much front ended. Thus, the disparity in energy use on an energy flow basis is likely to be greater than reflected in Figure 12.
- What we really need from energy products is the ability to stimulate the economy in a way that adds tax revenue. Either the energy products must produce high tax revenue directly, or they must indirectly produce high tax revenue by stimulating demand for new cheaper goods, produced with the new inexpensive form of energy. This is what I think of as “adding net energy”. Wind and solar PV clearly do the opposite. Thus, they behave like “energy sinks,” rather than as products that add net energy.
- Modern renewables that are connected to the grid can be expected to stop working when the grid stops working. This may not be too far in the future because we need oil to operate the trucks and helicopters that maintain the electric grid. If this problem were considered in the pricing of electricity from wind and solar PV, their required prices would be higher.
As I see it, one of the major roles of energy products is to support the growing overhead of our economy; this is what the discussion about the need for “net energy” is about. Thus, we need energy products that are cheap enough that they can be taxed heavily now, and still produce an adequate profit for those producing the energy products. If we find ourselves mostly with energy products that are producing cash flow losses for their producers, as seems to be the case today, this is an indication that we have a problem. We don’t have enough “net energy” to run our current economy.
10. Debt and other paper assets are likely to “have a problem” as the economic growth pump falters and stops.
Debt is absolutely essential to making an economy work because it allows businesses to “bring forward” future profits, so that they don’t have to accumulate a high level of savings prior to building a new factory or opening a new mine. Debt also allows potential buyers of expensive products such as homes, cars, and factories to pay for them on an affordable monthly payment plan. Because more buyers can afford finished goods with the use of debt, debt raises the demand for goods, and indirectly raises the prices of commodities. With these higher prices, a greater quantity of commodity extraction is encouraged.
At some point, it becomes very difficult to support the very large amount of debt outstanding. In part, this happens because of the large accumulated amount of debt. Falling inflation-adjusted wages of rank and file workers add to the problem. In such a situation, interest rates need to be kept very low, or it becomes impossible to repay debt with interest. Even with continued low rates, defaults can eventually be expected.
Once debt defaults begin, commodity prices are likely to drop even further. Such a drop is likely to lead to even more loan defaults, especially by commodity producers (such as oil companies) and commodity exporters. Prices of equities can be expected to drop as well, because the problems of the debt system will affect businesses of all kinds.
Once debtors start defaulting, it will become very difficult to keep financial institutions from collapsing. International trade is likely to become a problem because financial institutions are needed to provide debt-based financial guarantees for long-distance transactions.
- Biggest US Dark Pool Busted For Rigging Markets, Engaging In Precisely The Manipulation It Warned Against
One year ago, in the first ever crack down on market manipulation and rigging in HFT-infested dark pools and ATS venues, the NY AG crushed Barclay’s dark pool LX with just one lawsuit alleging the bank had misrepresented and taken advantage of gullible clients to benefit well-paying HFT parasitic scalpers who not only have never “provided liquidity” but merely frontrun whale orders and completely shut down any time the market turns against the prevailing momentum wave, in the process crushing liquidity.
Following the Barclays debacle, which confirmed not only what Michael Lewis had said earlier in 2014 about HFT manipulation, but everything we had said about HFT manipulation since 2009, the paid defenders of the HFT criminal syndicate scrambled to prove that it was “only” one bad sheep in a herd of well-meaning, tame and well-behaved liquidity providing animals.
A year later, enough time had passed since the Barclays bust that the more gullible elements almost believed these paid defenders of market-rigging. Then the best laid plan of vacuum tubes and men went horribly wrong when at the end of July, none other than the original dark pool, ITG, was busted for using a prop trading silo to frontrun client order flow using an HFT architecture.
Worse, as we revealed and as was confirmed later, the person behind this latest HFT manipulation charge was none other than Hitesh Mittal, the current head trader of mega quant fund AQR, the 4th largest in the world, whose boss Cliff Asness has over the years become one of the most vocal advocates of HFT. Now we know why.
And then, earlier today, the WSJ reported that none other than the operator of the biggest dark pool in the US by volume, Credit Suisse and its massive Crossfinder dark pool, “is in talks with regulators to settle allegations of wrongdoing at its “dark pool” with a record fine in the high tens of millions of dollars, according to people familiar with the matter.”
The Swiss bank is negotiating a joint settlement with the New York Attorney General and the Securities and Exchange Commission. A deal could come as soon as the next several weeks, though talks could still fall apart, the people said. The settlement under discussion would lead to the largest fine ever levied against an operator of a private trading venue.
