- It Gets Even Uglier In Canada
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
The Province of Alberta, the epicenter of the Canadian oil bust, may be sliding into something much worse than a plain-vanilla recession. And it’s not exactly perking up the rest of Canada.
Layoffs are already cascading through the oil patch, as companies are retrenching and adjusting to the new reality. New vehicle sales are plummeting. And home sales are taking a broadside.
In August so far, total home sales in Calgary plunged 28% from a year ago, on flat prices. Condo sales collapsed 39%, with the median price down 8%, according to the Calgary Real Estate Board. Year-to-date, total home sales in Calgary are down 25%; condo sales 30%. And those condos that did sell spent 30% longer on the market than condos did a year ago, as sellers hang on by their fingernails to the illusion of wealth, and sales are stalling.
And the Business Barometer Index for all of Canada, which measures the optimism among small businesses, dropped again in August for the third month in a row. An index level between 65 and 70 indicates that the economy is growing at its potential. But now it hit 56.7, the lowest level since April 2009.
The Canadian Federation of Independent Business, which produces the index, blamed the commodity bust but added additional sectors, particularly those that are considered absolutely crucial for the hopefully coming economic recovery in the second half: construction, transportation, and retail.
The index dropped in 7 of 10 provinces, even in British Columbia, which was weighed down by “domestic conditions, coupled with weakening economic prospects in Asia.”
And that feverishly expected rebound of GDP in the second half from recessionary levels in the first half? Small business owners don’t see it. What they see is a continued downturn.
But it’s in Alberta where small business optimism has totally crashed. The Index dropped 3.5 points in August to 40.4, the worst level since March 2009, and just one such step above the historic low of 37, of February 2009, the very bottom of the Financial Crisis.
A bitter irony: for the years after the Financial Crisis, small businesses in Alberta were practically exuberant compared to those in the rest of Canada. But in November and December, their exuberance dissipated into the oil bust, and the index began plunging. In January, it fell below the national level for the first time since March 2010. And it has continued plunging.
The chart shows how the index for Canada (green line) has hit the worst level since April 2009, and how the index for Alberta (blue line) has plummeted to the trough of the Financial Crisis:
“As businesses are crunched, they’re examining all of their expenses more closely – their taxes, the regulatory costs, their wage costs – and if the government continues to add to the list of things, at some point they simply can’t handle all of those new costs,” CFIB Alberta director Amber Ruddy told the Calgary Herald, with an eye on the province’s new government that is musing about raising royalty rates on energy companies at the worst possible time.
And it’s not just businesses. It’s consumers too. Confidence of Canadian households regarding current economic conditions, according to the Conference Board of Canada, dropped to 91.9. Last year, the index was set at 100. But in the Prairie Provinces of Alberta, Saskatchewan, and Manitoba, consumer confidence plummeted to the lowest level since March 2009.
Sentiment dropped across all survey questions. The chart by the Alberta Real Estate Association (AREA), which is fretting about home sales, shows just how fast household confidence has fallen in the Prairie Provinces (black line, right scale). But the feeble hope is that it will not totally asphyxiate homes sales: the percentage of households thinking that now is a good time for a major purchase (blue bars, left scale) has fallen sharply – and is low (white horizontal line) – but has not yet totally crashed:
It looked dreary in the Prairie Provinces: Expectations for household budgets declined in August, and more households expected their budgets to decline further over the next six months. The outlook for jobs deteriorated, as layoffs of employees and reduced hours or no hours for contract workers – numerous in the oil business – are cascading through the local economy.
So it remains a mystery where exactly the power for that feverishly anticipated rebound in the second half is supposed to come from, unless a miracle happens to commodity prices. But miracles have become exceedingly rare these days.
The commodities rout is tearing into Canada’s broader economy, but this is even worse. Read… Canada “Getting Clocked” by Something Far Bigger than Oil
- Ron Paul Rages "Blame The Fed, Not China" For The Stock Market Crash
Submitted by Ron Paul via The Ron Paul Institute for Peace and Prosperity,
Following Monday’s historic stock market downturn, many politicians and so-called economic experts rushed to the microphones to explain why the market crashed and to propose "solutions” to our economic woes. Not surprisingly, most of those commenting not only failed to give the right answers, they failed to ask the right questions.
Many blamed the crash on China’s recent currency devaluation. It is true that the crash was caused by a flawed monetary policy. However, the fault lies not with China’s central bank but with the US Federal Reserve. The Federal Reserve’s inflationary policies distort the economy, creating bubbles, which in turn create a booming stock market and the illusion of widespread prosperity. Inevitably, the bubble bursts, the market crashes, and the economy sinks into a recession.
An increasing number of politicians have acknowledged the flaws in our monetary system. Unfortunately, some members of Congress think the solution is to force the Fed to follow a “rules-based” monetary policy. Forcing the Fed to “follow a rule” does not change the fact that giving a secretive central bank the power to set interest rates is a recipe for economic chaos. Interest rates are the price of money, and, like all prices, they should be set by the market, not by a central bank and certainly not by Congress.
Instead of trying to “fix” the Federal Reserve, Congress should start restoring a free-market monetary system. The first step is to pass the Audit the Fed legislation so the people can finally learn the full truth about the Fed. Congress should also pass legislation ensuring individuals can use alternative currencies free of government harassment.
When bubbles burst and recessions hit, Congress and the Federal Reserve should refrain from trying to “stimulate” the economy via increased spending, corporate bailouts, and inflation. The only way the economy will ever fully recover is if Congress and the Fed allow the recession to run its course.
Of course, Congress and the Fed are unlikely to “just stand there” if the economy further deteriorates. There have already been reports that the Fed will use last week’s crash as an excuse to once again delay raising interest rates. Increased spending and money creation may temporally boost the economy, but eventually they will lead to a collapse in the dollar’s value and an economic crisis more severe than the Great Depression.
Ironically, considering how popular China-bashing has become, China’s large purchase of US Treasury notes has helped the US postpone the day of reckoning. The main reason countries like China are eager to help finance our debt is the dollar’s world reserve currency status. However, there are signs that concerns over the US government’s fiscal irresponsibility and resentment of our foreign policy will cause another currency (or currencies) to replace the dollar as the world reserve currency. If this occurs, the US will face a major dollar crisis.
Congress will not adopt sensible economic policies until the people demand it. Unfortunately, while an ever-increasing number of Americans are embracing Austrian economics, too many Americans still believe they must sacrifice their liberties in order to obtain economic and personal security. This is why many are embracing a charismatic crony capitalist who is peddling a snake oil composed of protectionism, nationalism, and authoritarianism.
Eventually the United States will have to abandon the warfare state, the welfare state, and the fiat money system that fuels leviathan’s growth. Hopefully the change will happen because the ideas of liberty have triumphed, not because a major economic crisis leaves the government with no other choice.
- 80 Year Old Woman Trampled To Death In Venezuela Supermarket Stampede
With 30% of Venzuelans eating two or fewer meals per day, social unrest is mounting rapidly in President Nicolas Maduro's socialist utopia. As WSJ reports, soldiers have now been deployed to stem rampant food smuggling and price speculation, which Maduro blames for triple-digit inflation and scarcity. "Due to the shortage of food… the desperation is enormous," local opposition politician Andres Camejo said, and nowhere is that more evident than the trampling death of an 80-year-old woman outside a state-subsidized supermarket.
An 80-year-old Venezuelan woman died, possibly from trampling, in a scrum outside a state supermarket selling subsidized goods, the opposition and media said on Friday.
The melee at the store in Sabaneta, the birthplace of former Venezuelan leader Hugo Chavez, was the latest such incident in the South American nation where economic hardship and food shortages are creating long queues and scuffles.
The opposition Democratic Unity coalition said Maria Aguirre died and another 75 people were injured – including five security officials – in chaotic scenes when National Guard troops sought to control a 5,000-strong crowd with teargas.
"Due to the shortage of food … the desperation is enormous," local opposition politician Andres Camejo said, according to the coalition's website. It published a photo of an elderly woman's body lying inert on a concrete floor.
Camejo said thieves had also attacked the crowd, members of which were seeking to buy cheap food on offer at an outlet of the state's Mercal supermarket chain in Barinas state.
El Universal newspaper reported that Aguirre was knocked to the ground during jostling in the crowd, while the pro-opposition El Nacional said she was crushed in a stampede.
Another person was killed and dozens detained following looting of supermarkets in Venezuela's southeastern city of Ciudad Guayana earlier this month.
