Nov 03

Today’s News November 3, 2015

  • Key Apple Supplier Halts Hiring Due To Poor iPhone Sales

    Two months ago, Tim Cook reportedly wrote Jim Cramer that everything was awesome with iPhone sales in China. Days later, channel checks appeared to call Cook's statement into question. Several day ago, one of Apple's component makers – Dialog Semi – issued cautious guidance strongly suggesting iPhone sales momentum was weakening. Apple's earnings produced disappointment as China sales rather notably fell (but was quickly dismissed by analysts as US sales rose) and now, perhaps most worrying of all, Taiwan’s Pegatron Corp – maker of Apple's next-gen iPhone 6S and iPad – has halted hiring in its Shanghai factory as workers note "sales of iPhone 6S have been disappointing."

    In May 2013, Pegatron became "the new FoxConn" as then new Chief Executive Tim Cook, Apple divided its weight more equally with a relatively unknown supplier, giving the technology giant a greater supply-chain balance.

    Pegatron Corp., named after the flying horse Pegasus, will be the primary assembler of a low-cost iPhone expected to be offered later this year. Foxconn's smaller rival across town became a minor producer of iPhones in 2011 and began making iPad Mini tablet computers last year.

    Back in June 2014, everything was awesome:

    Two companies that assemble Apple’s iPhones and iPads are on a hiring spree, a signal that orders from the Cupertino-based group are ramping up ahead of the launch of a new device.
    not so much

     

    Taiwan’s Pegatron Corp, which employs 100,000 people, said on Monday that it is expanding its workforce in mainland China by 30 per cent to keep up with the production of smartphones.

    But now, in October 2015, the huge facility at Pegatron Technology's factory in Shanghai sports a deserted look, as China Daily reported moments ago.

    Gone are crowds waiting for job interviews or others who come to enquire about possible job openings.

     

    The facility, which at its peak employed around 100,000 people, has temporarily suspended hiring as demand for Apple products has waned considerably.

     

    The winding passage that leads to an interview room is all but deserted. Rather than excited faces, one can see young employees trudging out of the facility with fatigue and despair written large on their face.

     

    Zhang Libing, a 23-year-old from Anhui province, told China Daily that he had just resigned from his job at Pegatron as he was exhausted and fatigued with the long working hours. Next to him was a huge electronic screen that kept flashing the message that the company has put on hold all fresh hiring for the time being.

     

    "We are not surprised at that," Zhang said. "The sales of iPhone 6S have been disappointing. I am afraid that if we do not leave now, we will be laid off soon."

     

    …

     

    China, its biggest market outside the United States, accounted for nearly one-fourth of its total revenues in the fourth fiscal quarter because of its robust handset sales in the country. But fresh concerns have arisen over whether the company would be able to sustain the sales momentum.

     

    Fading enthusiasm for iPhones in China has dragged down the device prices in the parallel market and hit new orders to the supply chain partners.

     

    Pegatron was planning to hire roughly 40,000 workers for its Shanghai plants in the summer when Apple entrusted it with the iPhone 6S and iPad manufacturing. The current employee strength of the company remained unclear.

    It appears things have changed dramatically in a very short period of time…

    Cai Xiaoshuai left his hometown in Luoyang of Henan province and landed a job at the assembly line in Pegatron four months ago. But the 22-year-old man said he had had enough. His basic wage was 2,020 yuan ($320) per month and he had to work overtime for 2.5 hours every day to make sure that his salary would get close to 4,000 yuan.

     

    "Some of my friends went to Kunshan in Jiangsu province to try their luck there. But it seems that the electronics industry there is in an even worse shape. So I am thinking of staying on and checking out other opportunities in Shanghai. But I will definitely not work in any electronics company. I have had enough," said Cai.

    Which leaves us asking, as we did when doubts began to surface about Cook's letter to Cramer:

    So is AAPL the next AOL, and is Tim Cook the next Thorsten Heins?

     

    It all depends on China: if the world's most populous nation can get its stock market, its economy and its currency under control, then this too shall pass. The problem is that if, as many increasingly suggest, China has lost control of all three. At that point anyone who thought they got a great deal when buying AAPL at $92 will have far better opportunities to dollar-cost average far, far lower.

    Oh, and to anyone still holding their breath for AAPL to file a public statement which may well contain an outright lie, you may exhale now.

  • Widening Probe Snags Most Senior Chinese Banker Yet, Sends Stocks Lower; RBA Sparks Commodity Slide, FX Turbulence

    It's a busy night in AsiaPac. The ubiquitous Japanese stock buying-panic at the open quickly faded. China weakened the Yuan fix quite notably and injected another CNY10bn of liquidity but news of the arrest of the President of China's 3rd largest bank and a graft investigation into Dongfeng Motor's general manager sparked greater uncertainty and Chinese stocks extended the losses from yesterday. Commodities had started to creep lower, with Dalian Iron Ore pushing 2-month lows with its biggest daily drop in 3 months, were extended when the Aussie central bank kept rates steady (as expected) but sparked turmoil in FX markets with forward guidance of th epotential for more easing.

     

    Japanese markets opened in their usual glory, then faded fast…

     

    China opened with more liquidity injections and a sizable weakening in the Yuan fix…

     

    Probes widened with AgBank (China's 3rd largest bank) President arrested…

    The president of China’s third-largest bank has been detained, local media reported on Monday — the most senior bank official to be swept up in President Xi Jinping’s sweeping anti-corruption campaign.

     

    Zhang Yun, president, vice-chairman, and deputy Communist party secretary of Agricultural Bank of China had been “taken away to assist an investigation”, Sina Finance and QQ Finance reported, using a known euphemism for corruption arrests. QQ cited an AgBank employee saying that Mr Zhang had been arrested on Friday and that executives had held a meeting late into the night to discuss a response.

     

    Mr Zhang is the most senior banker to be ensnared in China’s anti-corruption probe.

     

    In January, then-president of midsized Minsheng Bank, Mao Xiaofeng, was arrested in an investigation linked to a top aide to former president Hu Jintao. Days later Lu Xiaofeng, a board member at Bank of Beijing, was also arrested.

     

    More recently, police arrested the general manager and several other top executives at Citic Securities, China’s largest securities brokerage, for insider trading linked to the big fall in China’s stock market this year.

     

    Local media also reported on Monday that a famous hedge fund manager was under arrest for insider trading.

    And Dongfeng Motors general manager facing graft charges…

    A general manager of China's Dongfeng Motor Group is being investigated for suspected corruption, the country's graft watchdog said on Monday.

     

    Zhu Fushou was being investigated for "suspected severe violation of discipline", the Central Commission for Discipline Inspection (CCDI) said in a statement on its website. Discipline violations generally refer to corruption.

    All of which follow the weekend's extraordinary actions around Xu Xiang and the Zexi Fund – whose holdings (below) are all under more pressure again today (amid liquidation fears)…

    • Guangdong Electric Power
    • China Gezhouba
    • Guoxuan High-Tech
    • China Sports Industry
    • Shanghai Metersbonwe Fashion
    • Eastern Gold Jade
    • Founder Technology Group
    • Shanghai Tofflon Science
    • Hareon Solar Technology
    • Fujian Rongji Software
    • Anhui Xinlong Electrical
    • Shenzhen Desay Battery
    • Anhui Xinke New Materials
    • Jiangsu Alcha Aluminum
    • Tianjin Saixiang Technology
    • Jinzi Ham
    • Guangdong Eastone Century Tech
    • Nantong Jiangshan Agrochemical
    • Guangzhou Lingnan Group
    • Hangzhou Cable
    • Xiamen Academy of Building
    • Ningbo Kangqiang Electronics
    • Fujian Haiyuan Automatic
    • Tieling Newcity Investment
    • Ningbo United
    • Elec-Tech International

    All of which sparked selling pressure in Chinese stocks as recent re-leveraging was unwound for the 2nd day in a row…

     

    China is in big trouble…

     

    And then RBA decides, as economists expected, not to cut rates

    • *RBA LEAVES KEY RATE AT 2.0% AS SEEN BY MAJORITY OF ECONOMISTS
    • *RBA: FINANCIAL MARKET VOLATILITY ABATED SOMEWHAT FOR THE MOMENT

    Which extended commodity losses…

     

    But of course fed the crowd some forward guidance hope:

    • *RBA SAYS INFLATION OUTLOOK MAY AFFORD SCOPE FOR POLICY EASING
    • *RBA: SUPERVISORY MEASURES HELPING CONTAIN HOUSING RISKS

    This erased Aussie stock gains and sparked chaos in the FX markets – despite the "no move" being expected…running stops high and low before settling back unch…

     

    One wonders who knew what early? Just like last time (and will the regulators get involved again)

     

    And US equity futures are drifting lower as USDJPY rolls over and Apple fears rise on Pegatron hiring freeze...

