- No, Bank Bailouts HAVEN’T Ended
CNN headlines, “Fed Ends ‘Too Big to Fail’ Lending to Collapsing Banks”.
Sounds good …
But CNN quickly backtracks:
“There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions,” [Congresswoman Elizabeth] Warren, a Democrat, told CNNMoney.
***
It’s important to note that the new rule allows the Fed to judge by its own measures whether a firm qualifies for its emergency aid.
The idea is the Fed can still lend to banks during times of emergency, but the bank must be able to pay it back. Yet the true health of a bank in turmoil can be very difficult to assess.
“It’s very hard to judge in real time whether a firm is insolvent or just having liquidity problems because it becomes impossible to price assets,” says Paul Ashworth, chief U.S. economist at Capital Economics, a research firm.
That’s why Warren wants clearer guidelines.
“It’s up to Congress to close those loopholes and ensure that Fed emergency lending is limited to protecting the economy and not to saving a few favored banks,” Warren says.
***
The Fed performs “stress tests” on banks to see how they perform in a mock financial crisis scenario. It’s also forced banks to increase the amount of cash they have stashed away to weather the next rainy day.
As we reported in 2009, the stress tests are a sham:
- Time Magazine called the previous stress tests a “confidence game” and Geithner a “con man” for running them deceptively
- Paul Krugman called the stress tests a mere “self-esteem class” for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests “fail the basic criterion of a reality check”
- William K. Black called them “a complete sham”
- FDIC head Sheila Bair didn’t believe they were credible
- The stress tests were a P.R. stunt devised by the banks themselves
We noted in 2011 that the the heads of the Federal Reserve and Treasury Department lied about the health of the big banks in pitching bailouts to Congress and the American people:
The big banks were all insolvent during the 1980s.
And they all became insolvent again in 2008. See this and this.
The bailouts were certainly rammed down our throats under false pretenses.
But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.
Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.
In addition, the $700 billion 2008 bailout was just one aspect of the government’s ongoing bailouts of the too big to fail banks. A leading banking analyst says that the giant banks are receiving $780 billion dollars each and every year through various types of hidden bailouts.
In other words, the “end” of the type of bailout discussed by CNN doesn’t touch the other massive, ongoing bailouts of the big banks.
Moreover, the powers-that-be may be setting us up for “bail-ins”, where banks simply grab our deposit money and use it to plug the holes in their balance sheets.
The bottom line: Beneath the headlines, the truth is that the financial reform legislation has NOT really ended the bailouts … and things are only getting worse.
- 11 "Alarm Bells" That Show The Global Economic Crisis Is Getting Deeper
Submitted by Michael Snyder via The Economic Collapse blog,
Economic activity is slowing down all over the planet, and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008. Yesterday, I explained that the economies of Japan, Brazil, Canada and Russia are all in recession. Today, I am mainly going to focus on the United States. We are seeing so many things happen right now that we have not seen since 2008 and 2009.
In so many ways, it is almost as if we are watching an eerie replay of what happened the last time around, and yet most of the “experts” still appear to be oblivious to what is going on. If you were to make up a checklist of all of the things that you would expect to see just before a major stock market crash, virtually all of them are happening right now. The following are 11 critical indicators that are absolutely screaming that the global economic crisis is getting deeper…
#1 On Tuesday, the price of oil closed below 40 dollars a barrel. Back in 2008, the price of oil crashed below 40 dollars a barrel just before the stock market collapsed, and now it has happened again.
#2 The price of copper has plunged all the way down to $2.04. The last time it was this low was just before the stock market crash of 2008.
#3 The Business Roundtable’s forecast for business investment in 2016 has dropped to the lowest level that we have seen since the last recession.
#4 Corporate debt defaults have risen to the highest level that we have seen since the last recession. This is a huge problem because corporate debt in the U.S. has approximately doubled since just before the last financial crisis.
#5 The Bloomberg U.S. economic surprise index is more negative right now than it was at any point during the last recession.
#6 Credit card data that was just released shows that holiday sales have gone negative for the first time since the last recession.
#7 As I mentioned yesterday, U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession.
#8 The velocity of money in the United States has dropped to the lowest level ever recorded. Not even during the depths of the last recession was it ever this low.
#9 In 2008, commodity prices crashed just before the stock market did, and late last month the Bloomberg Commodity Index hit a 16 year low.
#10 In the past, stocks have tended to crash about 12-18 months after a peak in corporate profit margins. At this point, we are 15 months after the most recent peak.
#11 If you look back at 2008, you will see that junk bonds crashed horribly.
Why this is important is because junk bonds started crashing before stocks did, and right now they have dropped to the lowest point that they have been since the last financial crisis.
Bonus Alarm #12: The US Services economy is weakening in its usual lagged way to manufacturing. This is a problem as the narrative has been that Services will save the economy even as manufacturing collapses.
If just one or two of these indicators were flashing red, that would be bad enough.
The fact that all of them seem to be saying the exact same thing tells us that big trouble is ahead.
And I am not the only one saying this. Just today, a Reuters article discussed the fact that Citigroup analysts are projecting that there is a 65 percent chance that the U.S. economy will plunge into recession in 2016…
The outlook for the global economy next year is darkening, with a U.S. recession and China becoming the first major emerging market to slash interest rates to zero both potential scenarios, according to Citi.
As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent, Citi’s rates strategists wrote in their 2016 outlook published late on Tuesday. A rapid flattening of the bond yield curve towards inversion would be an key warning sign.
Personally, I am convinced that we are already in a recession. There is a lag in the official numbers, so often we don’t know that we are officially in one until it is well underway. For example, we now know that a recession started in early 2008, but in the summer of 2008 Ben Bernanke and our top politicians were still insisting that there was not going to be a recession. They were denying what was actually happening right in front of their eyes, and the same thing is happening now.
And of course if the government was actually using honest numbers, we would all be talking about the recession that never seems to end. According to John Williams of shadowstats.com, honest numbers would show that the U.S. economy has continually been in recession since 2005.
But just like in 2008, the “experts” at the Federal Reserve are assuring all of us that everything is going to be just fine. In fact, Janet Yellen is convinced that things are so rosy that she seems quite confident that the Fed will raise interest rates in December…
Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.
Her comments at the Economic Club of Washington amount to the strongest indication the Fed has provided so far that it will take action at a December 15-16 meeting.
But this time around, any mistake that the Fed makes will have global consequences. The rising U.S. dollar is already crippling emerging markets all around the globe, and an interest rate hike will just push the U.S. dollar even higher. For much more on this, please see my previous article entitled “The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse“.
Many people are waiting for “the big crash”, but the truth is that almost everything has crashed already.
- Oil has crashed.
- Commodities have crashed.
- Gold and silver have crashed.
- Junk bonds have crashed.
- Chinese stocks have crashed.
- Dozens of other stock markets around the world have already crashed.
But the “big event” that many are waiting for is the crash of U.S. stocks. And just like in 2008, it is inevitable that a U.S. stock crash will follow all of the other crashes that I just mentioned.
Sometimes I get criticized for issuing these kinds of alarms. But just think of how many people could have been helped if they would have known that the financial crisis of 2008 was going to happen ahead of time.
The exact same patterns that we experienced back then are playing out once again right in front of our eyes, and the more people that we can warn in advance the better.