President Nicolas Maduro accuses opponents of deliberately stirring up trouble, exaggerating incidents, and sabotaging the economy to try and bring down his socialist government.
Critics, though, say incidents of unrest are symptoms of the increasing hardships Venezuela's 29 million people are facing due to a failed state-led economic model. Low oil prices are exacerbating economic tensions in the OPEC nation.
Venezuelans protest the starvatiion with signs saying 'hunger'…
Shoppers are finger-printed when buying government-controlled foods…
“What’s certain is that we are going very hungry here and the children are suffering a lot,” said María Palma, a 55-year-old grandmother who on a recent blistering hot day had been standing in line at the grocery store since 3 a.m. before walking away empty-handed at midday.
In a national survey, as WSJ reports, the pollster Consultores 21 found 30% of Venezuelans eating two or fewer meals a day during the second quarter of this year, up from 20% in the first quarter.
Around 70% of people in the study also said they had stopped buying some basic food item because it had become unavailable or too expensive.
As The Mises Institute's Carmen Elena Dorobat details,
Millions, Billions, Trillions: The Disaster of Socialism, Once Again
Venezuela’s nearly full-blown socialism is making the news once again. For approximately two years now, the country’s economic crisis has been rapidly unfolding: rising prices, fuelled by increased scarcity of goods and a depreciating currency, were followed by price controls, which brought about even higher prices and more shortages. The list of basic commodities missing from stores, such as toilet paper, has gradually expanded to include cooking oil, corn flour, sugar, sanitary pads, batteries, coffins, and even oil (once the country’s main export). The Cendas survey showed that more than a third of foodstuffs cannot be found on supermarket shelves; moreover, vegetables are 32% more expensive every month, meat prices are going up by 22% every month, and beans are surging by 130%. Basic Venezuelan dishes containing rice and beans have thus become a luxury, as people queue for 8 hours a week, on average, to buy basic goods.
This time it was the bolivar, Venezuela’s currency, which made the headlines, as it tumbled from 82 bolivars to the dollar last year, to 300 bolivars in May, and to a staggering 670 bolivars this August. Because the Venezuelan administration stopped publishing inflation figures in December 2014 (when annual inflation reached 68%), some economists have designed an Arepa (i.e. cornmeal cake with cheese) hyperinflation index, which suggests a current inflation rate of around 400%. Others estimate the annual inflation rate is actually 808%.
A photo of a Venezuelan using a 2 bolivar banknote as a napkin to hold a cheesy pastry (an empanada) has recently gone viral: the banknote is worth less than a third of one US cent on the black market, while the price of a pack of napkins is about 500-600 bolivars. The photo is reminiscent of the Weimar Republic hyperinflationary episode, where the wholesale price index jumped from 100% in July 1922 to more than 2500% in January 1923, which led to German banknotes being used to light fires (right photo).
One can only speculate at the moment the extent of the damage this episode will leave on Venezuelan savings. But if history is any indication, we could soon hear stories similar to those of some of Mises’s acquaintances (recorded from his lectures by his student, Bettina Bien-Greaves):
[A] man made a will according to which this $ 2,000,000 was to be sent back to Europe to establish another orphan asylum such as that in which this man had been educated. This was just before World War I. The money was sent back to Europe. According to the usual procedure it had to be invested in government bonds of this country, interest to be paid every year to keep up the asylum. But the war came, and the inflation. And the inflation reduced to zero this fortune of $ 2,000,000 invested in European Marks—simply to zero.
[The president of a Bank in Vienna] told me that as a young man in his twenties he had taken out a life insurance policy much too large for his economic condition at the time. He expected that when it was paid out it would make him a well-to-do burgher. But when he reached his sixtieth birthday, the policy became due. The insurance, which had been a tremendous sum when he had taken it out thirty five years before, was just sufficient to pay for the taxi ride back to his office after going to collect the insurance in person. Now what had happened? Prices went up, yet the monetary quantity of the policy remained the same. He had in fact for many, many decades made savings. For whom? For the government to spend and devastate (Mises 2010, 30-31).
As news of Venezuela’s suffering keeps coming through, one cannot help but feel a certain sense of dread. All governments control the money supply to essentially the same extent that Maduro’s administration does. All around the world we have monetary socialism, where national currencies are subject solely to political power. And one cannot help but wonder (and fear) how many more such economic disasters it will take before it becomes clear that socialism of all shapes, sizes, and degrees, is unrealizable, unbearable, and unforgivable.
* * *
- Chinese Stocks Slump After "Arrest-Fest", Yuan Strengthens Most In 9 Months, Goldman Cuts Outlook
Update: So much for the "no more intervention" Since the government bailout fund has run dry of money, the brokerages have to step up – CHINA SAID TO ORDER BROKERAGES TO BOOST STOCK MARKET SUPPORT
A busy weekend in Asia was dominated by mayhem in Malaysia, and witch-huntery in China. Chinese authorities began a wide-scale crackdown on rumor-mongerers, arrested journalists, and even detained a regulator for insider trading, as they lifted loan caps on the banking system at the same as withdrawing (verbally) support for the stock market. China strengthen the Yuan fix by 0.15% to 6.3893 – this is the biggest 2-day strengthening of the Yuan fix since Nov 2014. Then just to rub some more salt in the wounds, Goldman cut China growth expectations to 6.4% and 6.1% respectively for the next 2 years. Chinese stocks are opening modestly lower (SHCOMP -3.3%).
- *SHANGHAI COMPOSITE INDEX EXTENDS DECLINES, FALLING 3.1%
Yuan fixed stronger for 2nd day in a row…
- *CHINA SETS YUAN REFERENCE RATE AT 6.3893 AGAINST U.S. DOLLAR
- *CHINA RAISES YUAN REFERENCE RATE BY 0.15% TO 6.3893/USD
Then Goldman slahes China growth…
- *CHINA 2016 GDP GROWTH FORECAST CUT TO 6.4% VS 6.7% AT GOLDMAN
- *CHINA 2017 GDP GROWTH FORECAST CUT TO 6.1% VS 6.5% AT GOLDMAN
- *CHINA 2018 GDP GROWTH FORECAST CUT TO 5.8% VS 6.2% AT GOLDMAN
A “double-dip” in China’s growth in 2015…
China’s economic growth was very weak in early 2015, reflecting a combination of slowing money/credit growth, reform-driven fiscal tightening, and an appreciating CNY, among other factors. Policy easing starting in March seemed to help revive growth in May and especially June. But growth has slowed anew in July and August, prompting market and policymaker concerns and a further spate of easing measures. We retain our 2015 real GDP growth forecast of 6.8%, but note that alternative indicators of activity suggest a sharper slowdown, and mark down our 2016/17/18 forecasts to 6.4%/6.1%/5.8% respectively from 6.7%/6.5%/6.2% previously. We now expect short-term interest rates to fall further, to 1.5% by end-2016 (from 2.25% previously).
…and increased policy uncertainty…
Policy uncertainty has increased. Measures to contain local governments' off-balance sheet financing have taken a back seat for now to a focus on reviving infrastructure spending. Equity market volatility has been large, diminishing the near-term potential for this channel to reduce reliance on debt financing. The snap 3% depreciation in the CNY is small in a macro context, but represents the sharpest weakening in two decades that were dominated by stability/appreciation vs USD, and has prompted an acceleration in capital outflows, heightening the risk of a larger move down the road.
But before all that, this happened…
First, as The FT reports, China "says" it will abandon buying stocks…
China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.
For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.
…
Traders and officials said the latest intervention was aimed at providing a “positive market environment” in preparation for a big military parade this week to celebrate the 70th anniversary of the “victory of the Chinese people’s war of resistance against Japanese aggression”.
Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.
Which could be a problem as all that stopped total and utter carnage last week was their buying…
But then they unleashed full scale fractional reserve banking…
- *SCRAPPING OF LOAN CAP TO HELP STABILIZING ECO GROWTH: FIN. NEWS
Though we suspect this is as much use as a chocalate fireguard for the already maximally-indebted Chinese public.
Butnothing stops the propaganda from flowing…
- *CHINA ECO FUNDAMENTALS BETTER THAN OTHER MAJOR ECONOMIES: 21ST
As authorities begin wide-scale crackdowns on rumor-mongers and nay-sayers…
- *CHINA DETAINS REPORTER ON SUSPECTED SPREADING RUMORS: XINHUA
- *CHINA DETAINS CSRC OFFICIAL ON SUSPECTED INSIDER TRADING:XINHUA
In a worrying signal for global investors with a presence in China, some officials have argued strongly for a crackdown on “foreign forces”, which they say have intentionally unsettled the market.
