- Something Just Snapped In China
While Sweden is over-flowing with excess cash on bank balance sheets, it appears that banks in Hong Kong are desperate to borrow Yuan (or scared to lend) as overnight HIBOR just exploded higher to 9.45% – a record for the interbank offered rate. The HKD and CNY/CNH FX markets remain relatively stable (with Yuan fixed marginally higher again for the 3rd day).
From sub-2% a week ago (before The Fed hiked rates) to 9.45%, the overnight rates has exploded…
It appears as though it could be year-end window-dressing-related as 1-week rates also soared – but we do note the extent of the spikes are unprecedented even for year-end liquidty needs.
The last time 1-week rates spiked like this, US equity markets crashed…
Did a Chinese/Hong Kong bank just blow-up and suck all the liquidity out of the room? Or is this delayed blowback from The fed's RRP?
We suspect it is unrelated but we do note that Caixin earlier reported the banking regulator has suspended the private-equity arms of 17 commercial lenders.
Charts: Bloomberg
- Christmas 2015: Will Syria & Iraq Become Washington's Stalingrad?
Submitted by Ron Holland via PravdaReport.com,
73 years ago on Christmas Eve 1942 German troops sang Silent Night on a European wide radio Christmas program from the distant battlefields of Nazi conquest outside Leningrad in the North and from surrounded Stalingrad on the southern Eastern Front to the Middle East. Also all across Nazi occupied Europe, from Italy and Norway to the Atlantic coastlines of Fortress Europe the soldiers sang to their families and listeners back home starting to question the promises of Nazi victory propaganda.
The Dangers of Empire Overreach in 1942 & 2016
Yes Germany excelled at propaganda, as does the establishment cable and print news media in the United States today. Although the radio show had the intended propaganda effect of temporarily raising civilian morale, Germany and their fair weather allies were already stretched way too thin around the expansive parameter of Nazi conquered and occupied territory.
Now on Christmas 2015 there is a Washington military effort also stretched too far among our many distant conquests, peacekeeping missions, occupations and attempts to secure oil resources and pipelines. Our foreign policy is designed to perpetuate the failing petrodollar system. Like the Germans 70 plus years ago, our allies and local populations generally hate us and our attempts to go after local resistance groups only results in the growth of more anti-American groups we describe as terrorists.
In America Today Political Correctness Is Just Fascism By Another Name
Unlike the German's singing Christmas hymns in the 1940's, in the Washington politically correct military today the songs would certainly be secular rather than religious in nature. American soldiers are not permitted to promote Christianity because in the modern US military soldiers are often court martialed even for failing to remove Bible verses from their computers.
But there are some scary parallels between the Nazi Empire of the 1940's and the Washington Empire and conquests today that revolve around the Petrodollar system that has maintained the dollar reserve currency status since the end of World War Two. This dollar world reserve currency model required that oil was only priced and sold in dollars forced all foreign nations buying and importing oil to keep major dollar reserves to pay for their oil imports guaranteed a permanent and expanding demand for dollars around the world.
Three Middle East countries first broke the oil/dollar requirement and threatened the petrodollar system including Iraq, Libya and Iran hence the US military attempts to violently overthrow these governments to maintain Washington hegemony and the dollar.
Washington's War Fever
America has plenty of population to increase military forces unlike Germany in 1942 but we are reaching the limit to voluntary military enlistments in a time of permanent war and repeated overseas assignments. Also the continuous terror threats since 9/11 as well as real and orchestrated plots are being questioned by a growing number of alternative Internet media sites and polls show Americans no longer trust Congress or the media establishment.
I fear the political leadership has determined a real war of limited scope and duration may be the best way to regain control of the situation and inspire the American people to sacrifice and support their political leadership. Also a war scenario will allow Washington, Wall Street and the Federal Reserve to transfer the blame for the looming death of the Petrodollar to foreign adversaries like Russia, China and Iran. This will provide political cover to a decade long recession and dramatically reduced economic growth and prosperity as the death of the petrodollar works its way through the US economy over the next few years.
Looking Back To 1942
Few military historians would question that the German Wehrmacht was the best led, trained and most highly motivated military force in the world. But remember Germany still lost the war because they were out numbered and fighting on too many fronts.
The German weapon superiority was complete until the Soviet T-34 and KV tanks entered the picture and the overwhelming manufacturing power of the US, Soviet Union and the British Empire doomed Germany to eventual defeat although it wasn't necessarily apparent at the time.
Today on Christmas 2015 the well-led and highly motivated American forces with the best in weaponry, aircraft and carriers are also stretched far too thin across Afghanistan, Asia and the Middle East. While Republican politicians in the presidential debates want to put "boots on the ground" in Iraq and Syria, the Obama Administration has reduced funding for weapons and soldiers resulting in far too few troops, air and naval forces to cover the multiplying trouble spots across the Middle East and Asia. This is even more concerning when you see our aircraft and naval vessels goading China into a fight or military incident in the Spratly Islands.
Like the Germans 70 plus years earlier we want to control oil and gas reserves, resources and pipelines while keeping the military pressure on China, Russia and Iran. Our previous actions have already destroyed the countries of Iraq and Syria and more nations in the Middle East are now considering switching to Russia over the US.
Remember the German Reich didn't have enough troops to defend its conquered lands and had to rely on weak allied troops. Thus when the Soviet's encircled Stalingrad they attacked the weak German flanks held only by second-rate Rumanian troops without the modern weaponry required to hold back the Soviet attack and the rest is history.
It is much the same for outnumbered American troops today in or near the Shia Crescent. Bush invaded Iraq to overthrew Saddam but took out the leading country able to hold the Sunni line against Iran. Although we had much freedom of action earlier after the fall of the Soviet Union but now with Putin's leadership and a modernized Russian military the Washington days of having a free pass to pursue our goals in the Middle East without Russian hindrance and pushback are over.
Washington's Petrodollar System Is Dying!
Today the Washington Petrodollar system is in terminal collapse with China, Russia, Iran and many nations trading oil and natural gas with a wide variety of currencies and credits. In addition, the refugees from our Middle East actions have weakened the euro and now threaten the stability of Europe. This has made the dollar rise in value temporarily against the euro and I believe this is a planned outcome. All designed to weaken the euro and provide the appearance of near term strength to the dollar in a desperate attempt to buy time for US political leadership.
In closing, Washington is in a race to create instability, possibly a military incident and even a limited war before the final Petrodollar collapse in order to put the blame of a future dollar and debt crisis on a foreign adversary rather at than at home where it belongs. The problem for them in early 2016 is time may be running out as markets and currencies are reacting to the consequences of too much world debt, market and central bank manipulation and a global recession resulting in the collapse of oil demand and prices.
So my suggestion for investors is to follow China and Russia and increase your personal gold holdings now at record low prices. Also consider diversifying portfolios outside US stocks and jurisdictional, regulatory and presidential executive order risks.
I hope I'm wrong but I fear Washington is trying to provoke a war in the Middle East to cover the coming collapse of the Petrodollar system and the American economy when the dollar is no longer the world reserve currency. The war is necessary to blame the coming dollar and debt collapse on Russia and China rather where it belongs on Wall Street, the central banking cartel and Washington political establishment.
Remember while a Washington provoked war or conflict is likely to start in the Shia Crescent; it could spread across the Middle East and into Europe.