The case against Credit Suisse includes allegations that it provided unfair advantages to some traders, violated rules against pricing of stocks and didn’t adequately disclose to investors how CrossFinder works, according to the people familiar with the matter.
What is grotesque about this story is not that yet another dark pool has been found to cater solely to HFTs i.e., the best paying clients who will always get priority treatment by banks such as Credit Suisse and Barclays simply because that’s all they do: pay to frontrun others because in a market which is rigged to the core, HFT and dark pool manipulation is now the rule. What is grotesque, is that back in December 2012, it was none other than Credit Suisse which conveniently explained and laid out all those forms of HFT manipulation which we accused virtually every HFT firm of employing since 2009… and which Credit Suisse itself is now accused of engaging in!
This is how Credit Suisse summarized all the predatory strategies of HFT algos in the market as of 2012:
- Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
- Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
- Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
- Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.
And the punchline: Credit Suisse’s Advanced Execution Services (i.e., the group behind its dark pool) was putching itself as the one venue where trading participants are immune from such abuse. From “High Frequency Trading – Measurement, Detection and Response” (which can be found on the website of edge.credit-suisse.com with a cursory title-based google search):
Dark pools using a synthetic EBBO (consolidated book) for their reference price are at higher risk of being gamed by quote stuffing. Exhibit 10 shows an example in Ashmore Group, where the Primary Bid and Ask (represented by the outer dark red and light blue lines at 356.2 and 355.7) are static, but the Chi-X bid moves (dark blue line). The consolidated EBBO shows a locked book, with the bid equal to the ask at 356.2.
This scenario could be exploited in EBBO-referenced dark pools. A gamer could place a sell order in the pool with a 356.2 limit, then place (and rapidly cancel) a Chi-X bid, also at 356.2. Any buy order pegged to mid would trade at the temporary gamed “mid” of 356.2 (as the EBBO bid and offer are both temporarily 356.2), paying the whole spread rather than half.
Crossfinder (Credit Suisse’s dark pool) does not use the EBBO, preferring to use primary-only data to help minimise the chance of midpoint gaming. Furthermore, when AES detects any quote stuffing, it may add extra protections across its orders (both lit and dark) to further reduce the risk of being gamed, more details of which are discussed later from page 7.
* * *
Dark-only flow traded through AES (e.g. in tactics such as Crossfinder+) can minimise the chance of being affected by ‘mid-point gaming’ with by withdrawing from certain venues, raising MAQs and using tighter limits. These protections will allow the midpoint to come towards the order – enabling the strategy to participate at a temporarily more favourable price – but restrict it from moving away.
If apparent gaming occurs consistently on a particular venue or with a particular counterparty in Crossfinder, the AES Alpha Scorecard will pick this up and highlight that venue or that counterparty as exhibiting excessive “opportunistic” behaviour. Credit Suisse’s clients then have the ability to decide whether to trade on those venues or against that group of counterparties.
Flow that reaches Credit Suisse’s dark pool (Crossfinder) via aggregators does not receive such protections, as Crossfinder is simply an execution venue for this flow. When interacting through AES algorithms, these additional protections are available.
Turns out they weren’t, and that anyone who believed the Credit Suisse reps and warrants was lied to, just like in Barclays’ case, and quite likely all those parasitic HFT strategies, quote stuffing, layering, orderbook fading and momentum ignition, Credit Suisse raged against were being used against CS’own clients.
And, just like in Barclays case, these lies will now cost the Swiss bank tens of millions, or a fraction of the profits it made abusing its clients’ trust.
But the biggest question, just like in the Barclays case, is whether the bulk of its carbon-based clients – we know the HFTs will never leave – will depart the Crossfinder dark pool, and send the orderflow volume on the Credit Suisse market plunging, which like with LX, will start a self-fulfilling prophecy of dark pool collapse since once the key clients leave there is no reason for anyone else to stay.
Finally, if this is what happens, who will be winner: upstart AEX, or Goldman Sachs, which as we reported recently is back in the HFT arena and as we reported in “Why Goldman Is About To Become The Biggest HFT Firm In The World“, is likely the firm that is ordering the regulatory hits on its biggest competitors until it takes them all down one by one, in a New Normal replica of how Goldman destroyed Lehman back in 2008.