“If our own people have collaborated with foreign forces to attack the soft underbelly of the market and bet against the government’s stabilisation measures then they should be suspected of harming national financial security and we must take resolute measures to subdue them,” said an editorial in the state-controlled Securities Daily newspaper last week.
As SCMP's Goerge Chen details…
Meet the man who is leading special team to make arrests in stock market: Vice Public Security Minister Meng Qingfeng pic.twitter.com/yvOjangd5s
— George Chen (@george_chen) August 30, 2015
Chinese authorities have held several people, including a journalist, an official of China's securities watchdog and four senior executives of China's major securities dealer for stock market violations.
Wang Xiaolu, journalist of Caijing Magazine, has been placed under "criminal compulsory measures" for suspected violations of colluding with others and fabricating and spreading fake information on securities and futures market, Xinhua learned on Sunday.
Wang confessed that he wrote fake report on Chinese stock market based on hearsay and his own subjective guesses without conducting due verifications.
He admitted that the false information have "caused panics and disorder at stock market, seriously undermined the market confidence, and inflicted huge losses on the country and investors."
Also put under "criminal compulsory measures" were Liu Shufan, an official with China Securities Regulatory Commission. He is held over suspicions of insider dealings, taking bribes and forging official seals.
According to Liu's confession during the investigation, he has taken advantage of his position to secure an approval from the securities authorities for a public company and help the growth of the company's shares.
In return, the head of the company offered bribes worth several million yuan to him.
Also, Liu has used insider information from the above-mentioned company and another company and obtained millions of yuan of illegal gains, according to his confession.
Liu confessed that he has forged official seals to fake a court ruling on divorce and taxation certificates for his mistress.
Xinhua also learned from authorities that Xu Gang, Liu Wei, Fang Qingli and Chen Rongjie, senior executives of the Citic Securities, China's leading securities dealer, have been put under "criminal compulsory measures" for suspected insider trading. They have also confessed to their violations.
"Compulsory measures" may include arrest, detention, issuing a warrant to compel a suspect to appear, bail pending trial, or residential surveillance.
* * *
Way to go China – "open" those markets up to anyone (as long as they are buying)
Charts: Bloomberg
- Why Devaluing The Yuan Won't Help China's Economy
Submitted by Frank Shostak via The Mises Institute,
Earlier this month, the Chinese government decided to depreciate its currency on three consecutive occasions. On August 13, the price of the US dollar was trading at 6.413 — an increase of 3.3 percent against July.
The key factor behind the central bank’s lowering of the yuan is a sharp decline in the growth momentum of exports with the yearly rate of growth falling to minus 8.3 percent in July from 2.8 percent in June.
It is held that by means of currency depreciation that it is possible to strengthen the export of goods and services, thereby strengthening the gross domestic product (GDP), which currently displays a visible weakening. The yearly rate of growth of real GDP stood at 7 percent in Q2 against 7.5 percent in Q2 last year and 8.6 percent in Q1 2012.
According to popular thinking, the key to economic growth is demand for goods and services. It is held that increases or decreases in demand for goods and services are behind rises and declines in the economy’s production of goods. Hence in order to keep the economy going economic policies must pay close attention to overall demand.
Why Governments Devalue Currencies to Boost Exports
Now, part of the demand for domestic products emanates from overseas. The accommodation of this demand is labeled “exports.” Likewise, local residents exercise demand for goods and services produced overseas, which are labeled “imports.” Observe that while an increase in exports implies an increase in the demand for domestic output, an increase in imports weakens demand. Hence exports, according to this way of thinking, are a factor that contributes to economic growth while imports are a factor that detracts from the growth of the economy.
From this way of thinking it follows that since overseas demand for a country’s goods and services is an important ingredient in setting the pace of economic growth, it makes a lot of sense to make locally produced goods and services attractive to foreigners. One of the ways to boost foreigners’ demand for domestically produced goods is by making the prices of these goods more attractive.
One of the ways of boosting their competitiveness is for the Chinese to depreciate the yuan against the US dollar. Based on this one can reach the conclusion that as a result of currency depreciation, all other things being equal, the overall demand for domestically produced goods is likely to increase while also lowering Chinese demand for American goods. This in turn will give rise to a better balance of payments and in turn to a stronger economic growth in terms of GDP. What we have here, as far as the Chinese is concerned, is more exports and less imports, which according to mainstream thinking is great news for economic growth.
Why an Exports Boost Fueled by Depreciation Can’t Grow the Economy
When a central bank announces a loosening in its monetary stance this leads to a quick response by participants in the foreign exchange market through selling the domestic currency in favor of other currencies, thereby leading to domestic currency depreciation. In response to this, various producers now find it more attractive to boost their exports. In order to fund the increase in production, producers approach commercial banks which — on account of a rise in central bank monetary pumping — are happy to expand their credit at lower interest rates.
By means of new credit, producers can now secure resources required to expand their production of goods in order to accommodate overseas demand. In other words, by means of newly created credit, producers divert real resources from other activities. As long as domestic prices remain intact, exporters record an increase in profits. (For a given amount of foreign money earned they now get more in terms of domestic money.) The so-called improved competitiveness on account of currency depreciation in fact amounts to economic impoverishment. The improved competitiveness means that the citizens of a country are now getting fewer real imports for a given amount of real exports. While the country is getting rich in terms of foreign currency it is getting poor in terms of real wealth (i.e., in terms of the goods and services required for maintaining people’s life and well being).
As time goes by, the effects of loose monetary policy filters through a broad spectrum of prices of goods and services and ultimately undermines exporters’ profits. A rise in prices puts an end to the illusory attempt to create economic prosperity out of thin air. According to Ludwig von Mises,
The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.
This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.
Contrast the policy of currency depreciation with a conservative policy where money is not expanding. Under these conditions, when the pool of real wealth is expanding, the purchasing power of money will follow suit. This, all other things being equal, leads to currency appreciation. With the expansion in the production of goods and services and consequently falling prices and declining production costs, local producers can improve their profitability and their competitiveness in overseas markets while the currency is actually appreciating.
The economic slowdown in China was set in motion a long time ago when the yearly rate of growth of the money supply fell from 39.3 percent in January 2010 to 1.8 percent by April 2012. The effect of this massive decline in the growth momentum of money puts severe pressure on bubble activities and in turn on various key economic activity data. Any tampering with the currency rate of exchange can only make things much worse as far as the allocation of scarce resources is concerned.
- Illinois Pays Lottery Winners In IOUs After $30K/Month Budget "Guru" Fails To Produce Deal
Much as Brazil is the poster child for the great EM unwind unfolding across emerging economies from LatAm to AsiaPac, Illinois is in many ways the mascot for America’s state and local government fiscal crisis.
Although well documented before, the state’s financial troubles were thrown into sharp relief in May when, on the heels of a state Supreme Court ruling that struck down a pension reform bid, Moody’s downgraded the city of Chicago to junk.
Since then, there’s been quite a bit written about the state’s pension problem and indeed, Reuters ran a special report earlier this month that outlined the labyrinthine, incestuous character of the state’s various state and local governments.
On Friday, in the latest sign that Illinois’ budget crisis has deepened, Governor Bruce Rauner apparently fired “superstar” budget guru and Laffer disciple Donna Arduin who had been making some $30,000 a month as an economic consultant.
And while Illinois apparently found the cash to fork over six figures to Arduin for just four months of “work”, the budget stalemate means hard times for Illinoisans – including, apparently, lottery winners. The Chicago Tribune has more:
After years of struggling financially, Susan Rick thought things were looking up when her boyfriend won $250,000 from the Illinois Lottery last month. She could stop working seven days a week, maybe fix up the house and take a trip to Minnesota to visit her daughter.
But because Illinois lawmakers have not passed a budget, she and her boyfriend, Danny Chasteen, got an IOU from the lottery instead.
“For the first time, we were finally gonna get a break,” said Rick, who lives in Oglesby. “And now the Illinois Lottery has kind of messed everything up.”
Under state law, the state comptroller must cut the checks for lottery winnings of more than $25,000.
And lottery officials said that because lawmakers have yet to pass a budget, the comptroller’s office does not have legal authority to release the funds.
Prizes of $25,000 or less will still be paid at lottery claim centers across the state, and people who win $600 or less can cash in their ticket at the place where they bought it.
But the bigger winners? Out of luck, for now.