- How Would World Markets Respond To 4% Chinese GDP Growth? UBS Explains "The Dragon's Tail"
When it comes to explaining why the post-crisis world has been defined by lackluster aggregate demand and a deceleration in global trade, all roads lead to China.
Indeed, the country’s attempt to mark a difficult transition from an investment-led, smokestack economy to a consumption and services-led model has contributed mightily to an epic downturn in commodities which has in turn conspired with an expected Fed tightening cycle and a laundry list of country-specific political risk factors to push EM to the brink of disaster.
All of this is complicated by the fact that no one really knows how China’s economy is actually doing.
Everyone knows the “official” GDP prints are a joke and alternative measures such as the Li Keqiang index and the CBB paint a worrying picture of how the world’s engine of global growth and trade is really performing. “National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months,” the CBB reported just days ago, commenting on the performance of the Chinese economy in Q4. The profit reading is “particularly disturbing,” CBB President Leland Miller said, before noting that the share of firms reporting earnings gains has slipped to the lowest level ever recorded.
As we documented last month, the credit impulse in China rolled over and died in October as banks are reluctant to lend in the face of rising NPLs and corporates are reluctant to borrow in the face of an acute overcapacity problem.
Meanwhile, Beijing’s deficient deflator math – which causes the NBS to habitually overstate GDP in times of rapidly falling commodity prices – only adds to the confusion.
So, how swiftly (or not) is China’s economy actually growing? Well, no one knows, but as we noted last week, you can hardly blame the sellside penguin brigade for sandbagging the numbers.
Effectively, Wall Street is forced to produce forecasts they know are erroneous because trying to estimate actual output in China would mean missing the “official” mark every single time.
Be that as it may, UBS has endeavored to analyze what would happen should real Chinese GDP growth (so netting out deflation) hit 4% (where it almost certainly already stands).
“We try to simultaneously determine the reaction to an extremely unlikely China ‘worst case’ shock on China-hit economies in different regions, and on different asset markets,” UBS says. Again, this caught our eye because not only is this not “extremely unlikely,” it’s actually already the case, so we’re all ears when it comes to assessing the cross-market impact.
“We see the government ramping up monetary and fiscal policy support and accelerating growth supportive reforms, which is why our base case continues to see a grind-down rather than sharp plummet in Chinese GDP growth through 2017,” UBS begins, in an effort to justify their 6.2% 2016 GDP target for 2016 and 5.8% outlook for 2017.
However, they go on to note that Beijing could fail to ease monetary and fiscal policy “sufficiently” leading to “a highly improbable event” that would see China’s GDP slowing to 4% “with fixed investment contracting (yes, this can happen in China); real imports collapsing, and import prices declining further.”
“In this worst case scenario,” UBS continues, “falling investment and commodity prices will likely drive both producer prices and the GDP deflator into deeper negative growth territory [while] nominal GDP would likely drop to 1.3%, as the government delivers as many interest rates and RRR cuts as is necessary.”
“The most important channel through which the Dragon’s Tail scenario can affect other markets is trade, although financial linkages and market contagion could also have a significant impact on some markets and asset prices,” UBS says. Here’s the visual:
And here’s UBS’ take on the impact for DM and EM going forward:
Commodity exporters and regional economies with extensive trade and economic links with China will likely be most affected, while the impact through financial linkages is likely to be concentrated in Hong Kong and Singapore. Of course, as this past summer showed, the impact of contagion is hard to predict and quantify, and could spread to markets and asset classes beyond the usual vulnerable countries with twin deficits and high leverage. Developed economies will most likely feel a chill, but not be critically affected.
In EM, Asia-ex-Japan growth would be hardest hit by a Dragon’s Tail scenario, especially Hong Kong, Taiwan, Korea and ASEAN. Latin America would be hard hit not only by trade but also investment flows and a simultaneous knock-on impact on commodity prices, with Argentina most affected. EMEA would be more affected by its indirect trade and commodity price exposures.
In the DM world, Australia’s 2016 GDP growth should stay positive but drop sharply to almost zero in a Dragon’s Tail scenario, as Japan would return to recession and CPI deflation in contrast to our current positive base case forecasts. Europe’s 2016 GDP growth should stay positive in a Dragon’s Tail scenario, but slip back to only 1% with Germany, Finland, Austria and France the most exposed.
Of all the economies we track, the US would be the most insulated from a China worst case scenario, in which its 2016 GDP dip would likely dip to a still healthy 2.3% level thanks to its more domestically rooted growth engine. With softer global inflationary pressures, US CPI would likely also soften, potentially slowing the Federal Reserve’s pace of tightening to leave the Funds rate at 0.875% by end- 2016 instead of our current baseline forecast of 1.38%. In this scenario, the Euro would also likely end 2016 at 1.10 against the USD instead of the 1.20 we currently expect. The USD would gain strongly against EM and commodity currencies, however.
Right. Got it. So once again, we encourage you to bear in mind that this isn’t, as UBS says, a “highly improbable” event.
Rather, this is something that’s already happened, so if you put any stock in UBS’ forecast for how things will shape up in the event that real GDP touches 4% in China, you should probably go ahead and factor in more pain ahead for Argentina and Brazil, a sextuple recession for Japan, and a decisively less steep “flight path” for the Fed.
In other words: if you’re the type that’s inclined to predict a resurgence in global economic acitivity, a rebound in commodity prices, and a smooth, successful exit from seven years of “unconventional” Keyneisan insanity, you can just go ahead and give it up.
- Donald Trump Explains What "Schlonged" Really Means
“She got schlonged!”
That’s what GOP frontrunner Donald Trump had to say about Hillary Clinton’s primary loss to now President Barack Obama in 2008.
“She lost. I mean, she lost,” Trump added, just in case anyone was confused about the meaning of the term “schlonged.”
Predictably, the liberal media was offended by the brazen billionaire’s assessment but, in keeping with his steadfast refusal to apologize or even to backtrack on controversial commentary, the Trump campaign is sticking with the “schlonging”, a move which has the political punditry tracing the term’s history.
Here’s Trump:
Once again, #MSM is dishonest. “Schlonged” is not vulgar. When I said Hillary got “schlonged” that meant beaten badly.
— Donald J. Trump (@realDonaldTrump) December 23, 2015
NPR’s @NealConan said “schlonged” to WaPo re: 1984 Mondale/Ferraro campaign: “That ticket went on to get schlonged at the polls.” #Hypocrisy
— Donald J. Trump (@realDonaldTrump) December 23, 2015
For those on TV defending my use of the word “schlonged,” bc #MSM is giving it false meaning-tell them it means beaten badly. Dishonest #MSM
— Donald J. Trump (@realDonaldTrump) December 23, 2015
Here’s an excerpt from the WaPo‘s take:
“Given Trump’s history of vulgarity and misogyny, it’s entirely possible that he had created a sexist term for ‘defeat’ (as far as I know there is no such slang verb in Yiddish),” Pinker wrote. “But given his history with sloppy language it’s also possible that it’s a malaprop.”
Trump’s problem? He’s a gentile who, linguistically, may have wandered too far from home.
