- Financial Warfare & The Big Reset: Koos Jansen Interviews Willem Middelkoop
Submitted by Koos Jansen via BullionStar.com,
The very reason I became interested in gold after the financial crisis in 2008 was because of Dutch gold guru, author, journalist, entrepreneur, and fund manager Willem Middelkoop. When I started reading his books I was immediately obsessed with economics and the gold market – along with thousands of others across the world. Who would have thought that I would become a precious metals analyst a few years later?
It was an honor to have contributed to Willem’s latest book The Big Reset with translations from Chinese policy makers that stimulate their citizenry to accumulate physical gold and my initial research into the Shanghai Gold Exchange that revealed Chinese gold demand was approximately twice a large as what was previously thought in the English-speaking world.
When The Big Reset was first released in January 2014 I’ve conducted an interview with its author about the inevitable reset of the international monetary system (the interview was published in two parts on this blog – one, two). Since then a lot has happened in the global realm of economics and at the same time The Big Reset became an international best seller. As we speak The Big Reset has been translated in Dutch, German and Chinese and is expected to appear in Portuguese, Arabic, Polish and Vietnamese.
To keep up with the most recent developments Willem has added 70 pages in the revised edition of The Big Reset. For me a reason to have another chat with him about what he saw has happened in the past two years:
The Big Reset
J: Is it a coincidence that after the financial crisis more tensions between the West and East emerged and is there a financial war played by the US?
WM: Economic warfare aims to capture or otherwise control the supply of critical economic resources or destroying a country’s currency. The US understands better than anybody else that a country can sometimes be hurt more by doing this than by bombing its infrastructure. A recent example of financial economic warfare was the sudden crash of the price of oil and value of the ruble soon after the annexation of the Crimea by Russia, in the second part of 2014. In less than six months the price of oil halved. This large drop could not be explained by fundamentals like supply and demand. Some market commentators said it reminded them of the Cold War era when the US and the former USSR competed not only in a military way, but also tried ‘to play the economy’. Because the USSR was increasingly more dependent on food imports, especially grain, the export of oil had to bring in enough dollars. The US decided to use its influence on Saudi Arabia (OPEC) and persuaded them to expand the supply of oil, making the oil price plunge in the 1980s. It would soon prove to be a fatal attack for Russia and the Soviet Union collapsed in 1991. The fact that Saudi Arabia in 2014 again increased its oil production fuelled rumours of a new economic war against Russia. The collapse of the oil price led to collapse of the Russian ruble. The Russian Sberbank, confirmed that it had come under a financial economic attack in December 2014. Herman Gref, CEO of Sberbank, disclosed a foreign-based attempt to provoke a bank run during the December ruble crisis. In an interview he said that about $6 billion had been withdrawn from the Sberbank in a single day after a massive information attack, with people receiving text messages saying Sberbank was facing problems paying out deposits. Thousands of SMS-messages were sent, including a large number of mailings done from foreign websites.
Willem Middelkoop
J: What more do you see around the world in terms of financial warfare?
WM: In May 2015, the US had a number of high-ranking FIFA officials arrested in Switzerland in connection to a bribery case. Most observers did not understand that the US action was designed to pressure FIFA, ‘urging it to consider removing Russia as host of the 2018 FIFA World Cup because of its role in the Ukraine crisis and occupation of Crimea.’ China and Russia were also shocked to learn how the SWIFT international payment system was used as a means to attack Russia. In 2014, the United Kingdom pressed the EU to block Russia from the SWIFT network as a sanction for the Russian aggression in Ukraine. China responded quickly and launched its own alternative, the China International Payment System (CIPS). In addition, by 2012 SWIFT disconnected all Iranian banks from its international network. Alastair Crooke, a former MI6 official is one of the few individuals who has been very open about the purpose of this kind of financial and economic warfare.
J: Is this all meant to defend the US dollar hegemony?
WM: In a book, ‘Treasury’s War,’ the tool of exclusion from the dollar-denominated global financial system is described as a ‘neutron bomb.’ When a country must be isolated, a ‘scarlet letter’ is issued by the US Treasury that asserts that such-and-such bank is somehow suspected of being linked to a terrorist movement – or of being involved in money laundering. The author of ‘Treasury’s War’ Juan Zarate, chief architect of modern financial warfare and a former senior Treasury and White House official, writes this scarlet letter constitutes a more potent bomb than any military weapon. With Ukraine we have a substantial, geostrategic conflict taking place, being part of a geo-financial war between the US and Russia.
J: What’s China’s roll in this?
WM: It has brought about a close alliance between Russia and China. China understands that Russia constitutes the first domino; if Russia is to fall, China will be next. These two states are together moving to create a parallel financial system, disentangled from the Western financial system. That’s why both are accumulating so much physical gold. It includes replicating SWIFT and creating entities such as the Asian Infrastructure Investment Bank. One of the principal tools in the hands of Washington to control the global system was always the International Monetary Fund (IMF). Nations have to go to the IMF to ask for financial help, when in difficulties, but recently it was China – and not the IMF – which bailed out Venezuela, Argentina and Russia as their currencies crashed. China became concerned when the ruble crashed late 2014, and intervened to halt a run on the currency. The IMF and the World Bank are no longer at the center of the global financial order.
J: Why is this dollar hegemony so important for the US?
WM: ‘Great nations have great currencies and great currencies can give countries great power so they can even grow into empires’, political scientist Jonathan Kirshner once said. In order to maintain its monetary hegemony, the United States must weaken any potential competitors who will possibly challenge the US monetary hegemony. Wars in the Middle East are fought to strengthen the dollar’s position and fight regimes that have been supporting Russia. General Wesley Clark, the Supreme Allied Commander of NATO during the 1999 War on Yugoslavia, confirmed in an interview that the US had decided to work toward regime changes in seven countries, in order to secure US interest in the region before any new world power might arise.
J: Through the dollar the US has unlimited powers?
WM: Any country, like the US, that issues the dominant world reserve currency has almost limitless power to finance other countries. It gives the monetary hegemony ‘exorbitant privilege,’ as the French remarked in the 1960s. Because it can print the world currency the US can buy anything it wishes without having to worry about its liabilities. While the Soviet Union collapsed because they had to import food with hard-earned dollars from their oil exports, in the 70s and 80s, the US could start the Korean War and the Vietnam War with freshly printed greenbacks. By ‘obliging’ foreign central banks to keep their monetary reserves in Treasury bonds, the US in fact forced them to finance US military spending abroad, as Michael Hudson explains in his book ‘Super Imperialism’.
In this new form of imperialism, the US is able to rule not through its position as world creditor, but as world debtor. America’s weakness as a debtor country has indeed become the foundation of the world’s monetary and financial system. A Chinese market commentator once remarked: ‘World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy … a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US … Everyone accepts dollars because dollars can buy oil.’ Only when dollar-holding nations decide to buy natural resources instead of US treasuries, is the dollar’s reserve currency status in danger. This is exactly the exit strategy China and Russia seems to be playing right now. In recent years, the Russians have sold most of their dollar holdings, while they tripled their gold position. The Chinese have stopped buying extra US Treasuries since 2010 while they have imported and invested in huge amounts of gold. These developments signal the first stages of the US dollar’s decay.