While lottery officials could not immediately say how many winners’ payments were delayed or provide the total amount of those payoffs, the agency’s website lists multiple press releases for winners since the current fiscal year began July 1. Including Chasteen, those winners represent millions of dollars in prizes.
“The lottery is a state agency like many others, and we’re obviously affected by the budget situation,” Illinois Lottery spokesman Steve Rossi said. “Since the legal authority is not there for the comptroller to disburse payments, those payments are delayed.”
Generally speaking, this just serves to underscore the extent to which gross fiscal mismanagement along with the perceived inviolability of pension “implicit contracts” is pushing Illinois further into the financial abyss, but what’s particularly interesting about the suspension of lottery payouts is that the state is now effectively in default to its own citizens, something which, if the situation were reversed, would not be tolerated, and on that note, we give the last word to Rick (quoted above) and also to State Rep. Jack Franks:
Rick: “You know what’s funny? If we owed the state money, they’d come take it and they don’t care whether we have a roof over our head. Our budget wouldn’t be a factor. You can’t say (to the state), ‘Can you wait until I get my budget under control?'”
Franks: “Our government is committing a fraud on the taxpayers, because we’re holding ourselves out as selling a good, and we’re not — we’re not selling anything. The lottery is a contract: I pay my money, and if I win, you’re obligated to pay me and you have to pay me timely. It doesn’t say if you have money or when you have money.”
- JPMorgan: "Nothing Appears To Be Breaking" But "Something Happened"
If you thought you were merely on the fence about being confused on the topic of the global economy, and how the Fed may be on the verge of a rate hike when on both previous occasions when financial conditions were here the Fed was launching QE1 and QE2, here is JPM’s chief economist Bruce Kasman to make sure of that.
Something happened
The August turbulence in global markets has produced significant shifts, including a 6.6% fall in equity prices. The currencies of emerging market countries have depreciated substantially against the G-4, while emerging market borrowing rates for sovereigns and corporates have moved higher. Global oil prices have been whipsawed as have G-4 bond yields.
The speed and magnitude of these movements is reminiscent of past episodes in which financial crises emerged or the global economy slipped into recession. However, nothing appears to be breaking. Global activity indicators have, on balance, disappointed but remain consistent with a modest pickup in the pace of growth. Additionally, despite the turbulence in financial markets, there is no sign of unusual stress in short-term funding markets or of a credit crisis in any large EM economy.
And just to ease the confusion somewhat, here is Kasman’s attempt at explaining what many others had foreseen months, if not years, ago:
While the global economy is not breaking, the events of recent weeks have prompted a reassessment of the risks to global growth and financial market stability. Three related factors tied primarily to EM economies, lie behind this reassessment.
- US and China not giving expected boost to EM. We have noted the widespread expectations (including our own) that a demand boost from the US and China would help to fuel a growth bounce-back across the EM, similar to what happened last year. However, recent activity data from China have uniformly disappointed, reversing a modest firming that took place into mid-year. The US and other DM economies look to be generating solid growth, a point underscored by this week’s impressive revision to 2Q US GDP. However, the positive impulse this is providing to the EM is limited— partly because the composition of G-3 growth appears to be shifting toward services—and so far has been insufficient to offset the sharp deceleration in EM domestic demand.
- It’s not a war, but currency moves hurt. Against a backdrop of divergent business cycles, shifts in FX rates can be a constructive force that promotes rebalancing. To a large degree, the dollar’s rise against the euro and the yen over the past two years reflects this dynamic since this was accompanied by ECB and BOJ easing. However, the recent declines in EM currencies signal a sense of heightened risk and, in some cases, concerns about policy credibility— further constraining EM policymakers’ ability to ease even as local financial market conditions have tightened.
- The elephant in the room is the EM credit overhang. The risks associated with weaker growth and tighter financial conditions in the EM are magnified by the large overhang of EM private-sector credit. Our estimates suggest that overall EM private sector debt stands at about 130% of GDP, about 50%-pts above the 2007 level. This pace of increase is unsustainable and the risks of a disruptive deleveraging have increased.
While recent developments have raised the specter of past EM financial crises, EM governments have taken steps to limit these risks over the past 15 years. In most cases, EM public sector balances are in good shape and FX reserves have risen significantly. What’s more, the role of short-term interbank financing has been limited in this cycle. Thus, the risk of a crisis that begins with EM sovereigns or the banking sector appears limited.
That said, EM governments’ capacity to offset the effects of an adverse shock to the corporate credit supply is limited. And the risk of this deterioration is real given the interaction of weak growth, reduced pricing power for goods and commodity producers, and rising local market borrowing rates. The downtrend in many EM FX rates will add to the pressure on corporates that have significant FX liabilities. A tightening in EM credit already is under way. Data through
June show bank loan growth has slowed by one-third in recent years.The immediate concern for the EM economies seems to be that the credit supply may tighten further, possibly sharply, adding to the downward pressure on growth and capping global growth at a pace much closer to the economy’s potential 2.6%, which is significantly below our current forecast.
And a pop quiz: at a time when a sharp contraction in the credit supply is the top global growtth fear by Wall Street’s most “respected” bank, does the Fed: i) hike or ii) ease more. This is not a trick question.
- Do You Feel Lucky?
- Policy Confusion Reigns As China Caps Muni Debt, Uncaps Bank Debt, And Bad Loans Soar
Last week, China moved to increase the quota for issuance under the country’s local government debt swap program to CNY3.2 trillion. The program, designed to help the country’s local governments crawl out from under a debt burden that amounts to more than 30% of GDP, allows provincial governments to issue bonds with yields that approximate the yield on central government debt and swap the new bonds for outstanding LGFV loans which generally carry higher interest rates. Generally speaking, the debt swap will save local governments somewhere in the neighborhood of 300 to 400 bps.
Of course, as we’ve detailed exhaustively, these types of deleveraging initiatives come at a cost for China. That is, with the economy slowing, there’s a certain degree to which China needs to re-leverage by attempting to boost credit growth and juice aggregate demand. That reality, plus the fact that the banks which made the initial loans to local governments weren’t keen to swap those high yielding assets for the new, lower yielding bonds, prompted the PBoC to implement what amounts to Chinese LTROs which allow the banks to pledge the new local government bonds for central bank cash which can then be re-lent to the real economy. So, in a nutshell, local governments issue new bonds, the bank swaps existing loans for those bonds, then the PBoC allows the bonds to be pledged as collateral for new cash. Ideally, this would be a win-win; that is, local government save billions in debt servicing costs and banks have fresh cash to make new loans.
The only problem is this: what happens when local governments need to borrow more money to finance things like infrastructure projects? That question prompted the PBoC to relax rules on LGVF financing, a move which hilariously negated the entire refi effort by encouraging local governments to turn to the very same high interest loans that got them into trouble and necessitated the debt swap program in the first place.
There’s some (or maybe we should say “a lot”) of ambiguity here regarding how much of local governments’ new financing needs can be met by issuing on-balance sheet bonds (i.e. the same type of traditional, low yielding munis that are part and parcel of the debt swap program only issuance is aimed at raising cash, not at refinancing old LGFV loans) and how much is new, off-balance sheet LGVF borrowing, and sorting that out is an exercise in futility (trust us), but whatever the case, China has now moved to cap local government debt issuance at CNY16 trillion for 2015. Here’s Xinhua with the story:
China’s top legislature on Saturday imposed a ceiling of 16 trillion yuan (2.51 trillion U.S. dollars) for local government debt in 2015.
The decision was adopted at the close of the National People’s Congress (NPC) Standing Committee bi-monthly session.
The 16-trillion-yuan debt consists of two parts, 15.4 trillion yuan of debt balance owned by local governments by the end of 2014, and 0.6 trillion as the maximum size of debt local governments are allowed to run up in 2015.
The 2014 debt balance surged over 40 percent from the end of 2013 H1, and valued 1.2 times of the final accounting of 2014 public budget, according to the statistics.
According to the Budget Law which took effect this year, and a State Council regulation, China should cap local government debt balance, and the size of local government debt should be submitted by the State Council to the NPC for approval.
Wang Dehua, researcher at Chinese Academy of Social Sciences, said the fast expansion of local debt was a result of former inaccurate statistics and the recent proactive fiscal policy as well as major infrastructure projects.
“The move will rein local government debt with law,” said Ma Haitao, a professor at Central University of Finance and Economics.