“Many goyim are confused by the large number of Yiddish terms beginning with ‘schl’ or ‘schm’ (schlemiel, schlemazzle, schmeggegge, schlub, schlock, schlep, schmutz, schnook), and use them incorrectly or interchangeably,” he wrote. “And headline writers often ransack the language for onomatopoeic synonyms for ‘defeat’ such as drub, whomp, thump, wallop, whack, trounce, clobber, smash, trample, and Obama’s own favorite, shellac (which in fact sounds a bit like schlong). So an alternative explanation is that Trump reached for what he thought was a Yinglish word for ‘beat’ and inadvertently coined an obscene one.”
And here’s a bit from the NPR piece Trump references:
As it turns out, the use of “schlong” as a verb is not unprecedented in political discourse. As the Washington Post’s Justin Moyer pointed out, NPR’s own Neal Conan used it on the air in 2011, explaining that the Walter Mondale-Geraldine Ferraro presidential ticket “went on to get schlonged at the polls” in the 1984 election.
As it now appears increasingly likely that the general election will see Trump face off against Hillary, it’s a virtual certainty that the American people will ultimately be the ones who end up getting “schlonged.
Enjoy it America.
- Economists Confirm Financial Aid Is Inflating Student Loan Bubble
Submitted by Samuel Bryan via SchiffGold.com,
A paper recently published by the National Bureau of Economic Research confirms that a large percentage of the increase in college tuition can be explained by increases in the amount of available financial aid.
Peter Schiff was saying this as far back as 2012. That summer, Peter appeared on CNBC and debated an economist with the Progressive Policy Institute. Peter insisted that colleges are “basing their prices on the fact that students can borrow money with government guarantees.”
Economists Grey Gordon and Aaron Hedlund wrote their paper for the NBER after creating a sophisticated model of the college market. When they crunched the numbers, it confirmed exactly what Peter said in 2012. The demand shock of ever-increasing financial aid accounted for almost all of the tuition increase:
Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks, net tuition only rises by 16%. These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.”
George Mason University economist Alex Tabarrok pointed out that Gordon and Hedlund revealed the inevitable outcome of government financial aid policy in his analysis of their paper for the Foundation for Economic Education:
"Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.”
According to Gordon and Hedlund, the spike in tuition driven by increased financial aid actually crowds out additional enrollment. But students who do enroll end up taking out $6,876 in loans compared to $4,663 absent the increased availability of financial aid. The end-result, a surging loan default rate from 17% to 32%:
"Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.”
The NBER paper coincides with a study released this summer by the Federal Reserve Bank of New York. Its major conclusion:
We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65%.”
This is not just a bunch of economic theory. These studies reflect the realities we see in America today. A White House study released in September revealed that about 73% of student loans are being repaid. That means 27% are not. And that number will likely grow in the years ahead.
A case currently working its way through the federal court system could pave the way for student loan debtors to discharge their obligations through bankruptcy. The federal student loan bill currently stands at more than $1.3 trillion, and it’s increasing at a rate of about $2726.27 per second. Some 7.5 million student debtors are now severely behind in paying their student loans.
In a nutshell, the federal government is destroying the value of a college degree. Peter summed up the problem during an interview with Tom Woods:
"Government wanted to make college more affordable. They made it more expensive. And at the same time, they destroyed the value of the degree. It costs more to get a degree, and the degree is worth less, because everyone now has one.”
Meanwhile, the American taxpayer is on the hook for all of this student loan debt.
To learn more about the student loan debt crisis and how it may impact you directly, get Peter’s exclusive white paper The Student Loan Bubble: Gambling with America’s Future. You can download it free HERE.
- 9 Of The Top 10 U.S. Occupations Pay Miserly Wages
With Dora Mekouar of VOAnews
9 of 10 Largest US Occupations Pay Miserly Wages
Of the 10 largest occupations in the United States, only one – registered nurse – makes more than the national average when it comes to all U.S. jobs.
Nurses make $69,790 annually while the average U.S. worker makes $47,230, according to the Bureau of Labor Statistics. The bureau’s Occupational Employment Statistics program provides employment and wage estimates for more than 800 occupations nationwide.
More Americans worked as retail salespersons or cashiers in May 2014 than in any other job, accounting for about 6 percent of total U.S. employment.
Cashiers at work at Walmart. About 3.4 million Americans work as cashiers. (AP Photo)
The 10 largest occupations include retail salespersons and cashiers, food preparation and serving workers, general office clerks, registered nurses, customer service representatives, and waiters and waitresses. That combined group of workers accounted for 21 percent of total U.S. employment in May 2014.
Waitress Laura Haege carries a breakfast to be serve at the Waveland Cafe, June 19, 2015, in Des Moines, Iowa. (AP Photo)
The annual average wages for those largest occupations — excluding nurses — ranged from $19,110 for combined food preparation and serving workers, to $34,500 for secretaries and administrative assistants. Food preparation and serving workers also had one of the lowest paying occupations overall, as did fast food cooks ($19,030), shampooers ($19,480), and dishwashers ($19,540).
Here is the full breakdown of the top 10 occupations from the BLS:
On the opposite end of the spectrum, the highest paying jobs include certain physicians and dentists, chief executives, nurse anesthetists and petroleum engineers.
So-called STEM jobs — occupations requiring science, technology, engineering, or math-related degrees — accounted for about 6.2 percent of all U.S. jobs. There are 100 different occupations that account for the STEM jobs. Seven of the 10 largest STEM occupations were related to computers.
Ninety-three of the 100 STEM occupations had mean wages that were significantly above the U.S. jobs average. The highest paying STEM occupations included petroleum engineers ($147,520) and physicists ($117,300). The lowest paying STEM jobs included agricultural and food science technicians ($37,330) and forest and conservation technicians ($37,990).
Overall, the most lucrative U.S. jobs included management, legal, and computer and mathematical occupations.
The lowest paying included food preparation and serving, personal care and service, and farming, fishing, and forestry occupations. Each had an annual mean wage of about $25,000 or less.
* * *
Here is the chart of the average annual wages of the top 10 US occupations:
- Foursquare Is Now Twosquare: Latest Tech Bubble Casualty Has Valuation Slashed By 60%
First it was Dropbox.
In late October ago we reported that one of the numerous “unicorns” prancing around Silicon Valley was about to have a very rude wake up call when Dropbox was warned by its investment bankers that it would be unable to go public at a valuation anywhere near close to what its last private round (which had most recently risen to $10 billion from $4 billion a year ago) valued it at.
Than it was Jack Dorsey’s “other” company, Square (which soon may have a higher valuation than Twitter).
In early November we wrote that “another company realized just how big the second “private” tech bubble, one we profiled first in January of 2014, truly is. That company is Jack Dorsey’s Square, which earlier today filed a prospectus in which it said that the “initial public offering price per share of Class A common stock will be between $11.00 and $13.00.” Assuming a mid-point price of $12 and applying the 322.9 million shares outstanding after the offering, it means a valuation of $3.9 billion. The problem is that in its last private fundraising round, Square was valued at about $6 billion…“
Then, one month ago it was the turn of Snapchat, the fifth most highly valued private tech start up.
According to FT, “Snapchat has been marked down by one of its most high-profile investors, raising further questions about the soaring valuations of private technology companies. Fidelity, the only fund manager to have invested in the four-year-old company best known for disappearing photos, wrote down the value of its stake by 25 per cent in the third quarter. It had valued each share at $30.72 at the end of June but dropped the valuation to $22.91 by the end of September.”
Fast forward to today, when the latest semi-unicorn to drop like a fly was none other than Foursquare, a company which makes apps that do something that most other apps already do as well if not better.