- "But It's Just A 0.25% Rate Hike, What's The Big Deal?" – Here Is The Stunning Answer
After today’s market plunge, the result of what even Goldman admitted may have been a major policy error by the ECB, suddenly the Fed’s determination to hike rates in two weeks lies reeling on the ropes. After all, what the ECB did was an implicit tightening of reverse QE1 proportions (it is no accident that the EURUSD is soaring as much as it did in March 2009 when the Fed unleashed QE).
But assuming the Fed is still intent on hiking at all costs, and does just that in two weeks time, a question many are asking is where will General Collateral repo trade in case the Fed does decided to push rates higher by 0.25%: after all the Reverse Repo-IOER corridor is the most important component of the Fed’s rate hike strategy, one which better work or otherwise the Fed will be helpless to raise rates with some $3 trillion in excess liquidity sloshing around, and what little credibility it has will be gone for good.
And much more importantly, what are the liquidity implications from such a move.
For the answer we go to the repo market expert, Wedbush’s E.D. Skyrm. Here are his thoughts:
Where will General Collateral trade when the fed funds target range is moved 25 basis points higher to .25% to .50%? In the most simple method, GC has averaged about .15% for the past month, which implies a GC rate around .40% after the Fed move.
However, given the unprecedented amount of liquidity in the financial system, there’s a belief the Fed will have problems moving overnight rates higher.
We have two quantifiable events over the past few years where the Fed moved Repo rates higher or lower: quarter-end and the QE programs. Given there are so many moving parts, consider these to be very rough estimates: Beginning in 2015, when funding pressure began each quarter-end, the market, on average, took approximately $255B additional collateral from the Fed and, on average, GC rates averaged 20.5 basis points higher.
In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.
If readers didn’t just have an “oops” moment, please reread the last bolded sentence until they do, because it explains precisely what the market is missing about the Fed’s rate hike cycle: according to Skyrm’s calculations, to push rates by a paltry 25 bps, the smallest possible increment, what the Fed will have to do is drain up to a whopping $800 billion in liquidity!
Putting that in context, QE2 – which pushed the S&P higher from November 2010 until June 2011 – was “only” $600 billion.
In other words, to “prove” to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2…. only in reverse.
For those who think this will have a positive, or even neutral, impact on risk assets, we have several bridges located in Brooklyn that we are looking to offload at 150% of par. Please send your BWICs to the usual address.
- Money Is Becoming Unmanageable
Submitted by John Rubino via DollarCollapse.com,
Some of the money managers who made names (and billions of dollars) for themselves in the past decade are suddenly failing:
Hedge Funds Brace for Redemptions
(Bloomberg) – When BlueCrest Capital Management told investors Tuesday it would no longer oversee money for outsiders, one thing founder Michael Platt didn’t mention was that clients had already pulled billions of dollars this year.
Platt, who cited client demands and pressure on fees as a reason for his decision, isn’t alone in feeling the heat from investors. Firms including Och-Ziff Capital Management Group LLC and Mason Capital Management have seen cash flee this year, and others such as Fortress Investment Group LLC’s macro funds business shut down after redemptions and losses.
Hedge fund investors are losing patience even with marquee firms as many of them struggle this year, especially those that offer macro strategies or stock funds heavily weighted to rising shares. Some managers have lost money for two years running, while others such as David Einhorn’s Greenlight Capital are suffering declines that rival their worst year. After the weakest third-quarter inflows in six years, the industry could see outflows in the fourth quarter, said investors and bankers who watch the ebb and flow of hedge fund assets.
“The fourth quarter will be flat and possibly negative,” said Peter Laurelli, head of research at Evestment Alliance, which tracks hedge fund investments.
Among the most prominent losers in the second half is Bill Ackman, whose Pershing Square Capital Management is down more than 17 percent in 2015 through November. The firm has been hurt by its investment in Valeant Pharmaceuticals International Inc., whose shares have slumped 31 percent this year amid scrutiny over drug prices.
Einhorn’s Greenlight Capital has declined 21 percent this year, as positions such as SunEdison Inc., Consol Energy Inc. and Micron Technology Inc soured. Einhorn’s worst annual loss was in 2008, when his fund fell 23 percent.
Others firms have been losing money for more than a year. Mason Capital, an event-driven fund based in New York, was down about 20 percent from the start of 2014 through this year’s third quarter, according to investors. Assets fell to about $5.6 billion from about $9 billion at the end of last year.
Fortress Investment Group LLC said in October it was closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Earlier that month, Bain Capital decided to shutter its Absolute Return Capital fund after more than three years of declines.
At BlueCrest, assets have shrunk by more than 40 percent this year to $7.9 billion, mostly from withdrawals after years of lackluster returns in what was once its biggest fund. New Jersey’s public pension plan decided to pull $284 million from one international fund as of June 30, citing “disappointing” returns just over a year after adding to its investment.
Why are the worlds’ most successful investors having so much trouble lately? The short answer is that the markets they used to understand have been replaced by something very different. Consider:
Starting in the late 1990s, every crisis with even a hint of systemic import – which would have provided information for market participants about what not to do – has been short-circuited with easy money, lower interest rates and directed bail-outs. Where a properly-functioning financial market would have signaled banks and leveraged speculators to ease up on the risk taking, the “Greenspan put” said “do whatever you want, we’ll fix it if you fail.” The result was a massive increase in leverage across the board, to the point where virtually every government and many corporations and individuals now carry unprecedented amounts of debt.
While the world was leveraging itself to the hilt, governments and big banks were manipulating virtually every major market for, respectively, political gain and trading profits. The list of indexes and instruments that are or have been messed with include LIBOR, long and short-term sovereign interest rates, blue chip equities, gold, developed world currencies, emerging market currencies, mortgage backed bonds and various kinds of swap contracts. In each of these (and many other) sectors, fundamentals no longer matter, leaving investors with no tea leaves worth reading.
Last but not least, financial crises lead to geopolitical turmoil. With the Middle East engulfed in end-to-end war, the US butting heads with Russia and China in, respectively, Syria and the South China Sea, and Europe being swamped by millions of Middle Eastern refugees and the rise of anti-euro political parties, market price signals, to the extent they exist at all, are being drowned out by geopolitical noise, which is another way of saying that political risk now trumps economic/financial fundamentals.
In this new, post-market world, money managers can’t separate signal from noise and end up on the wrong end of wild swings in commodities, currencies and interest rates. And now their clients are figuring this out.
- Auto Loan Madness Continues As US Car Buyers Take On Record Debt, Lunatic Financing Terms
Way back in June, we noted that auto sales had reached 10-year highs on record credit, record loan terms, and record ignorance. We based that assessment on the following set of Q1 data from Experian:
- Average loan term for new cars is now 67 months — a record.
- Average loan term for used cars is now 62 months — a record.
- Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
- Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
- The average amount financed for a new vehicle was $28,711 — a record.
- The average payment for new vehicles was $488 — a record.
- The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.
In short, the “renaissance” in US auto sales is being driven (no pun intended) by increasingly risky underwriting practices and this is leading directly to the securitization of shoddier and shoddier collateral pools in a return to the “originate to sell” model that drove the housing bubble over a cliff in 2008.
As Comptroller of the Currency Thomas Curry recently put it, “what’s happening in the auto loan market reminds me of what happened in mortgage-backed securities in the run-up to the crisis.”