- Markets Brace For More Fund Liquidations As Record Outflows Slam Debt Funds
Among the fixed income community, this week’s most important number, more so than the pre-telegraphed 25 bps increase in the Fed’s interest rate, was the weekly report of capital flows in and out of bond funds by Lipper/EPFR, which came out moments ago and which following last week’s junk bond fund fireworks involving Third Avenue and several other gating or liquidating funds, was expected to be a doozy.
It did not disappoint: in the words of Bank of America, there was “Carnage in Fixed Income” as a result of the largest outflows from bond funds since Jun’13 ($13bn) with outflows concentraing, as expected, in illiquid & low-quality assets.
The details showed a broad revulsion to all aspects of the fixed income space, from Investment Grade, to Junk to bank loans. To quote Bank of America:
- Huge $5.3bn outflows from HY bond funds (largest in 12 months)
- $3.3bn outflows from IG bond funds (outflows in 4 of past 5 weeks) (2nd biggest in 2 years)
- $2.2bn outflows from EM debt funds (largest in 15 weeks) (outflows in 20 of 21 weeks)
- Huge $1.8bn outflows from bank loan funds (largest in 12 months) (outflows in 19 of past 20 weeks)
Bloomberg, which cited BofA numbers, and yet which had different totals was nonetheless close enough. It reported that investors “pulled $3.81 billion from U.S. high-yield bond funds in the past week, the biggest withdrawal since August 2014, according to Lipper.”
The FT’s numbers were even more different:
Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.
Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.
The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.
Whatever the real number, the result is clear: investors have launched a feedback loop where lower bond prices lead to more redemptions which force more selling, leading to more redemptions and so on.
As Bloomberg reminds us, the average yield on junk bonds jumped to more than 9 percent on Dec. 14 for the first time since 2011, according to Bank of America Merrill Lynch indexes. And yet despite endless laments that there is “not enough yield”, investors couldn’t get out fast enough. It appears investors aren’t “starved for yield”… they are simply “starved for safety in numbers.”
“The negative headline feeds upon itself,” Ricky Liu, a money manager at HSBC Global Asset Management told Bloomberg. “And if you are in a poorly performing retail fund, there is also the concern that there could be more pain to follow. The commodities space is still a pretty big part of high yield and there is no relief there yet.”
The visual breakdown: junk bonds.
Bad news for buybacks: Investment Grade outflows soared in the last week to the highest in over a year driven entirely by redemptions from mutual funds, and offset by a small injection in IG ETFs.
Total fixed income fund flows.
But the one category that was certainly the most interesting, is the one we highlighted earlier today when we said “the one asset class that has so far slipped through the cracks, but which will be very closely scrutinized in the coming weeks now that rates are rising: leveraged loans.” The reason: the underperformance in leveraged loans so far this year is on par if not worse than that of junk bonds.
Result: bank loan funds just recorded their 2nd biggest outflow since August 2011.
And longer term.
The bottom line: as new investor liquidity evaporates and as billions are redeemed first from the junk bond universe, then investment grade and then loans, the debt crisis which was unleashed in anticipation of the Fed’s rate hike, is about to get much worse, and lead to even more prominent hedge fund “gates” and liquidations, while in the equity space, the lack of Investment Grade dry powder means that buybacks are about to grind to a halt.
- All Of The World’s Money And Markets In One Visualization
By Jeff Desjardins of Visual Capitalist and the Money Project
How much money exists in the world?
Strangely enough, there are multiple answers to this question, and the amount of money that exists changes depending on how we define it. The more abstract definition of money we use, the higher the number is.
In this data visualization of the world’s total money supply, we wanted to not only compare the different definitions of money, but to also show powerful context for this information. That’s why we’ve also added in recognizable benchmarks such as the wealth of the richest people in the world, the market capitalizations of the largest publicly-traded companies, the value of all stock markets, and the total of all global debt.
The end result is a hierarchy of information that ranges from some of the smallest markets (Bitcoin = $5 billion, Silver above-ground stock = $14 billion) to the world’s largest markets (Derivatives on a notional contract basis = somewhere in the range of $630 trillion to $1.2 quadrillion).
In between those benchmarks is the total of the world’s money, depending on how it is defined. This includes the global supply of all coinage and banknotes ($5 trillion), the above-ground gold supply ($7.8 trillion), the narrow money supply ($28.6 trillion), and the broad money supply ($80.9 trillion).
All figures are in the equivalent of US dollars.
- We Disappeared Some Folks: Details Emerge In China's Sweeping Probe Of Stock Market Rescue
It was exactly one week ago today when we reported that Guo Guangchang, a self-styled Chinese Warren Buffett worth some $7 billion, had disappeared.
For those who follow developments in China’s capital markets, it was obvious what had happened. Guo was swept up in Xi’s campaign to root out misconduct tied to the country’s equity market meltdown and subsequent government-engineered rescue effort.
Dubbed “kill the chicken to scare the monkey,” the witch hunt has ensnared a number of high profile government officials and bankers tied to Beijing’s plunge protection “national” team, which poured in excess of CNY1.5 trillion into Chinese stocks in Q3 in a desperate attempt to push back against an epic unwind in the half dozen backdoor margin lending channels that helped push stocks to nosebleed valuations earlier this year.
Guo’s detention (he was allegedly met by authorities when he arrived in Shanghai on a flight from Hong Kong) sent shockwaves through Chinese markets. “His disappearance will fuel anxieties in the private sector that the anti-corruption crackdown launched by President Xi Jinping three years ago is being extended to high-profile entrepreneurs,” FT noted last week.
Guo has since resurfaced, but the crackdown – which, you’re reminded, is led by Fu Zhenghua, a former Beijing police chief responsible for orchestrating an infamous prostitution bust, a campaign against “popular bloggers whose sometimes anti-establishment comments drew the ire of party leaders,” and a decree prohibiting police officers from drinking alcohol outside of their homes – continues unabated. On Thursday, we get still more details about Beijing’s comical crusade courtesy of WSJ who notes that the focus of the probe has shifted squarely to members of the national team.
“Communist Party graft busters have been taking officials, one by one, to a hotel close to the [CSRC’s] headquarters to press them to come clean or report on others,” The Journal says, adding that “the investigators also have set up shop on the top floor of the agency’s 22-story headquarters in downtown Beijing, banned agency officials from leaving China and set up a hotline and red mailbox in the lobby for anonymous tips.”
We’re also now beginning to understand the connection between Guotai Junan Chairman and CEO Yim Fung, Citic executives Jun Chen, Jianlin Yan, Xu Gang, hedge fund manager Xu Xiang, and CSRC vice chairman Yao Gang. Here’s more from The Journal:
Authorities have arrested or put under corruption probes major figures including executives at well-connected brokerage Citic Securities Co. and a highflying hedge-fund boss suspected of insider trading.
The CSRC has grown in importance as China’s leadership seeks to turn the nation’s underdeveloped capital markets into a viable corporate funding source.
The top official accused so far is Yao Gang, 53 years old, until recently its vice chairman and a rising star within the party.
On Nov. 13, the commission said Mr. Yao was taken away for “suspected serious violation of party discipline.” The officials with knowledge of the matter say investigators are probing whether Mr. Yao leaked classified information about the government’s market rescue to executives at brokerages including Citic Securities and Guotai Junan Securities Co. so they could buy stocks before they were purchased by state funds.