Actually make that Twosquare, or rather Oneandathirdsquare, because according to ReCode, the company is close to finalizing a funding round that will see the company’s value plunge to $250 million, almost two-thirds less than the $650 million it was “valued” at two years ago.
ReCode, which explains that the startup “makes apps that let you find local restaurants and stores and “check in” to them” adds that the company has also talked to potential buyers. So it could still conceivably sell instead of finishing up the funding, which should raise at least $20 million and as much as $40 million. Or, conceivably, it may do neither if investors realize that now that the tech bubble has burst the only way they “get out” is without another down round in 6-9 months, because unfortunately just like virtually all other tech bubble 2.0 names, this one has zero hope of ever generating a profit either.
According to ReCode, at least one new investor will participate in this round; previous investors include DFJ Growth, Microsoft, Silver Lake Partners, Spark Capital, Union Square Ventures and Andreessen Horowitz.
Most importantly, in 2013, Foursquare raised $35 million in a round that valued the company at about $650 million. We can’t wait to see if after the 2017 valuation round, the company will have a “zero dot” prefix ahead of the number of pro forma “corners.”
The good news for the late stage investing idiots who inflated this particular tech bubble in hopes even greater idiots will emerge, is that unlike “luxury online retailer” Gilt Group which is trying to go public at a quarter of its recent private round valuation, Foursquare has raised less, or $121 million, than its so-called valuation. Then again, throw in one more downround, and 4Square will also have raised more in cash than it has in equity value.
How did this collapse happen? ReCode tells the story:
Foursquare, which used to be one of New York’s buzziest startups, launched in 2009 as a social service that let you tell friends what bar or restaurant you were hanging out at — the same concept as Dodgeball, Foursquare CEO Dennis Crowley’s previous company. Foursquare eventually evolved into an ad-supported service that was meant to help you find places to eat, drink or shop, and last summer Crowley said the company had 50 million active users.
But while Crowley has said Foursquare could make real money from advertising, its growth has never matched its valuation, a reality the company and its backers are now tacitly conceding.
Crowley has also spent the past few years talking up the company’s data assets, accumulated via its users’ travels. That data could theoretically be valuable to a big platform company like Microsoft, which has already invested in Foursquare, or Twitter, which is already using Foursquare to power its location function.
But we thought Twitter was hoping that Four Square (or Microsoft) would buy it? This second tech bubble sure is getting confusing.
Luckily, even if Foursquare meets an untimely demise sooner rather than later (and considering its “cash flow”, make that sooner) when its potential investors finally realize they are throwing lots of good money after even more bad money, the entrepreneurial spirit will be alive and well, concocting of the next great idea such as this one:
The good news, sarcastically of course, is that as the WSJ reminds us, there is a whole lot of this kind of “greater idiocy” still to go.
And then there’s this
- Equity Markets Will Be Increasingly Accident Prone In 2016
BofAML's Economics of Volatility framework has been anticipating the 2015 starting point to a turn in volatility for the last two years. From here on we expect to see a rising trend in equity volatility levels, a trend that could last 1-2 years, transporting us from the low volatility regime of the last 3 years towards a sustained high volatility regime.
The Economics of Volatility framework – a quick refresher
The framework attempts to forecast the transitions from low volatility environments to high volatility ones, and vice versa. These periods can last a few years at a time, as do the transitions themselves. The ends of peak and trough periods in interest rates lead declines and rises in mean volatility levels by around 2 years.
During low volatility environments, the inevitable volatility spikes that occur as new information hits the market will get washed over with plentiful risk capital, such that the spike is quickly suppressed. In high volatility environments, higher mean volatility levels can be sustained due to a reduced supply of risk capital.
The global equity derivative team's expectation for a turn in the volatility cycle follows from a clear turn higher in 5Yr real rates in 2013, and allows for a 2-year lag (Chart 6). High volatility regimes may resemble periods like 1998-2003 or 2008-2011, as two examples. Transition periods can also take various forms. Unlike the 1996-1998 transition period which was gradual and well behaved, the 2008-2009 transition was short and violent, as a suppressed and overdue re-pricing of risk finally manifested itself. It’s hard to predict the exact form the next transition will take. While our base case is for an orderly transition, we are wary of the possibility of unpleasant surprises resulting from an unwinding of the highly unusual monetary policy of the last 7 years.
Unwinding extreme easy monetary policy is a tightening
The monetary tightening cycle which started with the 2013 taper has continued its progress, reflected in rising 5yr real rates. This in turn has driven a significant tightening in global liquidity as capital flows from developed to emerging markets start to reverse, evidenced in a slowdown and reversal of FX reserve accumulation.
Tightening liquidity combined with fragility: equity markets are accident prone
Chart 7 shows a measure of global US$ liquidity derived from the momentum of the Fed’s balance sheet. Historically we see that tightening cycles have typically started at high liquidity levels. The current cycle in fact started in anticipation of the tapering of the open-ended QE3 program in 2013, with the impact evident in the sharp turn in the 5Yr TIPs rate (Chart 6), and the subsequent fall in US$ liquidity.
Given how far liquidity has already dropped, it is going to be interesting to watch the impact of the more traditional part of the tightening cycle – actual rate hikes – which are expected to start imminently. Combined with our view of an increased likelihood of local shocks due to deteriorating trading liquidity, we may find the markets more accident prone in 2016 than they have been in some time.
- The World Economy Explained With Two Cows: New Normal Edition
'Keep It Simple Stupid' is the underlying narrative of the "two cows explain economics" meme… but, in light of the 'new normal' reality unleashed by ever-intervening central planners, some of the key political, economic, and corporate systems needed a re-work…
Productivity 'increases'… or slave labor?
It's not a cow, it's a unicorn…
It's not easy being Greek…
Manipulation and lies…
China or America?
Venezuela or America?
Aha, America…
- Orwell's Nightmare Is Here – China Just 'Gamified' Obedience To The State (And Soon It'll Be Mandatory)
Submitted by Claire Bernish via TheAntiMedia.org,
As if further proof were needed Orwell’s dystopia is now upon us, China has now gamified obedience to the State. Though that is every bit as creepily terrifying as it sounds, citizens may still choose whether or not they wish to opt-in — that is, until the program becomes compulsory in 2020. “Going under the innocuous name of ‘Sesame Credit,’ China has created a score for how good a citizen you are,” explains Extra Credits’ video about the program. “The owners of China’s largest social networks have partnered with the government to create something akin to the U.S. credit score — but, instead of measuring how regularly you pay your bills, it measures how obediently you follow the party line.”
In the works for years, China’s ‘social credit system’ aims to create a docile, compliant citizenry who are fiscally and morally responsible by employing a game-like format to create self-imposed, group social control. In other words, China gamified peer pressure to control its citizenry; and, though the scheme hasn’t been fully implemented yet, it’s already working — insidiously well.
Zheping Huang, a reporter for Quartz, chronicled his own experience with the social control tool in October, saying that “in the past few weeks I began to notice a mysterious new trend. Numbers were popping up on my social media feeds as my friends and strangers on Weibo [the Chinese equivalent to Twitter] and WeChat began to share their ‘Sesame Credit scores.’ The score is created by Ant Financial, an Alibaba-affiliated company that also runs Alipay, China’s popular third-party payment app with over 350 million users. Ant Financial claims that it evaluates one’s purchasing and spending habits in order to derive a figure that shows how creditworthy someone is.”