Yes, “rein local government debt with law,” but because this is China, and because one initiative designed to curtail leverage must everywhere and always be met with an initiative to expand credit growth lest Beijing, in an effort to get control of the situation should inadvertently end up choking off what little demand for credit still exists outside of CSF plunge protection borrowing, China has also decided to remove the 75% loan-to-deposit cap. Here’s WSJ:
China will remove a 75% cap on banks’ loan-to-deposit ratios on Oct. 1 following the adoption of a legal amendment by the national parliament on Saturday, according to state news agency Xinhua.
The ratio will instead be regarded as a liquidity monitoring indicator, according to the amendment passed by the Standing Committee of the legislature, known as the National People’s Congress, Xinhua said.
The 75% cap has been in place since its inclusion in a commercial banking law enacted in 1995, Xinhua said. China’s State Council, or cabinet, said in June that the ceiling would be scrapped in a draft amendment to the law.
Under current rules, Chinese banks must keep their loan-to-deposit ratios below 75%. For every dollar a bank collects in deposits, it can lend only 75 cents.
Analysts say the move could modestly boost lending, while also making banks safer as the ceiling encouraged many of them to disguise loans as investments or move them off their balance sheets.
Of course it’s not at all clear here how much of this decision is truly aimed at reducing risk and how much is simply a desperate attempt to encourage banks to lend. After all, the fact that Chinese banks disguise loans as investments and hold as much as 40% of credit risk off balance sheet isn’t exactly a secret, and in fact, it’s a critical piece of the puzzle when it comes to what is essentially a state-sponsored effort to keep NPLs artificially low (another part of the effort involves forcing banks to roll bad loans).
And speaking of artificially suppressed NPLs, even the fake numbers official NPL ratios are rising. Here’s FT with a bit of color on H1 performance for China’s big four:
The country’s big four state-controlled banks — Agricultural Bank of China, ICBC, Bank of China and China Construction Bank — reported only marginal gains in net profit for the first half of the year, while official measures of non-performing loans surged.
While the central bank eased policy last week, cutting the benchmark interest rate and lowering the reserve ratio requirement for banks, analysts expect China’s lenders to remain under increasing pressure as they grapple with the most difficult market conditions they have faced in recent years.
“It’s definitely going to get tougher before we see any turnround,” said Patricia Cheng, head of China financial research at CLSA in Hong Kong. “This is the usual trick of kicking the can down the road, adding new liquidity and hoping it goes to more productive businesses so companies can generate better returns and pay off debt,” she said. “But for the last few years, it hasn’t come true.”
Analysts at Moody’s, the credit rating agency, estimate that the move to cut the RRR — the amount of reserves that banks must keep with the central bank — by 50 basis points to 18 per cent will free up Rmb600bn-Rmb700bn ($94bn-$110bn) of liquidity in the banking system.
Andrew Collier, managing director of Orient Capital, an independent research house in Hong Kong, reckons the People’s Bank of China will continue to reduce the RRR in an attempt to support the banks and the real economy.
But he doubts that will be effective in tackling the main challenge of rising bad debts.
“There are trillions available in banks that the government is slowly releasing like air being let out of a basketball,” he said. “It will help banks’ profitability but it won’t help them overcome the real problem.”
No, it most certainly will not and in fact, one could plausibly argue that flooding banks with liquidity and forcing them to lend into a weakening economy where household and corporate balance sheets are feeling the heat from a stock market collapse and generally poor economic conditions, respectively, is a recipe for disaster in terms of NPLs. Here’s a bit more from FT:
[ICBC’s] NPL ratio rose to 1.4 per cent as of end-June, from 1.29 per cent at the end of March, while Bank of China’s rose to 1.4 per cent from 1.33 per cent and Agricultural Bank of China’s hit 1.83 per cent from 1.65 per cent. The ratio for CCB rose to 1.42 per cent from 1.19 per cent at the end of last year.
Not to put too fine a point on it, but China no longer has any idea what it’s doing. On the one hand, NPLs are rising and there’s every reason to think that creditworthy borrowers are becoming fewer and farther between as the economic deceleration gathers pace. Meanwhile, demand for credit has fallen off a cliff as evidenced by the fact that in July, lending to the real economy (i.e. not to the plunge protection team) cratered 55%. But China simply cannot afford to let the system adjust and rebalance, especially not when daily FX interventions are sapping liquidity and tightening money markets. So Beijing has resorted to forcing the issue by flooding banks with liquidty, an effort which, again thanks to currency management, has to be orders of magnitude larger than it would otherwise be which is why you’re seeing RRR cuts, LTROs, hundreds of billions in reverse repos, and a mishmash of short- and medium-term lending ops.
So where, ultimately, does this leave China? Well, it’s almost impossible to say. What the above demonstrates is the extent to which Beijing is continually forced to implement conflicting policy initiatives in a desperate attempt to deleverage and re-leverage simultaneously. At the risk of using an overly colloquial metaphor, this is just a giant game of whack-a-mole. The question is where and how it all ends.
- Black(er) Monday Looms: Dow Futures Down 220 After J-Hole Speeches & China Fold
It appears a combination of Stan Fischer’s ‘September is still on the table’ hawkishness (among others at Jackson Hole) and the “promise” once again that China will not intervene in the stock market anymore has taken all the exuberance out of last week’s epic short squeeze in US stocks. Dow futures have given all of Friday’s manipulation back and are trading back near Thursday’s JPM panic lows – down 220 from Friday’s close.
An ugly start to the week:
With some key Fib support being tested:
China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.
For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.
…
Traders and officials said the latest intervention was aimed at providing a “positive market environment” in preparation for a big military parade this week to celebrate the 70th anniversary of the “victory of the Chinese people’s war of resistance against Japanese aggression”.
Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.
Finally, for a glimpse at where we might mean-revert to after the biggest 3-day short-squeeze since the bank bailout in Nov 2008…
We are gonna need another AAPL email, stat.
Charts: Bloomberg
- Manipulation = Fragility
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
In markets distorted by permanent manipulation the most powerful incentive is to borrow as much money as you can and leverage it as much as you can to maximize your gains in risk-on asset bubbles.
A core dynamic is laying waste to global financial markets: the greater the level of central bank/government manipulation, the greater the systemic fragility.
One key characteristic of this fragility is that it invisibly accumulates beneath the surface stability until some minor disturbance cracks the thinning layer of apparent stability. At that point, the system destabilizes, as it has been hollowed out by ceaseless manipulation, a.k.a. intervention.
There are a number of moving parts to this dynamic of steadily increasing fragility.
One is that any system quickly habituates to the manipulation, that is, the system soon adds the manipulation to its essential inputs.
For example: if you lower interest rates to near-zero, the system soon needs near-zero interest rates to remain stable. Raising rates even a mere percentage point threatens to fatally disrupt the entire system.
Another is that permanent intervention (i.e. manipulation, or to use a less threatening word, management) strips the system of resilience. When participants are rescued from risk by central bank/central state authorities, they take bigger and bigger gambles, knowing that if the bet goes south, the central bank/state will rush to their rescue.
One of the core sources of resilience is a healthy fear of losses. If you're going to face the consequences of your actions and choices, prudence forces you to either hedge your bets or diversify very broadly, so if bets in one sector go south you won't be wiped out.
Thanks to the permanent manipulation of central banks and states, trillions of dollars have concentrated in high-risk, high-yield carry trades that are now blowing up.
A third source of fragility in manipulated financial systems is the perverse incentives generated by cheap credit and assets bubbles. In markets distorted by permanent manipulation–near-zero interest rates, central bank asset purchases, quantitative easing, etc.–the most powerful incentive is to borrow as much money as you can and leverage it as much as you can to maximize your gains in risk-on asset bubbles.
Why this increases system fragility is obvious: when the bubbles pop, the debt has to be paid back. But once the assets drop enough, selling won't raise enough money to pay back the debt.
At that point, the borrowers are bankrupt, and the dominoes of debt topple the entire financial system.
Dave of X22Report and I discuss these dynamics in Central Banks Have Manipulated The Markets Which Will Ultimately Crash: (42:48)
- Jackson Hole Post-Mortem: "Door Still Fully Open To September Lift Off"
Curious why the S&P futures have opened down some 0.6%, wiping out the entire late-Friday ramp? The reason is that as SocGen summarizes it best, following the Jackson Hole weekend, we now know that despite Bill Dudley’ platitudes “the door is still fully open to Fed liftoff in September.”
