- US & China Stocks Are Plunging After PMI Hits 6.5-Year Low, PBOC Strengthens Yuan Most Since Nov 2014
Following China's official PMI print at a 3-year low, Caixin's PMI collapsed to 47.3 – the lowest sinec March 2009. Despite another CNY150bn liquidity injection (but the biggest strengthening of Yuan since Nov 2014 and a financial conditions tightening in FX trading), China, US, and Japanese stocks are plunging… SHCOMP -4%, Dow -280, NKY -340
Carnage!
China -4%
Dow -280…
NKY -340
Japan is now getting worried:
- *ASO: CHINESE ECONOMY HAS BIG IMPACT ON JAPAN ECONOMY
Blood on the streets again in China…
None of this should come as a surprise to anyone as we noted earlier…
Stop acting surprised pic.twitter.com/BxbmCk0Wfx
— zerohedge (@zerohedge) September 1, 2015
* * *
And as we detailed earlier…
Having exposed the culprit for all of its economic and market woes, China is likely going to have problems explaining why its economic plague is still spreading (with South Korean exports collapsing and Japanese Capex growth slowing) and China's official manufacturing PMI slipped into contraction for the first time in 6 months (to 3 year lows). Amid the face-saving clean-air of Parade Week, the appearance of awesomeness must prevail and following the worst quarter since Lehman, stocks are indicated lower despite having received some 'help' into last night's close. PBOC proxies push 'hope' as a strategy for stock stability (even as US markets and oil are re-collapsing) as margin debt drops to an 8-month low – still double YoY though. PBOC fixes Yuan 0.22% stronger- the biggest jump since Nov 2014 – as it injects another CNY150bn via 7-day rev.repo.
China's bubonic economic plague is spreading…
- S. KOREA EXPORTS DROP BY MOST SINCE 2009, FALLING FOR 8TH MONTH
So guess who wil lbe next to devalue!
* * *
But having arrested the culprit for all of China's market and economic woes, following the worst 3-month slide in stocks since Lehman…
And with Parade Week under way, the propaganda continues…
- *PBOC ACADEMIC URGES ATTENTION ON STOCK MKT STABILITY: SEC TIMES
Which, he writes, means market expectations should be optimistic about the economy as they were during the bull market… even though there seems to disconnect between economic fundamentals and the stock market, while the gap between the link, it is the reflection of the policy.
Which roughly translated means – In China, hope is a strategy.. and if you are anything but hopeful you are arrested.
But then China PMI hit…
- *CHINA MANUFACTURING PMI AT 49.7 IN AUG. – 3 Year Low – The Official PMI in contraction for first time in 6 months.
- *CHINA NON-MANUFACTURING PMI AT 53.4 IN AUG.
"Both domestic and external demand are weak," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Market sentiment is bad and it’s too early to say the Chinese economy is bottoming out."
Don't forget – Hope fills the gap.
So having switched its focus to more economic-growth-focused measures than stock-levitation, $100s of billions later, the economy keeps sliding.
Of course, there is always the unofficial Caixin print at 2145ET to baffle everyone with bullshit.
* * *
There is some good news… The delveraging continues:
- *SHANGHAI MARGIN DEBT BALANCE FALLS TO LOWEST IN EIGHT MONTHS
- Outstanding balance of Shanghai margin lending fell to 673.1b yuan on Monday, lowest level since Dec. 25.
- Balance dropped by 1.5%, or 10b yuan, from previous day, in a 10th straight decline
But then again, we are not sure if we are allowed to mention that. And in any case – just to screw things up completely, China is goping full subprime in the real estate market…
China may strengthen property loosening and reduce down payment ratio on commercial mortgage loans if property investment remains weak, analysts led by Ning Jingbian write in note.
Move to boost mkt confidence in short term, though real policy effect may be impaired due to caps on housing provident fund loans
Yeah – because loosening standards and lowering upfronts worked out so well for America's already inflated housing market.!!
Asian equity markets are not happy…
- *JAPAN'S NIKKEI 225 MAINTAINS LOSS AFTER CHINA PMI; DOWN 1.5%
- *CHINA FTSE A50 STOCK-INDEX FUTURES FALL 1% AT OPEN
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.5% TO 3,157.83
- *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.1% TO 3,296.53
After two days of stronger Yuan fixes, PBOC goes crazy and drastically strengthens Yuan…
- *CHINA SETS YUAN REFERENCE RATE AT 6.3752 AGAINST U.S. DOLLAR
- That is the biggest single-day strengthening since Nov 2014…
We are not sure of the implications yet but it seems like a tightening of financial conditions:
- *PBOC SAID TO MAKE BANKS TRADING FX FORWARDS HOLD RESERVES: RTRS
- *PBOC FX FORWARD RESERVE RATIO SAID TO BE 20% FOR NOW: REUTERS
Charts: Bloomberg
- The Oligarch Recovery: Low Income Americans Can't Afford To Live In Any Metro Area
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
We were told we needed to bail out Wall Street in order to save Main Street. Well the results are in…
Wall Street has never done better, and Main Street has never done worse.
From the Huffington Post:
Low-income workers and their families do not earn enough to live in even the least expensive metropolitan American communities, according to a new analysis of families’ living costs published Wednesday.
The analysis, released by the left-leaning Economic Policy Institute, is an annual update of the think tank’s Family Budget Calculator that reflects new 2014 data. The Family Budget Calculator is a formula designed to determine the income “required for families to attain a secure yet modest standard of living” in 618 different communities across the country that the U.S. Census Bureau defines as metropolitan areas. The formula uses data collected by the government and some nonprofit groups to measure costs of housing, food, child care, transportation, health care, “other necessities” like clothing, and taxes for families of 10 different compositions in these specific locales.
The updated Family Budget Calculator shows that even the most affordable metropolitan areas in the country are beyond the reach of millions of American families with incomes above the official federal poverty level. The official federal poverty level for a family of two parents and two children in 2014 was $24,008, according to the EPI. But the least expensive metropolitan area in the country for this family type is Morristown, Tennessee, where a family needs an income of $49,114, according to the Economic Policy Institute’s budget calculator.
The Economic Policy Institute also estimates that minimum-wage workers — who almost universally earn less than the federal poverty level — lack the income needed to make an adequate living in any of the communities surveyed, even if they are single and childless. The think tank notes that this includes minimum-wage workers living in cities or states with a higher minimum wage than the federal minimum of $7.25 an hour, or $15,080 a year for a full-time worker.
Even families with incomes closer to the middle of the earnings spectrum lack the means to maintain an adequate standard of living. The nation’s median household income was $51,939 in 2013 — the most recent year in which data were available — not much higher than the cost of living in the relatively inexpensive Morristown.
Where’s our hero when you need him?
- Russian Military Forces Arrive In Syria, Set Forward Operating Base Near Damascus
While military direct intervention by US, Turkish, and Gulf forces over Syrian soil escalates with every passing day, even as Islamic State forces capture increasingly more sovereign territory, in the central part of the country, the Nusra Front dominant in the northwestern region province of Idlib and the official “rebel” forces in close proximity to Damascus, the biggest question on everyone’s lips has been one: would Putin abandon his protege, Syria’s president Assad, to western “liberators” in the process ceding control over Syrian territory which for years had been a Russian national interest as it prevented the passage of regional pipelines from Qatar and Saudi Arabia into Europe, in the process eliminating Gazprom’s – and Russia’s – influence over the continent.
As recently as a month ago, the surprising answer appeared to be an unexpected “yes”, as we described in detail in “The End Draws Near For Syria’s Assad As Putin’s Patience “Wears Thin.” Which would make no sense: why would Putin abdicate a carefully cultivated relationship, one which served both sides (Russia exported weapons, provides military support, and in exchange got a right of first and only refusal on any traversing pipelines through Syria) for years, just to take a gamble on an unknown future when the only aggressor was a jihadist spinoff which had been created as byproduct of US intervention in the region with the specific intention of achieving precisely this outcome: overthrowing Assad (see “Secret Pentagon Report Reveals US “Created” ISIS As A “Tool” To Overthrow Syria’s President Assad“).