Of course you can count on Experian and its incomparable senior director of automotive finance Melinda Zabritski (who never saw a subprime loan with ridiculous terms she didn’t like) to let you know that as dangerous as this dynamic most certainly is, everything will be fine.
On Wednesday, Experian released data for Q3 and well, let’s just say that the trend we’ve observed and documented over the past two quarters is still intact.
First, the percentage of new and used vehicles with financing rose to 86.6% and 55.3%, respectively. The trend is readily apparent:
Next, the number of leased vehicles as a percentage of the total continues to rise:
The percentage of subprime and nonprime in the leasing category rose meaningfully Y/Y:
And the average credit score on loans for new vehicles just hit its lowest level since before the crash:
While the average amount financed is up across the board:
As are average payments:
And loan terms:
“As the price for a new or used vehicle continues to rise, leasing has become a more viable financing option for consumers looking to maintain an affordable monthly payment,” the aforementioned Melinda Zabritski said on Wednesday.
Well yes Melinda, leasing has become a “more viable financing option” for people who otherwise couldn’t afford a car as has acquiescing to the extension of loan terms. On the lender side of the equation, continuing to feed Wall Street’s securitization machine means constantly expanding the finite pool of eligible borrowers and that means lower underwriting standards.
What’s incredible here is that Experian should be shouting about this from the rooftops and instead they’re making up excuses for why it isn’t a disaster waiting to happen. Auto loan ABS supply is set to rise by a quarter this year to around $125 billion and keeping that party going means making more loans. For those who missed it, here’s a look at the latest data from the NY Fed on originations by FICO:
See a problem there?
Of course the bigger question for the US economy is this: what happens when this bubble bursts just as auto inventories hit their highest levels relative to sales since 2009?
- General Wesley Clark: ISIS Serves Interests Of US Allies Turkey And Saudi Arabia
Submitted by Claire Bernish via TheAntiMedia.org,
"Let’s be very clear: ISIS is not just a terrorist organization; it is a Sunni terrorist organization. That means it blocks and targets Shi’a. And that means it’s serving the interests of Turkey and Saudi Arabia – even as it poses a threat to them." – Retired Gen. Wesley Clark
Former NATO Supreme Allied Commander General and retired U.S. General Wesley Clark revealed in an interview with CNN that the Islamic State (Daesh, ISIS) remains geostrategically imperative to Sunni nations, Turkey and Saudi Arabia, as they clamor for strategic power over Shi’a nations, Syria, Iraq, and Iran. He explained that “neither Turkey nor Saudi Arabia want an Iran-Iraq-Syria-Lebanon ‘bridge’ that isolates Turkey, and cuts Saudi Arabia off.”
When asked by the CNN host if Russian President Vladimir Putin’s suggestion that Turkey was “aiding ISIS” had any validity, he responded:
“All along there’s always been the idea that Turkey was supporting ISIS in some way. We know they’ve funneled people going through Turkey to ISIS. Someone’s buying that oil that ISIS is selling; it’s going through somewhere – it looks to me like it’s probably going through Turkey – but the Turks haven’t acknowledged that.”
After explaining this virtual gateway for the Islamic State’s oil, Clark was quick to emphasize that Putin’s allegations about Turkey’s support for terrorist organization, ISIS, aren’t without their own hypocrisy. Russia, of course, has been upholding President Bashar al-Assad’s administration in Syria against rebel groups backed by the U.S. — despite continuing denials by U.S. officials that that particular theater is its primary interest in the region.
He said, “Putin would like to dirty Turkey by saying it’s supporting terrorists, but the truth is that he’s supporting terrorists. I mean, the tactics used by the Assad regime have been terror tactics. They’re dropping barrel bombs on innocent civilians.”
Clark concludes the interview with a statement that encapsulates growing sentiment of many Westerners who’ve grown war-weary with such geopolitical wrangling overseas:
“There’s no good guy in this – this is a power struggle for the future of the Middle East.”
- Off-Balance Volume
“Buying” versus “selling” volume has diverged dramatically in the last few weeks creating a dangerous sense of pre-Black-Monday deja-vu.
We’ve seen this before.. very recently…
Bigger picture, since the end of QE3, this pattern of divergence has been building…
Is an imminent market crash just what The Fed needs to avoid making the same mistake it made in 1937…
h/t @Not_Jim_Cramer
Charts: Bloomberg
- 3 Things: Expected Returns, Returns, & Net Returns
Submitted by Lance Roberts via STA Wealth Management,
What Drives Returns
John Coumarianos, via MarketWatch, penned a very interesting note recently with respect to the view that it is just "volatility" is driving prices.
"The great economist John Maynard Keynes once said: 'Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.'
Few recent writings display this phenomenon better than a blog post by Josh Brown, aka The Reformed Broker, the title of his well-read (usually deservedly so) website.
Brown's post, cleverly titled "Why the stock market has to go down," incorrectly asserts that volatility is ultimately what rewards stock investors who have the ability to withstand it.
This is the standard talk that most advisers give their clients. It comes from the academic 'efficient markets' or 'random walk' school of thought. And it is totally wrong.
The truth is that the stock market doesn't owe you anything, no matter how volatile it is and no matter how long you wait."
This is absolutely true. What drives stock prices (long-term) is the value of what you pay today for a future share of the company's earnings in the future. Simply put – "it's valuation, stupid." As John aptly points out:
"Stocks are not magical pieces of paper that automatically deliver gut-wrenching volatility over the short run and superior returns over the long run. In fact, we've just had a six-year period with 15%-plus annualized returns and little volatility, but also a 15-year period of lousy (less than 5% annualized) returns.
It's not just volatility; it's valuation.
Instead of magical lottery tickets that automatically and necessarily reward those who wait, stocks are ownership units of businesses. That's banal, I know, but everyone seems to forget it. And it means equity returns depend on how much you pay for their future profits, not on how much price volatility you can endure."
"And stocks are not so efficiently priced that they are always poised to deliver satisfying returns even over a decade or more, as we've just witnessed for 15 years. A glance at future 10-year real returns based on the starting Shiller PE (price relative to past 10 years' average, inflation-adjusted earnings) in the chart above tells the story. Buying high locks in low returns and vice versa.
Generally, if you pay a lot for profits, you'll lock in lousy returns for a long time."
Volatility is simply the short-term dynamics of "fear" and "greed" at play. However, in the long-term as stated it is simply valuation. As I showed earlier this week in "4 Warnings And Why You Should Pay Attention" I discussed valuation specifically stating:
"Valuations are a very poor market timing device for short-term investors. However, from a long-term investment perspective, valuations mean a great deal as it relates to expected returns. Chris Brightman at Research Affiliates recently noted this exact point.
'As a long-term investor, we experience short-term price volatility as opportunity, and high prices as risk.'
With earnings growth deteriorating, and valuation expansion having ceased, the risk of high-prices has risen sharply."
Nothing But "Net"
One of the biggest myths perpetrated by Wall Street on investors is showing individuals the following chart and telling them over the "long-term" the stock market has generated a 10% annualized total return.
The statement is not entirely false. Since 1900, stock market appreciation plus dividends have provided investors with an AVERAGE return of 10% per year. Historically, 4%, or 40% of the total return, came from dividends alone. The other 60% came from capital appreciation that averaged 6% and equated to the long-term growth rate of the economy.