However, according to a translation of the “Planning Outline for the Construction of a Social Credit System,” posted online by Oxford University’s China expert, Rogier Creemers, it’s nightmarishly clear the program is far more than just a credit-tracking method. As he described it, “The government wants to build a platform that leverages things like big data, mobile internet, and cloud computing to measure and evaluate different levels of people’s lives in order to create a gamified nudging for people to behave better.”
While Sesame Credit’s roll-out in January has been downplayed by many, the American Civil Liberties Union, among others, urges caution, saying:
“The system is run by two companies, Alibaba and Tencent, which run all the social networks in China and therefore have access to a vast amount of data about people’s social ties and activities and what they say. In addition to measuring your ability to pay, as in the United States, the scores serve as a measure of political compliance. Among the things that will hurt a citizen’s score are posting political opinions without prior permission, or posting information that the regime does not like, such as about the Tiananmen Square massacre that the government carried out to hold on to power, or the Shanghai stock market collapse. It will hurt your score not only if you do these things, but if any of your friends do them.” And, in what appears likely the goal of the entire program, added, “Imagine the social pressure against disobedience or dissent that this will create.”
Social pressure, of course, can be highly effective given the right circumstances. China seems to have found exactly that in the intricate linking of people’s scores to their contacts, which can be seen publicly by anyone — and then upping the ante through score-based incentives and rewards. Rick Falkvinge pointed out a startling comparison:
“The KGB and the Stasi’s method of preventing dissent from taking hold was to plant so-called agents provocateurs in the general population, people who tried to make people agree with dissent, but who actually were arresting them as soon as they agreed with such dissent. As a result, nobody would dare agree that the government did anything bad, and this was very effective in preventing any large-scale resistance from taking hold. The Chinese way here is much more subtle, but probably more effective still.”
As Creemers described to Dutch news outlet, de Volkskrant, “With the help of the latest internet technologies, the government wants to exercise individual surveillance. The Chinese aim […] is clearly an attempt to create a new citizen.”
Chinese internet specialist at the Swedish Institute of International Affairs, Johan Lagerkvist, said the system is“very ambitious in scope, including scrutinizing individual behavior and what books people read. It’s Amazon’s consumer tracking with an Orwellian political twist.”
James Corbett has been tracking the implementation of Sesame Credit for some time. Introducing the ubiquitous tracking system for a recent episode of the Corbett Report, he mused:
“Coming soon to a New World Order near you: social credit! Earn points by behaving like the government wants you to behave! Get penalized if you don’t act like a doubleplusgood citizen! What could be more fun?”
Indeed, because mandatory enrollment in Sesame Credit is still a few years away, its true effectiveness won’t be measurable for some time. But even a reporter’s usual wariness appears knocked off-kilter, as Zheping Huang summarized his personal experience, “Even if my crappy credit score doesn’t mean much now, it’s in my best interest I suppose to make sure it doesn’t go too low.”
And that, of course, is precisely why gamifying State obedience is so terrifying.
- Commerce Department Releases Consumer Spending Data Early – Worst YoY Growth Since May 2013
In yet another government SNAFU, the US commerce department has released spending data prematurely. Instead of tomorrow morning, its website released the data at 1923ET.. and it is not good. Despite a 0.3% rise in November, thanks to downward revisions, the YoY growth in Spending was just 2.9%. May 2013 was the last time YoY growth was weaker than this and corresponds with spending weakness seen in each of the last 3 recessions.
The figure, which was to be made public Wednesday with the agency’s
report on personal income and spending, was released early on the Bureau
of Economic Analysis’ websitePersonal consumption in Nov. rose to $12.43t, up 0.3% from a revised $12.39t in Oct.
That constitutes a 2.94% rise YoY…
Deep in recessionary territory.
Charts: Bloomberg
- Chinese Executive Who Was Once Kidnapped By Angry Investors Disappears
Back in August, angry investors captured Shan Jiuliang, the head of Fanya Metals Exchange, in a daring predawn raid on a luxury hotel in Shanghai.
The citizen’s arrest (depicted in the rather dramatic image shown below) came after Fanya stopped making payments on WMPs it issued. As we reminded readers at the time, WMPs are marketed to investors through as a high yielding alternative to savings deposits. Investors aren’t often aware of exactly what they’re investing in or how risky it might be or that in many cases, issuers borrow short to lend long resulting in a perpetual case of maturity mismatch.
“Fanya, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid WMPs from its offices in Shanghai and its financing branch in Kunming,” FT explained. Over the summer, the exchange ran into “liquidity problems” at which point those who had bought the company’s financial products had their funds (billions worth) frozen. Investors began to protest.
The situation began to deteriorate rapidly after that, and within a month, investors decided to take matters into their own hands by flying in from all corners of the country to ambush Shan and deliver him to local authorities. He was later released.
As the RBA put it in a report out earlier this year, “a key issue is whether the presumption of implicit [state] guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products.” That may indeed be a key issue, but as we noted in “The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?,” in the event investors are forced to take losses, the key issue is what those investors will do next.
Similarly, FT says that “one of the risks posed by high interest rate shadow banking in China is the possibility that it will erode support for the Communist party among the urban middle classes who have benefited most from China’s increasing prosperity.”
In other words: if China’s multi-trillion dollar WMP market implodes and the state doesn’t step in to bail investors out, there’s a very real risk of social upheaval as evidenced by what happened to Shan in August.
Well, if Xi and his attack dog Fu Zhenghua are serious about rooting out corruption in China’s financial markets, you’d think they’d spend a little more time getting to the bottom of things like $6.4 billion in missing funds tied to WMPs issued by an indium exchange than on arresting securities officials for frontrunning the national team.
Sure enough, Imagi Animation Studies (another company run by Shan) now says it can’t locate its leader. “In a filing to the Hong Kong stock exchange, Imagi Animation Studies, a company controlled by Shan Jiuliang, said it had “lost contact” with the Fanya founder. It said he last attended a board meeting on October 15 but did not turn up for a meeting on December 11 and had not been reachable,” FT reports, adding that “announcements that a company has ‘lost contact’ with its leader are usually the first and sometimes only sign that a Chinese executive has become ensnared in the country’s three-year anti-corruption campaign.”
Party officials have reportedly occupied Fanya’s offices and are now rummaging through files and documents presumably in an effort to figure out where the money is and what happened over the summer that forced Shan to freeze the WMP payouts.
As noted above, the Politburo isn’t particularly keen on the witnessing a popular revolt triggered by some kind of dramatic meltdown in financial markets. Indeed, the main reason the PBoC spent CNY1.5 trillion in Q3 propping up the SHCOMP was to keep the legions of farmers and housewives-turned day traders (who China encouraged to leverage their life savings by buying grossly overvalued stocks on margin) from losing their minds in the midst of the summer selloff.
Given that, it seems likely that Beijing will end up bailing out Fanya’s disgruntled investors rather than risk ongoing protests – or worse. As for Shan, we imagine Xi will be none to pleased about having to shell out CNY36 billion to fix a problem that very well might have arisen from mismanagement, greed, or both. On that note, we’ll close with a quote from an attorney who helps foreign firms ensnared by Xi’s anti-corruption probe:
“The best thing you can do is establish processes for who is likely to be taken away, and how to make sure they aren’t disappeared forever.”