Here is how SocGen describes a Fed whose posture still hints at a September rate hike:
Jackson Hole vs Market Consensus
Analysing the speeches and papers from Jackson Hole, we note several “gaps” to the market consensus. Top of the list, Vice-chair Fischer struck a slightly less dovish tone suggesting that all options remain open with respect to a September liftoff. New research presented, moreover, showed that US inflation is less influenced by FX rates than some in markets fear. BoE Governor, for his part, played down the China slowdown noting this did not yet warrant a change to BoE strategy. Vice President Constancio also sounded confident in the ECB’s ability to close the output gap and raise inflation. More worrying, RBI Governor Rajan warned that central banks should not be overburdened and noted mispricing of certain assets. Also notable was the apparent lack of discussion on what tools central banks have left to fight new downside risks; and this at a time when one of the more effective QE channels of emerging economies’ leverage expansion has lost its punch. A topic perhaps for the 4-5 September G20 in Ankara.
Door still fully open to Fed liftoff in September …
Comments by Fed Vice Chair Fischer kept the door open to a September rate hike. Speaking Saturday, he noted that at “At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.” At the same time, he highlighted that “With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.”
Interestingly, while Fischer made reference to role of the dollar in potentially keeping US inflation low, new research from Harvard Economics Professor Gita Gopinath, (link here) suggested that the US economy is fairly “insulated” from foreign inflation/deflation pressures via exchange rates given that the bulk of US foreign trade in conducted in dollars. This is very much in line with the findings of our Chief US Economist, Aneta Markowska.
At present the market is pricing in a probability of just under 40% for a September rate hike, up from a low last week of 24% but still below our own baseline which sits above 50% and more dovish than our interpretation of the tone struck at Jackson Hole and recent data releases. Albeit that part of the Q2 GDP revision from 2.3% to 3.7% came from an inventory build, private demand was also robust. This week’s employment report is the key release ahead of the 16-17 September FOMC and we look for 250K. In addition to the economic data, financial conditions will play an important role in shaping the Fed’s liftoff decision; the recent stabilisation if confirmed should increase the odds.
* * *
Translation: while the Fed may or may not hike in September, the Fed itself does not know what it will do, less than three weeks until the September FOMC, but as we explained on Friday the higher the market rises, i.e., the looser financial conditions become, the higher the likelihood the Fed does hike in September after all… thereby forcing another sell off.
Good luck with that particular bit of circular logic.
- A Very Unexpected Statement From A Central Banker: "We Are Merely Reacting To A Situation We Did Not Create"
The ECB’s Vitor Constancio, while largely a silent puppet operating quietly in the shadow of his boss, former Goldmanite Mario Draghi, is best known for his tragicomic statement from October 2014 that the ECB will not stress test Europe’s banks for deflationary scenario because it simply won’t happen…
My question would be on how credible these tests are. Looking at the adverse scenario, you haven’t even included deflation. You have not included an interruption in gas imports to Europe. You have not included full-on sanctions on Russia. So please elaborate and convince us.
Constâncio: The scenario for the stress test was published earlier in the year, so some of the things you mentioned would not have been considered. But indeed, what was considered is a severe shock being the growth of other countries. If you look to the scenario, you see that for the US, there is also a big deceleration of growth which is part of the scenario and also for other countries that are the markets of the euro area. So that is embedded in those assumptions of indeed a big drop in external demand directed to the euro area. That’s the first point. The scenario of deflation is not there because indeed we don’t consider that deflation is going to happen.
… just two months before the same Constancio warned Europe would shortly have its first episode of outright deflation, and which was confirmed in the first week of January…
… precipitating the launch of Europe’s own version of QE.
But while the general public is now largely used to central bankers’ utter cluelessness when it comes to predicting even the most immediate future, just a few days ago the same ECB vice president uttered something far more confusing and perhaps troubling during the Annual Congress of the European Economic Association, on August 25.
Here is what he said:
Sometimes the criticism directed at our policies implicitly attributes responsibility for the low interest-rate environment to central bank policies. But the truth is precisely the opposite: central banks are simply reacting to and trying to correct a situation that they did not create. Indeed, medium and long-term market interest rates are mostly influenced by investors and market players, as the recent so-called “bund tantrum” illustrates.
Huh? Suddenly central bankers are pulling the Obama ‘defense’ – it was all the “other guy’s fault”. But why? And if the current unprecedented regime of ubiquitous central planning is not the central planners’ fault, then whose fault is it?
Well, according to the same ECB comedian, it is the market’s fault: the same markets that haven’t existed since 2009 when the only “trade” was to frontrun, drumroll, the central bankers.
It gets better, because suddenly Constancio decides to completely lose logic and blame low rates on… low rates.
More importantly though, it should be pointed out that for a few decades now we have been witnessing a sort of secular trend towards lower real interest rates. This trend is related to secular stagnation in advanced economies, resulting from a continuous deceleration of total productivity growth and an increase in planned savings accompanied by less buoyant investment prospects. Monetary policy short-term rates are low because of those developments, not the other way around. At the same time, our monetary policy has to be accommodative precisely in order to normalise inflation and growth rates, thereby opening up the possibility of higher interest rates.
Actually, dear Vitor, the only reason there is secular stagnation now is because of the $200 trillion in global debt your policies have enabled: debt, which even McKinsey and the IMF, i.e., very serious institutional participants, admit needs to be washed away for global growth to have even a remote chance.
But the moment Constancio’s speech jumped the printer was this:
Furthermore, in the present short-term conditions, with no fiscal room for manoeuvre, it is monetary policy that has the capacity to create the hope that this normalisation will protect savers in the future and improve net margins for banks.
Get this: a VP for a central bank… whose deposit rate is negative… which forces savers to pay the banks for the privilege of holding their cash… is suddenly concerned about “protecting savers.”
One couldn’t make this up.
The good news is that finally central bankers are scared: otherwise they wouldn’t be deflecting public anger from their actions and blaming the “market” – a market which may have existed once upon a time, but in a world with $22 trillion of central bank liquidity is just a fond memory.
Here is to hoping that whatever is scaring these same central planners, finally forces them to admit what has been clear to most for the past 7 years: the money printing emperor has been naked from day one. And to finally leave and never come back, allowing this so-called “market” to return and wipe away 7 years of parasitic policies that have only benefited the top 1% of the population while crushing everyone else.
- Did The Fed Intentionally Spark A Commodity Sell-off?
Submitted by Leonard Brecken via OilPrice.com,
The intention here is the bring facts to light so the public can decide.
I’m not quite sure what to believe on how and why oil prices remain more than 50 percent below free cash flow break even for most independent E&P companies. I know for sure it’s not just one reason and is more likely a confluence of events.
Part of the reason oil prices broke new six-year lows is tied to hedge funds shorting equities and pressuring equity pricing through shorting oil. Another reason is the desire of private equity firms to buy assets on cheap and some banks seeking M&A fees. Obviously OPEC policy has a part to play. There is also no doubt that EIA statistics mistakenly leave the impression that production has remained resilient throughout the summer. But the spark that set the ball in motion was the dollar strength as every major money center bank in the U.S. recommended going long EU equities and long the dollar because of further monetary easing in Europe.
The inverse correlation between the U.S. dollar and oil prices in June was virtually 100 percent, but that has changed more recently, as I have noted previously. At that time, investors here in the U.S. plowed into biotechnology and technology and went short oil as if they knew what assets central banks were going to buy and not buy based on all the free money from Europe and Japan.
Since the financial crisis began the cozy relationship between money center banks and the Federal Reserve, since the bail outs, is well known. For example, Goldman Sachs’ deep ties to the U.S. government are notorious and, not surprisingly, they led the charge in calls for a downturn in oil. So has the media, as I have extensively documented all year here.
On the other hand, oil inventories on paper in the U.S. were rising into the fall of last year for sure while the economy was weakening in the U.S. and in China, the largest importer of commodities. So the merits of weaker commodity prices stand on their own to an extent. The correction to $70 from $100 was justified, but the crash to levels not seen since the crisis of 2008-2009 are overblown. Now the cries comparing the 2015 crisis to the 1986 oil demise rise as well. Are economic conditions that bad?
For oil, demand has greatly accelerated, in fact. Then why go long the riskier, higher beta technology that, at their highs and still to this day, are still being pumped? To make matters worse, record short positions in oil futures and equities still exist, eclipsing even the 2008-2009 meltdown. So where did this long tech, short commodity trade derive from and why? One possibility is the Federal Reserve itself; either indirectly, through monetary policy, or directly.
When the markets corrected last fall, Fed officials did not shy away from additional use of monetary policy or Quantitative Easing (QE). The cries from Wall Street were as loud as ever for it.