However, there are several fallacies with the notion that the markets long-term will compound 10% annually.
1) The market does not return 10% every year. There are many years where market returns have been sharply higher and significantly lower.
2) The analysis does not include the real world effects of inflation, taxes, fees and other expenses that subtract from total returns over the long-term.
3) You don't have 145 years to invest and save.
The chart below shows what happens to a $1000 investment from 1871 to present including the effects of inflation, taxes, and fees. (Assumptions: I have used a 15% tax rate on years the portfolio advanced in value, CPI as the benchmark for inflation and a 1% annual expense ratio. In reality, all of these assumptions are quite likely on the low side.)
As you can see, there is a dramatic difference in outcomes over the long-term.
From 1871 to present the total nominal return was 9.07% versus just 6.86% on a "real" basis. While the percentages may not seem like much, over such a long period the ending value of the original $1000 investment was lower by an astounding $260 million dollars.
Importantly, the return that investors receive from the financial markets is more dependent on "WHEN" you begin investing as noted above.
Too Optimistic
Following on with the point above, with valuations currently at the second highest level on record, forward returns are very likely going to be substantially lower for an extended period. Yet, listen to the media, and the majority of the bullish analysts, and they are still suggesting that markets should compound at 8% annually going forward as recently stated by BofA:
"Based on current valuations, a regression analysis suggests compounded annual returns of 8% over the next 10 years with a 90% confidence interval of 4-12% (Table 2). While this is below the average returns of 10% over the last 50 years, asset allocation is a zero-sum game. Against a backdrop of slow growth and shrinking liquidity, 8% is compelling in our view. With a 2% dividend yield, we think the S&P 500 will reach 3500 over the next 10 years, implying annual price returns of 6% per year."
However, there are two main problems with that statement:
1) The Markets Have NEVER Returned 8-10% EVERY SINGLE Year.
Annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Furthermore, while the markets have indeed AVERAGED an 8% return over the last 115 years, you will NOT LIVE LONG ENOUGH to receive the same.
The chart below shows the real return of capital over time versus what was promised.
The shortfall in REAL returns is a very REAL PROBLEM for people planning their retirement.
2) Net, Net, Net Returns Are Even Worse
Okay, for a moment let's just assume the Wall Street "world of fantasy" actually does exist and you can somehow achieve a stagnant rate of return over the next 10-years.
As discussed above, the "other" problem with the analysis is that it excludes the effects of fees, taxes, and inflation. Here is another way to look at it. Let's start with the fantastical idea of 8% annualized rates of return.
8% – Inflation (historically 3%) – Taxes (roughly 1.5%) – Fees (avg. 1%) = 3.5%
Wait? What?
Hold on…it gets worse. Let's look forward rather than backward.
Let's assume that you started planning your retirement at the turn of the century (this gives us 15 years plus 15 years forward for a total of 30 years)
Based on current valuation levels future expected returns from stocks will be roughly 2% (which is what it has been for the last 15 years as well – which means the math works.)
Let's also assume that inflation remains constant at the current average of 1.5% and include taxes and fees.
2% – Inflation (1.5%) – Taxes (1.5%) – Fees (1%) = -2.0%
A negative rate of real NET, NET return over the next 15 years is a very real problem. If I just held cash, I would, in theory, be better off.
However, this is why capital preservation and portfolio management is so critically important going forward.
There is no doubt that another major market reversion is coming. The only question is the timing of such an event which will wipe out the majority of the gains accrued during the first half of the current full market cycle. Assuming that you agree with that statement, here is the question:
"If you were offered cash for your portfolio today, would you sell it?"
This is the "dilemma" that all investors face today – including me.
Just something to think about.
- Markets In Turmoil – Bonds, Stocks, & Dollar Dumbstruck After Disappointing Draghi & Dire Data
Draghi has one message for everyone today…
US equities had their worst day since September 28th…
US Treasuries were a bloodbath…
European equities were an even bigger bloodbath…
As DAX gave back all its Paris gains… (down over 500 points and back below 10,700)
As European bonds utterly crashed… (Bunds seen here across the curve were massive percentage moves)
All driven by The 3 'D's…
- Domestic Terrorism hinted at… and the use of the word 'radicalized' spooked a number of markets
- Draghi Disappointed – grossly over-promised and under-delivered, trapped in a corner of QE limitations and admitt8ing it failed.
- Dire Data – US macro plunged to its lowest level in 6 months… (bonds seem to get it)… with durable goods, factory orders, and ISM Services all crushing The Fed's narrative.
* * *
On the day, Trannies were worst but broadly speaking, the entire equity market dumped in a highly correlated manner… (notthe bounce into the EU Close then dump)
FANGs are not helping…
Futures show it's been quite a week and now all major indices are red post-Russia-Turkey…
After Europe closed, stocks kept falling…
Some notable breaks:
- All major US equity indices are now negative year-to-date (aside from NASDAQ)
- S&P 500 broke below its 200DMA (also got close to it 50DMA before bouncing)
- Dow broke below its 200DMA
- Small Caps (Russell 2000) broke below its 100DMA
- Trannies broke below all technical support to 2 month lows
Biotechs plunged from the 100DMA to break the 50DMA…
Commentators were confused why Energy stocks dropped while oil rose… this is why – they had decoupled from raw reality a month ago…
VIX soared over 3 handles – almost touching 20 and breaking above its 50, 100, and 200DMA… This was thebiggest percentage rise in VIX since Black Monday
Treasuries were a disaster, extending losses after Europe closed…
Credit markets have been crushed with the junkiest junk now at 6 year high yields…
The USD Index crashed 2.25% – its biggest single-day drop since March 2009…. (having hit 12 year highs yesterday) Put another way – today's lack of ECB action had the same effect on the USD as The Fed's unleashing of QE in 2009!
Led by Swissy and EUR strength…
Gold is now the week's biggest gainer in the commodity space (crude the loser) as the entire space picked up on USD weakness…
Crude's been volatile heading into tomorrow…
Charts: Bloomberg
- How Bull Markets End
Submitted by Jared "The 10th Man" Dillian via MauldinEconomics.com,
Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.
That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.
But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.
Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.
There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.
We are watching the top happen right before our eyes.
Square
If you were paying attention a couple of weeks ago, you might have read the news about a company called Square going public. Jack Dorsey is the CEO of Square. He is also the CEO of Twitter. I think of this sometimes whenever I complain that I’m too busy.
Square got a round of financing in 2014 at a $6 billion valuation, and now it’s a public company. If you pull up SQ on Yahoo! Finance, you will see that the market cap is $4 billion.
As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich. So there wasn’t much demand for Square at a $6 billion market cap. It eventually went public at a $3 billion market cap, or $9/share. (The deal performed well in the aftermarket, at least. The stock is trading at $12.)
No catalyst. No bell ringing. The price simply got too high, and people pulled back. But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.
On to the next data point…
Fidelity
You may not know this, but Fidelity owns shares of private companies in some of its funds (like Contrafund). Fidelity has to figure out how to value these things.
In general, venture capital firms have to mark their investments to “market,” whatever that means. To do this, they use the services of third party valuation firms. Those valuation guesses are probably subject to mood or opinion, and as you can imagine, there are a lot of bad guesses. The valuations don’t mean much—if you’re an LP (limited partner), at the end of the day, you care about cash in and cash out. But mark-to-market creates some interesting short-term incentives.