* * *
Full Imagi filing
- Increasingly Durable Correlations
Submitted by Jeffrey Snider via Alhambra Investment Partners,
There are a few correlations that I find particularly compelling.
The first is Chinese RMB (or CNY) next to WTI crude oil, as both are proxies in their own way of multi-dimensional crosscurrents between global “dollar” finance and real economy function. Since March, that correlation has come into renewed and tight focus. In the past few days, the CNY has traded and fixed narrower, perhaps indicating an end to the latest run that has demonstrated huge “dollar” tightness. WTI, however, is still on the way down “catching up” to CNY and thus signaling instead only a short-term pause in the financial downgrade and downdraft.
The second is the Russian ruble compared to more “mid-grade” US corporate junk. Again, you have the same overtones of finance and real economy, with both indications presenting heavy energy exposure but nowhere limited to just that. The ruble declares Russia’s expected oil fortunes, and thus the ability to “service” dollar financial conditions, but also more than that as the overall Russian economy sinks toward its next abyss. The BofAML High Yield Master II index is very much the same, undoubtedly with a high proportion of energy-related junk obligors but increasingly the selloff attains much more shifting risk perceptions about those raw economic circumstances (the credit cycle in general, as the worst of junk increasingly has already greatly strained the boundaries of expectations for default).
Here, unlike January and February, the ruble has held up comparatively well after August 24 and 25. Given the state of the Russian economy, I’m not too sure that isn’t an ill omen in terms of the junk bubble. In other words, in the first “dollar” wave the ruble declined faster and sharper, while this time it is US junk that throws off so much complacency. To me, that says a lot about how “transitory” was viewed in both participants only to converge at this later stage.
In more succinct terms, there remains a serious global problem across both economy and finance. Given the very distinct elements contained in each of these individual indications, that they would come together so well and for so long leaves little to chance (or continuing recovery, for that matter). A few weeks might be random, a half year very unlikely so (CNY/WTI) while nearly a year and a half (RUB/HY) establishes a lot of credibility.
- "Canadians Should Be Concerned" As Energy Sector Job Losses Spike To 100,000 This Year
It's grim up north… and getting grimmer. Amid soaring suicide rates, Canada's once-booming oil patch is rapidly accelerating its downward trajectory. "Canadians should be concerned in times like these," warned Tim McMillan, president and chief executive of the Canadian Association of Petroleum Producers, noting that the oil and gas sector will see 100,000 job losses by the end of this year. Even if oil prices rise early and fast next year, Financial Post reports, it may take a while for Canadian oilsands to rebound as the industry has mothballed a number of long-term projects.
Over the past year, we have extensively chronicled the tragic story of Alberta – Canada's once booming oilpatch – disintegrate slowly at first, then very fast, into an economic and financial wasteland:
- "Canada Crude Contagion: Calgary Home Prices Drop Most In 2 Years"
- "Canada's Biggest Oil Casualty To Date: Calgary's Nexen Shutters Oil Trading Desk"
- "The Canadian Housing Bubble Has Begun To Burst"
- "Canada's Oil Patch Confidence Crashes"
- "Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk"
- "The Stage Is Set For A Massive Housing Market Correction in Canada's Oilpatch"
And, in one of the latest articles of this sad series describing the Alberta "bloodbath", we said that the worst casualty of Canada's recession has been the local commercial real estate market, where office vacancies are about to surpass the aftermath of the (first) great financial crisis.
But, it turns out the biggest casualty of Canada's recession, which unless oil rebounds strongly soon will follow Brazil into an all out depression, are people themselves. As CBC reports the suicide rate in Alberta has increased dramatically in the wake of mounting job losses across the province.
Sadly, as The Financial Post reports, the situation looks set to get worse… as policy uncertainty has exacerbated the pain of low prices…
The oil and gas sector will see 100,000 job losses by the end of this year, including 40,000 direct jobs, as a combination of policy uncertainties and low crude oil prices decimates the sector, the head of the country’s oil and gas industry group says.
“Canadians should be concerned in times like these,” Tim McMillan, president and chief executive of the Canadian Association of Petroleum Producers, said in an interview. “We have a lot of big policy pieces moving around. We need … to ensure we can compete in a slower price environment and if prices do bounce back , that we are the preferred investment jurisdiction and that we are picking up more than our fair share.”
Apart from the protracted price declines, Alberta’s oil and gas sector has also had to contend with a 20 per cent hike in corporate taxes, a carbon tax and new regulatory policies to limit rein in carbon emissions.
Meanwhile, a new provincial royalty regime is to be announced in January, leaving Alberta oil and gas producers under a cloud of uncertainty. The new federal government also plans to unveil new policies, including a review of the regulatory process, which the sector sees as more burden in an already difficult environment for the industry.
McMillan said those burdens are chipping away at Alberta’s competitiveness as an energy jurisdiction. In the 1990s, Canada attracted 37 per cent of all oil and gas investments in North America, a figure that now stands at 17 per cent, he said.
Furthermore, on Friday, American lawmakers lifted a 40-year ban on U.S. crude oil, which would bring a new competitor into the already-crowded international suppliers market. McMillan said while scrapping the export ban will bring more efficiency to the North American oil landscape, Canada should try to forge its own path to international markets.
However, as Financial post goes on to say, even if oil prices rise early and fast next year, it may take a while for Canadian oilsands to rebound as the industry has mothballed a number of long-term projects.
Canada has led the world in deferments since the oil crisis unfolded in November last year, with just under 40 projects scaled back due to low prices and lack of market access, according to Texas-based energy investment and merchant bank Tudor, Pickering, Holt & Co.
As we concluded previously, Nancy Bergeron, who has answered distress centre phone lines for a few years, says this year has been the hardest. "People are just at wit's end and they're contemplating it, right?"
Why? Simply because the price of a commodity has dropped to a third of what it was just over a year ago, and the shocking impact has been a paralysis of every aspect of financial, economic and social life, first in Alberta, and soon everywhere else across Canada, as the local recession (on its way to a depression) spreads across the country and eventually crosses the U.S. border.
- Police Whisper Into Protesters’ Ear: “Keep On Protesting”
Former New York Times reporter Chris Hedges has previously noted that oppressive regimes fall when their soldiers stop obeying orders and start following the will of the people.
Hedges gave an example from the U.S. In 2010, Hedges, Daniel Ellsberg and 131 veterans were arrested for holding an anti-war protest in front of the White House.
Everyone was arrested, their wrists tied with plastic restraints, and hauled off to jail. So – on the surface – it looked like the police unquestioningly cracked down on the protest.
But Hedges says (in a speech broadcast on public radio station last week) that – as their wrists were being tied – the police officer whispered in the protesters ears:
“Keep protesting. Keep doing what you’re doing, because these wars stink.”
Hedges later explained that the police were vets, too. And they knew recent American wars have been fought for oil and geopolitical power … not to protect America.
Postscript: American military heroes have also blown the whistle on things which could have led to nuclear war.
And Pulitzer prize-winning reporter Seymour Hersh claims that top-level U.S. military officials are disregarding Obama’s dangerous orders to oust Syria’s Assad.
No wonder veterans are considered terrorists by the USG.