“The focus of the investigation is on him potentially having enabled those big brokerage executives to make a killing at the expense of the nation’s interest,” one of the officials said. “Another question is whether he received any personal gains in return.”
Apparently, Yim Fung has known Yao Gang for at least 15 years. Both worked at Guotai, and “they’ve been friends since then.” Beijing is also probing CFS, the state-sponsored margin lender under CSRC’s control.
At this point, it’s not entirely clear what Xi is trying accomplish. We already know selling and especially short selling can “get you buried real quick” (to quote Black Mass) in China, and it now appears front running (in this case buying ahead of the plunge protection team) is a one way ticket to a Politburo prison as well.
With 15% of the market still halted, and with further yuan turbulence dead ahead, China may want to consider whether abducting executives and hauling them off to clandestine interrogation sessions in hotel rooms is the right approach when it comes to promoting the liberalization of capital markets and projecting the “right” image to the rest of the world on the eve of the yuan’s SDR inclusion.
- Gold & The Federal Funds Rate
Submitted by Pater Tenebrarum via Acting-Man.com,
Wrong Assumptions
It is widely assumed that the gold price must decline when the Federal Reserve is hiking interest rates. An example is given by this recent article on Bloomberg, which informs us that SocGen believes “gold will be a casualty of Federal Reserve policy”. Never mind that the assumption that the Fed will now be able to simply embark on a “normal” rate hike cycle is in our opinion utterly absurd. It will only do that if the inflation genie unexpectedly gets out of the bottle, and is guaranteed to remain “behind the curve” if that happens (more on this further below).
It seems logical enough: gold has no yield, so if competing investment assets such as bonds or savings deposits do offer a yield, gold will presumably be exchanged for those. There is only a slight problem with this idea. The simple assumption “Fed rate hikes equal a falling gold price” is not supported by even a shred of empirical evidence. On the contrary, all that is revealed by the empirical record in this context is that there seems to be absolutely no discernible correlation between gold and FF rate. If anything, gold and the FF rate exhibit a positive correlation rather more frequently than a negative one!
Let us look at exhibit one – the 1970s:
So the gold price is falling when the Fed hikes rates? Not in the 10 years depicted above, when it did the exact opposite. It rose by 2,350% over the decade, and the vast bulk of the increase happened while the FF rate rose sharply. Gold did however plunge by almost 50% in a mid cycle correction from late 1974 to mid 1976 – while the FF rate actually went down – click to enlarge.
So the guessers at SocGen might actually have improved their statistical odds a bit if they had said “now that the Fed is hiking rates, gold prices should rise”. The reality is though that even if they knew perfectly well what the Fed was going to do next year – which they don’t, as not even the Fed itself knows – they could not possibly make a correct gold price forecast based on that information.
Let us look at a few more historical data – here is the gold price and the FF rate from 2001 to 2015. The best interpretation one can come up with on the basis of the raw data is that there simply exists no fixed correlation:
Gold and the FF rate since 2001: What the gold price ends up doing seems to have very little to do with the federal funds rate – click to enlarge.
It Simply Isn’t That Simple
Now, if you have taken the time to read the article at Bloomberg we linked to above in its entirety, you will have noticed that it actually offers no analysis whatsoever. The SocGen analyst quoted by Bloomberg is simply parroting the current consensus.
In August of 2011, the same guy would probably have told us why gold was certain to go higher over the next year (this is beside the fact that Wall Street loves to hate gold – after all, a rising gold price most of the time coincides with bad business for WS).
The way markets – and the economy for that matter – appear to be analyzed most of the time is as follows: a ruler is applied to the most recent tred in the data, so as to be able to extrapolate a target. Then stuff is made up to provide “reasons” for the forecast. This is quite an easy exercise, because at any given time, statistical data can be used to support just about any forecast.
This is why one first needs a correct theory – theory will help to constrain one’s forecasts (certain things are simply not possible) and can be used to properly interpret historical data. The data are practically useless by themselves. Naturally even a reasonably good grasp of theory will by no means ensure that one will be able to make a correct forecast – especially not in terms of timing. Considerable uncertainties will attend any attempt at prediction.
However, we can be absolutely certain that 99% of mainstream financial and economic analysts will fail to correctly forecast turning points in prevailing trends. The analysts quoted by Bloomberg will never tell us when the trend is going to change.
Once the trend has changed, they will however begin to “explain” the new trend to us at some point and forecast its continuation – after it has been underway for about three years. In the case of gold it may take a bit longer – last time they realized it was in an uptrend, the trend was about to celebrate its 10th birthday 🙂
Obviously, things are not as simple as these analysts are making them out to be.
The Fundamental Drivers of Gold
We have recently made an updated list of the most important fundamental drivers of the gold price – not necessarily in order of their importance. Moreover, many of these drivers are obviously not independent of each other. Here is the list:
- real interest rates, as determined by the difference in market-derived inflation expectations and nominal interest rates
- the trend in credit spreads
- the steepness of the yield curve
- the trend of the US dollar
- faith in the banking system’s solvency
- faith in the monetary authority
- faith in government more generally (with a special focus on fiscal policy)
- the trend in risk asset prices
- the relative performance of financial stocks vs. the broad market
- the rate of change in money supply growth
- the demand for money and the desire to increase precautionary savings
- the trend in economic confidence in general
- the trend in commodity prices
Below we show a simple chart that serves as a quick explanation why the trend in the federal funds rate as such is not relevant to the gold price. It is “simple” in the sense that while it is connected with point one of the above list of fundamental gold price drivers, it doesn’t employ a proper calculation of real interest rates (which would involve deducting expected price inflation rates from nominal interest rates).
Instead we have merely calculated the real federal funds rate by deducting the annualized rate of change of CPI from the nominal FF rate. This has not only saved us a bit of time (since the proper calculation mentioned above involves more steps), but it also keeps the focus on the one interest rate the Fed actually controls.
The “real” federal funds rate vs. the gold price. This obviously provides a much better explanation than the simple (and completely wrong) formula “FF rate up/gold down, FF rate down/gold up” – click to enlarge.
If one looks at the above chart more closely – readers can easily zoom in and out of it by constructing their own version at the Fed’s FRED database (in order to illustrate the point, we will show a close-up of the 1970s period below though) – one can see that even the real FF rate is only part of the explanation, or rather, insufficient as an explanation of the gold price trend.
In particular once can see that there are considerable leads and lags involved. These partly reflect market expectations of future trends in the fundamental backdrop and partly the influence of the other gold price drivers listed above. In short, it is the totality of contingent circumstances that needs to be considered when attempting to forecast the future trend of the gold price.
One has to adopt a holistic view of the economy and try to make an educated guess of the future evolution of the fundamental backdrop – always keeping in mind that there is a limit with respect to what can be known about the future. After all, new information constantly emerges – the only true “constant” in the market economy is the fact that is is subject to unceasing change.
A close-up of the real FF rate in the 1970s and the gold price reveals significant leads and lags in the negative correlation between these data series. These are based on market expectations as well as the other drivers of the gold price – click to enlarge.
Central Planning Quandary
We can conclude that it is simply incorrect that a rising federal funds rate “guarantees” further declines in the gold price. On the contrary, one could well argue that the decline in the gold price since 2011/12 very likely already more than fully discounts a period of rising rates.