As it turns out, it may all have been just a ruse. Because as Ynet reports, not only has Putin not turned his back on Assad, or Syria, but the Russian reinforcements are well on their way. Reinforcements for what? Why to fight the evil Islamic jihadists from ISIS of course, the same artificially created group of bogeyman that the US, Turkey, and Saudis are all all fighting. In fact, this may be the first world war in which everyone is “fighting” an opponent that everyone knows is a proxy for something else.
According to Ynet, Russian fighter pilots are expected to begin arriving in Syria in the coming days, and will fly their Russian air force fighter jets and attack helicopters against ISIS and rebel-aligned targets within the failing state.
And just like the US and Turkish air forces are supposedly in the region to “eradicate the ISIS threat”, there can’t be any possible complaints that Russia has also decided to take its fight to the jihadists – even if it is doing so from the territory of what the real goal of US and Turkish intervention is – Syria. After all, it is a free for all against ISIS, right?
From Ynet:
According to Western diplomats, a Russian expeditionary force has already arrived in Syria and set up camp in an Assad-controlled airbase. The base is said to be in area surrounding Damascus, and will serve, for all intents and purposes, as a Russian forward operating base.
In the coming weeks thousands of Russian military personnel are set to touch down in Syria, including advisors, instructors, logistics personnel, technical personnel, members of the aerial protection division, and the pilots who will operate the aircraft.
The Israeli outlet needless adds that while the current makeup of the Russian expeditionary force is still unknown, “there is no doubt that Russian pilots flying combat missions in Syrian skies will definitely change the existing dynamics in the Middle East.“
Why certainly: because in one move Putin, who until this moment had been curiously non-commital over Syria’s various internal and exteranl wars, just made the one move the puts everyone else in check: with Russian forces in Damascus implicitly supporting and guarding Assad, the western plan instantly falls apart.
It gets better: if what Ynet reports is accurate, Iran’s brief tenure as Obama’s BFF in the middle east is about to expire:
Western diplomatic sources recently reported that a series of negotiations had been held between the Russians and the Iranians, mainly focusing on ISIS and the threat it poses to the Assad regime. The infamous Iranian Quds Force commander Major General Qasem Soleimani recently visited Moscow in the framework of these talks. As a result the Russians and the Iranians reached a strategic decision: Make any effort necessary to preserve Assad’s seat of power, so that Syria may act as a barrier, and prevent the spread of ISIS and Islamist backed militias into the former Soviet Islamic republics.
See: the red herring that is ISIS can be used just as effectively for defensive purposes as for offensive ones. And since the US can’t possibly admit the whole situation is one made up farce, it is quite possible that the world will witness its first regional war when everyone is fighting a dummy, proxy enemy which doesn’t really exist, when in reality everyone is fighting everyone else!
That said, we look forward to Obama explaining the American people how the US is collaborating with the one mid-east entity that is supporting not only Syria, but now is explicitly backing Putin as well.
It gets better: Ynet adds that “Western diplomatic sources have emphasized that the Obama administration is fully aware of the Russian intent to intervene directly in Syria, but has yet to issue any reaction… The Iranians and the Russians- with the US well aware- have begun the struggle to reequip the Syrian army, which has been left in tatters by the civil war. They intend not only to train Assad’s army, but to also equip it. During the entire duration of the civil war, the Russians have consistently sent a weapons supply ship to the Russian held port of Tartus in Syria on a weekly basis. The ships would bring missiles, replacement parts, and different types of ammunition for the Syrian army.“
Finally, it appears not only the US military-industrial complex is set to profit from the upcoming war: Russian dockbuilders will also be rewarded:
Arab media outlets have recently published reports that Syria and Russia were looking for an additional port on the Syrian coast, which will serve the Russians in their mission to hasten the pace of the Syrian rearmament.
If all of the above is correct, the situation in the middle-east is set to escalate very rapidly over the next few months, and is likely set to return to the face-off last seen in the summer of 2013 when the US and Russian navies were within earshot of each other, just off the coast of Syria, and only a last minute bungled intervention by Kerry avoided the escalation into all out war. Let’s hope Kerry has it in him to make the same mistake twice.
- Is This Man Responsible For China's Stock Market Crash?
Authored by Shannon Tiezzi, originally posted at TheDiplomat.com,
If Chinese authorities are to be believed, we finally know the cause of the country’s stock market woes: a single reporter. In a video segment aired by China’s state television broadcaster, journalist Wang Xiaolu confessed to fabricating a “sensationalized” story about the stock market and claimed responsibility for having “caused panic and disorder” among China’s investors.
At issue is a story Wang wrote for Caijing on July 20, in which he reported that China Securities Regulatory Commission was looking to end interventions designed to prop up share prices. CSRC denied the report, which was removed from Caijing’s website last week. CSRC blamed Wang’s piece for a massive drop in the stock market in late July, which sparked market woes that continue today.
Caijing, a financial and business newspaper in China, often pushes the envelope of state-sanctioned media coverage. It has been particularly active in publishing investigations into the finances and business connections of officials suspected of corruption.
Wang was arrested on August 25 for “fabricating and spreading false information about securities and futures trading.” A Xinhua report said that Wang had confessed to writing a false report on China’s stock market. According to Xinhua, Wang admitted that his story “caused panics and disorder at stock market, seriously undermined the market confidence, and inflicted huge losses on the country and investors [sic].”
On Monday, CCTV aired a video confession from Wang, in which he said he was “deeply sorry” for his actions. “At such a sensitive time, I should not have published a report that negatively affected the market,” Wang said, saying he had “caused great losses to the country and to investors” all for the sake of “sensationalism.”
Reporters Without Borders condemned Wang’s arrest in a statement issued on August 28. “Suggesting that a business journalist was responsible for the spectacular fall in share prices is a denial of reality,” the international non-profit’s secretary general Christophe Deloire said in the statement. “Blaming the stock market crisis on a lone reporter is beyond absurd.”
Chinese authorities have warned media outlets not to speculate on (or devote too much coverage to) the stock market troubles. The high-profile scapegoating of Wang is likely designed to send a stern message to other journalists thinking about following in his footsteps. And journalists aren’t the only ones being encouraged to keep quiet: China’s Ministry of Public Security also said that it had punished 197 people for spreading online rumors about the stock market crash, the deadly explosions in Tianjin, and China’s upcoming military parade.
Meanwhile, Xinhua also reported that a CSRC official, Liu Shufan, is under investigation for insider trading and accepting bribes. Four senior executives at Citic Securities, China’s largest brokerage firm, are also under investigation for insider trading. All five men have confessed, Xinhua said.
Chinese markets endured another roller-coaster-ride of a day on Monday, with both the CSI300 index and the Shanghai Composite Index dropped more than four percent before rising again in the afternoon. Both indexes fell by around 12 percent over the month of August, Reuters reported, and have lost almost 40 percent of their value compared to mid-June 2015.
- Exposed: The New American Way Of Life
- "It's The Gun's Fault!!"
- The Age Of Voodoo Finance
Submitted by Jeffrey Snider via Alhambra Investment Partners,
The Jackson Hole gathering may end up providing at least some clarification, but not even close to the manner in which everyone seems intent on inferring. With Janet Yellen’s notable absence, there isn’t the same sort of celebrity about what would have been the media hanging upon every word; that is, after all, what the Federal Reserve has become, not an organ of stability or even expertise but a public relations effort aimed squarely at trying to convince everyone possible that it is. Given the unique circumstances at the moment, the real issue is not whether they might raise rates but just how much systemic misdirection has already been revealed even to the least attentive of people.