     

    Charts: Bloomberg

  • Confusion: US Equities Drift Lower (China Higher), Yuan Surges & Purges As China Manufacturing Misses (And Beats)

    Confusion reigns… China's Manufacturing PMI is in contraction according to both the Official and Markit/Caixin measures (but the former was flat and missed while the latter rose and beat "confirming economic stability" according to the 'official' press). Following the largest strengthening fix for the Yuan in 10 years, both the onshore and offshore Yuan are weakening by the most since the August devaluation. Finally, having cliff-dived at the open, Chinese stocks have bounced back to unchanged on the Ciaxin PMI beat (but US equities drift lower still).

     

    It's a rise and a beat & a miss and a drop for Chinese manufacturing…

    The last two times the Caixin measure has diverged positively from the official data, it has converged lower in the next 3 months.

     

    After the biggest strengthening fix in 10 years…

     

     

    Onshore (and offshore Yuan) are weakening by the most since the August devaluation…

     

    Compressing the Onshore/Offshore spread back to zero…

     

    And finally Chinese stocks tumbled on the weak 'official' PMI and surged back to unchanged on the Caixin PMI…

     

    But US equities saw no such bounce as hopes for moar easing fade after comments on "stability" after the Caixin print…

     

    So chaos reigns once again…

     

    Charts: Bloomberg

  • Bill Ackman Is Down 19% In 2015 Following 7.3% Loss In October On Valeant Plunge

    First the good news for Bill Ackman: as of October 31, it appears that Pershing Square has not had a spike in redemption requests (or if it has, it hasn’t granted them yet). We know this because as of October 31, Pershing Square’s AUM was $15.1 billion.

     

    This is down from $16.5 billion the month before. This means that the $1.4 billion drop in AUM is largely accounted for by the $75 or so drop in Valeant shares during the month of October (of which Ackman owned about 20 million for most of the month) and that there has been little additional changes to Pershing’s portfolio.

    The bad news is that at $15.1 billion, this is the lowest AUM for Bill Ackman in over a year…

     

    … and his current net performance for October and YTD is a deplorable -7.3%, and -19.0% respectively.

    And yet if this collapse in Pershing’s return YTD on the back of just one stock (memories of PS IV and Target come to mind) is enough to lead to the overdue unwinding of his hedge fund, we doubt the billionaire hedge funder will lose much sleep. He is largely set for life.

    However, we can’t say the same for those unlucky souls who invested in the stock of Dutch-listed stock of Pershing Square hodlings, which recently hit its all time low, and which – if the fund is unwound – will likely proceed to likewise liquidate on short notice. 

  • A Brief History Of Crime: How The Fed Became The Undemocratic, Corrupt & Destructive Force It Is Today

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    Perhaps the most famous, and prescient, financial cartoon in American history is the depiction of the Federal Reserve Bank as a giant octopus that would come to parasitically suck the life out of all U.S. institutions as well as free markets. The image is taken from Alfred Owen Crozier’s US Money Vs Corporation Currency, “Aldrich Plan,” Wall Street Confessions! Great Bank Combine, published in 1912, just a year before the creation of the Federal Reserve. Here it is in all its glory:

    Screen Shot 2015-11-02 at 10.48.55 AM

    Our ancestors were wiser and far more educated than modern Americans about the dangers posed by a centralized, monopolistic system charged with the creation and distribution of money, and our society and economy have paid a very heavy price for its ignorance.

    Indeed, some of today’s Fed critics aren’t even aware that the U.S. Central Bank originally had far less power than it does today. As concerned as they were, its early critics could never have imagined how perverted its mandate would become in the subsequent 100 years. A mandate that has now made it the single most powerful and destructive force on planet earth.

    Earlier today, I came across an excellent op-ed in the Wall Street Journal in which the author explains this transformation in just a few short paragraphs. Here’s some of what he wrote:

    History suggests that the only way to rein in the sprawling Federal Reserve is to end its money monopoly and restore the American people’s ability to use gold as a competing currency.

    The legislative compromise that created the Fed in 1913 recognized that the power to print money, left unchecked, could corrupt both the government and the economy. Accordingly, the Federal Reserve Act created the Federal Reserve System without a centralized balance sheet, a central monetary-policy committee or even a central office.

     

    The Fed’s regional banks were prohibited from buying government debt and required to maintain a 40% gold reserve against dollars in circulation. Moreover, each of the reserve banks was obligated to redeem dollars for gold at a fixed price in unlimited amounts.

     

    Over the past century, every one of these constraints has been removed. Today the Fed has a centrally managed balance sheet of $4 trillion, and is the largest participant in the market for U.S. government bonds. The dollar is no longer fixed to gold, and the IRS assesses a 28% marginal tax on realized gains when gold is used as currency.

     

    The largest increases in the Fed’s power have occurred at moments of financial stress. Federal Reserve banks first financed the purchase of government bonds during World War I. The gold-reserve requirement was dramatically reduced and a central monetary policy-committee was created during the Great Depression. President Richard Nixon broke the last link to gold to stave off a run on the dollar in 1971.

     

    This same combination of crisis and expediency played out in 2008 as the Fed bailed out a series of nonbank financial institutions and initiated a massive balance-sheet expansion labeled “quantitative easing.” To end this cycle, Americans need an alternative to the Fed’s money monopoly.

    And that, in a nutshell, is how American citizens lost their country and became a nation of debt serfs.

     

  • The Reason For Bitcoin's Recent 60% Surge Revealed

    It was precisely two months ago, on September 2nd, when we explained that as a result of China’s recent currency devaluation, in order to mitigate the inevitable capital outflows that such an FX move would unleash, China was “scrambling to enforce capital controls” in order to prevent the exit of hot (and not so hot) money from China’s economy.

    We then said the following to explain why “this is great news for bitcoin”:

    Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

    At the time of this forecast, the price of bitcoin was highlighted with the red arrow.

     

    And while we were confident it was indeed Chinese capital “mobility” using the bitcoin channel that was the impetus behind the nearly 60% surge in the price of the digital currency in past two months to fresh 2015 highs, moments ago we got the closest thing to a confirmation when Bitcoin Magazine reported that “China is leading the charge, with the price trading anywhere from $10-$15 above the rates on U.S. and European exchanges.”

    Bitcoin Magazine further adds that “China is experiencing unprecedented amounts of growth. On October 30th, Jack C. Liu, the Head of International at OKCoin, said, in a tweet, that it had been the “busiest day of the year @OKCoinBTC as #Bitcoin trades to 2015 high of $344. No clawbacks on futures, no downtime. Great day for us & industry.””

    Two days later, he went on to reveal that OkCoin had seen incredible demand for accounts on the exchange:

    And here is the validation that, just as predicted here two months ago, bitcoin has become the go-to asset class for millions of Chinese savers seeking to quietly and under the radar transfer funds from point A to point B, whatever that may be, in the process circumventing the recently expanded governmental capital controls:

    While he didn’t provide any concrete numbers, he did comment last week on what was driving the adoption. “Some Chinese traders are expressing a view on the CNY exchange rate after the last devaluation and you have interest by mainland speculators to move to other assets after the stock market fallout,” he explained in an interview with Bitcoin Magazine.