As for Fidelity, they also have to mark things to market, and they also use valuation firms. But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.
So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own, higher valuations in the face of dissenting opinions?
None of this makes people very bullish on startups.
Uber
Uber is the biggest unicorn of all, with a $50 billion valuation. Side note: they don’t make any money.
Uber is trying to raise another billion—at a $70 billion valuation.
Now, the only reason you would invest in Uber at a $70 billion valuation is if you thought they would go public at $80 billion or more. But looking at what happened to Square, that will almost definitely not happen.
And why would you pay $70 billion for Uber when Fidelity is going to mark it in your mush? Another great question.
I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck. They will have to go public or take a down round if they really need the cash.
And this, folks, is how bear markets start.
Brainstorming Session
So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).
- Since tech has been going up while energy/mining has been going down, could this trend reverse?
- Could value start to outperform growth? (If I’m not mistaken, it already is.)
- Could large cap start to outperform small cap? (Boy, is it ever.)
- If you lived in the Bay Area, would you want to sell your house and rent?
- As new tech is in the process of topping, have you seen what old tech has been doing? Check out the chart of Microsoft, at 15-year highs:
For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”
The other thing I’ve learned is that even when people recognize the top, they vastly underestimate how bad the pain is going to be on the downside. “Oh, it’ll just be a quick correction.” Never is.
One last riposte: Anyone who invested at these valuations will richly deserve what’s coming to them. Those prices were cuckoo.
- In Addition To Swimming In Feces, Olympians Will Have To Pay For AC In Brazil
In late July we said Brazil was sliding into a depression.
We based that assessment, in part anyway, on the following graphic from Goldman:
It would only take the bank four months to agree with our summary of their own analysis (Alberto Ramos called it a “depression” on Tuesday after a decidedly abysmal GDP print).
Accompanying our depression call was the following assessment of Brazil’s preparations for the upcoming Olympic games in Rio:
The Brazilian economy hit its metaphorical, and literal, bottom earlier today when AP reported that, with the Brazil Olympics of 2016 just about 1 year away,“athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.”
In other words, competitors in Brazil’s olympic games will be swimming in shit.
Brazil was, and still is, literally up shit creek without a paddle.
Well as you might have surmised based on the release of a series of economic data so bad that analysts are having trouble coming up with new ways to describe the situation, the outlook for next year’s summer games hasn’t improved. In fact, things have worsened materially to the point that now, athletes will be asked to pay for their own air conditioning.
As Bloomberg reports, “following a new round of cost-cutting by the Rio 2016 organizers, athletes will be asked to pay for the air conditioning in their dorm rooms, stadium backdrops will be stripped to their bare essentials, and fancy cars and gourmet food for VIPs are out.”
In short, organizers can no longer depend on the government (and who knows what the government will look like by the time the games commence) to fund cost overruns. That means spending only as much as Brazil expects to take in from sponsorships, ticket sales, and a grant from the International Olympic Committee.
Apparently, the games were already some $520 million over budget. The government was supposed to cover that (and more) but obviously that’s out of the question given Brazil’s worsening fiscal crisis. “By the time the Games begin, the committee plans to have 500 fewer paid staff than the 5,000 it originally expected,” Bloomberg notes, adding that “the deepest cuts will probably come from operational areas like catering, transportation and cleaning services.”
As for the athletes, well obviously they’re a bit concerned.
“The world wants to tune in and watch the world’s greatest athletes compete at the absolute highest level,” Nick Symmonds, a two-time Olympic runner said. “If you don’t provide them with good food, a good place to sleep and comfortable temperature, they won’t be able to recover and bring the A-plus product that the world is demanding. To cut the budget on athletes’ hospitality and comfort, that’s just going to cheapen the games.”
Brazil has also abandoned a plan to put TVs in Olympic Village rooms.
Meanwhile, there was no respite on Thursday from still more abysmal economic data. Industrial production contracted by 0.7% M/M in October (-11.2% Y/Y). That’s the fifth consecutive monthly decline. “The industrial sector (which has been reducing headcount at an increasingly fast pace) contracted 0.9% in 2014 and is expected to contract at a much higher rate in 2015 as it continues to face strong headwinds from high levels of inventories, record low confidence indicators, a high and rising tax burden, rising energy costs, and weak external demand (particularly from Argentina for durable goods),” Goldman writes.
Oh, and for anyone still holding out hope that the central bank might throw caution to the wind – pass through inflation be damned – and cut to save the economy, well, you probably shouldn’t read the Copom minutes. Here’s one passage from Goldman that pretty much sums it up: “Specifically, the Copom is now committed to adopt the necessary measures to keep inflation under the 6.50% upper limit of the inflation target band by end-2016, and to make inflation converge to the 4.50% target in 2017. Hence, based purely on a strict interpretation of the new guidance, the probability of a rate hike at the January meeting rose significantly.”
There is, however, a silver lining. Rich NBA players will not be affected by the Olympic cutbacks (via Bloomberg):
Others worry that the cuts will further underscore the chasm between athletes from wealthy countries and those from poorer ones. (Already some top athletes, including the NBA players who join the USA Basketball squad, choose luxury hotels over accommodations in the Olympic Village.) Those who can afford extra for air conditioning or who travel with laptops or iPads will have it; others may not.
- California Terror Attack PROVES Mass Spying Doesn’t Keep Us Safe
Top security experts agree that mass surveillance is ineffective … and actually makes us MORE vulnerable to terrorism.
For example, the former head of the NSA’s global intelligence gathering operations – Bill Binney – explained to Washington’s Blog that the mass surveillance INTERFERES with the government’s ability to catch bad guys, and that the government failed to stop 9/11, the Boston Bombing, the Texas shootings and other terror attacks is because it was overwhelmed with data from mass surveillance on Americans.
Binney told Washington’s Blog:
A good deal of the failure is, in my opinion, due to bulk data. So, I am calling all these attacks a result of “Data bulk failure.” Too much data and too many people for the 10-20 thousand analysts to follow. Simple as that. Especially when they make word match pulls (like Google) and get dumps of data selected from close to 4 billion people.
This is the same problem NSA had before 9/11. They had data that could have prevented 9/11 but did not know they had it in their data bases. This back then when the bulk collection was not going on. Now the problem is orders of magnitude greater. Result, it’s harder to succeed.
Expect more of the same from our deluded government that thinks more data improves possibilities of success. All this bulk data collection and storage does give law enforcement a great capability to retroactively analyze anyone they want. But, of course,that data cannot be used in court since it was not acquired with a warrant.
Binney also told us:I always like to point to the obvious. Look at what is happening in France and Belgium after the attack in Paris. They are going after targeted individuals, who they knew were related to the killers before the attack. And, it’s working!!! So, this is what I have been saying they should do all along.
Do a targeted selection of data from the communications based on known people and their attributes and you can succeed (as now in France and Belgium) instead of the bulk collection on everyone which buries them in data and they fail. After the attack and people die, they do the right thing. This should make it obvious what route to take.
The same is true in California … As CNN notes:
Syed Rizwan Farook — who along with his wife, Tashfeen Malik, carried out the San Bernardino shooting massacre — apparently was radicalized and in touch with people being investigated by the FBI for international terrorism, law enforcement officials said Thursday.