The retreat at Jackson Hole goes back more than thirty years to the early 1980’s and Paul Volcker’s apparent affinity for fly fishing. It had started more as a very quiet and exclusive affair but for the first time this year there were outside and competing conferences held at the same time in the same place. That configuration, I think, speaks volumes about finally understanding the broad, general terms of what monetary policy actually is.
Apparently, right next to the main central banker conclave, a left-wing group was meeting ostensibly not to target the Fed and its Wall Street bias, perceived or not, but rather to urge it against ending ZIRP.
“The economy has not fully recovered and interest rates should not be raised when racial disparities exist,” said Shawn Sebastian, a policy advocate for the Fed Up Coalition of the Center for Popular Democracy, pointing to continued higher-than-average unemployment rates for black Americans…
As Fed officials hear from central bankers from Switzerland and Chile Friday, they are doing so practically next door to a workshop called “Do Black Lives Matter to the Fed?” sponsored by Sebastian’s group, which wants rates to stay low until wage growth and unemployment improve, especially for minorities.
The Fed Up Coalition is a grab bag of union activists and community organizers, the very sorts that propelled the crude communism of Occupy Wall Street almost five years ago. This is not to say that there might be differences in what becomes embraced on the heavily governmental wing, but for a few generations it had been that Wall Street and “money” were upon the “side” of free market set against those government means of redistribution.
Even the Fed itself, especially under Yellen, has taken up “inequality” as a major emphasis with the same lack of self-awareness that it has operated with for decades. This, however, is not really much of a change as the institution has been the same side of the coin going back to the reformation after the Great Inflation; the ruse about free markets was always that, as monetary policy has never been anything else other than redistribution by other means.
The crude history of the Great “Moderation” gives away the charade, as at the end of the 1970’s there were no more charms in “demand side” economics. Even the great “liberals” of the day had renounced Keynesianism with full vigor, setting up the “supply side” as the great answer to the decade and a half malaise of redistribution experimentation (with the “inflation” part coming as the Fed was monetizing it all). It was so unquestioned that George HW Bush accused Ronald Reagan of risking more “inflation” by including tax cuts for individuals rather than exclusively limiting to the business end; that was the infamous “voodoo economics” that Bush proposed, the historically-invalidated redistribution of the “demand side.”
The idea of “supply side” economics has come to mean, I think, more about tax cuts in general than anything of a true set of economic ideas. That isn’t surprising given politics playing out over more than thirty years, but for me it really comes down to redistribution vs. markets. There is always going to be some of both in any economic system, the question is really about the balance especially at setting the marginal economic changes. In that sense, tax cuts have to be seen in the broader framework of a market-oriented approach rather than their own ends.
What was most devious about monetarism is that it snuck in way under the radar as if it were among those market schemes. A lot of that has to do with the secrecy with which monetary policy was carried and why that was so, but mostly it was Paul Volcker who had, starting in 1979, given the Fed “market” credibility that in hindsight was obviously overstated. It is taken as convention that Volcker “defeated” the “demand side” inflation by placing the US into recession twice. Thereafter would be the “supply side” revolution of “Reaganomics.”
Almost straight away you can see that wasn’t really true; after all, how in the world could this market approach during the Great “Moderation” end up with serial asset bubbles? It never really was truly an embrace of the market format, especially at the Federal Reserve which had already begun to explore means of intruding further and further. The “exploitable” Philips Curve, which had engendered the start of the Great Inflation was monetary policy intent on “aiding” fiscal redistribution (in the form, firstly, of the “Great Society” and even Vietnam), had been replaced, at first in an effort to understand what went wrong, by “rational expectations.” Instead of redistribution by taxation through the Treasury, it was to be monetary redistribution by financialism that wasn’t at all truly a market effort.
In May 1982, the Fed was debating stabilizing markets over what Volcker termed a “rinky dink” firm that had caused trouble for several Wall Street dealers. Rather than let actual markets work out and deal out the discipline, the Fed met in an almost emergency setting where Volcker, the assumed champion of free markets, was already on the side of monetary interference.
VOLCKER Ultimately, if there’s no other solution, we might just have to stabilize this market for a period of time. At least I can see that as a possible scenario. So, I just took this very preliminary step of keeping in touch with the market if it really goes off. I think the next step, if the market comes under more pressure, is that we’ll just have to go in openly and buy some bonds. That is very insufficient knowledge, but it about summarizes what I know, frankly. The other lenders involved in this particular short-selling operation are apparently major security houses in New York. There is a group of 7 or 8 of them; they’re all well-known firms. They should be able to withstand the loss if things ever settle, so far as we know about the loss. But that doesn’t mean it won’t send ripples of very deep concern all through the market.
The very tone and nature of Volcker’s methodology is quite recognizable, isn’t it? Here, in 1982, was the very Fed that we see right now being crafted in secrecy apart from Wall Street which was very much in the loop (as Volcker says above, “I just took this very preliminary step of keeping in touch with the market if it really goes off”). Too big to fail had been embraced in other forms before, even in the 1970’s, but this was very different as it applied not to individual firms but the whole “market.” As I wrote further about this voodoo history, this was perhaps the central point of this coming “moderate” age:
This was just a minor episode of primitive “too big to fail” in its view of “market stability” as a primary function of policy – which opens up the entire so-called market to a central bank determining wholly on its own what counts as “stability” and even where that applies to which “market.” …The Fed was, by the early 1980’s, making plain where its priorities were taking policy and why. Almost at the same moment the “supply side” of economics removed the Keynesian destructiveness from the mainstream the “demand side” had already re-entered the back door of the open Fed.
Once taking the technocratic reins, they have only increased the applications in exactly those terms – deciding, particularly through the Greenspan era, to “stabilize” not just minor bond market perturbations but whole asset markets and actually the entire economy. “Filling in troughs without shaving off the peaks” is exactly this kind of mission creep, where the Fed took it upon itself to “stabilize” the world, all done by monetary redistribution.
As if to emphasize this point beyond any of my own descriptive capabilities, by the time of the dot-com bubble, monetary models and modes of mathematical incorporation had turned back once more toward Keynesian thinking about the mechanics of the economy; the monetarists had not removed the “demand side”, far from it, they only changed the primary manner in which it was to be “stabilized”, going from taxes and treasuries to central banks and financial factors. The voodoo of technocratic redistribution had never actually disappeared, it went underground faking free markets.
I believe that is why we are starting to see another re-alignment at least in perceptibility. The Fed isn’t much fooling anyone about being dedicated to actual markets, at least not to the degree it was taken in the years before 2007. As it is, if you look closely, it has become quite openly hostile to them just as Samuelson and Solow were writing about in 1960. That is why I termed that period of the Great “Moderation” the third age of economic socialism because it was entirely redistribution in the monetary part that had taken over from the fiscal part which had so utterly failed as to be universally rejected in bipartisan fashion. But rather than give way to the free market rebirth as is commonly cited (again, how could free market discipline lead to not just a single asset bubble but rather a series of them globally?) it was just the same voodoo system with different actual incantations.
This political re-alignment is simply another view to what is certainly the end of that third age. Central banking has run itself aground and there isn’t much hiding anymore either that fact or the means by which it has been operating all this time. Hopefully we can yet get it right, that there won’t be any more underground subversion disposed of the same inevitable failings; markets actually work whereas technocracy only ends up with totalitarian (read: unresponsive) disruptiveness and decay. The argument for the technocratic approach, under more honest discussion, has always been that it might achieve less robust growth on the upswings but would be absent the violence and messiness of a purely market regime, a more stable and steady platform as an almost utopian piety.
By 2015, it is beginning to dawn quite widely that instead the redistribution in this form isn’t different at all from the last, delivering instead the same or worse violence and instability only without any of the economic growth. Already, the lines are being drawn in ways in which to go back exclusively to the 1960’s and 1970’s as if it has been markets the problem all along. Properly understanding what has happened is the only in which to understand how to break out of it.