- Six Signs That 2016 Will Be Much Worse Than 2015
Submitted by GlobalGold's Claudio Grass via Acting-Man.com,
A Turbulent Year
In the course of 2015 we have witnessed several events that had, and will have, negative repercussions on individual freedom. Orwellian totalitarianism is increasingly creeping into our everyday lives. How much more intrusive will the violations of our liberties become and for how long will the establishment get away with this? These are questions that remain unanswered.
United we move toward a perfectly monitored society – the US Congress has just passed the controversial CISA spying law – the worst possible version of it – by sneaking it into a budget bill. This utterly corrupt method of enacting laws that would not get passed on their own because they are such a huge affront to decency and civilization has become the norm in the “land of the free” – which ironically is “exporting democracy” by force of arms all over the world!
With regards to the financial system, no real solution was found to issues such as those in the euro zone. Furthermore, the financial system as a whole once again got deeper into debt. For how much longer can central banks and governments continue kicking the can down the road without any real reform? I will try to answer these questions and identify trends for 2016 by looking at six key issues that have had an impact this year.
1. Geopolitical Developments
We have witnessed a number of troubling geopolitical developments during this past year. From the continuing conflict between Russia and Ukraine, territorial disputes between Japan and China, the escalating proxy war in Syria, the refugee crisis in Europe, the rise of religious tensions all over world to the rise of the Islamic State, the world has become increasingly unstable.
Yet another finger-wagger: Abu Bakr al-Baghdadi, the self-anointed “Caliph” of the medieval retro-state that has sprung up in Syria and Iraq.
Going into the details of these conflicts is beyond the scope of this article, but the fact is that all of these developments harbor the potential for large-scale escalation. From the perspective of the West, the conflicts and wars of the past decades were for the most part far away. Only now do we realize that this will change as we have already begun to see in 2015. The times of conventional warfare, when two armies met on the battlefront, are over. Future conflicts and wars will be fought closer to home. We should get ready for a period of increased instability, particularly with respect to politics and security issues.
2. Totalitarianism is on the Rise
The sudden rise of ISIS and its affiliates is a disturbing development that has produced a smorgasbord of feelings, ranging from fear to rage to sadness and more. Ultimately though, they all lead to the same result: States are seeking more control over their citizens by curbing individual liberties.
One example is that Western countries are limiting the use of cash, under the guise of fighting terrorism and illicit activities. JP Morgan has placed restrictions on the amount of cash one is allowed to deposit and several European countries have banned cash transactions exceeding a certain size. Looking to the future, it seems that this trend will continue to worsen and that we are headed toward an Orwellian police state in which no one is entitled to financial privacy anymore.
Another hot-button issue is gun control. Since it became known that the San Bernardino shooting and the Paris attacks were apparently carried out with legally obtained arms, there have been increased calls for massive restrictions on private gun ownership. Disarming the masses is a necessity to control them and that is exactly what our governments are gradually doing.
“The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in Government” – Thomas Jefferson.
FRONTEX operational territory; insert: Frontex uniform. This paramilitary bureaucracy is headquartered in Warsaw and threatens to override the sovereignty of EU member nations.
On the EU level, a disturbing development is the fact that FRONTEX (the EU agency responsible for border management) has stated that it will intervene to secure the EU’s borders should the refugee crisis get out of hand, even if the respective countries oppose its action. On a global level, the Transatlantic Trade and Investment Partnership (TTIP) says that arbitration courts will have the potential to annul national sovereignty when it comes to jurisprudence. We expect this trend toward ever greater centralization to continue.
3. The “Rescue” of Greece: Coming to a Country Near You?
At the beginning of this year, the topic of a potential “Grexit” dominated news cycles over several weeks. It seemed like a realistic possibility that Greece might leave the euro zone. Instead, after yet another one billion euro bailout package, Greece was “saved” and a “Grexit” was off the table (for the time being). Once again, political idiocy prevailed over economic rationale. In the end, delaying the inevitable failure of the Greek financial system is all that was achieved.
Desperate Greek pensioners queuing at an ATM during the “bank holiday”. Many of them realized a number of facts far too late: a) that fractionally reserved banks are de facto insolvent and cannot pay the vast majority of their depositors in extremis (especially if the central bank backstop is withdrawn); b) that the European elites would expropriate them in an eye-blink for “their own good”; and c) that any vote that doesn’t conform to the wishes of the EU bureaucracy is worth precisely nothing – even in the “cradle of democracy”.
More astonishing than the fact that Greece – a country that represents less than one third of one percent of the world GDP – received another huge bailout package, was how it all played out. A bank holiday was announced, capital controls were implemented, cash withdrawals were massively restricted, the stock market closed and any assets inside the banking system (even safety deposit boxes) were no longer accessible to their owners. This is an unprecedented level of infringement on private ownership that has never been seen in a modern Western country.
4. Fed Hikes Interest Rates
The Fed hikes interest rates for the first time since the financial crisis of 2008. For the past 7 years we have had an interest rate band between 0-0.25%, which is essentially “money for nothing”. With its decision, the Fed became the first large (and the leading) central bank to effectively hike interest rates.
The effective federal funds rate (a weighted average) has jumped to the highest level since late 2008. This “high level” is still next to nothing though – click to enlarge.
Meanwhile, on the other side of the Atlantic, the ECB cut its deposit rate (slightly) deeper into negative territory and prolonged its QE program that is now expected to continue until March 2017. Since last summer, the media continuously speculated about a rate hike and its timing. So, will interest rates start to normalize after the long-awaited change in monetary policy? We don’t think so! We believe that the main reason the Fed decided to hike rates was to regain some of its lost credibility.
For the past seven years the monetary floodgates have been open with no clear positive effect on the real economy. A continuation of zero interest rate policy (ZIRP) would have been an admission of failure. With this slight rate hike of 25bps, the Fed is trying to show the world that its policy during the financial crisis worked.
We all know that the economy in the US is not as healthy as the Fed would like us to believe. When we throw in the potentially explosive impact the failing shale industry could have on the economy and the strength of the dollar, that is likely to increase further due to this rate hike, we doubt that this move by the Fed is the turning point and that the Fed will continue hiking rates as it has done previously in such cycles. The Fed raised interest rates because it had to, but don’t expect the monetary shenanigans to be over. There are a lot more to come!
5. Defaults Surge as Global Debt Explodes
2015 has seen the greatest number of corporate defaults since the financial crisis. Many of the companies that are defaulting are from the energy and materials sector. Why? It is the logical outcome of the excessive borrowing by corporations who were misled by close-to-zero interest rates. And, of course, we must not forget the boom in the shale industry.
With a barrel of oil costing over USD100, shale oil was a very interesting investment. Now with oil hitting rock bottom, some oil producers are operating at a loss and only continue operations to be able to make their interest payments. The number of corporate bonds Standard & Poor’s rates as junk or speculative, has gone up to 50% from a previous 40%. Unfortunately, the world did not learn its lesson after the financial crisis and instead of deleveraging, it has accumulated even more debt, as the chart below illustrates. Of course it not only corporations that are responsible; governments have not learned their lesson either.
No deleveraging is in sight – click to enlarge.
The issue of debt will continue to be with us for some time to come; the house of cards will eventually collapse, but we think that politicians and central bankers have the will to “do whatever it takes” to prolong its eventual demise. What we will likely see in 2016, however, is a massive increase in defaults. Yields on high-yield bonds are already at alarming levels.