    Which again brings us back to our conclusion from two months ago:

    … if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

    As of this moment, the total value of bitcoin is up from the $3 billion two months ago to a little over $5 billion. That means the ratio of Chinese deposits (at around $22 trillion) to bitcoin, is down to a far more “conservative” 4,400x.

    And now, again, imagine what could happen if these same Chinese depositors realize they have been lied about the non-performing loans “backing” their deposits and that instead of the official 1.5% bad debt ratio, the real number is really far greater, somewhere in the 20% ballpark as we will show shortly, suggesting major deposit impairments are no longer the stuff of Cypriot nightmares but just the thing hundreds of millions of Chinese depositors have to look forward to, and that they have just two possible choices to avoid said impairment: reallocating their savings into bitcoin or, of course, gold.

  • Did Something Just Snap In China: Total SOE Debt Rises By $1 Trillion In One Month

    We found something unexpected when skimming through the website of China’s finance ministry.

    While most China pundits keep close track of China’s monthly loan creation and, especially these days, its Total Social Financing number to get a sense of what, if any, credit is being created outside of conventional lending channels within China’s shadow banking system, one just as critical please to keep track of Chinese credit is the monthly report on national state-owned and state holding enterprises. 

    Such as this one from October 22, which reports that as of September 30, total liabilities of state-owned enterprises had risen to 77.7 trillion yuan. Why is this notable? Because the monthly update just preceding it, reported a total debt figure of “only” 71.8 trillion yuan: a whopping increase of almost CNY 6 trillion, or USD $1 trillion, in just one month.

    This is the biggest monthly increase by a massive margin among China’s SOE by orders of magnitude, and yet just to get a sense of the magnitude of debt held at China’s SOEs, even this record monthly increase is not even 10% of the total debt held by China’s state-owned enterprises which stood at CNY78 trillion or USD $12 trillion at the end of September, more than the total Chinese GDP.

     

    What can explain this snap? There has been very little commentary on this particular surge aside from a report posted on Wall Street.cn, and translated by Chiecon, which reports the following:

    China’s state owned enterprises added almost 6 trillion yuan (around 1 trillion dollars) of debt in September, described by Luo Yunfeng, an analyst at Essence Securities, as “an unprecedented increase in leverage”. This means that not only is the government abandoning its deleverage policy, it is actually increasing leverage.

     

    According to Luo “it’s possible that debt that was originally classified as government debt, has been reallocated as SOE debt”.

     

    This might be a reflection of how the government plans to tackle its massive debt. Luo mentions that one of the obstacles to managing government debt is that it remains difficult to draw a line between government and SOE debt. The crux of of current reform plans to increase the role of market forces is aimed at resolving this issue.

     

    If it really is the case of shifting government debt to SOEs, then it represents a step forward for this reform, and the prospect of revaluing credit risk. Another implication, it seems unlikely there will be a pause in government debt increase over the fourth quarter.

     

    This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

    Ironically, “shifting” the debt – no matter how troubling – would be by far the more palatable explanation. Because if somehow China had quietly “created” $1 trillion in debt out of thin air parked subsequently on SOE balance sheets, that would suggest that things in China are orders of magnitude worse than anyone can possibly imagine.

    Still, if China did not create this debt now, it will eventually:

    This raises the more important question of what will be the impact of this enormous debt? Over the past few years credit expansion has surpassed economic growth, and with the governments aggressive leverage, will this lead to a greater waste of resources?

     

    [W]ith China experiencing slowing economic growth, and no turnaround on the horizon, its seems likely the Chinese government will continue to increase leverage. In September, China Merchants Securities stated that since Chinese government debt leverage ratio is still low, lower than the US, Europe and Japan, there is still more room for leverage.

    It’s low? Really? Because according to the following McKinsey chart total Chinese debt was $28.2 trillion as of Q2 2014 (it has since risen well over $30 trillion), and represents nearly 300% debt/GDP.

    But there is another implication. If China’s is indeed merely stuffing government debt on SOE balance sheets as the report suggests…

    Haitong Securities said at the start of the year that in order to prevent systemic risk the focus over the next few years will be on government leverage. Based on the experience of other countries, monetary easing almost certainly follows an increase in government leverage, with interest rates in the long term trending to zero.

    … then China, while ultimately having to engage in QE, will last out the current regime as long as possible, offloading government debt in ever greater amounts to SOE until finally their debt capacity is maxed out.

    Then, and only then, will China unleash the world’s last remaining debt monetization episode, whereby the PBOC will proceed to openly monetize the roughly $3-4 trillion in total debt China creates every year. At that point the “Minsky Moment” of not only China, but the entire world, will have arrived.

  • Infrared Satellite Reveals Heat Flash At Time Of Russian Airplane Disaster

    Earlier today, we highlighted commentary from Russia’s Kogalymavia (the airline operating the ill-fated Airbus A321 which crashed in the Sinai Peninsula) where officials said human and technical factors weren’t responsible for the mid-air disaster which killed 224 people. 

    IS Sinai took credit for “destroying” the plane but it wasn’t immediately clear what the contention was in terms of just how the group went about sabotaging the flight. Subsequently, a series of analysts and commentators opined that there was simply no way the militants could have possessed the technology or the expertise to shoot down a plane flying at 31,000 feet, but as Kogalymavia put it, “a plane cannot simply disintegrate.” 

    In short, it seems as though something exploded, and while we can’t know for sure whether someone detonated on board or whether, as former NTSB investigator Alan Diehl told CNN, “final destruction” of the plane was the result of “aerodynamic forces or some other type of G-forces,” the circumstances are exceptionally suspicious especially given where the plane was flying and the current rather “tense” relationship between Moscow and Sunni extremists. 

    Now, the US has apparently ruled out the possibility that a projectile hit the plane but satellite imagery depicts a “heat flash” at the time of the crash which indicates “some kind of explosion on the aircraft itself, either a fuel tank or a bomb.” Here’s NBC:

    While many have speculated that a missile may have struck a Russian commercial airliner that went down over Egypt’s Sinai peninsula, U.S. officials are now saying satellite imagery doesn’t back up that theory.

     

    A senior defense official told NBC News late Monday that an American infrared satellite detected a heat flash at the same time and in the same vicinity over the Sinai where the Russian passenger plane crashed.

     

    According to the official, U.S. intelligence analysts believe it could have been some kind of explosion on the aircraft itself, either a fuel tank or a bomb, but that there’s no indication that a surface-to-air missile brought the plane down.

     

    That same infrared satellite would have been able to track the heat trail of a missile from the ground.

     

    “The speculation that this plane was brought down by a missile is off the table,” the official said.

     

    A second senior U.S. defense official also confirmed the surveillance satellite detected a “flash or explosion” in the air over the Sinai at the same time.

     

    According to the official, “the plane disintegrated at a very high altitude,” when, as the infrared satellite indicates, “there was an explosion of some kind.”

     

    That official also stressed “there is no evidence a missile of any kind brought down the plane.”

    We’d be remiss if we didn’t note that the video released by ISIS which purports to depict the plane exploding in mid-air doesn’t appear to show any kind of missile, but rather seems to suggest that someone on the ground knew the exact time when the aircraft was set to explode. 

    To be clear, there’s always the possibility that this is a coincidence and that the explosion which brought down the plane wasn’t terror related, but given the circumstances, you certainly can’t blame anyone for suspecting the worst and as we noted earlier, the Sinai Peninsula is well within the range of Russia’s warplanes flying from Latakia:

  • Catalonia And The Move Against Empires

    Submitted by Jeff Thomas via InternationalMan.com,

    Recently, the people of Catalonia voted in favour of seceding from Spain.