- Dow Futures Plunge 240 Points As Oil Drops 4% Ahead Of China PMI
Just when you thought it was safe to listen to the stability-preaching talking heads, crude futures are sliding and US equity futures are tumbling as Asia opens. Worse still XIV (VIX inverse ETF) has tumbled to fresh lows with a 24 handle in the after-hours market, suggesting more downside for stocks. With all eyes on China PMIs – though, there is little need for a weak PMI to be present for China to unleash moar measures, and a strong PMI will be scoffed at – it seems, the end-of-month rip-fest is fading fast…
Oil is sliding back..
As Goldman explains,
within the context of the global oil market balance, rising OPEC and elevated non-OPEC ex. US production leave the global oil market still oversupplied with a decline in US production in 2016 increasingly likely to halt the build in inventories. For example, OPEC production rose by 485 kb/d between April and June as US production declined by 316 kb/d.
As a result, we reiterate our view that oil prices have to remain low, with our near-term WTI forecast of $45/bbl, to rebalance the oil market by late 2016
but US equity futures are tumbling… back to Thursday JPM crash levels…
Front-month VIX futures surge back to Monday's highs…
As XIV tumbles… well below the scene of Friday's crime…
And VXX nears Monday's flash-crash highs…
For if we learned one thing last week, it is the suddenly-illiquid ETF tail wagging the dog underlying assets that creates the big air pockets in today's markets.
Charts: Bloomberg
- Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To "Bloody Terror Film"
Late last week, Brazil officially entered a recession as the economy contracted 1.9% in Q2, a quarter in which Brazilians suffered through the worst stagflation in over ten years.
What was perhaps worse than the GDP print however, was budget data for July which was meaningfully worse than expected. “On a 12-month trailing basis the consolidated public sector recorded a 0.9% of GDP primary deficit in July, worse than the 0.6% of GDP deficit recorded in December and, therefore, increasingly distant from the new unimpressive +0.15% of GDP surplus target,” Goldman noted.
We summed the situation up as follows: “No primary surplus for you!”
And while analyzing LatAm fiscal policy doesn’t make for the most exciting reading in the universe, this particular budget battle is critical for a number of reasons, the most important of which is that Brazil’s investment grade credit rating might just depend on it and to the extent the country is forced to concede that it will not, after all, hit its primary surplus target this year, junk status could be just around the corner. Needless to say, if Brazil is cut to junk, that will do exactly nothing to help the country combat a bout of extremely negative market sentiment tied to Brazil’s rather prominent role in the great emerging market unwind.
Sure enough, government sources have now confirmed that embattled President Dilma Rousseff – whose political woes are making it nearly impossible to pass legislation designed to plug gaps – will now submit a 2016 budget proposal that projects a deficit. Here’s Bloomberg:
The Brazilian government will send to Congress Monday a budget proposal for 2016 that projects a primary deficit instead of the previously expected surplus, according to two government sources familiar with the matter.
President Dilma Rousseff had earlier abandoned the idea of reviving the so-called CPMF tax on financial transactions after a backlash from politicians and companies, said the sources, who asked not to be named because the negotiations aren’t public. The goal now is to send a budget proposal that is more aligned with the reality of a sharp economic slowdown, according to the sources.
Rousseff was alerted by Vice President Michel Temer in the past couple of days that the current political crisis would make it hard to convince the Congress to pass measures such as the CPMF tax. The government had planned to include the revenue collected from the tax in the budget proposal to be sent to lawmakers on Monday, one of the sources said. The president met with some ministers on Sunday to discuss the new budget proposal, according to the source.
Although, as one analyst told Reuters, “the rating agencies are trying to bend over backwards to give Brazil the benefit of the doubt,” there’s only so much they can do, especially considering the fact that no one likely wants to set a precedent of being behind the curve as we enter what may end up being an outright emerging markets crisis. And a bit more color from Bloomberg:
The government foresees a deficit next year excluding interest payments of 30.5 billion reais ($8.4 billion), or about 0.5 percent of gross domestic product, Budget Minister Nelson Barbosa told reporters in Brasilia on Monday. That compares with a target of 2 percent at the beginning of the year and a revised objective of 0.7 percent announced in July.
The revision reflects the growing political headwinds Finance Minister Joaquim Levy faces in winning congressional approval for austerity measures and pushes Brazil’s credit rating closer to junk status, said Italo Lombardi, senior Latin America economist at Standard Chartered Bank. The government over the weekend scrapped plans to revive a tax on financial transactions following opposition by congressional leaders.
“Politics are making Levy’s life very difficult,” Lombardi said by telephone. “It’s a big red flag and rating agencies would need to show a lot of patience to not downgrade Brazil.”
And that, as they say, is all she wrote for Brazil’s investment grade rating.
We’ll close with the following rather colorful analysis from Citi:
Morning Friends, A Nightmare on Elm Street – one of the scariest movies of my childhood, where Freddy Krueger (a burnt serial killer) used to haunt and execute his victims in their own nightmares, was the origin of asleep nights for many kids of my generation… Well, before I tell you the Nightmares on Via Palacio Presidencial (Brasilia) and what is keeping players asleep, let me voice you that as in any bloody terror film, the villain never dies and the sequels are worse than the initial film. So, the American villain (Fed September Lift-off) is alive, as Vice Chair Fischer suggested over the weekend, sounding less dovish than expected. Also, the Chinese anti-hero (fear of slow growth) never dies, with Korea`s Industrial Production bringing additional woes.
As the film says:
1&2 – Freddy’s coming for you!
3&4 – Better lock the door…
In the meantime, in our (un)beloved country, there is something scarier than Freddy Krueger: our growth / fiscal outlook. The Growth scenario is haunting and executing our policymakers, with limited ability to halt such negative vortex and took our economic team to revise our GDP forecast to -2.7% (-1.7% previous) in 2015 and to -0.7% (-0.2% prior) in 2016. Mr. Market will price a -3% GDP growth figure in 2015… This damaging growth scenario will undermine the political capability to implement any fiscal austerity measure and will undermine the already bloody fiscal situation. With no growth and no fiscal measures, the primary fiscal figure for 2015 & 2016 will be scarier than Freddy Krueger & Jason together… Our view is that the 2015 primary fiscal print will be a deficit of -0.7% GDP (-0.3% previous) and -0.1% GDP (+0.3% prior) deficit in 2016. Wires are mentioning that the government will send a draft budget proposal with a primary DEFICIT of 0.50% GDP (+0.70% primary SURPLUS target), with the proposal of reintroduction of the financial tax transaction being defeated and President Dilma not approving further spending cuts. The Nightmares on Via Planalto Presidencial must be keeping a lot of kids asleep.
Rates are trading 10/51bps wider on back of such bloody fiscal news as Players are pricing the downgrade from the Investment Grade level before year end. As the film says:
1&2 – Freddy’s coming for you!
3&4 – Better lock the door…
- Unusually Massive Protests Erupt in Japan Against Forthcoming "War Legislation"
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
In case you aren’t up to speed on your Japanese history, the nation’s post WWII Constitution prohibits military action unless it’s in self-defense. Clearly a sensible approach, which is why the current Japanese government, led by the demonstrably insane and incompetent Prime Minister Shinzo Abe, wants to get rid of it.
This story is very important. Not only will this action increase the likelihood of World War III in the Far East, but it’s another important example of a government acting against the will of the people.
Polling has indicated the Japanese public is against a pivot toward militarization and war, but Prime Minister Shinzo Abe is pushing forward nonetheless. In fact, the current legislation to allow overseas military intervention has already passed the lower house of government. This prompted many Japanese to emerge from their decades long political apathy and get out into the streets. It’s estimated these protests were the largest in recent memory.
The AP reports:
TOKYO (AP) — Mothers holding their children’s hands stood in the sprinkling rain, some carrying anti-war placards, while students chanted slogans to the beat of a drum against Prime Minister Shinzo Abe and his defense policies.