One also needs to keep in mind that the Fed finds itself in quite a quandary. It has just begun to hike rates based on the trend in a lagging indicator of the economy (i.e., employment). At the same time, leading economic indicators are already indicating that a recession is probably fairly imminent. How likely is it that a true “rate hike cycle” will even happen?
If the Fed is correct that CPI statistics will soon show rising price inflation (which they may well, mainly due to base effects), it will be in an even bigger quandary. Any attempt to stay “ahead of the curve” will immediately lead to a dramatic implosion of the asset bubbles it has fostered with its ultra-loose monetary policy in recent years. The economy will be taken right down with them (actually, we believe it is even more likely that the economy will tank before the stock market does).
What one really needs to consider when thinking about the gold price is whether the idea that the economy is back to “business as usual” has any merit. The answer to this question is a clear and unequivocal no. Globally, the level of debt in the economy has increased by around 60% since the “great financial crisis” of 2008. In the US alone, the broad true money supply has grown by almost 115% since then (as of November 2015).
In spite, or rather because of these bubble-blowing efforts, the economy has produced the by far weakest recovery of the entire post WW2 period. Nota bene that this applies to the US economy, which has actually stood out as the best performing developed market economy in recent years. Meanwhile, all indications are that this weak recovery will soon succumb to another cyclical recession.
A recession could easily turn into a truly catastrophic bust if market confidence in the monetary authorities and the sustainability of the huge global debtberg evaporates – which will inevitably happen one of these days. What encore can the authorities offer when (not if) that happens?
Obviously, gold bulls have been wrong for the past four years and they may well be wrong for a while longer – we don’t think it is very likely, but obviously we cannot rule it out. Then again, prior to that the bears were wrong for 11 years running and gold is still up more than four-fold since late 1999/2000. How much has the S&P 500 gained since 2000? There is a good reason for this discrepancy, and that reason hasn’t disappeared – on the contrary.
Conclusion
Our assessment is that one simply cannot afford to ignore the fact that gold provides insurance against a potential blow-up of the global fiat money and debt bubble – regardless of its near to medium term price performance. Its performance is in any case only negative in USD terms – in no other currency can gold be deemed to be in a significant bear market. In fact, as we have recently pointed out, it is already making new all time highs in some fiat currencies.
Gold’s characteristic as a hedge/insurance against the consequences of policymaker machinations has recently gained additional importance in light of the fact that the echo bubble is clearly fraying at the edges already. Sooner or later there will be another full-blown crisis, at which point gold ownership will definitely be of great advantage. It is often said that the only certainties in life are death and taxes, but that is not quite true. There is another apodictic certainty: all booms driven by credit expansion will eventually blow up.
- Dear Janet, Explain This!
Having been unable – or unwilling – to answer various reporters' questions with regard the 'odd' timing of The Fed's rate hike yesterday, we thought we would offer just one more chart to question the credibility of the central planners. Plucked from The Fed's own research, last week saw the largest surge in St.Louis Fed's Financial Stress Index (FSI) since August… and as Yellen proclaimed "all clear" the FSI was screaming "Danger" even louder than it did in September – when The Fed folded.
So, Financial Stress was surging and higher than in September when you folded… WTF Janet?
Financial market stress rose sharply in the latest reporting week. For the week ending Dec. 11, the St. Louis Fed Financial Stress Index (STLFSI) measured -0.691, up from the prior week’s revised value of -0.835. Last week’s increase was the fifth in the past six weeks and the largest since the week ending Aug. 28, 2015.
So, Janet, explain that!!
- Martin Shkreli, "America's Most Hated", "Price Gouging" Biotech Mogul Arrested For Securities Fraud, Released On $5 MM Bond
Update: Shkreli was released on a $5 million bond after a hearing Thursday, and had his travel restricted to parts of New York. It was not immediately clear how he pleaded to the charges. Evan Greebel, whom the SEC said was Shkreli’s lawyer, also faces a count of wire fraud conspiracy. He was arrested Thursday and released on a $1 million bail.
It is unclear if somehow Shkreli got 2.5x leverage on repackaged Collateralized Wu Tang Obligations.
* * *
The “most hated man in America” just got arrested for securities fraud.
- SHKRELI, CEO REVILED FOR DRUG PRICE GOUGING, ARRESTED FOR FRAUD
- N.Y. LAWYER EVAN GREEBEL ARRESTED IN SHKRELI INVESTIGATION
MOMENTS AGO: Martin Shkreli leaving FBI after being processed by officials in New York following his arrest.
https://t.co/qGNZOusfgV— CNBC Now (@CNBCnow) December 17, 2015
Shkreli, the baby faced, former Jim Cramer protege and serial biotech mogul who famously raised the price of a toxoplasmosis drug by 5000% in September, igniting a media and political firestorm in the process, is accused of using Retrophin (a company he founded and ran until he was ousted by the board) as a kind of slush fund. As an aside, you’re reminded that Retrophin once raised the price of a drug used to treat a rare condition that causes reoccurring kidney stones from $1.50 a pill to $30.
Retrophin claims that after Shkreli’s hedge fund, MSMB Capital, went bust after a $7 million loss on a “disastrous” trade with Merrill Lynch four years ago, he used a series of complex transactions involving Retrophin to pay back MSMB’s investors.
“Retrophin sued Shkreli in August for misuse of company funds,” Bloomberg recounts. The company “claims he engineered numerous transactions between investors in MSMB and the biotechnology firm.”
Retrophin goes on to allege that “Shkreli paid some [MSMB] investors through fake consulting agreements and others through unauthorized appropriations of stock and cash”
At one point, Shkreli allegedly decided to reclassify a $900,000 investment MSMB made in Retrophin as a loan. So basically, he invested in himself and then decided later that he had actually loaned himself money and needed to pay himself back. Retrophin did indeed pay back the “borrowings” and Shkreli subsequently used the funds to “settle another unrelated legal dispute.”
As Bloomberg goes on to note, “The Securities and Exchange Commission, which according to court documents opened an investigation into Shkreli in 2012, is expected to file a parallel civil complaint against him, according to people familiar with the matter.”
While Shkreli is known for laughing in the face of criticism and ridicule, this one might be hard to shrug off. It’s at least possible he could end up banned from running a public company, meaning Turing and KaloBios would need to find new executives (maybe Joe Campbell’s KBIO short will pay off after all).
“Some of these companies seem to act more like hedge funds than traditional pharmaceutical companies,” said Senator Susan Collins, a Maine Republican who ran the recent hearing into the soaring cost of specialty drugs.
On the bright side for Shkreli, he’ll have plenty of time to listen to the one-of-a-kind Wu-Tang album he bought in May for $2 million if he ends up incarcerated.
Incidentally, we predicted this might happen way back in September when we said that while “we doubt the SEC will investigate his shorting activity of biotech indices – we are confident the young ‘hedge funder’ will have bigger headaches to deal with soon enough.”
And as for the ultimate punchline – drumroll – Shrekli had planned a meeting just two days ago with lawyers for incarcerated rapper “Bobby Shmurda” who Shrekli planned to bail out of jail. We’ll close with the following quote from Shkreli, who spoke to Vanity Fair:
“We’re actually in discussion to try to bail out Bobby Shmurda. Forget whether you think he’s guilty or not, the guy should not be sitting in jail right now. He deserves a fair trial. He deserves good lawyers. He doesn’t have good lawyers. His label is hanging him out to dry and so I have a conference call tomorrow morning with them (December 15). I’ll show up with $2 million bail money no fucking problem.”