After the Paris terror attack, the New York Times correctly pointed out in a scathing editorial that mass surveillance won’t help to prevent terrorism:
As one French counterterrorism expert and former defense official said, this shows that “our intelligence is actually pretty good, but our ability to act on it is limited by the sheer numbers.” In other words, the problem in this case was not a lack of data, but a failure to act on information authorities already had.
In fact, indiscriminate bulk data sweeps have not been useful. In the more than two years since the N.S.A.’s data collection programs became known to the public, the intelligence community has failed to show that the phone program has thwarted a terrorist attack. Yet for years intelligence officials and members of Congress repeatedly misled the public by claiming that it was effective.
Binney and other high-level NSA whistleblowers noted last year:
On December 26, for example, The Wall Street Journal published a lengthy front-page article, quoting NSA’s former Senior Technical Director William Binney (undersigned) and former chief of NSA’s SIGINT Automation Research Center Edward Loomis (undersigned) warning that NSA is drowning in useless data lacking adequate privacy provisions, to the point where it cannot conduct effective terrorist-related surveillance and analysis.
A recently disclosed internal NSA briefing document corroborates the drowning, with the embarrassing admission, in bureaucratize, that NSA collection has been “outpacing” NSA’s ability to ingest, process, and store data – let alone analyze the take.
Indeed, the pro-spying NSA chief and NSA technicians admitted that the NSA was drowning in too much data 3 months BEFORE 9/11:
In an interview, Air Force Lt. Gen. Michael Hayden, the NSA’s director … suggested that access isn’t the problem. Rather, he said, the sheer volume and variety of today’s communications means “there’s simply too much out there, and it’s too hard to understand.”
***
“What we got was a blast of digital bits, like a fire hydrant spraying you in the face,” says one former NSA technician with knowledge of the project. “It was the classic needle-in-the-haystack pursuit, except here the haystack starts out huge and grows by the second,” the former technician says. NSA’s computers simply weren’t equipped to sort through so much data flying at them so fast.
And see this.
If more traditional anti-terror efforts had been used, these terror plots would have been stopped.
So why does the NSA collect so much information if it admits that it’s drowning in info?
Postscript: Sadly, our government is not serious about stopping terrorism.
- Potential OPEC Cut? It Depends On Non-OPEC Nations Now
Submitted by Matt Smith via OilPrice.com,
Eighty-five years after the birth of French filmmaker Jean-Luc Godard, and the crude complex is acting suitably surreal today. As expected, rhetoric is ratcheting up out of Vienna ahead of tomorrow’s OPEC meeting, with the crude market shaken up like a snowglobe.
Today’s quote of the day is from an unnamed delegate in Vienna, who has summed up the situation pretty much perfectly: ‘In order for there to be a cut in production non-OPEC must participate, Iraq has to participate and the Iran output picture has to be clear’, the delegate said.
Hence the reason why no cut will be forthcoming; Saudi says it is willing to cut production if its cartel cohorts – Iraq, Iran, et al – are willing to do so, as well as key non-OPEC producers such as Russia and Mexico. This is because Saudi knows full well these nations are unwilling to cut production – we have already been told us as much by them.
From one OPEC-focused tidbit to another, and Saudi Arabia has announced its OSP (official selling price) for January, further discounting Arab Light into Asia by $1.40 a barrel (versus the Oman/Dubai average), 10 cents more than December’s discount. It also cut its January Arab Light OSP to the US by $0.30 a barrel, but raised it to Northwest Europe by $0.50.
As our #ClipperData show below, the U.S. has imported just over one million barrels per day from Saudi Arabia this year, of which Arab Light is basically half of that volume. Imports from Saudi are averaging 20% less in 2015 than last year, although Arab Light imports have dropped at a lesser pace. Nonetheless, as US production slows and Saudi OSPs are cut, more oil has found its way to US shores in recent months:
Saudi Arabia crude imports to US (source: ClipperData, Datamyne)
Another interesting OPEC-related tidbit comes in the form of drilling activity. Oil rigs are being idled across Latin American nations such as Columbia and Mexico, where 57% and 42% of rigs have been idled this year, respectively. In Venezuela, however, the rig count is rising, up 19% this year, as the OPEC member tries to slow a decline in production:
In terms of overnight economic data, we have seen the China Caixin services PMI come in well below consensus (53.1), but still showing expansion (at 51.2). For an economy which is shifting away from being driven by industry and exports, and towards being driven by domestic demand, we need to see the service sector picking up the slack as industrial production continues to slow.
The rippling effect of a slowing Chinese economy continues to cripple Brazil, as it is their largest trade partner. Industrial production year-over-year in Brazil has dropped to -11.2% in October, the lowest level since May 2009 (think: belly of the Great Recession).
Brazil industrial production, YoY % (source: investing.com)
From one sign of worry to another, the Eurozone services PMI also came in weaker than expected, as did retail sales (negative for a second consecutive month). Meanwhile, the European Central Bank has pushed the deposit facility rate (aka, bank rates for overnight deposits) further into negative territory to -0.30% in an effort to stoke inflation, while extending quantitative easing for another six months – keeping purchases at 60 billion euros per month through until March 2017.
Mr. Market has responded emphatically to this announcement, and the euro is rallying like an absolute mad thing, in a bad-is-good kind-of-way. Correspondingly, the crude complex is being propelled higher as the US dollar softens; there are plenty more shakes left in the tail for today’s crude price action it would seem.
- Meet Syed Farook And Tashfeen Malik, The Husband And Wife San Bernardino Shooters
“Was there a link to terror?”
That’s the question Americans are asking themselves the morning after a husband and wife opened fire with assault rifles killing 14 and wounding 21 at a San Bernardino County employee holiday party.
The shooters, Syed Rizwan Farook, 28, and Tashfeen Malik, 27, left their young child with Farook’s mother in nearby Redlands on Wednesday morning before dressing in “assault clothing,” and crashing the party (literally). A subsequent shootout with authorities left both suspects dead. The couple used a DPMS model and a Smith & Wesson M&P 15 along with two handguns, a llama and a Smith & Wesson. The rifles, two .223s, are capable of piercing bulletproof vests. The weapons were purchased legally.
Here’s what we know about Farook and Malik so far.
Farook, whose family was originally from Pakistan, was born in America and was employed as an environmental health specialist for San Bernardino County. He did what health specialists do: inspect restaurants and other facilities for health violations.
Reuters was able to obtain some on-the-ground intelligence from a SusAnn Chapman, who’s described as “a cashier and waitress at China Doll Fast Food.” Apparently, Farook inspected the China Doll earlier this year. “He was real quiet,” Chapman said. “He checked the food and said he was here because somebody complained. … He looked completely normal.”
Ok, not helpful.
However, some clues as to what might (and we emphasize “might”) be going on here emerge when we take a closer look at Malik. According to Hussam Ayloush, executive director of the Los Angeles chapter of the Council on American-Islamic Relations who, like SusAnn, spoke to Reuters, Malik “was believed to be from Pakistan and had lived in Saudi Arabia before coming to the United States.”
“Farook traveled to Saudi Arabia earlier this year and returned with a wife,” AP reports, citing co-worker Patrick Baccari, who said Farook “was gone for about a month in the spring, and when he returned word got around [he’d] had been married.” His new wife was described as “a pharmacist.”