Japan is seeing new faces join the ranks of protesters typically made up of labor union members and graying leftist activists. Tens of thousands filled the streets outside Tokyo’s parliament on Sunday to rally against security legislation expected to pass in September.
“No to war legislation!” “Scrap the bills now!” and “Abe, quit!” they chanted in one of the biggest protests in recent memory. The bills would expand Japan’s military role under a reinterpretation of the country’s war-renouncing constitution.
In Japan, where people generally don’t express political views in public, such rallies have largely diminished since often-violent student protests in the 1960s.
The demonstrations started earlier this year and grew sharply after July, when Abe’s ruling coalition pushed the legislation through the more powerful lower house despite polls showing a majority of Japanese were opposed.
Just like in Greece, the Japanese public is rapidly being forced to come to grips with the fact that their opinions don’t matter and they are politically irrelevant. Of course, this is also the case in these United States. Recall: New Report from Princeton and Northwestern Proves It: The U.S. is an Oligarchy
A group called Mothers Against War started in July and gained supporters rapidly via Facebook. It collected nearly 20,000 signatures of people opposed to the legislation which representatives tried unsuccessfully to submit to Abe’s office last Thursday.
The security bills would permit the military to engage in combat for the first time since World War II in cases of “collective defense,” when Japan’s allies such as the U.S. are attacked, but Japan itself is not.
Abe’s government argues that the changes are needed for Japan to respond to a harsher security environment, including a more assertive China and growing terrorist threats, and to fulfill expectations that it will contribute more to global peacekeeping.
…and to distract a disillusioned population from the disastrous economic policies of its government. Recall from earlier this year:
and…
The Stock Market Myth and How the Japanese Middle Class is on the Precipice Thanks to AbenomicsThe topic has become almost a regular item in women’s magazines, traditionally known more for covering entertainment, beauty, health, food and the Imperial family.
Takashi Watanabe, a deputy editor-in-chief of Shukan Josei (Ladies Weekly), said there has been a growing appetite for social issues among readers, especially since Fukushima.
This is a great sign for Japan. However, when will Americans emerge from their political slumber? Will it take several decades of economic decay such as in Japan?
About half a century ago, 300,000 students, many of them Marxist ideologues, staged violent protests, repeatedly clashing with police, over revising the U.S.-Japan security treaty. Those protests played a role in driving Abe’s grandfather, then-Prime Minister Nobusuke Kishi, out of office after his government approved the revision.
Apparently, they love failed political dynasties in Japan as well.
“I’m afraid the legislation is really going to reverse the direction of this country, where pacifism was our pride,” said a 44-year-old architect who joined Sunday’s rally with her 5-year-old son. “I feel our voices are neglected by the Abe government.”
You’re not the only one…
Of course, when it comes to Japan this has been a long time coming. Recall the following published in 2013:
War on Democracy: Spain and Japan Move to Criminalize Protests
How Japan’s “Stealth Constitution” Destroys Civil Rights and Sets the Stage for Dictatorship
Democracy is dead. Globally. If we fail to bring it back, history will see us as one of the most inept and spineless generations in history.
- How China Cornered The Fed With Its "Worst Case" Capital Outflow Countdown
Last week, in “What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse,” we took a look at the potential size of the RMB carry trade, noting that according to BofAML, the unwind could, in the worst case scenario, be somewhere on the order of $1 trillion.
Extrapolating from that and applying Citi’s take on the impact of EM reserve drawdowns on 10Y UST yields (which, incidentally, is based on “Financing US Debt: Is There Enough Money in the World – and at What Cost?“, by John Kitchen and Menzie Chinn from 2011), we noted that potentially, if China were to use its FX reserves to offset the pressure on the yuan from the unwind of the great RMB carry, the effect could be to put more than 200bps of upward pressure on the 10Y yield.
Going farther, we also said that $1 trillion in FX reserve liquidation by the PBoC would essentially negate around 60% of QE3. In other words, China’s persistent FX interventions amount to reverse QE or, as Deutsche Bank calls is “quantitative tightening.”
Now, SocGen is out with a description of China’s “impossible trinity” or “trilemma”. Here’s the critical passage:
The PBoC is caught in an awkward position: not letting the currency go requires significant FX intervention that will not prevent ongoing capital outflows but which will result in tightening domestic liquidity conditions; but letting the currency go risks more immense capital outflow pressures in the immediate short term, external debt defaults and possibly further domestic investment deceleration. Furthermore, it has to consider the painful repercussions globally that could result from any sharp RMB depreciation.
In other words, because the new currency regime looks to have paradoxically created a situation where the market will play less of a role in determining the exchange rate for the yuan, China will be stuck liquidating its reserves and offsetting that resultant liquidity drain with reverse repos, RRR cuts, and a mishmash of short- and medium-term lending ops which, to the extent they’re seen as net easing, will only exacerbate pressure on the yuan, necessitating still more interventions in a very non-virtuous loop until such a time as the PBoC either runs out of assets to sell or else throws in the towel and moves to a free float which would likely trigger an all-out short-term panic.
Well, that’s not entirely true. Everything could suddenly be “fixed”, or, as SocGen describes it, “for the RMB to appreciate compared to its current value (6.40) will require a very positive environment for EM coupled with a cessation of capital outflows and a vibrant cyclical growth and an export recovery.”
Since it’s difficult to imagine a situation that’s further from what’s currently playing out across emerging economies, we can rule that out, and because even if China can manage to mitigate outflows by “temporarily tighten[ing] (the implementation of capital controls,” solving the puzzle here will, to quote SocGen again, “still entail large-scale FX intervention,” we can move straight to a consideration of how dramatic the FX reserve liquidation may ultimately be. Here’s SocGen’s three scenarios:
Logically, we should first make assumptions about the PBoC’s tolerance for currency volatility and FX reserves drawdown. However, practically, it still helps to envision likely scenarios of capital outflows and reverse-engineer the amount of FX reserves needed. We present a few scenarios over a one-year time horizon to gauge possible reserve usage.
- Base case: Current account surplus of $280bn over the next four quarters plus capital outflows (FDI + portfolio + other + NEOs) that are 50% greater than the previous year ($560bn) would equate to the PBoC needing to use $280bn of reserves over the next twelve months if it wanted to stabilize the RMB.
- Moderately bad case: Current account surplus falls by 50% ($150bn) and capital outflows accelerate by a factor of two compared to the previous year ($750bn). The PBoC would need to absorb $600bn in outflows if its goal was no further RMB depreciation
- Worst case: Foreigners exit all cumulative portfolio investment from the past five years ($260bn), five years worth of cumulative foreign inflows into trade credit/loans/deposits are reversed ($530bn), and locals accelerate outflows by a factor of two ($400bn). There could be $1.2trn in outflows. If the current figure halved over the next year to $140bn, net outflows would be around $1.04trn. There would be hardly any money left to leave after this, and the PBoC would be left with a meagre $2.5trn in reserves (chart 18).
Or, visually:
The chart above is important: what it shows is that not only is the Fed trapped in a corner domestically, on one hand dreading the launch of the tightening cycle (as can be seen by the endless drama and dithering about whether or not to hike rates) which will not only unleash even more asset selling and in the process tighten financial conditions even more, thus limiting what little inflationary impulse exists in the economy, while on the other risking complete loss of confidence if it were to postpone or cancel the tightening cycle, but now it is also trapped internationally, courtesy of China’s August 11 announcement of its currency devaluation, which has started a T-minus 365 day countdown on the Fed’s successful conclusion of its monetary policy implementation.
Furthermore, as SocGen explains vividly, the potential outcomes for China from this point on, are bad, worse and worst, and since China’s recent “success” in effectively controlling its housing, credit, and last but not least, its stock market bubble, has demonstrated a worst case scenario is almost certainly the most probable one, what the above analysis means, is that while the Fed may be hoping for the best and expecting an even better outcome, the “reverse QE” that China launched less than three weeks ago, will make the Fed’s job that much more difficult as its presents not only a timing constraint to Fed policy, but a monetary one as well in the form of what Deustche Bank dubs “Quantitative Tightening.”