Better save that $2 million in bail money Martin. You may need it for yourself.
Meanwhile, Jim Cramer is getting nervous:
I hired summer interns from NYC School system program. They sent me this kid Shkreli for a summer. It was part of a program to help kids
— Jim Cramer (@jimcramer) December 17, 2015
I did not work at Cramer Berkowitz when they hired Shkreli as an analyst. I had left the firm; It kept my name. Didn’t know him. Period
— Jim Cramer (@jimcramer) December 17, 2015
.@ReformedBroker It’s insane. I hired poor high school kids as interns from the NYC program. Trashed for it here! https://t.co/S7te8snLmF
— Jim Cramer (@jimcramer) December 17, 2015
Full indictment:
- ISIS, Al Qaeda And The CIA: The Documented Connection
The Middle East is fertile ground for conspiracy theories, and one growing to towering heights these days says the US created the Islamic State. But while the US may well have aided ISIS in its formative days with covert supplies of weapons and CIA funding (directly or indirectly, via Turkey leading political families) the one nation most responsible for iteration after iteration of “terrorist organizations” is Saudi Arabia which “created” not only the Islamic State, but al-Qaeda, al-Nusra, and many other Sunni Jihadist groups in Thailand, the Philippines, Indonesia, India, Pakistan.
The US has long been aware of this, of course, and it has provided material support to some of them in the distant past, for example to the Taliban in the war against Russia. But the more reasonable among us have questioned recent claims that the US intentionally created the Islamic State, a group of the same lineage as the Saudi terrorists responsible for 9/11.
Those rejecting a direct link between the US and the Islamic State instead ask a perfectly logical question: why would the US allow a country ruled by monarchs with dark-age-sensibilities get away with attacking us on 9/11, funding al-Qadea in Iraq (a group that killed a few thousand US soldiers), and now the Islamic State? Two answers: fat, senile Saudi kings are preferable to the Islamic monsters that would replace them in a regime change, and the Bush family/Carlyle Group would prefer not to kill the goose that lays the golden egg.
Thanks to the resurrection of “J Pierpont Morgan”, these doubts and questions are no longer reasonable. They are, in fact, irrelevant. Because J Pierpont Morgan, apparently experiencing a Scrooge-like transformation, has seen the light. Yesterday he tweeted three public source documents that conclusively show a Senior CIA Spy- a major figure in operations from South America to the Middle East-is lobbying the US Government to destroy Iraq and formally create an independent Sunnistan on behalf of a Sunni terrorist.
Senior CIA spy turned consultant hired by Sunni Iraqi insurgent to destroy Iraq, create formal Sunni-jihad-istan pic.twitter.com/EQasbBp4kB
— J Pierpont Morgan (@pierpont_morgan) December 17, 2015
That terrorist joined the Iraq insurgency in 2004 under the Al-Qaeda Iraq banner, and was given hundreds of millions of dollars by the CIA and CENTCOM to defect, joining the US-led coalition in the now famous “Surge.” Known as H.E. Shaykh Abdalrazzaq Hatem al-Sulayman, this self-described prince is the head of a 4 million strong (mostly Sunni) tribe in Anbar, and lived the high life on US taxpayer money- that is until Obama declared AQ and AQI dead, bolted from Iraq and pivoted toward Asia. No CIA. No Surge. No money. Just the wasteland that is Anbar, and a Baghdad government intent on consolidating power at Sulayman’s expense.
His Eminence, with his children in need of Bugatti supercars, flats in London, multiple Vertu mobiles, and an entourage of slaves, did what any good dad would: he created an insurgency called The Anbar Tribes Revolutionary Council in 2013, and solicited funds from Sunni Monarchs and individuals throughout the GCC. The goal: destroy Baghdad and restore the Sunni to power in Iraq. His allies: the Ba’ath and ISIS.
In late 2014 Sulayman connected with Jonathan Greenhill, “former” Senior Operations Officer at the CIA who set up shop in DC as a lobbyist. Makes sense. CIA Spy since the early 1980s, probably living oversees under non-official-cover, comes home to lobby Congress. Anyway, Mr. Greenhill incorporated the Greenhill Group, and Sulayman retained him. One wonders how Sulayman became aware of Greenhill’s lobbying venture.
Mr. Greenhill’s LinkedIn page says he “conceptualized and executed one of the Agency’s most successful counterterrorism covert action operations while leading a CIA Base in an exceptionally dangerous, high stress war zone environment.” Might that be the Surge? Might Mr. Greenhill have played a role in funneling hundreds of millions of dollars to members of the AQ Iraq insurgency like Sulayman?
Oddly enough, Mr. Greenhill has a Facebook page too.
Who knows? What we do know is one of the most important spies in the CIA, one with a major role in the Near East (probably Iraq), definitely was retained as a lobbyist by Sulayman. And Sulayman retained him to “create an autonomous Sunni region in Iraq or an independent Sunni State.” In other words, destroy Iraq by formally creating and recognizing Sunni-Jihadi-stan. Or a safe-zone for Sunni terrorists. Or what it actually is, a caliphate. It was recently written in the Washington Post that many Shia Iraqis harbor the conspiratorial belief the US created the Islamic State to destroy Iraq. Conspiracy theory becomes conspiracy fact.
h/t @pierpont_morgan
- Artist's Impression Of The Fed Rate Hike Hangover
- "Let Them Fly There Now": Putin Threatens To Shoot Down Turkish Jets In Syria, Calls Erdogan An Ass Kisser
It’s been nearly a month since Turkey shot down a Russian Su-24 in what not only represented the most serious escalation to date in Syria’s five year conflict but also marked the first time a NATO member has engaged a Russian or Soviet aircraft in at least six decades.
The “incident” – which came several weeks after Ankara downed what certainly appeared to be a Russian drone – infuriated The Kremlin, setting off a war of words that culminated in a lengthy presentation by the Russian MoD which purported to prove that illicit Islamic State oil flows through Turkey. Both Putin and a number of other Russian officials have implicated Erdogan and his family in the trafficking of illegal crude and there’s speculation that Ankara’s brazen move to fire on the Russian warplane stemmed from Erdogan’s desire to “punish” Russia for disrupting what Deputy Minister of Defence Anatoly Antonov sarcastically called “a brilliant family business.”
As for the Russian foreign ministry, Sergei Lavrov canceled a planned trip to Turkey and Maria Zakharova went so far as to reference Turkey’s infamous political blogger Fuat Avni (a pseudonym) on the way to suggesting that Ankara had been planning to shoot down a Russian fighter jet for at least a month.
In an effort to ensure that the downing of a Russian warplane in Syria was a “one and done” event, Moscow deployed the Moskva off the coast of Latakia and sent in the S-400 air defense systems (which were rumored to have already been in place).
Those moves rattled the US and its partners who fear that a nervous Putin might “inadvertently” shoot down an American, French, or British warplane. Indeed Putin ratcheted up the rhetoric last week. While not detailing ‘who’ he was focused on, the President told a session of the Defense Ministry’s collegium that “I order to act extremely tough. Any targets that threaten Russian forces or our infrastructure on the ground should be immediately destroyed.”