Now clearly there are no smoking guns there, but it’s worth noting that when it comes to radicalization, no one does it quite like the Saudis. But as we read further, AP uncovers the smoking gun: “Several months ago Farook grew out his beard.” There you go – excessive beard action. The terrorist hallmark.
All sarcasm aside, AP goes on to say that according to coworkers, Farook was “a devout Muslim,” and according to a profile posted on the dating site iMilap, Farook enjoyed “reading religious books and target practice with younger sister and friends.”
A separate profile on Dubaimatrimonial.com (which describes itself as the “first and only legal marriage service provider in the UAE), shows Farook identifying himself as a Sunni:
Although we would urge caution when it comes to drawing conclusions around the sectarian divide, we’d be remiss if we didn’t note that ISIS, al-Qaeda, and many of the other groups the public generally identifies with extremism, are Sunni. Saudi Arabia (where Farook allegedly found his wife) promotes puritanical Wahhabism.
In the wake of the tragedy, Muzammil Siddiqi, religious director of The Islamic Society of Orange County, reminded Americans that Islam is not synonymous with terror: “Please do not implicate Islam or Muslims. Our faith is against this kind of behaviour.”
Here’s Patrick Baccari’s (quoted above) account of the shooting, again, via AP:
Baccari, who was sitting at the same table as Farook, said employees at the holiday party were taking a break before snapping group photos when Farook suddenly disappeared, leaving a jacket draped over his chair. Baccari stepped out to the bathroom when he heard explosions.
“I’m getting pelted by shrapnel coming through the walls,” he said. “We hit the ground.”
The shooting lasted about five minutes, he said, and when he looked in the mirror he realized he was bleeding. He was hit by fragments in the body, face and arms.
“If I hadn’t been in the bathroom, I’d probably be laying dead on the floor,” he said.
Clearly, quite a bit hinges on whether or not this gets tied to radical Islam. If authorities “prove” (or create) a link to extremists, the backlash against Syrian immigrants and against American Muslims more generally, will only grow.
Additionally, public support for American boots on Syrian ground will rise as any link to terrorist ideology will invariably be trotted out as “proof” that “lone wolf” or not, attacks have now crossed the pond to reach American soil.
Of course at the end of the day, two people opening fire with assault rifles on a holiday party seems pretty “terrifying” to us regardless of what inspired the shooters, but remember, crises like these are only “useful” in today’s world if they serve someone’s geopolitical ends so don’t be surprised if the mainstream media soon turns up the San Bernardino equivalent of the forged Syrian passport found in Paris three weeks ago.
- A Crushed Goldman FX Strategist Speaks: "We Badly Misread This Meeting"
Of all the mea culpas by the sellside penguin crew, the one post ECB mortem we were expecting above all, was that of Goldman FX strategist Robin Brooks who infamous, perhaps legendarily, opined just yesterday that “it remains the case that downside skew in EUR/$ is modest compared to the run-up to the Jan. 22 meeting. In short, we think risk-reward to short EUR/$ into tomorrow’s meeting remains compelling and we anticipate a 2-3 big figure drop on the day.”
Well, Goldman was right about the 2-3 figure move… only it wasn’t a drop. Actually make that 4-5 figure move in the wrong direction, in fact the biggest surge in the EUR since the announcement of the Fed’s QE1!
So after waiting for a few hours, we were delighted to see that Robin is still ok, and sharing more muppet-crushing wisdom. Here is GOldman’s just released note on the ECB’s “shocker” titled “Dry powder, lost credibility.” It is unclear just who lost credibility however.
From Goldman’s Robin Brooks:
We badly misread this meeting.
Given the mixed messages from the ECB over QE, starting with the Bund sell-off in May, we had thought there were bigger stakes at play than the usual considerations around growth and inflation. Indeed, we expected President Draghi to deliver a forceful message, in part to fix some of the damage wrought over the summer. But today badly wrong-footed us and, in our view, further damaged the credibility of ECB QE.
As Exhibit 1 shows, the smaller-than-priced deposit cut was relatively minor in the scheme of things, moving EUR/$ higher by about one big figure (from 1.0550 to 1.0650), in line with our view that a 10 bps surprise maps into two big figures. The bigger disappointment came in the press conference, when a smaller-than-expected extension of QE, upward revisions to growth, and a stand-offish message on further deposit cuts took EUR/$ near 1.09.
Our impression from the press conference was that this message was deliberate, so that the Governing Council seems far less willing to ease aggressively than we had expected. At current levels, meaning around 1.09, EUR/$ prices only the 10 bps deposit cut, given that a good part of the decline from 1.13 prior to the Oct. 22 meeting was driven by the hawkish FOMC (Oct. 28) and strong payrolls (Nov. 6). That might be a reason to remain optimistic about further declines in EUR/$, especially with Fed lift-off around the corner. But the stakes for EUR/$ and the ECB are higher.
The big question today raises is whether the ECB is serious about QE. That question also arose over the summer, when the volatility in Bund yields raised questions over whether the ECB is willing to stabilize yields in Europe’s safe haven asset to encourage portfolio shifts into risk assets. Today’s sell-off in Bund yields (Exhibit 2) and the bounce in EUR/$ rivals those seen in April and May and again puts the question of ECB commitment to QE firmly on the table.
From an FX perspective, this matters a great deal, as today’s price action shows. The Euro rallied, driven by declining inflation break-evens and rising nominal yields, i.e., rising real yields. This price action has all the hallmarks of the Yen under Governor Shirakawa, as opposed to Governor Kuroda, raising for us the unpleasant possibility that the idiosyncratic Euro weaker story has been compromised. Even in the unlikely event that today’s disappointment was a mistake, we think it has cost enough credibility that the Euro down story we had envisaged is now less likely to play out. We are placing our forecasts under review.
* * *
For those who skiped through all that here is the now traditional one picture summary:
- Did the Bull Market Begun March 2009 Just End?
For weeks we have been warning not to trust the bounce in stocks.
The most critical item we were concerned with was the fact that the S&P 500, despite its massive bounce, had failed to regain its former trendline.
As we first noted back in early September, Bear Markets do not happen all at once. EVERY time a major top has formed and stocks have taken out their Bull Market trendline, we’ve had a bounce to “kiss” the line before the Bear Market really took hold.
This is precisely what has happened with the October bounce: stocks rose to “kiss” the former trendline, but failed to reclaim it.
Having failed to reclaim this line twice, the S&P 500 is now turning sharply down. The financial media sees this as a reaction to ECB President Mario Draghi’s failure to do “enough” this morning, but the reality is that this was not to be trust, driven primarily by manipulation with little carry through from REAL buy orders.
In the near term stocks could crater to 1900 in short order. However, what happens in the next few days or even weeks is not the real concern.
The REAL concern pertains to the BIG PICTURE for the markets: the massive monthly rising wedge pattern stocks have been forming since the 2009 bottom.
As you can see in the chart below, the August-September collapse broke this formation. That, in of itself, is not the be all end all. But the fact that stocks have failed to reclaim their former bull market trendline is a MAJOR concern indicating that it is highly likely that the bull market begun March 2009 is OVER.
If this is the case, the next Crash has already begun. This would put us at the equivalent of where the markets were in late 2007: just before the whole mess came crashing down in 2008.