In fact, one can argue that since there is no way resolve China’s “impossible trinity” of pursuing a stable exchange rate, an open capital account and an independent interest rate policy all at the same time, the worst case scenario is very likely an optimistic one. This means that as the Fed debates whether or not to hike, and how much, the acceleration in Chinese capital outflows starting on August 11 has set the path for the Fed, and at this point any incremental delay in hiking merely adds more to the already vast cross-capital and currency confusion around the globe. However, no longer is the Fed’s quandary open ended: with every passing day, China is suffering incremental tens of billions in capital flight, in reserve liquidation, and thus, tighter global financial conditions, as can be expected from the unwind of the world’s largest depository of USD-denominated reserves.
Finally, what all of this really means, is that having pushed China to the point of dissociating itself from the USD peg officially, the more the Fed tightens, the more China will have to push back through devaluation or otherwise, and the more capital outflows it will be subject to, thereby amplifying the Fed’s tightening posture around the globe. In this very unstable arrangement, suddenly the smallest policy error will reverberate exponentially, and result in the only possible outcome: the Fed’s admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque “helicopter money” episode.
In even simpler terms: China has just cornered the Fed: not just diplomatically, as observed when China’s PBOC clearly demanded that Yellen’s Fed not start a rate hiking cycle, but also mechanistically, as can be seen by the acute and sudden selloff across all asset classes in the past 3 weeks. Now Yellen has about 365 days or so to find a solution, one which works not only for the US, but also does not leave China a smoldering rubble of three concurrently burst bubbles. Good luck.
- China Rocked By Another Massive Chemical Explosion
Seriously, what the f##k is going on over there?
- *BLAST SEEN IN CHEM. IND. ZONE IN SHANDONG, CHINA: PEOPLES DAILY
This is the second explosion in Shandong, which both follow the huge and deadly explosion in Tianjin.
We’ll await the details which we imagine will suggest that, as was the case in Tianjin, many more tonnes of something terribly toxic were stored than is allowed under China’s regulatory regime which apparently only applies to those who are not somehow connected to the Politburo.
After the last Shandong explosion, The People’s Daily reported that the plant contained adiponitrile, which the CDC says can cause “irritation eyes, skin, respiratory system; headache, dizziness, lassitude (weakness, exhaustion), confusion, convulsions; blurred vision; dyspnea (breathing difficulty); abdominal pain, nausea, [and] vomiting.”
Breaking: A blast seen and heard in a chemical industry zone in Lijin, Dongying City of Shandong around 23:25 Mon. pic.twitter.com/Yi29nJXEuX
— People’s Daily,China (@PDChina) August 31, 2015
Sur #weibo, série de clichés de l’explosion de #Shandong pic.twitter.com/TFk8w6daZz
— Breaking3zero (@Breaking3zero) August 31, 2015
This clip has just been posted to a Weibo account – reportedly showing tonight’s explosion (we are unable to confirm it this is the most recent or the previous Shandong explosion although that was more twlight than dead of night).
- Monday Humor: Go 'West' Young Men
First Trump, now this…!?
h/t @MaxwellStrachan
Relive the moment…
Get More:
…and read on for the full transcript below:
“Bro. Bro! Listen to the kids. First of all, thank you, Taylor, for being so gracious and giving me this award this evening.
And I often think back to the first day I met you also. You know I think about when I’m in the grocery store with my daughter and I have a really great conversation about fresh juice… and at the end they say, ’Oh, you’re not that bad after all!’ And like I think about it sometimes. … It crosses my mind a little bit like when I go to a baseball game and 60,000 people boo me. Crosses my mind a little bit.
And I think if I had to do it all over again what would I have done? Would I have worn a leather shirt? Would I have drank half a bottle of Hennessy and gave the rest of it to the audience? Ya’ll know ya’ll drank that bottle too! If I had a daughter at that time would I have went on stage and grabbed the mic from someone else’s? You know, this arena tomorrow it’s gonna be a completely different setup. Some concert, something like that. The stage will be gone. After that night, the stage was gone, but the effect that it had on people remained.
The … The problem was the contradiction. The contradiction is I do fight for artists, but in that fight I somehow was disrespectful to artists. I didn’t know how to say the right thing, the perfect thing. I just … I sat at the Grammys and saw Justin Timberlake and Cee-Lo lose. Gnarls Barkley and the FutureLove … SexyBack album … and Justin, I ain’t trying to put you on blast, but I saw that man in tears, bro. You know, and I was thinking, like, ’He deserved to win Album of the Year!'”
And this small box that we are as the entertainers of the evening … How could you explain that? Sometimes I feel like all this s–t they run about beef and all that? Sometimes I feel like I died for the artist’s opinion. For artists to be able to have an opinion after they were successful. I’m not no politician, bro!
Look at that. You know how many times MTV ran that footage again? ’Cause it got them more ratings? You know how many times they announced Taylor was going to give me the award ’cause it got them more ratings? Listen to the kids, bro! I still don’t understand awards shows. I don’t understand how they get five people who worked their entire life … sold records, sold concert tickets to come stand on the carpet and for the first time in they life be judged on the chopping block and have the opportunity to be considered a loser! I don’t understand it, bruh!
I don’t understand when the biggest album, or the biggest video … I’ve been conflicted, bro. I just wanted people to like me more. “But f–k that, bro! 2015! I will die for the art! For what I believe in. And the art ain’t always gonna be polite! Ya’ll might be thinking right now, ’Did he smoke something before he came out here?’ The answer is yes, I rolled up a little something. I knocked the edge off!
I don’t know what’s gonna happen tonight, I don’t know what’s gonna happen tomorrow, bro. But all I can say to my artists, to my fellow artists: Just worry how you feel at the time, man. Just worry about how you feel and don’t NEVER … you know what I’m saying? I’m confident. I believe in myself. We the millennials, bro. This is a new mentality. We’re not gonna control our kids with brands. We not gonna teach low self-esteem and hate to our kids. We gonna teach our kids that they can be something. We gonna teach our kids that they can stand up for theyself! We gonna teach our kids to believe in themselves!”
If my grandfather was here right now he would not let me back down! I don’t know I’m fittin’ to lose after this. It don’t matter though, cuz it ain’t about me. It’s about ideas, bro. New ideas. People with ideas. People who believe in truth. And yes, as you probably could have guessed by this moment, I have decided in 2020 to run for president.”
* * *
If you thought Kanye West’s declaration that he would run for president in 2020 was a joke, guess again. As MediaEqualizer reports,
A Maryland Republican has already registered a pro-West committee with the federal government, Ready For Kanye. Eugene Craig III of White Marsh (shown above) submitted paperwork to the Federal Election Commission this morning and was given FEC Committee ID number C00585596:
The rapper made the announcement during last night’s VMA Awards.
Mr Craig has set up a Ready For Kanye Facebook page, which has attracted just four likes so far but is sure to grow from here.
Two T-shirt designs are featured there as well, appearing to have heavily borrowed from past campaigns including Mitt Romney’s in 2012:
Craig is the Third Vice Chair of the Maryland Republican Party and Executive Director of The Bulldog Collegian.
We asked Craig whether West would run as a Republican and why his candidacy should be taken seriously and are awaiting a response.
* * *
Crazy or not, West, 38, scored the award show's top hashtag, #Kanye2020, according to social analytics company NetBase. The show became the most-tweeted television program since Nielsen began tracking Twitter TV activity in 2011, with some 21.4 million tweets sent in the United States alone.
- Stocks Suffer Biggest Monthly Drop In Five Years As Oil Spikes Most Since 1990
Only one thing for it really…
Forget stocks, today was all about crude oil again…
WTI pushed into the green for August!!!