    In the recent election, secessionist parties secured 72 out of the 135 seats, confirming that the majority of voters want secession. Artur Mas, region president of Catalonia and the leader of the Junts pel Sí movement, is seeking independence from Spain in 18 months.

    This is great news for libertarians the world over, as, to our minds, this is a clear step forward for the Catalan people and for those who seek greater freedom from governments worldwide. And, of course, any blow against the present trend toward empires is a step in the right direction.

    But, this is not the whole picture and, if we’re going to look at the greater truth instead of the truth that we’d like to see, things get a bit more complicated.

    Can They Pull it Off?

    First off, the mere fact that a majority of Catalans have, at this point, voted for independence is not sufficient to assure separation from Spain. Although Catalonia became a province of Spain through a rather arbitrary occurrence (a royal marriage in 1469) and Catalans have for centuries repeatedly behaved more as a conquered people than as loyal Spanish subjects, the territory has remained under Spanish rule for the most obvious of reasons: Spain has the greater power and is able to dominate.

    Although many Catalans seek a legally-recognised referendum from Madrid, Spanish Prime Minister Mariano Rajoy has called the separatist plan “a nonsense” and has stated that he will block it through the courts.

    It is perennially true that, once a given politician in any country feels he “owns” a piece of geography and its population, he will almost invariably hold onto it regardless of the will of the people, using force if necessary.

    And then, there are the practical benefits to being the ruler of a territory. In the case of Catalonia, Madrid has historically exacted more tax from Catalonia than it has paid out in benefits. Catalonia is a cash cow for the Madrid government. Surveys demonstrate that the majority of Catalans would choose to remain within Spain if they could be granted a more favourable tax regime.

    And so, what appears at first glance to be a victory in the quest for independence may not be quite so significant.

    Out of the Pan and into the Fire?

    But, let’s say that the secessionists prevail, that they achieve their goal. What then? Would Catalonia become a beacon of freedom for all the world to see? Well, possibly not. Artur Mas has already planned a central bank, tax authority, and even a Catalonian armed forces. In so doing, he is hoping to begin his reign in much the same way that the vast majority of politicians do, seeking to create controls that will assure his own power and wealth. (Cue The Who, singing “Meet the new boss; same as the old boss.”)

    And let’s not forget that all Catalans are not unified on the subject of independence. Polls over the years have flipped back and forth between a majority in favour of independence and a majority opposed to independence. As American independence visionary, Thomas Jefferson said:

    Democracy is nothing more than mob rule, where 51% of the people may take away the rights of the other 49%.

    In any move for independence, there are always those who unwillingly must pay for the new “freedom”, whether it be real or only imagined.

    This is not to say that the secessionists are wrong. It is only to say that, when considering change, it’s wise to step back and assess the overall situation, not merely the immediate goals of the movement.

    The Way of the Future?

    Finally, there is the world view. Internationally, the vote in Catalonia is being covered in the media, especially in Europe, where there are literally scores of secessionist movements, some of them with considerable support. Catalonia gives these efforts renewed vigour and, surely, with the EU shaking to its flimsy foundations, every successful move toward secession by any territory brings an end of the EU ever closer.

    And, to a lesser extent, there are secessionist movements around the globe. In the U.S., (which became a country as a result of independence from the UK), all 50 states have received secession petitions filed by their citizens. These have been signed by as few as 2,656 people (Vermont) to as many as 125,000 (Texas).

    It’s important to note that these numbers are not large and the state and federal governments of the U.S. can easily claim that secessionists are merely a crackpot fringe. However, when the empire, be it the EU, the U.S., or any other, past or present, reaches the point at which the government has become overlarge, overly domineering, and overly rapacious as to taxation and other forms of confiscation, secession movements will arise. (To be sure, the 1861 American secession of the southern states was not undertaken over the slavery issue, but over the increased power and economic dominance of the northern states over the southern states.)

    And this is to be expected. It’s the primary business of any government to grow its own power and wealth at the expense of its people. It’s therefore in the best interests of the people to do all they can to limit the size (and therefore the power) of their government.

    Even under the best forms of Government, those entrusted with power have, in time, and by slow operations, perverted it into tyranny. – Thomas Jefferson

    A government big enough to give you everything you want is strong enough to take everything you have. – Thomas Jefferson

    Small countries are more free and prosperous than large nation-states. – Ron Holland

    All of the above bear remembering. But a word on that last one, by Ron Holland. My own country, the Cayman Islands, is quite small (population 58,000); small enough that each of us who takes an interest can access our political leaders in a personal way. We find that this level of direct contract not only keeps them accessible to us, but places a lid on their ability to expand their ambitions to “rule”, rather than to “serve.”

    And, indeed, the Cayman Islands are decidedly freer and more prosperous than any of the world’s current empires.

    A long-held belief by the Amish, the Hutterites, and some sociologists is that the ideal population is a mere 150 people, the greatest number that an individual can relate to in a very personal and inter-dependent way. Certainly these communities are far more peaceful and rarely produce dictatorial leaders.

    The concept of secession is an admirable one and a move to secession will often arise whenever a government overreaches to the point of intolerance. In the case of empires, secession has served to increase freedom from the days of the fall of the Roman Empire on. Political leaders will always seek to create empires, whether large or small. The alternative to the ability to secede is the acceptance of tyranny and, therefore, secession, whilst not a panacea, is an essential tool of liberty.

  • One Analyst Says China's Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

    To be sure, we’ve long contended that official data on bad loans at Chinese banks is even less reliable than NBS GDP prints. Indeed, the lengths Beijing goes to in order to obscure the extent to which banks’ balance sheets are in peril is truly something to behold and much like the deficient deflator math which may be causing the country to habitually overstate GDP growth, it’s not even clear that China could report the real numbers if it wanted to. 

    We took an in-depth look at the problem in “How China’s Banks Hide Trillions In Credit Risk: Full Frontal”, and we’ve revisited the issue on a number of occasions noting in August that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. Of course that’s just the tip of the iceberg. In other words, that comes from a government agency and although the scope of the increase sounds serious, it still translates into an NPL ratio of just 1.82%. Here’s a look at the “official” numbers (note that when one includes doubtful accounts, the ratio jumps to somewhere in the neighborhood of 3-4%):

    Source: Fitch

    There are any number of reasons why those figures don’t even come close to approximating reality. For instance, there’s Beijing’s habit of compelling banks to roll over bad loans, and then there’s China’s massive (and by “massive” we mean CNY17 trillion) wealth management product industry which, when coupled with some creative accounting, allows Chinese banks to hold some 40% of credit risk off balance sheet.

    Well as time goes on, and as market participants scrutinize the data coming out of the world’s second most important economy, quite a few analysts are beginning to take a closer look at the NPL data for Chinese banks. Indeed, if Beijing continues to move toward “allowing” defaults to occur (even at SOEs) and if China’s transition from smokestack economy to a consumption and services-driven model continues to put pressure on borrowers from the manufacturing sector, the situation is likely to deteriorate quickly. If you needed evidence of just how precarious things truly are, look no further than a recent report from Macquarie which showed that a quarter of Chinese firms with debt are currently unable to cover their annual interest expense (as you might imagine, it’s even worse for commodities firms). 

    Just two weeks after we highighted the Macquarie report, we took a look at research conducted by Hong-Kong based CLSA. Unsurprisingly, it turns out that Chinese banks’ bad debts ratio could be as high 8.1%, a whopping 6 times higher than the official 1.5% NPL level reported by China’s banking regulator. 

    We called that revelation China’s “neutron bomb” but it turns out we may have jumped the gun. According to Hong Kong-based “Autonomous Research”, the real figure may be closer to 21% when one takes into account the aforementioned shadow banking sector. Here’s more from Bloomberg:

    Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks.

    Crisscrossing provinces from Shandong to Xinjiang, she’s seen too much — from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered.