- 1997 Asian Currency Crisis Redux
Submitted by Michael Lebowitz via 720Global.com,
Second Verse, Same as the First, a Little Bit Louder and a Little Bit Worse
China surprised the financial markets on August 11, 2015 by devaluing their currency, the Renminbi (CNY), the equivalent of 2% versus the U.S. Dollar (USD). This is the largest daily move in the CNY in over 10 years and likely the first in a series of devaluations by the Chinese government. Since 2014, the Chinese had pegged their currency to the strengthening USD and watched it appreciate against many of the world’s currencies just as the USD was doing. Over the past year for example, the USD and CNY appreciated 20%, 25% and 12% against the euro, yen and South Korean won respectively. It just so happens that these currencies are the ones used by 3 of Chinas largest trade partners. Thus, maintaining a peg to the USD eroded export growth as China’s products became more expensive for countries other than the U.S to import. Conversely, in China the rising CNY brought further deflationary pressure as goods imported from countries that use currencies other than the USD became less expensive. Now, in an effort to level the global trade playing field, China has decided that the economic harm produced by pegging to the dollar outweighs the benefits produced by a strong domestic currency.
In December 2014 the Bank for International Settlements (BIS) warned of the growing risks associated with the global carry trade. They estimated that since 2000 the amount of such trades quadrupled in size to $9 trillion and grew 5.5x faster than global growth over the same period. The massive amount of these trades outstanding dwarfs anything seen in the past, leading the BIS to repeatedly warn of potential financial repercussions if these trades suddenly and simultaneously unwound. The Asian currency crisis of 1997, for instance, was greatly magnified due to the unwinding of an estimated $300-$500 billion of these types of carry trades.
The carry trade that is so concerning to the BIS involves borrowing USD (typically on a leveraged basis) and investing those funds in a foreign country. This trade possesses all of the risks of a typical investment but it also layers on substantial currency risk as the borrower/investor must first convert the borrowed dollars to the currency of the country where the investment takes place. By default a USD short is created when the currency is converted.
It is estimated that carry trades involving USD loans invested in China could represent a quarter to a third of the BIS estimated $9 trillion global carry trade. The popularity of this trade grew steadily since 2006 as strong Chinese economic growth and an appreciating CNY versus the USD made this trade lucrative on both the investment front but also from a currency perspective. The graph below shows the CNY appreciation from 2006-2013 (green arrow), the pegging of CNY to the USD in 2014-2015 (blue arrow) and last night’s 2% devaluation (circled yellow).
As mentioned earlier this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.
The Asian currency crisis of 1997 could prove to be a worthy example of the effects to be felt from a massive unwind of carry trades of this sort, albeit of a much lesser magnitude. Therefore, caution is urged and investorsshould prudently monitor their positions and risk tolerances. During the Asian crisis of 1997 and 1998 the following effects were felt:
- South Korean Won declined 34% against the USD
- Thai Baht declined 40% against the USD
- South Korean Gross National Product (GNP) declined 34%
- The USD index rose 13% versus a basket of other major world currencies
- The S&P 500 fell 15% in 1997, rallied, and then dropped another 20% in 1998
- The Japanese Nikkei index declined 36%
- South Korean share prices declined 58%
- The 30 year US bond yield fell from 7.0% to 4.2%
- Crude oil prices declined 62%
- The Asian crisis contributed to the Russian default in 1998. This in turn led to the collapse of Long Term Capital which required a $3.625 billion bailout organized by the Federal Reserve as well as a 1% reduction in the Federal Funds Rate to contain the fallout.
- Nassim Taleb Explains The One Thing An Investor Should Never Fail To Do
Authored by Nassim Taleb via Absolute Return,
Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.
When it comes to investing in this environment, my colleague Mark Spitznagel articulated it well: investors are left with a simple choice between chasing stocks that have an increasing chance of a crash or missing out on continued policy effects in the short term. Incorporating a tail hedge minimizes the risk in the tail, allowing investors to remain invested over time without risking ruin. Spitznagel put together a video explaining the point.
To be robust, one must construct a portfolio as an engineer would a bridge and ask what your managers expect to lose should the market fall by 10%. Then ask them again what they’d expect to lose in the down 20% scenario. If that second number is more than two times more painful emotionally than the first, your portfolio is fragile. To fix the problem, add components to your portfolio that make the portfolio stronger in a crash, like actively managed put options. You will be able to build stronger, better bridges, with better returns, that will last for the long term.
By clipping the tail, you can own more risk, the good type of risk: upside with limited downside. And rather than helplessly watching your bridge collapse, you can be opportunistic in a crash, and take the pieces from others at bargain prices to increase the size of yours.