By early 2015, the economy had weakened, and GDP dropped below 2 percent growth on an annual basis. But Wall Street’s cries were largely silent, other than to say the Fed shouldn’t raise rates. The Fed, on the other hand, instead of threatening to ease, is instead threatening to tighten; the opposite of what we heard when markets fell similarly in 2014. The question is, why the change, despite fundamentals weakening?
One theory is that some within the Fed realized that QE wasn’t working, and never worked, thus another path was needed. But what alternative did they have, since rates were already ZERO?
So maybe they changed course and took a strong dollar policy vs. a weak one to intentionally weaken the commodity sector and thus boost consumer spending. Throughout this down turn, that message has been repeated by Yellen herself many times, as a source of economic stimulus and for sure has been repeated over and over in the media and the talking heads of Wall Street.
Wall Street is notorious for not fighting Fed policy, so they turned to other asset classes such as technology to blow that bubble up even further. But then why was there such a desire to close the Iran deal so suddenly, which would further add to global oil supply?
This theory isn’t as farfetched as it initially seems, especially considering that Wall Street has been investing based on central bank policies for 6 years now, moving money where easing occurs around the globe and putting very little into real fundamentals. It’s something to consider in explaining prices.
- Polish Government Confirms Discovery Of Nazi "Gold Train", Warns It May Be Booby-Trapped
Last weekend we reported that in the past month two men, a Pole and German, claimed to have discovered the legendary Nazi “gold train” – a 150 meter long German train alleged to be full of gold, gems and weapons, which disappeared just before the end of World War II – in the proximity of the Polish town of Walbrzych, close to where the Nazi are said to have loaded up the train with valuables for its final voyage in the town of Wroclaw, just as the Soviet forces approached in 1945.
As we detailed, the train is said to have been entombed in the vast tunnel labyrinth located close to Ksiaz castle, which served as Nazi headquarters during World War II…
Ksiaz castle, Nazi headquarters during World War II
… and specifically, was said to be located at the foot of the Sowa mountain, in the woods three miles outside the town of Walbrych.
The “gold train” is said to be located under this hill
While many were skeptical that the mystical Nazi treasure train had been finally discovered after many years of searching, an official update last Friday by the Polish government suggested that that may indeed be the case. As the Mail reported on Friday, a representative of the Polish culture ministry, Poland’s National Heritage and Conservation Officer Piotr Zuchowski, said that the man who helped hide the train had revealed its location shortly before he died, and that proof of the train has been observed on radar.
Zuchowski added that “Information about where this train is and what its contents are were revealed on the deathbed of a person who had knowledge of the secret of this train.’ He added that Polish authorities had now seen evidence of the train’s existence in a picture taken using a ground-penetrating radar. He said the image – albeit blurred – showed the shape of a train platform and cannons.
Piotr Zuchowski, Poland’s National Heritage and Conservation Officer, confirmed the ‘unprecedented’ find
Mr Zuchowski said the find was ‘unprecedented’, adding: ‘We do not know what is inside the train. ‘Probably military equipment but also possibly jewellery, works of art and archive documents.
‘Armored trains from this period were used to carry extremely valuable items and this is an armored train, it is a big clue.’ He said authorities were now ’99 percent sure the train exists’ and whatever is on it will be returned to the rightful owners, if they can be found. ‘We will be 100 per cent sure only when we find the train,’ Mr Zuchowski added.
The train found in the mountains is an ‘armored train’ which looks similar to the one pictured
Mr Zuchowski told reporters that the train was about 100 metres long but added: ‘It is not possible to disclose the exact location of where the train can be found. Still, he noted cryptically that “The local government in Walbrzych knows where it is.”
He explained it is hidden along a 4km stretch of track on the Wroclaw-Walbrzych line.
Mr Zuchowski said the person who claimed he helped load the gold train in 1945 said in a ‘deathbed statement’ the train is secured with explosives. The official declined to comment further about the man who said this but speculation is now rife that it was a former SS guard or a local Pole who stumbled upon the train before hiding it.
Deputy Mayor of Walbrzych, Zygmunt Nowaczyk told the press: ‘The city is full of mysterious stories because of its history. ‘Now it is formal information – we have found something.’
Key excerpts from the press conference by the Polish official can be seen on the Euronews clip below:
The confirmation of the discovery unleashed a surge of treasury hunters, and forced the Polish government to warn the population to stop looking because it could be booby-trapped and dangerous. Zuchowski said “foragers” have become active since two people claimed to have discovered the train last week and urged eager fortune-hunters to stop searching, saying they risk injury or death.
Zuchowski adds that “there may be hazardous substances dating from the Second World War in the hidden train, which I’m convinced exists. I am appealing to people to stop any such searches until the end of official procedures leading to the securing of the find. There’s a huge probability that the train is booby-trapped.’
If anything, tthese warnings are sure to unleash an even more aggressive wave of seekers now that the train’s existience has been confirmed, and the government is actually warning seekers to be careful in their search.
But perhaps what is more interesting is just what the discovery, which would be straight out of an Indiana Jones sequel, will contain, and whether someone already got to the precious cargo over the past 7 decades. The answer should be made public shortly.
- Leveraged Financial Speculation In The US At A Familiar Peak, Once Again
"I believe myriad global “carry trades” – speculative leveraging of securities – are the unappreciated prevailing source of finance behind interlinked global securities market Bubbles. They amount to this cycle’s government-directed finance unleashed to jump-start a global reflationary cycle.
I’m convinced that perhaps Trillions worth of speculative leverage have accumulated throughout global currency and securities markets at least partially based on the perception that policymakers condone this leverage as integral (as mortgage finance was previously) in the fight against mounting global deflationary forces."
Doug Noland, Carry Trades and Trend-Following Strategies
The basic diagnosis is correct. But the nature of the disease, and the appropriate remedies, may not be so easily apprehended, except through simple common sense. And that is a rare commodity these days.
Like a dog returns to its vomit, the Fed's speculative bubble policy enables the one percent to once again feast on the carcass of the real economy.
'And no one could have ever seen it coming.'
Once is an accident.
Twice is no coincidence.
Remind yourself what has changed since then. Banks have gotten bigger. Schemes and fraud continue.
What will the third time be like? And the fourth?
Do you think that Jamie bet Lloyd a dollar that they couldn't do it again?
Should we ask them to please behave, levy some token fines, watch the politicans yell and posture in some toothless public hearings, let all of them keep their jobs and their bonuses? And then bail them out, wind up the old Victrola, and have another go at the same old thing again?
Maybe we can vote for one of their hired servants, or skip the middlemen and vote for one of the arrogant hustlers themselves, and hope they get tired of taking us for a ride before we all go broke.
This policy we have now is the trickle down stimulus that the wealthy financiers have been sucking on with every opportunity that they have made for themselves since the days of Andrew Jackson. Whenever the ability to create and distribute money has been handed over by a craven Congress to private corporations and banking cartels without sufficient oversight and regulation, excessive speculation, financial recklessness, and moral hazard have acted like a plague of misery and stagnation on the real economy.
"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank.
You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin!
You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."
From the original minutes of the Philadelphia bankers sent to meet with President Jackson February 1834, from Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels
I believe all of the above is entirely possible. Because we still have an unashamed cadre of quack economists and their ideologically blind followers blaming the victims, prescribing harsh punishments for the weak, laying all the blame on 'government' and not corrupt officials on the payrolls of Big Money, and giving the gods of the market and their masters of the universe a big kiss on the head, and expecting them to just do the right thing the next time out of the natural goodness of their unrestrained natures the next time.
What could go wrong with that?
Genuine reform. It's too much work, and too much trouble.
h/t Jesse Felder for the chart
- This Trade Works Like Clockwork
By Chris at www.CapitalistExploits.at
The past few weeks we’ve been enjoying the sights and sounds of Colombia with our Seraph group, a country which has gradually been dragging itself out of a nightmarish civil war, constantly overshadowed and closely tied to drug cartel wars which pepper it’s history. Much of that seems a distant memory now and the rise of a middle class, the flip side of which is a fairly rapidly falling unemployment numbers and poverty levels, is evident all around. Colombia has benefited in the last decade from strong commodity prices and on the face of it is doing well.
In the short term I think there comes some serious dislocations in the market for a host of reasons which we discussed in earnest late into the nights. I like a bit of chaos as prices typically move accordingly and in emerging markets like Colombia they tend to move more violently than elsewhere. This is due to relative illiquidity amongst other things.
I’ll have more on this next week but due to what the broader markets, especially those in the US, are delivering us right now I felt it better to provide some thoughts from our colleague Mark Schumacher.