     

    The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006.

     

    Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers.

     

    While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at

    Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions.

     

    While traditional bank loans are not Chu’s prime focus — she looks at the wider picture, including shadow banking — she says her work suggests that nonperforming loans may be at 20 percent to 21 percent, or even higher.

     


     

    “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

    As a reminder, here’s a look at the scope of the “problem” Chu is describing:

     

    And here’s a bit more on special mention loans and the ubiquitous practice of “evergreening”:

    Slicing and dicing the official loan numbers, Christine Kuo, a senior vice president of Moody’s Investors Service in Hong Kong, focuses on trends in debts overdue for 90 days, rather than those classified as “nonperforming.” Another tactic some analysts use is to add nonperforming debt to “special mention” loans, those that are overdue but not yet classified as impaired, yielding a rate of 5.1 percent.

     

    Banks’ bad-loan numbers are capped by “evergreening,” the practise of rolling over debt that isn’t repaid on time, according to experts including Keith Pogson, a Hong Kong-based senior partner at Ernst & Young LLP. Pogson was involved in restructuring debt at Chinese banks in 1998, when their NPL ratios were as high as 25 percent.

    So let’s just be clear: if 8% is a “neutron bomb”, a 21% NPL ratio in China is the asteroid that killed the dinosaurs. Here’s why: 

    If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 20% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $3 trillion. 

    That, as we suggested three weeks ago, may help to explain why round after round of liquidity injections (via RRR cuts, LTROs, and various short- and medium-term financing ops) haven’t done much to boost the credit impulse. In short, banks may be quietly soaking up the funds not to lend them out, but to plug a giant, $3 trillion, solvency shortfall. 

    In the end, we would actually venture to suggest that the real figure is probably far higher than 20%. There’s no way to get a read on how the country’s vast shadow banking complex plays into this but when you look at the numbers, it’s almost inconceivable to imagine that banks aren’t staring down sour loans at least on the order of a couple of trillion. 

    To the PBoC we say, “good luck plugging that gap” and to the rest of the world we say “beware, the engine of global growth and trade may be facing a pile of bad loans the size of Germany’s GDP.”

    We close with the following from Kroll’s senior managing director in Hong Kong Violet Ho (quoted above):

    “A credit report for a Chinese company is not worth the paper it’s written on.”

  • The UN Plans To Implement Universal Biometric Identification For All Of Humanity By 2030

    Submitted by Michael Snyder via The Economic Collapse blog,

    Did you know that the United Nations intends to have biometric identification cards in the hands of every single man, woman and child on the entire planet by the year 2030?  And did you know that a central database in Geneva, Switzerland will be collecting data from many of these cards?  Previously, I have written about the 17 new “Global Goals” that the UN launched at the end of September.  Even after writing several articles about these new Global Goals, I still don’t think that most of my readers really grasp how insidious they actually are.  This new agenda truly is a template for a “New World Order”, and if you dig into the sub-points for these new Global Goals you find some very alarming things.

    For example, Goal 16.9 sets the following target…

    “By 2030, provide legal identity for all, including birth registration”

    The United Nations is already working hard toward the implementation of this goal – particularly among refugee populations.  The UN has partnered with Accenture to implement a biometric identification system that reports information “back to a central database in Geneva”.  The following is an excerpt from an article that was posted on findbiometrics.com…

    The United Nations High Commissioner for Refugees (UNHCR) is moving forward with its plans to use biometric technology to identify and track refugees, and has selected a vendor for the project. Accenture, an international technology services provider, has won out in the competitive tendering process and will oversee the implementation of the technology in a three-year contract.

     

    The UNHCR will use Accenture’s Biometric Identity Management System (BIMS) for the endeavor. BIMS can be used to collect facial, iris, and fingerprint biometric data, and will also be used to provide many refugees with their only form of official documentation. The system will work in conjunction with Accenture’s Unique Identity Service Platform (UISP) to send this information back to a central database in Geneva, allowing UNHCR offices all over the world to effectively coordinate with the central UNHCR authority in tracking refugees.

    I don’t know about you, but that sure does sound creepy to me.

    And these new biometric identification cards will not just be for refugees.  According to a different FindBiometrics report, authorities hope this technology will enable them to achieve the UN’s goal of having this kind of identification in the hands of every man, woman and child on the planet by the year 2030…

    A report synopsis notes that about 1.8 billion adults around the world currently lack any kind of official documentation. That can exclude those individuals from access to essential services, and can also cause serious difficulties when it comes to trans-border identification.

     

    That problem is one that Accenture has been tackling in collaboration with the United Nations High Commissioner for Refugees, which has been issuing Accenture-developed biometric identity cards to populations of displaced persons in refugee camps in Thailand, South Sudan, and elsewhere. The ID cards are important for helping to ensure that refugees can have access to services, and for keeping track of refugee populations.

     

    Moreover, the nature of the deployments has required an economically feasible solution, and has demonstrated that reliable, biometric ID cards can affordably be used on a large scale. It offers hope for the UN’s Sustainable Development Goal of getting legal ID into the hands of everyone in the world by the year 2030 with its Identification for Development (ID4D) initiative.

    The Identification for Development (ID4D) initiative was originally launched by the World Bank, and they are proud to be working side by side with the UN to get “legal identity” into the hands of all.  The following comes from the official website of the World Bank…

    Providing legal identity for all (including birth registration) by 2030 is a target shared by the international community as part of the Sustainable Development Goals (target 16.9). The World Bank Group (WBG) has launched the Identification for Development (ID4D) cross-practice initiative, with the participation of seven GP/CCSAs sharing the same vision and strategic objectives, to help our client countries achieve this goal and with the vision of making everyone count: ensure a unique legal identity and enable digital ID-based services to all.

    Of course all of this is being framed as a “humanitarian” venture right now, but will it always stay that way?

    At some point will a universal biometric ID be required for everyone, including you and your family?

    And what would happen if you refused to take it?

    I could definitely foresee a day when not having “legal identification” would disqualify you from holding a job, getting a new bank account, applying for a credit card, qualifying for a mortgage, receiving any form of government payments, etc. etc.

    At that point, anyone that refused to take a “universal ID” would become an outcast from society.

    What the elite want to do is to make sure that everyone is “in the system”.  And it is a system that they control and that they manipulate for their own purposes.  That is one of the reasons why they are slowly but surely discouraging the use of cash all over the world.

    In Sweden, this movement has already become so advanced that they are now pulling ATMs out of even the most rural locations…

    The Swedish government abetted by its fractional-reserve banking system is moving relentlessly toward a completely cashless economy.  Swedish banks have begun removing ATMs even in remote rural areas, and according to Credit Suisse the rule of thumb in Scandinavia is “If you have to pay in cash, something is wrong.”  Since 2009 the average annual value of notes and coins in circulation in Sweden has fallen more than 20 percent from over 100 billion to 80 billion kronor.  What is driving this movement to destroy cash is the desire to unleash the Swedish central bank to drive the interest rate down even further into negative territory.  Currently, it stands at -0.35 percent, but the banks have not passed this along to their depositors, because depositors would simply withdraw their cash rather than leave it in banks and watch its amount shrink inexorably toward zero.   However, if cash were abolished and bank deposits were the only form of money, well then there would be no limit on negative interest rate policy as banks would be able to pass these negative interest rates onto their depositors without adverse consequences.  With everyone’s wages, salaries, dividends etc, paid by direct deposit into his bank account, the only way to escape negative interest rates would be to spend, spend, spend.  This, of course, is precisely  what the Keynesian economists advising governments and running central banks are aiming at….a pro-cash resistance movement is beginning to coalesce and the head of a security industry lobbying group relates,  “I’ve heard of people keeping cash in their microwaves because banks won’t accept it.”

    If you aren’t using cash, that means that all of your economic activity is going through the banks where it can be watched, tracked, monitored and regulated.