- And the Renminbi Bloodletting Begins…
By Chris at www.CapitalistExploits.at
Last week at my son’s football game, a fellow parent remarked to me that bald heads are cool. I actually thought the guy may be off his rocker a bit, but then I figured that maybe he was trying to be nice as I’ve got more hair on my big toe than on my shaved head. Then realization struck….
This guy was trying to comfort himself as he was trying unsuccessfully to cover his own balding pate.
Hiding balding can drive men nuts. You can look like Donald Trump, though someone needs to tell him he looks completely ridiculous. With all the money in the world, it’s clearly not possible to get a decent looking rug, and then you’ve got to ask yourself the question, who on earth could be bothered with putting up with all the rigmarole of sticking the thing to your head all the time? And what happens when you dive in a swimming pool or venture out on a windy day?
If rugs aren’t your thing you could shoot for a hair transplant and end up with something that looks like a seed tray in a high school science lab experiment. Or you can look like your mad uncle George – don a stripy cardigan and do the comb over.
Let’s face it: all options at hiding it are outright terrible. There are therefore only two realistic solutions to the problem. One is to hide indoors and never come out, and the other is to reveal it, get a grip and get on with life.
This brings me to China who have been using all means and measures to hide the true situation in their financial markets.
Blowing through $800 billion in public and private money in an attempt to prop up their ailing stock market has produced a muted response. Based on public statements, media reports and market data, we know that Beijing has just blown through at least 5 trillion yuan. This is an unprecedented amount, equivalent to nearly 10 percent of China’s GDP, and a trillion more than they committed in response to the global financial crisis in 2008. All this to calm a stock market sell-off. I say “at least” since we don’t really know how much Beijing has done under the covers and the opacity in China is legendary.
A Reuters article described it well:
While the market stabilised, with the Shanghai Composite Index SSEC recovering about 20 percent by Thursday’s close from a low point around 3,300 points struck on July 8, it is still below the semi-official recovery target of 4,500 points.
Beijing has thus produced the equivalent of around 1 index point gain for every $1 billion committed.
The selling pressure is clearly not of the garden variety. The problem is that the fundamentals don’t support the still lofty valuations.
As interesting as the stock market is, our interest lies in the currency, something we’ve been writing about since late 2014. We believed that the big move was to be in the RMB and while every man and his dog was trumpeting the end of the dollar and the rise of the yuan we felt that, while this certainly was getting investors giddy, it was plain wrong.
Back in December in an Brad was wondering about what China’s banking system was telling us?
I’d like to share some important excerpts:
The behavior of the interbank lending market can provide one with a good appreciation for the liquidity of the banking system as a whole. If there is a lot of liquidity in the system (more short term assets than liabilities) the interbank rate will fall, if there is scarcity of short term assets relative to liabilities then rates will rise. So a rising interbank rate is generally associated with contracting liquidity conditions. Rapid rises in interbank lending rates are often associated with banking or credit crisis. This happened in the lead up to the GFC.
Brad dug in and looked at interbank lending markets for a host of emerging market currencies and showed how China’s HIBOR rate was going parabolic, indicating stress in this market.
Fast forward till today and it’s no surprise to us that the PBOC has devalued.
“One Off Depreciation”
This is what the PBOC have officially called it. Ha!
An export driven economy with a rising currency in the midst of a global currency war has created a gigantic USD carry trade with its epicentre in the Middle Kingdom. Beijing needs a strong economy to support a strong currency and signs are everywhere that growth is falling.
What many people don’t realise is the self-reinforcing nature of an unwinding carry trade. Each tick down in the cross rate between the funding currency (USD) and the funded currency (RMB) acts as reverse leverage and forces additional participants who are short USD to cover and buy back their USD positions.
Just over 30 days ago when I suggested that the market was making a mistake in pricing volatility in the USD/CNH cross pair this allowed us a rare opportunity to position for a move either way for a stupidly cheap cost. While we’ve been bearish we actually had the ability to take on both positions for just 2.8% premium. I called it a gift…and it was.
Buying both is what traders term a “straddle” but don’t get hung up on terminology. The point is that for a 2.8% premium (2.5% + 0.3%) we can hold both positions. We don’t much care which way it moves but simply that it MOVES!
We may be looking at the last chance salon to putting on a short RMB trade before this gets out of control. When a central bank tells you it’s a “one off” event you may as well take that as a green light.