3 Bear markets and 3 Bull markets now in 2015 so far… perfectly tagging the 50-day moving-average today…
This is the biggest 3-day rise in WTI since 1990!!
Oil Volatility and credit markets were not squeezed into euphoria at all…
Trade accordingly!!
* * *
Having got that out of the way…Dow's worst monthly drop since May 2010..
and had an ugly close…
Stocks got some lift from the momo-igniters -but once NYMEX closed, it was over. Stocks traded in a relatiovely narrow range glued to VWAP after the overnight plunge… Small Caps outperformed as Nasdaq Underporformed…
But were glued to VWAP all day… on no volume
Futures markets giveus a better idea of the moves…NOTE -0 this is from the beginning of Friday's pathetic EOD ramp…
Once again complete chaos on VIX ETFs…
VIX had its biggest monthly jump in history…
For the month, it's been a wild ride!! but just look at how clustered the moves were…
Finacials & Enmergy and Healthcare (Biotech) were worst performers in August…
For all the excitment over FANG – August was a mixed bunch for them with FB and AMZN notably red…
With all the craziness in stocks, Treasury yields at the long-end ended the month practically unch… 2Y rose 8bps…
With some more notable weakness today (which was also seen in Bunds)…note once again selling weas in US session, buying in Asia and Europe…
The USD ended the day lower with some major swings in CAD…
As August's USD Index drop was the biggest in 4 months…
Commodities were insane today – led obviously by crude!
And on the month… perhaps most notably, the perfect recoupling of crude and gold on the month!!??
But we note that Gold (+3.5%) had its best month since January even as Silver dropped
Finally – amid all the chaos in August, it appears there is a safe-haven… Gold outperforms
Charts: Bloomberg
Bonus Chart: We're gonna need Moar QE…
- Preparing For A Potential Economic Collapse In October
Submitted by Jeff Thomas via InternationalMan.com,
There’s no question that the world economy has been shaky at best since the crash of 2008.
Yet, politicians, central banks, et al., have, since then, regularly announced that “things are picking up.” One year, we hear an announcement of “green shoots.” The next year, we hear an announcement of “shovel-ready jobs.”
And yet, year after year, we witness the continued economic slump. Few dare call it a depression, but, if a depression can be defined as “a period of time in which most people’s standard of living drops significantly,” a depression it is.
Many people are surprised that no amount of stimulus and low interest rates have resulted in creating more jobs or more productivity. Were they a bit more cognizant of the simple, understandable principles of classical economics (as opposed to the complex theoretical principles of Keynesian invention), they’d recognise that, when debt reaches the level that it cannot be repaid, a major re-set of some sort must take place.
The major economies of the world have reached and exceeded that point and the debt problem is no mere anomaly that can be papered over. It is, instead, systemic. There must be a major forgiveness of debt, a default, or an economic collapse, or some combination of the three.
And so, those who recognise the inevitability of such an event have been storing their nuts away in preparation for an economic winter.
Those of us who warned of the 2008 crash in advance had been regarded as economic “Chicken Littles.” After the crash, we were largely resented as having made a “lucky guess.” Following that time, a moderate amount of credence has been allowed us, as we’ve recommended investments in real estate and precious metals (outside of those jurisdictions that are most at risk). However, since the Great Gold Correction (2011-2015), that begrudging credence has worn away and been replaced with renewed contempt.
To the naysayers, the 2001-2011 gold boom has been relegated to the investment dustbin and, to most punters, gold is clearly “over.”
Just as importantly, the most significant events of the “Greater Depression” that we had been predicting have clearly not yet come to pass. They’re still ahead of us. And, in this, we must confess that those of us who made this prediction did unquestionably believe that it would have taken place by now. We were wrong.
Or at least we were wrong on the timing, but most of us still believe, more than ever, in the inevitability of a collapse (again, this is true because the problem is systemic, not symptomatic).
All of the above is a preface of the coming of October, a month which, historically, has seen more than its fair share of negative economic events.
This time around, there are warning signs aplenty that, sometime around October of this year, we shall see a number of black swans on the wing, headed our way.
The greatest of these is that, once every five years, the International Monetary Fund (IMF) renews its membership structure (SDR quota, governors, and voting power.) This is significantly in question this year, as China vies for a larger chair at the table.
Although China surpassed the US in 2014 as the world’s largest manufacturing economy, it still has less than one-quarter of the voting power of the US and even has less than France or Germany. To say the IMF has been dragging its feet on a rebalancing of IMF member voting would be an understatement.
In fairness, China should expect to be allotted significantly greater voting power in October. But we are discussing the IMF, which has never been known for fairness. It has, indeed, been infamous for its duplicity and self-serving inclinations (having been created at Bretton Woods in 1944 to allow the US hegemony over the world economy, its primary purpose is to assure US dominance).
Still, it would be difficult to imagine how the IMF could avoid a shift in its voting (diminishing the US and increasing China). Anything the IMF did at this point to derail the re-balance would be highly suspect.
And yet, that’s exactly what the IMF has done. It has publicly questioned whether 2015 is the right year for the review. However, even it is worried enough about its presumptuousness that, rather than announce a delay, it has announced the consideration of a delay. It has run the possible delay up the flagpole to see whether it will fly or be torn down.
Clearly the IMF feels it’s on shaky ground with its proposal. And it should be. In recent years, it has arrogantly pushed China away from the IMF table time after time, so the Chinese have taken matters into their own hands. They’ve created their own international development bank, their own worldwide cable communication system, and even their own SWIFT system.
Very soon, they’ll have the ability to run their own worldwide economic system, independent of the US/EU/IMF system. Early on, many of the world’s governments recognised the future opportunities that this would bring to the world. First, Russia and the countries of Southeast Asia signed on, then South America, Africa, and, finally, some EU countries reached agreements with China.
The IMF is in a jam, no member country more so than the US. If, in October, it allows China greater voting power, it will cast in stone China’s increased economic influence over the world. However, if the IMF chooses to put off China another year, China may move ahead with its own economic system.
Buying Time
There can be no doubt that the IMF is hoping to buy time. The question is whether it merely wishes to buy time to delay the inevitable, or whether it feels it has a card up its sleeve that it might be able to play, should it gain another year.
If the US is arrogant (as it generally is), it’ll employ its customary bravado and, in so doing, may well cause the Chinese to play hardball and dump some of their US Treasuries and/or dollars.
In considering the above, the US/IMF may feel that China is in the throes of a major correction at present and cannot retaliate without feeling the pain itself. They’d be correct. And so, the Chinese, known for being patient and choosing their moment carefully, may choose to swallow the IMF delay quietly, then, when they’ve dumped some of their baggage and possibly rebounded in 2016, make an even firmer stand than they could now make. For that reason, US arrogance now would create a very short-lived gain, and a very foolish one.
So, what does this mean to the investor? It suggests that, once again in history, October promises to be a month when great economic change may well take place. When dramatic change looms, it’s best to keep your powder dry, whilst keeping an eye open for opportunities as soon as events reveal the future. Until then, nut–gathering serves to provide an insurance policy against unpleasant economic surprises.
- Recession Odds Surge To 47%, Highest Since 2011
Once upon a time, when the market actually discounted the future path of the economy instead of being a lagging indicator to not only underlying macroeconomic conditions…
… or simply frontrunning central bank policy, economists would use it to anticipate key economic inflection points such as recessions and recoveries. Which is also why the recent correction in the market has spooked all those conventional economists who still believe there is a “market” instead of a centrally-planned “wealth effect” policy tool, whose only purposes is to react to every increase in the global $14 trillion central bank balance sheet.
It is these economists, which also include the academics on the Fed’s staff, who took one look at the tumble in stocks in the past two weeks and decided that a rate hike may not be such a hot idea after all. Because if the market is sliding, it surely is telegraphing that not all is well with the economy and therefore tightening financial conditions would be suicidal for any central bank.