    Every time the elite propose something for our “good”, it somehow always results in them having more power and more control.

    I hope that people will wake up and see what is happening.  Major moves toward a one world system are taking place right in front of our eyes, and yet I hear very, very few people talking about any of this.

    So where do you think that all of this is eventually heading?

  • S&P Puts Too-Big-To-Fail US Banks On Ratings Downgrade Watch, Blames Fed

    Having watched the credit markets grow more and more weary of the major US financials, it should not be total surprise that ratings agency S&P just put all the majors on watch for a rating downgrade:

    • *JPMORGAN, BANK OF AMERICA, WELLS FARGO, CITIGROUP, GOLDMAN SACHS, STATE STREET CORP, MORGAN STANLEY MAY BE CUT BY S&P

    Despite all the talking heads' proclamations on higher rates and net interest margins and 'strongest balance sheets' ever, S&P obviously sees something more worrisome looming. S&P blames The Fed's new resolution regime for its shift, implying "extraordinary support" no longer factored in. This comes just hours after Moody's put Bank of Nova Scotia on review also (blaming the move on concerns over increased risk appetite).

    The ratings agency cited significant measures taken by Canada's third-largest bank to increase its profitability over the past couple of years, which signal a "fundamental shift" in the bank's risk appetite.

     

    Over the past two years, Scotia has accelerated the growth in its credit card and auto finance portfolios "both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios," Moody's said in a note late Monday.

     

    While the bank's moves are aimed at increasing profitability to counter the lowest domestic net interest margins among Canada's six largest banks, Moody's believes they increase the prospect of future credit losses when the credit cycle turns.

    Goldman, Morgan Stanley & Citigroup rated A- with negative outlook, JPM has A rating with negative outlook, State Street rated A+ with negative outlook, according to Bloomberg data

    Who could have seen that coming?

     

    As Bloomberg noted earlier, The Fed's new proposal for a "final firewall" requiring total loss absorbing capacity (TLAC) buffers at the largest banks may be the driver of S&P's decision…

    U.S. banks may collectively need to add $90 billion in debt by Jan. 1, 2022, to help ensure an orderly wind down in case of failure, which may add $680 million to $1.5 billion in annual costs. Eight G-SIBs would hold a minimum of long-term debt (LTD) under the Fed's Oct. 30 TLAC proposal. LTD is meant to address "too-big-to-fail" concerns by having a known quantity of capital to help a bank transition through resolution. The Fed reasons that LTD could be used as a fresh source of capital, unlike existing equity.

     

    Companies Impacted: Using 4Q14 figures, the Fed estimates six U.S. G-SIBs collectively face a $120 billion TLAC and LTD shortfall. LTD stand-alone shortfall is approximate $90 billion. Among the eight G-SIBs are JP Morgan, Citigroup, Bank of America, Wells Fargo, Morgan Stanley, State Street and Bank of New York.

    All of which have seen risk-weighted assets surge since 2008…

     

    Just as we suspected, S&P's decision is based on The Fed's new regime:

    • *S&P CITES FED'S NOTICE OF RULEMAKING FOR ACTIONS ON EIGHT GSIBS
    • *S&P REVIEWS RESOLUTION REGIME FOR U.S. BANKS
    • *S&P SEES EXTRAORDINARY SUPPORT NO LONGER FACTORED IN GSIB RTGS
    • *S&P EXPECT TO RESOLVE CREDITWATCH ON GSIBS BY EARLY DEC.

    In other words right before The Fed's rate hike decision.

    Charts: Bloomberg

  • Your Health Insurance Premiums Are About To Go Through The Roof -The Stunning Reason Why

    After years of delays and failed launches, Obamacare has finally taken hold, and with it the economic and financial implications from this mandatory tax are finally being felt.

    We have extensively covered how Obama’s Affordable Care Act will end up being a failure,  observing both the economic implications in “In Latest Obamacare Fiasco, Most Low-Income Workers Can’t Afford “Affordable Care Act” as well as its operational shortcomings in “Obamacare Is A Disaster: Co-Op Insurers Across America Are Collapsing, And Now There Is Fraud“, paradoxically even as Obamacare – a tax – was according to the BEA the single biggest contributor to GDP growth in the third quarter.

    Of course, the most obvious reason why Obamacare will have a dire impact the economy is also very simple: soaring healthcare premiums, also covered before…

     

    … which incidentally also explain why all those touted “gas savings” failed to materialize in discretionary spending behavior: all of the “saved” money went to cover rising health insurance costs.

    None of this should come as a surprise.

    What should, however, is that according to a very unexpected twist healthcare premiums are about to soar so much in the coming months that the shocking increases of the past year will seem like a walk in the park.

    The reason for this comes courtesy of a new report from the WSJ which explains something few if any had expected: corporate insurers are scrambling to profit from Obamacare!

    Yes, we know: Obamacare was written by the health insurance companies, and it was supposed to benefit them first and foremost as US households struggled to catch up to what most rational observers had said would be surging premiums. And, on the top line, it did just that: “under the ACA, insurers have seen an influx of new membership in individual plans and in Medicaid plans they administer for the government, expanding the industry’s total U.S. revenue to $743 billion in 2014, the year the law’s biggest changes took effect, from $641 billion the year before, according to a new analysis by consulting firm McKinsey & Co.“

    So far so good, and just as expected – incidentally, that 16% increase in industry revenue comes right out of your pocket, dear U.S. reader with the blessings of the US Supreme Court of course.

    But where it gets fascinating is that while the surge in the top-line was expected, what comes as close to a black swan as possible, is what happens below the revenue line on the insurers’ income statement.

    The stunning finding comes from a new analysis by McKinsey which notes that much of that revenue growth has been unprofitable! Health insurers lost a total of $2.5 billion, or on average $163 per consumer enrolled, in the individual market in 2014, McKinsey found. A number are also expecting to lose money on their marketplace business for 2015.

     

    The simple bullet point summary:

    • Insurance industry revenues surged by 16% thanks to Obamacare
    • However, its costs surged by… more than 16%

    How is this possible?

    Shouldn’t all the benefits courtesy of the Obamacare tax flow through largely unobstructed to the bottom line? The answer, it appears, is no.

    At big insurer Aetna Inc., the evidence of the law’s impact could be spotted last month in a Phoenix classroom, where Aetna was training a class of customer-service hires who will support a suite of re-engineered ACA marketplace plans dubbed “Leap.” Those products will have a different service approach, with fewer automated phone prompts and a completely new staff that is supposed to spend more time solving customers’ problems.

     

    A trainee stood at a whiteboard, drawing stick figures with speech bubbles in a Pictionary-style game. “Conversation?” asked a class member. “Transition of care?” ventured another. The teacher gave the answer: The new reps had to keep commitments to consumers. That meant calling them back if needed.

     

    With its Leap plans, Aetna is using many of the approaches that are gaining momentum in the industry. The Leap plans, which will roll out in four states this fall but are expected to be more widely available next year, rest on different technology than other Aetna products, including a new claims-processing platform, the company says.

     

    “It’s a mammoth change in the offering, with everything being brand-new,” said Dijuana Lewis, an Aetna executive vice president. Aetna said this week it would likely lose money in 2015 on its exchange business.

     

    The Leap insurance will include limited networks: In Arizona, it will be built around just one provider, the large Banner Health system. The Leap plans also aim to be easy to understand. For instance, they generally won’t include coinsurance, in which a consumer pays a percentage of the cost of a medical service, a concept many people find confusing.

    And, as we now learn, all these changes and all this “simplification” will cost lots of money. In fact more money, than the tax actually brings in for most.

    It appears that while US health insurers had modeled out their spike in revenue courtesy of Obamacare, not even they anticipated the associated costs the “Affordable” Care Act would entail.

    That, however, is amazing, because while everyone else was worse off as a result of Obamacare, at least the conventional wisdom was that the insurers would make off like bandits. Not only is that not the case, but Obamacare – in a glorious example of how government meddling destroys everything – is actually leading to reduces profit margins for the one group that was supposed to be a sure winner!