– Chris
“It’s hard to believe this will be a one-off adjustment. In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start sagging Chinese exports. That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.” – Stephen Roach, former Chairman of Morgan Stanley Asia
- How One Hedge Fund Is Betting Against The $1.2 Trillion Student Loan Bubble
On Monday, we got some color on Hillary Clinton’s $350 billion plan to make college more affordable. Students and former students across the country owe more than $1.2 trillion in college loans, and as Bill Ackman so eloquently put it earlier this year, “there’s no way they’re going to pay it back.”
The fact that America’s student loan bubble is the focus of what may well end up being one of Clinton’s most expensive policy proposals speaks volumes about the urgency of the problem.
Of course there are some other folks who understand how quickly the situation is deteriorating. Chief among them are Moody’s and Fitch and a few sell-side strategists who are having quite a bit of trouble figuring out how to incorporate the various IBR plans being promoted by the Obama administration into their ratings models.
These worries showed up earlier this year when Moody’s put billions in student loan-backed ABS on review for downgrade. Many of the deals in question are sponsored by loan servicer Navient, which was spun off from Sallie Mae in 2014.
Now, one Boston-based hedge fund is building a short position on what it says is “runaway inflation in post-secondary education” by shorting the likes of Navient and other names tied to to the student loan bubble.
Here’s Bloomberg with more:
FlowPoint Capital Partners, the $15 million hedge fund co-founded by Charles Trafton, is betting against companies such as student-loan servicer Navient Corp. to profit from what it calls a college bubble bursting in slow motion.
The Boston-based firm is building positions against stocks of textbook publishers, student lenders and real estate companies that focus on college housing, Trafton said in an interview. Changes in the more than $1 trillion student loan market could hurt companies such as Navient, Sallie Mae and Nelnet Inc., according to a July investor letter from the firm.
Businesses “levered to runaway inflation in post-secondary education are susceptible to growth and margin shocks,” the firm wrote in the letter.
So there, ladies and gentlemen, is one way to trade the bubble if you believe expecting the nation’s graduates to somehow fork over $1.2 trillion is unrealistic in a job market where landing a gig as “head bartender” is sometimes the best one can hope for if you happen to have majored in anything other than petroleum engineering.
We wonder how many hedge funds are hard at work with Wall Street creating customized deals full of the worst student loan credits they can find with the sole intention of betting against them.
- Manic Monday Becomes Turmoil Tuesday As China Rocks The Global Boat
In honor of China's historic devaluation, today seemed like a two-clip day… For the Traders…
and of course… for the news media after yesterday's celebrations…
Ok, having got that off our chest we start with… USDCNH's collapse (utterly destroying carry traders as implying vol exploded) has continued after China's close…
Is it any wonder that carry trades worldwide exploded?
US equities roundtripped all of yesterday's gains… then bounced…
Leaving only Nasdaq red on the week though…but they did try to ramp that too…
Weighed down by AAPL..down 5% – worst since Jan 2014…
Dow Death Crosses…
VIX rollercoaster continues – VIX up 13% breaking above 14…
With a late day slam in VIX to ramp the S&P perfectly to VWAP… NOTE the institutional selling at VWAP on each bounce…and the volume difference!!
File these two charts under the WTF folder… Energy credit spiked to 1028bps and WTI crude collapsed to a $42 handle… so it makes perfect sense that energy stocks would surge…
Because buying Energy stocks at 22.85x is definitely a great call as credit and crude collapse…
Submerging markets collapse to 4 year lows…
Treasury yields collapsed around 9bps across the complex… The 5Y, 7Y, 10Y, and 30Y all closed below their 200DMAs
FX markets turmoiled… commodities currencies were monkey-hammered and EUR strengthened as the most popular CNH carry pair (which led to modest USD strength)..
Commodities were mixed with PMs up and industrials/base down…
Precious Metals appeared to get a nod that things were coming…
Crude Carnaged to fresh 6 year lows today… with a $42 handle… increased OPEC production (Supply) along with China growth (Demand) fears
And Copper closed at fresh 6 year lows…
Finally – a message from your friendly CNBC correspondent: "Flat Is The New Up"
Charts: Bloomberg
- Just As Brazil Hits Rock Bottom, Things Are About To Get Even Worse
For anyone who might have missed it, Brazil is in trouble.
The country is “at the center of a triple unwind of EM credit, China’s leverage, and US monetary easing” (to quote Morgan Stanley) and as Goldman recently pointed out, faces a stagflationary nightmare.
Last quarter, Brazil suffered through the worst growth-inflation mix in over ten years. As Goldman put it, “since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015.”