What exactly will be responsible for the next crisis is hard to foresee. The trigger might be the possible collapse of the shale industry, or the strengthening dollar, that will make it very hard for emerging market countries to repay their debts, or a completely unexpected sector (who knew what sub-prime was back in 2006?).
6. Oil Price Collapse
Crude oil prices fell to their lowest levels in nearly 11 years, as crude oil declined to nearly USD35 per barrel. The price of oil has been on a continuous downward trend and has plunged nearly 70% since the summer of 2014. From our perspective, the main factor that led to this decline is the US shale oil “revolution”.
It was truly a revolution, considering that the boom in shale oil production allowed production in the US to surpass that of Saudi Arabia, previously the world’s largest oil producer. Meanwhile, OPEC hasn’t changed its stance as it insists on maintaining its strategy to increase its market share, even if this comes at the expense of further oil price declines.
US crude oil production has more than doubled from the multi-decade lows reached in 2008/9
I am not an expert on oil and therefore it am not going to provide predictions on where the oil price is heading next. I would rather want to discuss the impact of the oil price movement to date. First of all, a collapse of the oil price, a commodity that is widely used in industry, has historically always been a herald of recessionary tendencies. In my view, the oil price clearly signals that the economy is not as healthy as is portrayed by the mainstream media.
Secondly, the ongoing failure of companies in the shale industry has the potential to bring on a crisis that could dwarf the previous financial crisis. Last, but definitely not least, is the question of how oil exporters such as Saudi Arabia, will finance their budgets when oil revenues massively decrease and they are no longer able to buy their population’s silence with gifts.
How can we Position Ourselves in such an Environment?
The outlook for the future looks bleak: continuously growing debt, looming defaults on a major scale and geopolitical tensions. So how can we best position ourselves?
In times like these, when it seems impossible to predict even the near future, we seek security. Precious metals like gold and silver represent wealth and value. They give their owners a degree of independence and protection from the whims of governments. In light of recent events in Greece, it turns out that gold and silver are only a safe investment as long as one has full control over it and can access it at any time. Holding gold outside of the banking system is therefore essential in my view.
Those who know me know that I am Swiss and rather biased towards my home country. To me, Switzerland strikes the perfect balance between international neutrality with a history of a safe and stable political landscape, and an environment that encourages investment and guarantees private ownership rights.
- "When Is The Crash Going To Happen?" – Mark Spitznagel Revisits "The Ticking Time Bomb"
Submitted by Mark Spitznagel via Pensions & Investments,
Since the question “when is the crash going to happen?” is always asked, we thought it particularly timely to update the research we have done on the topic. Timing a crash can be a fool's errand, and fortunately such efforts are largely irrelevant if you are tail hedging (though they are quite relevant if you aren't). When tail hedging efficiently, the extreme asymmetries in payoffs, by definition, removes any need to time the top. But this doesn't mean that exercises in timing are without merit.
As we showed in previous research, without a doubt (or at least with over 99% confidence), bad things happen with increasing expectation when conditioning on higher Q ratios ex ante. That is, when Q is high, large stock market losses are no longer a tail event but become an expected event. Factoring time into the equation, and again based on history, the confidence interval around the median time would point to an expectation that the crash should commence right about now.
Monetary policy has proven to be very effective over the past seven years in elevating asset markets. However, its effect has been limited to the price of assets (the “title” to existing capital), but not the price of new capital. This differential is depicted in the Q ratio, where one can think of the numerator as representing the aggregate price of the stock market and the denominator as the aggregate book value. The higher the ratio, the further the stock market is priced relative to the reality of the underlying capital, and the greater the implied return on that aggregate capital above the average aggregate cost of capital. This ratio has always had its breaking point, much to the frustration of interventionist monetary policy, as the numerator ultimately crashes back to the denominator, rather than the denominator catching up to the numerator (a fact that Keynesians from Paul Krugman to James Tobin himself have considered a central puzzle of economics). Indeed, the continued deviation of this ratio from its long run historical average is something that both economic history and, best of all, economic logic dictate as unsustainable.
The question becomes how deviations and extremes in the Q ratio are ultimately corrected. The short answer is: they are corrected via the numerator, i.e., through corrections in the aggregate stock market value. The further the Q ratio has deviated from its long run historical average, simply put, the further the stock market has to fall to correct that deviation (this is what the market's homeostatic process does so predictably well).
There are regularities in the “stopping time” to the market's homeostatic correcting of extreme Q deviations, and as we saw recently in China, even massive interventions can't ultimately stop such corrections. An equity holder should be very aware of the current valuation environment, the magnitude of the drop that is to be expected, and the inherent cyclicality behind the amount of time between crashes. We are currently beyond the median amount of time, historically, before we would expect to see at least a 20% correction of the stock market (the numerator). Most importantly perhaps, the majority of the losses tend to happen in a concentrated plunge at the tail end of the path down to minus 20%. For instance, in just the last two months before the market passes through our 20% drawdown trigger, it typically (on average) has experienced a loss of nearly the entire 20%.
The very high probability of a crash currently implied by history flies in the face of a very low probability of a crash currently implied by the options market. The same beliefs that have pushed the market to extreme valuations have also returned option prices back to near record lows. If there is elevated risk in the equity market to the degree we have seen, counter-intuitively, it is not at all priced into options markets.
To use my favorite investing metaphor, the pot odds – the payoff, or the size of the pot relative to the price of calling – are very favorable compared to the hand odds – the likelihood of making the best hand; that is, we are getting the best of it.
In the recent August volatility (or in any other crashes we have seen), the tide turned both too surprisingly and too quickly for most to fully re-position until it was much too late. The future need not look like the past, but for an equity holder (or an opportunistic trader), the price of equity tail risk is not currently representative of that which has proven itself throughout history under similar (if not far less risky!) circumstances. How much further the rally stretches, whether another 10% or 100%, does not matter to an efficient tail hedger; it only adds to the expected magnitude and timing of a pending crash—which grows larger and sooner with each uptick in the stock market and tick of the clock—thus adding to the expected profitability and strategic advantage of the hedge.
- Meanwhile, In Hawaii…
On Sunday we noted that while Obama’s possible successor was busy laying out her (or his) ideological vision for the future of America, the President was busy playing 18 holes in Hawaii, where the First Family is enjoying their annual $4 million, taxpayer-funded Christmas in paradise.
Of course the President wants to make sure the press stays in the loop so he graciously allowed reporters to tag along as he wrapped up a round at the Mid Pacific Country Club on Monday.
While those in attendance didn’t get anything notable from the commander in chief on foreign policy or anything else of geopolitical significance, they did get to witness this epic chip shot:
And they’ll be plenty more where that came from. Obama played 9 rounds on last year’s trip.
A question for Mr. Trump: do “losers” make 40ft. chip shots?
- Crude Extends Gains After API Reports Unexpectedly Large Inventory Draw
Following last week’s huge build reported by DOE, crude inventories reported by API tonight dropped 3.6 million barrels (drastically different from the 2.3mm build expected). WTI is rallying on the news, despite a 1.5 million barrel build at Cushing (up notably from last week’s 847k) – the 7th weekly build in a row.
Total Inventories saw a drawdown…
But Cushing saw the 7th weekly build in a row…
The reaction was modest as algos came to terms with the ‘build’ at Cushing, the ‘draw’ overall, and the strength of the Brent ‘arb’
Charts: Bloomberg
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