Well, in case that wasn’t clear enough, Putin took it a step further on Thursday.
During his annual news conference in Moscow, the Russian President literally dared Erdogan to send Turkish F-16s into Syrian airspace.
As Bloomberg reports, “President Vladimir Putin signaled that Russia is ready to shoot down any Turkish military aircraft that strays into Syrian airspace.”
“Turkey constantly violated Syrian airspace in the past. Let them fly there now,” he said, pointing out that Russia’s most advanced air-defense system, the S-400, is covering all of Syria.
(in case the S-400s and the Moskva should prove insufficient, Putin always has the “hands on” option)
“This is the 11th press conference Putin will have with Russian and international journalists during the three terms he has served as head of state,” Sputnik notes. “These large press meetings, held once a year, usually last several hours. Almost 1,400 journalists have received accreditation for this year’s event.”
As for whether The Kremlin thinks the US was in any way involved in the downing of the Russian warplane, Putin said he wasn’t aware of any American involvement, but did suggest (literally) that Erdogan may have been trying to kiss Washington’s ass or, in Bloomberg’s more politically correct terminology, “Turkey may have been trying to curry favor with the largest member of NATO”.
Putin: “If someone in Turkey decided to kiss Americans on a certain body part, I don’t know whether it was right or not.”
Watch the full video below.
For those who missed it, here’s an infographic look at the S-400:
- America, It's Over! Yale Students Sign Petition To Repeal First Amendment
Satirist Ami Horowitz tests the waters at Yale University to see if today's Ivy League students would actually sign a petition to repeal the First Amendment…
It goes exactly how you might think it would…
Within an hour on the Yale campus, Horowitz collected over 50 signatures from student who wanted to repeal a significant part of the Constitution.
The petition to “blow up” the First Amendment (which protects freedom of speech, freedom of religion, freedom of assembly, freedom of the press, and freedom of petition), was met with such comments as "I think this is fantastic, I absolutely agree," and "excellent," or "I love it."
And as DailyCaller noted, one female student ironically agreed with Horowitz when he suggested, "I think the Constitution should be one big safe space."
* * *
To sum it all up… America, It's Over!
- Dramatic Footage Of Reporters Mugging Martin Shkreli At Brooklyn Courthouse
The last time the frenzied media was mugging an alleged financial criminal with utter abandon took place 7 years ago, when days after the Lehman collapse, respected “fund manager” Bernie Madoff was found to be nothing but a $60 billion Ponzi scheme.
And while we don’t know if the emergence of the latest “financial criminal of a generation”, America’s most hated man Martin Shkreli, who earlier today was arrested and is facaing both civil and criminal charges and up to 20 yeasr in prison, is indicative of another Lehman-like even, what we do know is that a scene such as the one which unfolded in front of a Brooklyn courthouse, where dozens of reporters mugged the diminutive and scandalous figure after he posted a $5 million bond to be released back into society, is something that has not happened since Bernie Madoff’s time.
MOMENTS AGO: Martin Shkreli leaves court in large media scrum, makes no comment about his case.
https://t.co/V1quu2usTh— CNBC Now (@CNBCnow) December 17, 2015
Also earlier the FBI took an opportunity to explain that since there was no seizure warrant at Shkreli’s arrest, the infamous Wu-Tang clan album still remains in Shkreli’s possession.
#Breaking no seizure warrant at the arrest of Martin Shkreli today, which means we didn’t seize the Wu-Tang Clan album.
— FBI New York (@NewYorkFBI) December 17, 2015
Ironically, while it took just months for the full wrath of the US government to crack down on Shkreli, Madoff, whose $60 billion ponzi scheme, somehow operated for three decades and had to blow up on its own before the authorities got involved. Odd how that happens.
But who cares about Madoff: when talking about financial criminals of unmatched skill and the highest calibre, there really can be only one.
Jon Corzine on Martin Shkreli: “amateur”
— zerohedge (@zerohedge) December 17, 2015
The one seen with Hillary Clinton in the photo below…
… The same Hillary Clinton who, incidentally, sealed Shkreli’s fate:
Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. -H https://t.co/9Z0Aw7aI6h
— Hillary Clinton (@HillaryClinton) September 21, 2015
- Thursday Humor: Lawyer For Martin Shkreli Hike Fees 5,000%
Earlier today, the “most hated man in America”, serial biotech entrepreneur and former Jim Cramer protege Martin Shkreli was arrested by the FBI.
As Shkreli reminded the world earlier this week while discussing an absurd plan to free an incarcerated rapper, coming up with $2 million in bail money is “no fucking problem,” so we assume he’ll be able to afford an OJ-esque legal team.
Or will he…
* * *
A bit of humor, via The New Yorker:
A criminal lawyer representing Turing Pharmaceuticals chief Martin Shkreli has informed his client that he is raising his hourly legal fees by five thousand per cent, the lawyer has confirmed.
Minutes after Shkreli’s arrest on charges of securities fraud, the attorney, Harland Dorrinson, announced that he was hiking his fees from twelve hundred dollars an hour to sixty thousand dollars.
Shkreli, who reportedly received the news about the price hike while he was being fingerprinted, cried foul and accused his attorney of “outrageous and inhumane price gouging.”
“This is the behavior of a sociopath,” Shkreli was heard screaming.
For his part, Shkreli’s lawyer was unmoved by his client’s complaint. “Compared to what he pays for an hour of Wu-Tang Clan, sixty thou is a bargain,” he said.
- Refining ISIS Oil: Images From A Syrian Cottage Industry
From the time Turkey ambushed and downed a Russian Su-24 near the Syrian border late last month, the world has developed a fascination with Islamic State’s illicit and highly lucrative oil smuggling business.
Although there are multiple accounts which purport to explain how the group ultimately gets its oil to market, the general consensus is that there are a series of trafficking routes that all converge on the Turkish port of Ceyhan. The Russian defense ministry says it’s identified at least three such routes and a report by Al-Araby al-Jadeed documented the path the illegal crude takes from northern Iraq to the southeast coast of Turkey.
While no one has yet offered any conclusive evidence to prove that Turkish President Recep Tayyip Erdogan and his family are behind the trade, there’s quite a bit of circumstantial and anecdotal evidence to tie Ankara to “Raqqa’s Rockefellers” (if you will).
And while everyone loves watching Russian MoD clips of oil tankers barreling across the Turkish border without so much as slowing down, what you don’t see that often are images from the various cottage industries that have grown up around Islamic State’s oil trade.
Below are several pictures of a makeshift refinery near Idlib (the site of Tuesday’s Russian airstrike on a fuel market) which Reuters says runs on Islamic State oil.
Men work at a makeshift oil refinery site in Marchmarin town, southern countryside of Idlib, Syria December 16, 2015. The refinery site, owned by Yousef Ayoub, 34, has been active for 4 months. Ayoub says that he gets the crude oil from Islamic State-controlled areas in Deir al-Zor province and Iraq. The price for a barrel of crude oil varies and is controlled by the Islamic State, but it is currently at $44 dollars per barrel, he said.
A youth works at a makeshift oil refinery site in Marchmarin town, southern countryside of Idlib, Syria December 16, 2015. Islamic State is looking at potentially vulnerable oil assets in Libya and elsewhere outside its Syria stronghold, where the militant group controls about roughly 80 percent of the oil and gas fields, a senior U.S. official said.