And then there’s the twin deficit problem. Here’s Goldman again:
Over the last 11.5 years, we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-15 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.
Meanwhile, as we mentioned on Monday, Dilma Rousseff is now the most unpopular democratically elected president since a military dictatorship ended in 1985, with an approval rating of just 8%. In a recent poll, 71% said they disapprove of the way Rousseff is doing her job… and two-thirds would like to see her impeached. Here’s Bloomberg summing up the situation:
To be sure, the president faces a host of challenges this month, not least of which is a nationwide protest planned for Aug. 16.
The country’s audit court also must decide whether the government broke the fiscal law by doctoring budget results last year. A ruling against the government could provide the legal foundation to start impeachment hearings, opposition lawmakers say. Her administration says previous presidents used the same practices.
Investors are concerned that the political instability will push Brazil into a deeper recession and make it increasingly vulnerable to a sovereign-credit downgrade. The real has depreciated 8.1 percent in the last month, the biggest decline among 16 major currencies tracked by Bloomberg.
Given all of this, just about the last thing Brazil needed was for China to officially enter the global currency wars, which is of course exactly what happened overnight. Our response:
Biggest immediate loser from China’s devaluation: Brazil
— zerohedge (@zerohedge) August 11, 2015
And the response from Brazil’s trade ministry (via Reuters):
Brazil’s Trade Minister Armando Monteiro on Tuesday said China’s decision to devalue the yuan could hurt the country’s manufacturing exports.
So what lies ahead for Brazil given all of the above? Well, further BRL weakness – or at least according to Goldman. Here’s more:
We are moving our BRL forecasts to show further downside – we expect $/BRL to reach 4.00 in 12 months (relative to 3.55 previously). A weaker BRL is part of a necessary adjustment to address the macro imbalances in Brazil; and the combination of a weak and increasingly back-loaded path of fiscal adjustment and a central bank that appears to be done with tightening policy for now suggests that the exchange rate is likely to bear more of the overall burden of absorbing the impact of the commodity price downdraft, restoring competitiveness and correcting the current account deficit.
Brazil stands at a crossroads – both roads involve currency depreciation. The combination of significant macro challenges (economic contraction, elevated inflation and large fiscal and current account deficits) and a deteriorating political and institutional backdrop means that Brazil stands at a pivotal crossroads. One road involves the risk of a further deterioration in the political backdrop morphing into a full-fledged governability and institutional crisis (potentially including the departure of key policymakers) and a further deterioration in investor (and rating agency) confidence, with an associated additional hit to an already contracting economy. The other road involves a potential stabilisation in the political picture, which in turn would provide the authorities with room to undertake necessary short- and medium-term fiscal consolidation measures, coupled with monetary easing further down the line. In either case, we think the BRL is likely to depreciate further because it is hard for us to see a route back to a more balanced set of macro outcomes in Brazil that do not involve currency weakness. Along the first road, the depreciation is likely to be sharper and disruptive, with scope for overshooting and an eventual rebound; the alternative scenario would likely involve a grinding, more controlled move, potentially encouraged by policymakers.
Macro imbalances in Brazil are large, the worst in almost a decade…We have developed a simple scoring algorithm to assess the scale of internal (inflation relative to target) and external imbalances (current accounts relative to sustainable levels) and, as Exhibit 1 shows, in Brazil these imbalances are at their widest combined level in a decade. The fiscal deficit at -8.1% of GDP is also at its widest in more than 20 years, with the combined twin deficits now tracking at a disquieting 12.5% of GDP.
Of course as we said late last month, the simple fact is that whether it’s China, runaway stagflation, or simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall and against a backdrop of an escalating currency war (which the country’s most important trading partner has just officially entered), unattainable fiscal targets, and protracted weakness in commodity prices, the path to stabilization and rebalancing is anything but clear, but what does seem virtually certain is that Brazil has a date with junk status in the not-so-distant future.
And on cue, just moments ago:
- BRAZIL CUT TO Baa3 FROM Baa2 BY MOODY’S; OUTLOOK TO STABLE
So that’s one step up from junk for Moody’s and one step from junk for S&P – it shouldn’t be long now, because no matter what Moody’s says, there isn’t anything “stable” about this situation.
We suppose the only lingering questions are whether Rousseff will be impeached and whether economic decay, a dangerously unstable political situation, and problems of a more, shall we say, “putrid” nature, will conspire to make Rio a veritable ghost town for next summer’s Olympic games.
Then again, this young lady doesn’t seem particularly concerned…
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