    However, since it is too late to undo Obamacare, what do these latest revelations mean?  According to the WSJ “now, a lot of insurers are recalibrating their approach for 2016, with changes visible at all levels of the industry—from pricing to product design.”

    Mostly pricing.

    The WSJ reminds us that “premiums for a type of plan that is closely watched as a signal of consumer costs—the second-lowest-priced insurance product in the law’s “silver” metal tier—will increase 7.5% on average across the roughly three dozen states that rely on the HealthCare.gov marketplace, according to the administration.”

    For larger companies, the losses were survivable. But rate increases create a risk that consumers may get sticker shock despite the availability of federal subsidies that reduce the cost sharply for many.

    Peter Wainwright, 63 years old, who retired from a telecommunications job, currently has a plan bought on California’s ACA marketplace. He and his wife don’t get a subsidy and pay about $2,230 a month, and the rate is increasing for 2016. “Everything has gone up,” said Mr. Wainwright, of Half Moon Bay, Calif.

    The punchline:

    The health law remade the individual market, forcing insurers to sell plans to all consumers and banning them from charging rates based on health conditions. Insurers struggled to predict their costs, and many didn’t set rates high enough to cover the care of those they enrolled.

    And since the insurers care far more about boosting profits than merely rising revenues which are more than offset by rising costs, and since most insurers are losing money on existing plans, expect all the rate increases incurred so far to be a mere walk in the park compared to the stratospheric premium surges that are about to be unveiled and that would make even the infamous Martin Shkreli green with envy.

  • San Fran Fed Defends Rate Hike, Says Ignore Terrible Wage Growth Data

    It is becoming increasingly clear that, come hell, high water, or dismal data, The Federal Reserve will raise rates in December whether the market likes it (which it will guarantee) or the economy doesn't (which doesn't matter after all).

    A month ago, Stan Fischer dropped the first hint when he told Jackson Hole attendees that The Fed could ignore the inflation target because of transitory issues.

    Fischer said there's "good reason to believe that inflation will move higher as the forces holding down inflation dissipate further." He says, for example, that some effects of a stronger dollar and a plunge in oil prices have already started to diminish.

     

    Fischer added "The Fed should not wait until 2% inflation to begin tightening," thus making that data item irrelevant for deciphering The Fed's decisions.

    Then, having warned of global turmoil weighing on her decision to raise rates, Yellen reversed position and brushed off any concerns about global uncertainty.

    Yellen removed the "global economic developments" part as well:

     

    Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.

     

    So no matter what happens overseas, all clear given for rate hikes.

    And now, with the final nail in the coffin of data-dependent lies, The San Fran Fed just dismissed 'wage growth' as entirely irrelevent to future growth or inflation…

    These results do not imply that wages and prices are unrelated. Certainly they are tied together in the long run, and wage data will surely contain some information for future price inflation. However, after incorporating information from prices and activity measures, the marginal additional benefit of using wage data appears small.   

     

    Fundamentally, the weak forecasting power of wages for prices suggests that unexpectedly high or low inflation could occur regardless of the recent behavior of wages.   

     

    Researchers have extensively studied how wage data might help predict future price inflation. The overall conclusion of the literature is that wages generally provide less valuable insight into future prices than some other indicators.

     

    In fact, models that do not incorporate wages often result in superior inflation forecasts

    Thus enabling The Fed to justify a December rate-hike no matter how bad the data they are so dependent on turns out to be… Which explains this chart…

     

    As Dec rate-hike odds hit series record 52%… in the face of collapsing macro and micro data.

     

  • Transcanada Just Killed The Keystone XL Pipeline

    In an ironic twist, just hours after we discussed the record capital outflow from Canada, resulting from the plunge in oil prices and the mothballing of Canada’s energy industry, Obama’s long-desired goal of killing the Keystone XL pipeline has finally come true.

    Moments ago, the WSJ reported that Alberta-based Transcanada asked to suspend its U.S. permit application, “throwing the politically fraught project into an indefinite state of limbo, beyond the 2016 U.S. elections.”

    Calgary, Alberta-based TransCanada Corp. sent a letter to the State Department, which reviews cross-border pipelines, to suspend its application while the company goes through a state review process in Nebraska it had previously resisted.

    “In order to allow time for certainty regarding the Nebraska route, TransCanada requests that the State Department pause in its review of the Presidential Permit application for Keystone XL,” the company said in the suspension request reviewed by The Wall Street Journal. “This will allow a decision on the Permit to be made later based on certainty with respect to the route of the pipeline.”

    The WSJ correctly notes that “the move comes in the face of an expected rejection by the Obama administration and low oil prices that are sapping business interests in Canada’s oil reserves.” Clearly the former was never an issue before, however the collapse in oil prices and the resultant plunge in CapEx spending means that the pipeline no longer made much economic sense.

  • What The Oil And Gas Industry Is Not Telling Investors

    Submitted by Nick Cunningham via OilPrice.com,

    Oil prices crashed because of too much supply, but will rebound as production shrinks and demand rises. But what if long-term demand for oil ends up being sharply lower than what the oil industry believes?

    That is the subject of a new report from The Carbon Tracker Initiative, which looks at a range of scenarios that could blow up oil industry projections for long-term oil demand.

    Historically, Carbon Tracker says, energy demand has been driven by population, economic growth, and the efficiency (or inefficiency) of energy-using technologies. Carbon Tracker looks at a couple possible future scenarios in which those parameters are altered, resulting in dramatically lower rates of oil consumption.

    Carbon Tracker has been a pioneer in the concept of “stranded assets,” the notion that fossil fuel assets will lose their value as the world moves to restrict carbon emissions. If an oil field cannot be produced profitably in a carbon-constrained world – or cannot legally be produced because of certain regulations – then it ceases to have value. That puts investors’ dollars at risk, a risk that financial markets have not fully grappled with.

    However, in a new report, Carbon Tracker expands upon the possible scenarios in which oil demand may not live up to industry predictions.

    For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. Coal would be affected the most, with 25 percent reduction in demand compared to the business-as-usual case.

    How about GDP growth? The expansion of the global economy is pivotal to energy consumption. The industry typically bakes in a GDP growth rate of 2.8 to 3.6 percent per year into its forecasts. But these figures could be on the high end, especially since so much hinges on the ongoing blistering growth from China. But, using BP’s pessimistic GDP scenario in which China and India only grow at 4 percent per year, global energy demand could be 8.5 percent lower in 2035 than the business-as-usual case.

     

    Perhaps more threatening to future oil demand are global policies to ratchet down greenhouse gas emissions, as previously touched upon. Although international negotiations have largely failed to halt the growth of carbon emissions, a significant effort to zero out carbon over the long-term would necessarily cut deeply into demand. Industry projections largely ignore this possibility, as industry estimates for fossil fuel demand in the future would likely lead to average global warming of 4 to 6 degrees Celsius, exceeding the stated goal of capping warming at 2 degrees. More importantly, industry projections for fossil fuel use already exceed the totals that would result if the carbon reduction goals already laid out by countries heading into Paris are implemented. Caps on emissions would upend the entire business model of the oil industry.

    Carbon Tracker looks at a few other scenarios, including the possibility that renewable energy could make cost reductions and deployment much greater than the oil industry thinks. Indeed, energy prognosticators like the IEA consistently underestimate the market penetration of solar PV and wind. Actual deployment wildly exceeds every projection that the IEA publishes. It is not hard to see oil industry projections off the mark, undone by falling costs and rapid deployment of solar and wind.

    Moreover, the combination of energy storage and renewable energy could transform power markets, solving the problem of intermittent energy. Battery storage continues to get cheaper, another trend that the oil industry could be underestimating. Electricity market transformation would also help scale up battery manufacturing, which in turn would reduce the cost of electric vehicles.