A worker shows off the final fuel product at a makeshift oil refinery site in Marchmarin town, southern countryside of Idlib, Syria December 16, 2015.
- How The Fed Just Launched The Next Bear Market: BofA's Unexpected Conclusion In 8 Charts
While the afterglow of exuberance remains in stocks, BofAML's Michael Hartnett is less than impressed by what comes next…
As Fed hikes rates for the first time in 3,460 days, officially ending the era of extreme, abnormal monetary policy in the form of QE and zero rates, what do we see?
Risk assets were very oversold going into the Fed hike…they now bounce.
But the Fed hike follows significant tightening of liquidity; negative blowback is more and more visible, e.g. credit crunch causing less stock buybacks.
And global banks being at all-time relative lows indicate Fed tightening into deflationary expansion, as does the narrow breadth of economic growth, wealth and asset price gains.
Rising rates and falling profits are not a good combination for asset prices, so we will turn sellers of risk in early 2016.
The FOMC In 8 Charts
The Fed hiked 25bps, thus officially ending an unprecedented era of ZIRP and QE. Some quick thoughts:
The BofAML Global Breadth Indicator is on the verge of a tactical "buy" signal (Chart 2). Combined with high cash levels (5.2% in the Dec FMS = "buy signal") and the largest UW of US stocks since Jan'08, this suggests the final "pain trade" of a painful year is a squeeze higher in the most oversold risky assets.
The rate of growth of global liquidity (CB balance sheets + global FX reserves) is now shrinking (Chart 3). In the past 15 months, liquidity has unambiguously tightened as Fed QE3 ended, US real rates rose (see USGGT05Y INDEX), and China/OPEC FX reserves fell. Excess liquidity caused excess returns. But returns have been low and volatile in 2015 (cash is outperforming stocks and bonds for the 1st time since 1990) and we think the Fed hike will simply extend this backdrop…at least until stronger US data signals Quantitative Success.
Credit and commodities were two big "QE winners". The Fed hike coincides with a marked deterioration in the credit cycle, as evidenced by the widening of credit spreads. Rising rates and spreads means lower debt issuance, which in turn means less money for stock buybacks. Last week's S&P downgrade of Yum was driven by its announcement of a stock buyback program likely to be funded by even more debt. If companies cannot now issue debt to fund buybacks, this marks an important turning point for the stock market. Note wider credit spreads have gone hand in hand with underperformance of the stock buyback theme in recent months (Chart 4). We would thus take profits in any short-term bounce in stocks.
In every cycle, higher rates punish financial excess. The commodity crash of 2015 was driven by the combo of tighter liquidity (thus strong $) and excess supply (driven by tech disruption and the zero rate policies of recent years). The widening of Saudi Arabia's CDS (Chart 5) indicates the crash and its secondary impact are still being felt.
The end of QE3 in the autumn of 2014 sparked a bull market in QE "losers" such as the US dollar, volatility and cash, and a bear markets in QE "winners", such as EM, commodities & credit. The bear market in EM, commodities, credit would be irrelevant were the Fed hiking into a strong economy and a strong EPS trend. But the Fed is hiking at the same time as global bank stocks are at all-time relative lows versus global stocks (Chart 6). The absence of a bull market in bank stocks and a bear market in government bonds indicates the Fed is hiking into a very "deflationary expansion", hints at Quantitative Failure, and puts great onus on corporate earnings to support asset prices in 2016.
Unfortunately US corporate profits are currently falling 4.7% YoY and this has historically been associated with negative US payroll growth (Chart 7).
And while the overall stock market looks healthy, it betrays a fragile, deflationary bull market with increasingly narrow leadership (Chart 8).
The Fed's hike still leaves US and global interest rates close to "depression era" levels (Chart 9) and history is littered with examples of central banks struggling to escape from zero rates (Fed 1937, BoJ 1994 & 2000). We will turn sellers of risk in early '16 because rising rates and falling profits are ultimately not a good combination for asset prices.
- A Big, Fat "Policy Error" Or Worse? Find Out Tomorrow
On Tuesday, the day before Yellen’s historic rate hike, the S&P closed at 2,043. Today, the day after a Fed announcement which everyone cheered overnight as simply fantastic, perfect, “dovishly goldilocks”, and countless other superlatives because it sent the market surging, the S&P closed at…. 2,042. In the process all the euphoric gains from the widely telegraphed Yellen announcement and press conference have been completely wiped out, not just for stocks…
… but also for the most “sensitive” asset class in recent weeks, junk bonds which suffered a bruising wipeout today.
… and then there is the one asset classess that has so far slipped through the cracks, but which will be very closely scrutinized in the coming weeks now that rates are rising: leveraged loans.
All of which begs the question: did algos finally figure out precisely what we said first thing this morning, namely that the market completely ignored what was a hawkish hike..
Yesterday, in a carbon-copy response to what happened in December 2013 when the Fed announced the Tapering of QE, stocks first sold off then, as if to validate the Fed’s decision as being accurate, saw a dramatic buying surge which pushed them to close just off the highs. With bonds and gold selling off while the dollar rebounded, the Fed could not have asked for – or engineered – a better reaction, while markets, as Bloomberg’s Richard Breslow points out, ‘chose to hear the parts of the statement and press conference that they wanted to.”
That was the easy part. The hard part now is how to ween the market away from the old narrative, the one which has pushed the S&P to record highs over the past 7 years on bad economic news, and to renormalize the market’s own “reaction function” to that of the Fed. The problem is that from day one there is a major discrepancy between the two: as previously observed, the Fed did not deliver the desired dovish hike, and kept its 2016 year-end fed funds rate unchanged at 1.4% suggesting 4 rate hikes in the coming year, and which as Breslow notes means “being less dovish than the meeting previews suggested is now a sign of bullishness on the economy.” This sets the Fed on a collision course with the market because “with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong. If we do get four hikes next year, markets (read equities) will need to deal with a hawkish surprise. If the Fed is forced to backtrack, there goes the full-speed ahead theme.”
What this explicitly means is two things: bad economic news is no longer good for the market – after all the dominant paradigm now is one of strong dollar=strong economy=strong S&P (ignoring that the stronger the dollar, the worse the earnings recession sets up to be, the sharper the full economic recession), and that as Breslow concludes, the “Fed needs to focus on the real economy and get out of the QE mindset. I suspect that will be easier said than done.”
… and that as a result, what Yellen has done, now that the kneejerk reaction is over, is policy error, pure and simple? To be sure, the pancaking of the 2s30s screams “error” and an imminent global deflationary wave:
Or maybe it has nothing to do with the Fed, and everything to do with tomorrow’s quad witching. We warned about just this in last week’s “Beware The “Massive Stop Loss.” Recall:
[The Fed’s rate hike] falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.
And what is the number one rule about broken markets? All stops get taken out.The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market’s read through of monetary policy but by the “pin” in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the “psychological” stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days!
This is how we concluded:
“The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market’s read through of monetary policy but by the “pin” in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the “psychological” stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days! “
If so, tomorrow’s already illiquid expiration may be an event for the ages, one which may culminate with a Kervielesque-rate cut just days after the historic first ratae hike, only this time the Fed can’t do a 75 bps rate cut in response to one panicked futures trader, so 25 will have to suffice.