Enjoy!
————
This past week the Dow Jones industrial average fell almost 900 points or 5.1% from 17,352 to 16,460. The index is now 10.1% below its 18,312 peak reached on 5/19/15 crossing the 10% mark which defines a technical correction. For all of 2015 it is down 7.7% while our portfolios are still up this year. I’ll provide a thorough summary at the end of Q3.
The catalyst for the recent correction is renewed global growth fears which are centered on concerns about China having a hard landing as it attempts to become less dependent on exports by growing its service economy. The market is interpreting (correctly in my opinion) the recent nearly 2% devaluation of the yuan as evidence that China’s problems are worse than previously thought… why else would they need to make such a move on top of all the financial stimulus they have been pumping into their system. If trouble is indeed brewing in the 2nd largest economy and #1 exporter ($2.25T vs. 1.61T for the US), than there will be ripple effects across the globe.
There is no guarantee that US stocks prices will suffer a great deal especially for domestically oriented companies, plus some US businesses will benefit from a weaker China. However in case trouble spreads or the negative momentum simply feeds on itself for a while I purchased portfolio insurance in the form of three ETFs that will appreciate during a US stock market sell off.
Insurance: How Much and Which Products
I did not purchase enough insurance to cover our entire portfolio of investments as that would be overkill and too expensive. The products we own cover 26% – 30% of our entire portfolio including assets with limited risk. I am considering increasing it to cover up to 35% depending on how events develop but currently don’t see a need to go higher than that. Should another step be necessary for greater safety, I would simply sell some shares and hold the cash for a while, but I much prefer sitting tight as our holdings offer very good value especially at today’s prices. I expect the businesses we own to flourish for years because they are either leaders in their respective fields while benefiting from strong trends, or they are super cheap turnaround candidates that we are generating income from. We are best served by sitting tight with these investments while having some insurance rather than exiting now then trying to time when to get back in again.
Gold may appreciate during a stock market sell off but it does not always work that way, therefore I do not think of gold as portfolio insurance.
The three ETFs we purchased were:
1. SDS – moves inversely 2-1 vs. the S&P 500 index which is a basket of 500 very large US stocks spanning many industries.
2. QID – moves inversely 2-1 vs. the NASDAQ 100 which is a basket of large US technology stocks. This nicely correlates with some of our technology holdings.
3. BIS – moves inversely 2-1 vs. the NASDAQ biotechnology and pharmaceutical index which has had a crazy run up.
FYI, because these are -2x products we can cover 30% of our portfolio by investing just 15% of our assets in these ETFs. These inverse products experience some daily rebalancing decay so they are not buy and hold investments. You don’t sit on them for years. Several months is more typical, and I only plan to hold them for as long as the current market weakness continues.
Historical Chart: Corrections and Recoveries
The two biggest things I take away from observing the 20-year stock market chart below (which is on a log scale) are:
- Corrections happen quickly while recoveries happen more gradually but last longer. This is where the saying “stock investors ride escalators up but take the elevator down” comes from. The majority of the time you will be on the escalator. Right now we are in the elevator.
- The stock market rarely moves sideways. It is nearly always either trending up or trending down. I believe this is purely due to investor psychology rather than fundamentals such as GDP and business profits which fairly often trend sideways. Best not to ignore investor psychology at least over the near term as it drives stock price trends, in my opinion.
I would say this historical chart puts the size of the recent decline from 2,100 to 1,970 for the S&P 500 index into proper perspective which is why it is not too late to buy some portfolio insurance.
20-Year Chart: US Stock Market (SPX)
The 15-year chart below is simply to demonstrate the crazy run up biotech stocks have had over just the past few years making that sector vulnerable to a price correction as many of these stocks sport multi-billion dollar valuations but don’t yet have any products on the market.
15-Year Chart: US Biotech & Pharma Stocks (IBB)
Bottom Line
The stock market correction that I have been worried about for a few years is finally here. I hope it will be shallow and short lived but hope is not a defensive technique so I thought it prudent to buy some protection in case the selling continues. Having a portion of our portfolios appreciate during a sell off is even better than holding extra cash.
Furthermore, I have a plan should volatility spike really high; I will execute our time-tested strategy of buying ZIV or XIV which I will reiterate should we put that plan into action.
————
Members have just received an alert on this very trade.
Until next week…
– Chris
“A man who does not plan long ahead will find trouble at his door.” – Confucius
- The End Of "The Permanent Lie" Looms Large
Submitted by Satyajit Das via The Sydney Morning Herald,
Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.
The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.
Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.
The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.
Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions. Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity.
For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.
Governments are unwilling to tell the truth about the magnitude of the economic problems, the lack of solutions and cost of possible corrective actions to the electorate. Politicians have taken regard of historian Simon Schama’s comment that no one ever won an election by telling voters it had come to the end of its “providential allotment of inexhaustible plenty”. The official policy articulated, in a moment of unusual candour, by Jean-Claude Juncker, the current head of the European Commission, was that when the situation becomes serious it is simply necessary to lie.
Ordinary people are complicit; refusing to acknowledge that maybe you cannot have it all. They sense that the ultimate cost of the inevitable adjustments will be large. It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride. It is a pervasive sense of powerlessness.
The political and social response is likely to be volatile. It was the fear and disaffection of the middle class who had lost their savings in the events of Great Depression that gave rise to totalitarianism.
For the moment, to paraphrase Alexander Solzhenitsyn, the “permanent lie [has become] the only safe form of existence”. But the world cannot postpone, indefinitely, dealing decisively with the economic, resource management, social and political challenges we face.
- Sanders Surges As 1 Million Fake Hillary Followers Exposed
"This feels like 2008 all over again," as NPR reports the latest Iowa Poll showed Sanders just 7 points behind Hillary Clinton, who leads 37 to 30 percent among likely Democratic caucus-goers. Why 2008? As NPR notes, that's when a heavily favored Clinton stumbled and lost to Barack Obama, then a young senator whose middle name, Hussein, was the same as a dictator the U.S. had just overthrown and whose last name rhymed with America's Public Enemy No. 1. And while the socialist septuagenarian continues to surge, Hillary faces yet another 'issue', as Yahoo Tech reports, 1 million (or one third) of her 'apparent' Twitter followers are fake.
As The Des Moines Register reports,
Liberal revolutionary Bernie Sanders, riding an updraft of insurgent passion in Iowa, has closed to within 7 points of Hillary Clinton in the Democratic presidential race.
She's the first choice of 37 percent of likely Democratic caucusgoers; he's the pick for 30 percent, according to a new Des Moines Register/Bloomberg Politics Iowa Poll.
But Clinton has lost a third of her supporters since May, a trajectory that if sustained puts her at risk of losing again in Iowa, the initial crucible in the presidential nominating contest.
This is the first time Clinton, the former secretary of state and longtime presumptive front-runner, has dropped below the 50 percent mark in four polls conducted by the Register and Bloomberg Politics this year.
Poll results include Vice President Joe Biden as a choice, although he has not yet decided whether to join the race. Biden captures 14 percent, five months from the first-in-the-nation vote Feb. 1. Even without Biden in the mix, Clinton falls below a majority, at 43 percent.
"These numbers would suggest that she can be beaten," said Steve McMahon, a Virginia-based Democratic strategist who has worked on presidential campaigns dating to 1980.
* * *
But Hillary's problems continue to rise as Yahoo Tech finds that an analysis of the Hillary Clinton's and Joe Biden's Twitter accounts has revealed that over one million of Clinton's followers are fake, while only 53% of Biden's social media fans are real.
Fake Twitter followers abound among the U.S. presidential candidates as they gear up for the election in 2016. And Hillary Clinton isn’t the only candidate with more than a million of them. GOP frontrunner Donald Trump also has well over a million fake followers. Other candidates have them, too, but not as many (in large part because they don’t have as many followers, period).
“Fake followers are a mix of inactive Twitter users (who signed up but never log on), completely fake users that are created for the sole purpose of following people, and spam bots that are programmatically set up to tweet ads and malicious content,” explained David Caplan, co-founder of TwitterAudit.
“Fake followers aren’t inherently bad,” Caplan said, “they are just a dishonest form of using social media. They can be leveraged to inflate someone’s reputation. People will most likely follow someone who already has many followers, so buying followers is a way to boost your follower count in the future. Fake followers can also be used to commit fraud in the sense that you can inflate the value of your Twitter account for advertising purposes without creating any real value.”
Here are the "real" follower counts for the numerous presidential hopefuls…
Digest powered by RSS Digest
Saving...