    Take Toyota’s recent announcement that it will target a 90 percent reduction in greenhouse gas emissions from its vehicles by 2050 by developing fuel cell vehicles. There is a long way to go before such a scenario becomes viable, but the announcement should is a shot across the bow for the oil industry.

    In short, Carbon Tracker concludes, there are very real threats to the business models of oil companies, threats that need to be explained to investors. Right now, those threats are not being taken seriously.

  • US Will Send Warships To China Islands "Twice A Quarter", Pentagon Says

    Last week, the US did a silly thing. The Pentagon sent the USS Lassen to Subi Reef in the Spratlys just to see if Washington could sail by China’s man-made islands in the South Pacific without getting shot at. 

    (Subi reef)

    (USS Lassen)

    As ridiculous as that sounds from a kind of “let’s not start World War III” perspective, it’s an entirely accurate assessment of Obama’s “freedom of navigation” exercise. There was no reason whatsoever for the US to be there and the pass-by served no purpose at all other than to test Beijing’s patience. 

    To be sure, China isn’t innocent here. They’ve built 3,000 acres of sovereign territory atop reefs in disputed waters and built runways, ports, and cement factories on their new “land” which understandably makes Washington’s regional allies like The Philippines a bit nervous. 

    Still, it isn’t as if the PLA is about to invade Australia and it seems likely that if one could listen in at The Pentagon, US officials could probably care less about these “sandcastles.” But America’s “friends” in the region think that “this is the time for courage” (to borrow and alter a classic Gartman-ism), and so, Washington felt compelled to sail a warship by the islands just to prove it could. China didn’t fire on or surround the US-flagged guided missile destroyer, but the PLA did follow it and Beijing subsequently expressed its extreme displeasure at the “exercise.” 

    As we noted before and after the “incident”, most “experts” believe the US will need to keep up the patrols if they’re to be “effective.” Sure enough, The Pentagon now says destroyers will sail within 12 nautical miles of the islands twice every three months. Here’s Reuters:

    The U.S. Navy plans to conduct patrols within 12 nautical miles of artificial islands in the South China Sea about twice a quarter, a U.S. defense official said on Monday.

     

    “We’re going to come down to about twice a quarter or a little more than that,” the official said. “That’s the right amount to make it regular but not a constant poke in the eye. It meets the intent to regularly exercise our rights under international law and remind the Chinese and others about our view.”

    Yes, because Washington doesn’t want to “poke anyone in the eye.”

    So, as The White House attempts to put on a brave face amid mounting threats to US hegemony, The Pentagon is apprently set to antagonize Beijing for no reason at all other than to appease America’s regional allies who are effectively asking if Big Brother is still dedicated to playing world police officer. 

    We close with China’s warning, issued last week: 

    “If the United States continues with these kinds of dangerous, provocative acts, there could well be a seriously pressing situation between frontline forces from both sides on the sea and in the air, or even a minor incident that sparks war.”

  • How The Fed Has Backed Itself Into A Corner

    Submitted by Leonard Brecken via OilPrice.com,

    In my last article I outlined the case that the fall in commodities is a result of Fed policy more so than fundamentals. The fall in oil began, almost to the day, when the dollar began its rise last June and remained perfectly inversely correlated for rest of 2014 into part of 2015. In 2015, the dollar began to weaken as the U.S. economic growth myth got exposed and yet oil, instead of rising, fell further. The Iran deal helped, as well as OPEC continuing to pump oil above quota levels.

    Admittedly, U.S. oil inventories remain above historical levels, a trend that accelerated in the second half of last year, further fueling the decline in oil. To some extent, that oversupply was enabled by the Federal Reserve’s easy money via rising leverage, as speculation in futures markets drove oil prices up. However, the initial spark was probably tied to a change in the Federal Reserve policy of propping asset prices via Quantitative Easing (QE) vs. what’s going on now in threatening to raise rates.

    Coincidence?

    With Congress reaching a debt ceiling/budget deal, we learned more about how and why this occurred. Instead of more QE, it appears the government is opting for more fiscal stimulus in 2016 as the “deal” basically gives the White House unlimited spending thanks to a relaxed debt ceiling. Coincidence right? Of course not.

    Now it’s becoming clearer as to why this option was taken once again: allow the government to distort asset prices through intervention.

    The Yuan Threat

    As has been reported in the media, the IMF is likely to include the Yuan in its basket of currencies, basically opening the door to the Yuan becoming a reserve currency. This is occurring at the same time the petrodollar is being sold, as commodity oriented nations such as Saudi Arabia are selling wealth funds (i.e. U.S. dollars) to fill their budget gaps.

    Since this adds to downward pressure on the U.S. dollar, it’s no wonder the Federal Reserve has changed course. For one, a strong U.S. Dollar depresses commodities coming into an election year, boosting consumers in lower income brackets. The second motivation for a strong dollar is to ward off the threat of the Yuan replacing the Dollar as the reserve currency.

    Impending U.S Dollar Weakness

    The news that the Chinese government is considering relaxing capital controls and thus allowing the Yuan to appreciate, is a sign that they think the IMF inclusion of the Yuan is imminent. The displacement of the Petrodollar, even fractionally, will result in a drop in the U.S. Dollar. Thus, with this threat, if the Federal Reserve undertakes another round of QE it will further stoke U.S. Dollar weakness.

    That would reverse the commodity declines that began last summer, wreaking havoc on the standard of living especially for the lower income electorate the government depends on for votes, come 2016. So the Fed is weighing the negative consequences of a strong dollar on corporate profits vs. unleashing inflation on the electorate, pressuring long term interest rates. We now see which negative scenario they favor and why.

    This should further explain the influences on oil prices and clearly show that fundamentals aren’t the only thing at play on setting prices.

  • "Somebody Will Do Something Stupid"

    Submitted by Jim Quinn via The Burning Platform blog,

    Is it just me, or does it seem like we are moving inexorably towards a global confrontation?

    China claims some islands in the South China Sea and we attempt to provoke a military response by sending a US warship within 12 miles of the disputed islands.

     

    We accuse both China and Russia of cyber terrorism on regular basis, even though we released the Stuxnet virus into the Iranian nuclear facilities and have used mass surveillance against people around the world, including allied leaders.

     

    We created ISIS as part of our grand strategy that included turning Iraq and Libya into lawless countries racked by civil war strife and religious zealotry.

     

    We created the Syrian refugee crisis by funding militants against Assad because Saudi Arabia and Qatar want to build a natural gas pipeline through Syria to Europe.

    We led the overthrow of a democratically elected, Russian friendly, government in the Ukraine, and have continuously provoked Russia in their own backyard.

     

    We have covered up the true culprit in shooting down of the Malaysian airliner over the Ukraine.

     

    We have colluded with Saudi Arabia to drive the price of oil down in an attempt to destroy the economies of Iran, Argentina and Russia. Putin has now called our bluff and entered Syria in full force, bombing the shit out of ISIS and proving the US had no intention of defeating these terrorists, because our military industrial complex depends upon having an enemy to fight. Now Obama is placing US troops in the line of fire between Russia, Syria, Turkey, Iran, and ISIS.

     

    Europe was already bankrupt, using trillions in new debt to pay off the unpayable debt they already had. Now they are being overrun by Muslim hordes who will cause their societies to splinter and cause chaos, violence, and war.

     

    Domestically, Obama has successfully splintered the country along the lines of race, religion, gun ownership, producers vs consumers, and wealth.

    There are a multitude of fuses affixed to dozens of powderkegs and little kids with matches are on the loose.

    I don’t know which of the fuses will be lit and which powderkeg will blow, but someone is bound to do something stupid, and then all hell will break loose.

     

    It could happen at any time. One military miscue. One assassination. One violent act that stirs the world. And the dominoes will topple, setting off fireworks not seen on this planet since 1939 – 1945. I can see it all very clearly.

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