Or perhaps it is neither the Fed, nor tomorrow’s market technicals, and the reason is an old and familiar one. Dennis Gartman.
This is what the “world-renowned commodity king” said in his overnight letter:
What then do we make of this? How then are we to invest? What then are we supposed to do? … All we know is that the trend remains upward and it was for that reason that although we were cautious and recommended openly that it was wise, ahead of the Fed’s to become neutral of equities (a position obviously we wish we had not taken, with the benefit of hindsight), we did not and would not recommend being short of the equity market. As we have said for years, and shall say as long as we are able to write TGL on a daily basis, in a bull market there are only three positions that one can have: Aggressively long of equities; modestly long of equities, or neutral of them. As of earlier this week, ahead of the Fed meeting, we advocated neutrality. Now we have to suggest the middle course once again. We’ve really no choice.
There we sit this morning, knowing yet again that these things do not end well, but knowing too that it is better to be modestly long than otherwise.
The rest is history.
So tune in tomorrow when, if the JPM “Gandalf” is right again, things are about to get very exciting.
- Time For A Rate Cut? Dollar Surge Sparks Stocks, Credit, Crude Purge
From this – "See, rate hikes are awesome…"
To this…
US equities quickly tumbled as the NY session opened, erasing Yellen's gains, then trod water… then ended the day "NOT OFF THE LOWS"
FANGs puked into the close…
Leaving S&P, and Dow back in the red for 2015…
And while stocks are up for the week, they have just managed to clawback losses from last Thursday's pre-3rd-Avenue close…
The concentration (or lack of breadth) is becoming ridiculous…
Stocks caught down to credit markets today, which did not explode as exubersatly as stocks yesterday… Today's 24bps decompression in HYCDX is the biggest (ex rolls and last Thursday) widening since October 2014.
HYG broke below support…
But we note that the tip of the spear in credit continues to utterly collapse…
The Long-Bond is now the best-performing asset post-Fed, and crude worst with Gold notably weak…
Treasury yields tumbled with the long-end outperforming…
Cough "policy error" cough…
With the curve smashing 2s30s back below 200bps to 9-month lows…
And financials waking up to reality just a little…
The USDollar was well bid today… extending gains from the immediate "sell the news" reaction after The Fed…
Rallying against all the majors…
Of serious note in FX markets was the 9th consecutive weakening of The Yuan… (longest streak since 2008)
And the collapse of the Argentine Peso… plunging 30% to catch up with its unofficial rate…
And some volatility in Mexican Peso as they raised rates…
USDollar strength sparked weakness across the entire commodity complex with gold and silver suffering…
And crude testing new cycle lows…
And gold tumbled near cycle lows…
Charts: Bloomberg
Bonus Chart: Well, ok it's not a chart…but still…
"Who is: Martin Shkreli?" $KBIO pic.twitter.com/jWrLKQmVj3
— Jeopardy! Stocks (@JeopardyStocks) December 17, 2015
- WTF Headline Of The Day: Saudi Millionaire Edition
- 3 Things: Tick-Tocks, Stocks, & Shocks
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Yesterday, Janet Yellen announced the first hike in the Fed Funds rate in eleven years from .25% to .50%. When asked about why the Fed decided to raise rates now, Ms. Yellen responded by suggesting that the “odds were good” the economy would have ended up overshooting the Fed’s employment, growth and inflation goals had rates remained at low levels. She then went on to state that it was a “myth” that economic growth cycles die of “old age.”
While such an optimistic outlook for economic growth was certainly welcomed by the markets, both of her statements expose the challenges that lie ahead for the Fed.
Tick-Tock, The Fed Starts The Clock
Ms. Yellen is correct in stating that economic growth cycles do not die of “old age.” It is historically the impact of an exogenous impact that ultimately slows economic growth rates into a recessionary cycle. What Ms. Yellen failed to explain is that historically it has been the “tightening” of monetary policies that have been the “exogenous impact” to the economic growth cycle.
Looking back through history, the evidence is quite compelling that from the time the first rate hike is induced into the system, it has started the countdown to the next recession. However, the timing between the first rate hike and the next recession is dependent on the level of economic growth at that time. As I stated earlier this week:
“When looking at historical time frames, one must not look at averages of all rate hikes but rather what happened when a rate hiking campaign began from similar economic growth levels. Looking back in history we can only identify TWO previous times when the Fed began tightening monetary policy when economic growth rates were at 2% or less.
(There is a vast difference in timing for the economy to slide into recession from 6%, 4%, and 2% annual growth rates.)”
“With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long.”
Given the reality that increases in interest rates is a monetary policy action that by its nature slows economic growth and quells inflation by raising borrowing costs, the only real issue is the timing.
As Sam Zell noted yesterday:
“I think this interest rate hike is too late, this economy is closer to falling over than it is to going up. I think there’s a high probability that we’re looking at a recession in the next twelve months.”
Looking at the historical data above, Zell’s timing appears to be just about right.
Fed Rate Hikes And Bull Markets
The other common meme this morning, following yesterday’s rate hike decision is that “stocks have nowhere to go but up.”
Again, this is a timing issue. If you have a very short-term view, history suggests that stocks do rise on average following an initial rate hike. However, as shown in the chart below, historically rate hikes have occurred when earnings growth was on the rise, not peaking and deteriorating.
Furthermore, as explained by Jason Goepfert of Sentiment Trader yesterday:
“The S&P 500, gold and 10-year Treasury note yield are all up by more than 0.5% on the day. The knee-jerk assumption from that would be that traders are pricing in higher inflation.
This is occurring on a day the FOMC raised its Federal Funds target rate. If we go back to 1971 and look for every time all three rallied at least 0.5% on a day the Fed hiked rates, we get the following future performance.”
However, if we step our time frame out to longer-term, since we are all supposed to be long-term investors, the outlook becomes rather grim.
In every single instance when the Fed has started a rate hiking campaign, that campaign ended in a market correction or worse. (The Fed then began lowering rates immediately to stop the ensuing carnage.)
With corporate profits deteriorating, economic growth weak and the dollar surging, the Fed is very late to the game. This puts the time frame between now and the next recession at the very short end of the scale.
Growth So Bright, Lower Outlook
One thing that is always interesting is comparing what the Fed “says” during their press conference and then looking at the history of their own forecasts.
During yesterday’s press conference, Ms. Yellen made several references, as noted above, about the strength of the economy and that despite the surging dollar and collapsing oil prices, everything should continue to improve. The problem is that is NOT what was reflected in their forecasts released along with their announcement.
The table/chart below shows the history of the Fed’s average range of their estimates going back to 2011 when they started releasing their forecasts as compared to what actually occurred.
Currently, economic growth forecasts for 2016 and 2017 are at their lowest rate since the Fed began predicting for those two years. Furthermore, it is worth noting that for 2015, the Fed had originally estimated growth to be 3.35% rather than the current run rate of 2.2%.
Furthermore, they lowered their long-term outlook to just 2.05% from 2.25% at the last release.
Yes, please meet the “worst economic forecasters” ever. And while the mainstream media quickly laps up the optimistic outlook of the Fed, you might want to consider their own record of forecasts when making long-term investment bets.
Based on statistical history combined with the current underpinnings in the market, the outlook really isn’t as bright as Ms. Yellen suggests.
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