Smart investors are preparing now. The August-September correction was just a warm up. The REAL drop is coming shortly.
We just published a 21-page investment report titled Stock Market Crash Survival Guide.
In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.
We are giving away just 1,000 copies for FREE to the public.
To pick up yours, swing by:
https://www.phoenixcapitalmarketing.com/stockmarketcrash.html
Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research
- Dow Futures Dump 450 Points From Pre-Draghi Highs
From hope to nope…
From 17,870 highs as investors bought the hope in the early European markets (after weak data affirmed the assumption that Draghi would act). Then… he didn’t… and Dow Futures are hitting 17,410 lows…
- US Aircraft Carrier Harry Truman Is Now In The Mediterranean, Approaching Syria Coast – Full US Naval Map
Days before the dramatic military escalation between Turkey and Russia, we reported that in order to assure that the Syria proxy war has all the naval support the US-led alliance will need in the coming weeks, both a French and a US aircraft carrier were “steaming” full speed toward the Mediterranean sea, just off the coast of Syria.
As we noted, “the Truman is expected to reach the Persian Gulf before the year’s end. The U.S. has been launching air strikes into Iraq and Syria from aircraft carriers in the Persian Gulf — at least until last month, when the USS Theodore Roosevelt left the area after an extended deployment. The two-month gap is the first in nearly a decade that the U.S. has had no carrier in the region.”
Specifically, we emphasized the ETA, to wit “Once again, here is the ETA: Carrier Theodore Roosevelt left 5th Fleet in mid-October, leaving that region without a carrier until the Truman CSG gets there, which should be about six weeks, or just around the New Year” and pointed out just how busy the “parking lot” would be when the US aircraft carrier arrived. According to the Navy Times, whom we cited”
ISIS is not the only challenge that awaits the flotilla, which includes the cruiser Anzio, Carrier Wing Air 7, and destroyers Bulkeley, Gravely and Gonzalez. Russian, Chinese and Iranian marines have established their presence in Syria, and Russian warships from the Black Sea have relocated to the eastern Mediterranean to protect fighter jets conducting airstrikes in support of Syria’s Assad regime. In preparation, the strike group’s Composite Training Unit Exercise focused on adversaries that more closely resembled those of the Cold War.
We now know that there is also at least one Russian missile cruiser operating off the Syrian coast and providing air cover for Russian jets operating above the country.
In other words, the Mediterranean Sea surrounding Syria is getting more crowded by the day.
And the bottom line is that now that UK (and shortly German) planes are flying above Syria, and “striking ISIS”, having joined jets from the US, Syria, Iran, Turkey, Russia and France, the same is about to happen to the sea next to Syria.
Which, in our opinion, will also reveal the catalyst for the next, and even more serious, military escalation as one or more ships mysteriously suffer a Gulf of Tonkin incident in a proxy war in which the primary directive so far has clearly been the planting of false flags.
How long? According to the latest US naval map update from Startfor, the Truman is now off the Libyan coast, rapidly approaching Italy, and we expect is ahead of scheduled year-end ETA to its final destination, a few miles off the Syrian coast.
- Citi Turns Bearish On Stocks On "Richer And Richer" Markets, Sees 65% Recession Probability; Janet Yellen Disagrees
First it was Goldman, then JPM, then Credit Suisse, and now it is Citi’s turn to turn decidedly downbeat on stocks for next year and just cut its weighing on global equities to neutral. The main reason for Citi’s bearishness, it is the same as the one we noted two months ago, and again last night: margin sustainability, and rather the dramatic drop in corporate profits in recent months.
As a reminder, overnight we pointed out that according to Credit Suisse, “equities peak 12-18 months after a peak in margins” and “we are now 15 months after the peak in margins.”
Cue Citi:
In the US our chief concern is margin sustainability. Corporate profits as a share of GDP have been at all-time highs, which is just another way of saying the rewards to labour have been at all-time lows. But change may be afoot in the form of modest labour market tightening in the US. It is too soon to see this show up in core (ex Fins, Energy and Materials) margins in the US (Figure 13, LHS) but that may be where things go. Modest nominal wage acceleration combined with global disinflation (price taking by US firms) and lack of productivity growth may mean margins come under pressure from labour costs.
Citi’s contention – the pendulum is swinging away from Wall Street and back to Main Street:
US business surveys increasingly seem to be highlighting labour costs as a factor affecting future prices (Figure 14, LHS). Non-labour related costs don’t seem problem for businesses, which stands to reason given commodity price trends. It is also true that 2014/15 optimism regarding sales and margins seems to have waned (Figure 14, RHS), quite materially so in the case of sales.
Alas, one can’t pay workers with expectations of margin increase and goodwill. Whether these “expectations” actually materialize in higher wages remains to be seen, but Citi does not plan to hang around and find out:
Given the surge back towards the all-time highs in the S&P 500, we think that the best might be over for US equities and that indices might range trade more in 2016. We have downgraded US equities to neutral. This takes our overall equity weighting down to neutral, in many respects an extension of what we’ve been doing for most of this year as richer and richer asset markets, against a global background of economic risks, have made us more cautious.
As a reminder, Citi’s equities downgrade follows a report by Citi’s rates team according to which the probability of a recession in 2016 has soared to 65%. Here’s why:
If this were a typical policy cycle after a typical economic cycle, the Fed would have already raised rates 2-3 years ago. Instead, the US recovery is set to enter its seventh year while the European recovery is still embryonic. So in addition to China sneezing, FI markets need to price the longevity of the cycle. There are two approaches.
1. Cycle probabilities
Firstly, a statistical approach is shown in Figure 46 and highlights the cumulative probability of a recession based on data from 1970-14 across US, UK, Germany and Japan. As the U.S. economy enters year seven, the cumulative probability of a recession in the next year rises to 65%.
2. The economy continues to expand ….
The sub-title above would seem to contradict recession risk – but that is not the case – as an ongoing improvement in unemployment risks recession unless we are to believe in a soft landing. Consider the extrapolation of the U.S. unemployment rate drop on the trend since 2012.
- That would take the US U-3 unemployment below 4% by end 2016. Unless, there is a soft landing, the market will price both front end hikes but also a major flattening of the curve, to augur higher recession risk. Watch for flat forwards initially and then some inversion quicker than consensus prices.
How does this stack up in outright rates? The historical record is shown below for Treasury implied 5y5y rates.
- The median line shows that even against a time trend to account for the secular bond market rally that 5y5y Treasury yields move lower.
So is there a two-thirds chance the US economy contacts next year? According to Janet Yellen, who was asked precisely this question during her hearing in Congress today, there is no risk: according to her, she doesn’t see the recession risk as “anything close” to 65%. She did not provide a number which she thought is more appropriate.
She also said that the FOMC would only raise rates as long as policy makers think U.S. will “enjoy at least some above-trend growth” that would result in improving labor market..
Her conclusion: if the rate hike results in “unintended consequences” the Fed can always just lower rates. Which incidentally is precisely what the Fed did in last 1936 when it, too, erroneously decided the economy was strong enough to sustain a tightening of financial conditions…
… only to cut immediately. The collateral damage? The Dow Jones plunged 50% the next year…
… and unleashed a severe recession in the second half of 1937, followed a few year later by the start of World War II.
This time is not different.
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