So assuming that after being wrong for 7 years about everything, economists are actually right about the market still having some discounting abilities left, what then is the market telegraphing? The answer, according to the Bank of America: the biggest surge in recessionary odds since 2011, which over the past few days have nearly hit a 50% probability of an economic slowdown.
BofA explains:
Recession probability from stock prices shoots higher: The more interesting and difficult question is whether the equity correction is signaling a deeper economic malaise. Equity prices can be leading indicators of recession. Indeed, Michael Hanson has developed a variety of probit models that use financial variables to estimate the risk of a recession. According to his model, the 15% annualized drop in the S&P500 index (over the past six months) is signaling a 47% risk of recession starting sometime in the next 12 months. That sounds fairly grim; however, we wouldn’t take the signal too literally. As Paul Samuelson famously quipped in the late 1960s: “The stock market has called nine of the last five recessions.” Our probit model sends a lot of false signals. For example, in 2011 the model saw a 59% chance of recession (which we argued strongly against at the time).
Here is the chart that BofA has created to track coincident recession odds based on market signals:
Actually BofA is dead wrong about 2011 being a false positive: the only thing that delayed the 2011 recession, was the Fed’s launch of Operation Twist in September of that year, coupled with the Fed’s liquidity swap line bailout of Europe in November, and the commencement of the ECB’s massive €1 trillion LTRO in December 2011. It was this liquidity avalanche that delayed the effects of what was a guaranteed recession, one which even the ECRI called.
Delayed but not eliminated, and with every passing year that the world’s central banks have kicked the can of the global business cycle’s down phase, the more acute it will be when it finally launches.
Finally, unlike 2011 this time not only is the Fed not planning any pro-cyclical liquidity interventions, but Yellen is actively considering tightening monetary conditions as soon as September with the start of the first rate hiking cycle in nearly a decade.
Which is why while the market may or may not be correctly discounting a recession this time, or anything else for that matter, an economic recession is precisely what is coming, just because every single time when financial conditions were as adverse as they are now, the Fed would proceed to bailout if not the economy, then certainly the “market.”
- Sep 1 – Global Stocks Extend On Rout
Follow The Market Madness with Voice and Text on FinancialJuice
EMOTION MOVING MARKETS NOW: 14/100 EXTREME FEAR
PREVIOUS CLOSE: 14/100 EXTREME FEAR
ONE WEEK AGO: 3/100 EXTREME FEAR
ONE MONTH AGO: 20/100 EXTREME FEAR
ONE YEAR AGO: 42/100 FEAR
Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 26.67% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
Market Volatility: FEAR The CBOE Volatility Index (VIX) is at 28.43, 71.89% above its 50-day moving average and indicates that investors are concerned about the near-term values of their portfolios.
Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.
PIVOT POINTS
EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY
S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)
EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)
MEME OF THE DAY – I JUST LOVE MY NEW SWEATER
UNUSUAL ACTIVITY
MU SEP 20 CALL ACTIVITY @$.11 on OFFER 2400+ Contracts
FAST SEP 38 PUT ACTIVITY ON OFFER @$.70 2500+ Contracts
TWTR DEC 50 CALLS 1500+ @$.15 .. also activity in the DEC 40 calls
APLE EVP, Chief Legal Counsel P 5,592 A $ 17.88
MTZ 10% Owner Purchase 10,000 A $15.98 and Purchase 5,000 A $15.63
HEADLINES
OIl Surges as OPEC Stands Ready To Talk Other Producers
US EIA Reports Decline In Monthly Oil Output
G20 Said To Not See Currency War As Major Issue
US Chicago PMI (Aug): 54.4 (est. 54.5, prev. 54.7)
US Dallas Fed Manufacturing Activity (Aug): -15.8 (est. -3.8, prev. -4.6)
Global Stocks Extend On Rout Seen Through August
Europe: stocks cap worst month since 2011 with drop
Apple, Cisco Unveil Business Partnership
Google, Sanofi join forces on Diabetes monitoring and treatment
GOVERNMENTS/CENTRAL BANKS
G20 Said To Not See Currency War As Major Issue –BBG
No ‘viable’ alternative to QE seen for the ECB –Reuters poll
Greece’s ‘invisible negotiator’ may assuage bailout fears in election run-up –Rtrs
FIXED INCOME
German and US Bonds Drop as Inflation Expectations Show Recovery Sign –BBG
ECB Bought EUR 1.937Bln Under Covered Bond Programme –ECB
ECB Sold EUR 106mln under ABS purchase programme –ECB
ECB Bought EUR 9.776bln under public sector purchase programme –ECB
CURRENCIES, COMMODITIES, METALS
Oil ends up 8.8%, at $49.20 a barrel; highest since July 21 –CNBC
OPEC stands ready to talk to other producers about market –ForexLive
Oil futures spike sharply higher after EIA reports monthly output declines –MktWatch
Citi: Crude price rally to be short-lived; prices should post another fresh leg lower – RTRS
USD: Euro, yen on track to post monthly gains vs. dollar –MarketWatch
GBP: Pound Slips Near 3-Mth Low Against USD –WBP
EUR: Buck Lacks Momentum After Unremarkable Chicago PMI –WBP
JPY: Dollar Pares Morning Losses Amid Momentum Struggle –WBP
Gold Prices Fall as Traders Mull U.S. Monetary Policy –WSJ
EQUITIES
Global Stocks Extend August Rout–BBG
Europe: stocks cap worst month since ’11 with a drop –FT
China funds cut equity allocations to lowest on record- Reuters Poll
Google, Sanofi join forces on Diabetes monitoring and treatment –MktWatch
Apple, Cisco Unveil Business Partnership –WSJ
Netflix passes on Epix content deal, Hulu steps in –MktWatch
Fiat Chrysler’s Marchionne says ‘unconscionable’ to give up on GM deal –Rtrs
Fiat Chrysler US is recalling approx. 206K vehicles –Detroit News
GT Advanced Technologies to cut staff, operating expenses by about 40% –MktWatch
Pemex Investors Face Crude Reality With Credit Downgrade Threat –BBG
EMERGING MARKETS
China eases housing investment rules again to boost economy –Rtrs
China Markets End Volatile August in Continued Slide –BBG
Argentine Central Bank Assets Can?t Be Seized by Bondholders –BBG
- If The Fed Is Always Wrong, How Can Its Policies Ever Be Right?
Submitted by Ralph Benko via Forbes.com,
One of the most curiously persistent surrealisms of Washington, DC is the reflexive deference given the Federal Reserve System. The Washington elite tends to accord more infallibility to the Fed than do Catholics the Pope.
Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui:
“The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.”
Even the government’s official budget forecasters are dubious of the Fed’s own forecast.
This is a theme that Mui has touched on before. In 2013, she wrote Is the Fed’s crystal ball rose-colored?:
The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized. In January 2011, Fed officials predicted that GDP would grow around 3.7 percent that year. It clocked in at 2 percent. In January 2012, they anticipated growth of about 2.5 percent. We ended up with 1.6 percent.
To give Ms. Mui’s competition its due, Dr. Richard Rahn at the Washington Times last April crisply noted:
The Federal Reserve had forecast the U.S. economy to grow about 4 percent near the beginning of each year for the last five years. But during each year, the Fed was forced to reduce its forecast until it got to the actual number of approximately 2 percent. (Other government agencies have been making equally bad forecasts.) These mammoth errors clearly show that the forecast models the official agencies use are mis-specified and contain incorrect assumptions.
What’s going on here?
A good bet would be that there’s a problem with the Fed’s reliance on an arcane art. This art is designated “Dynamic Stochastic General Equilibrium” modeling.
Sound scientific? Well.
With admirable intellectual honesty an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, Marco Del Negro, Wharton Ph.D. student Raiden Hasegawa and University of Pennsylvania professor of economics Frank Schorfheide (speaking for themselves and not the Fed) open a two part analysis at the NY Fed’s own excellent Liberty Street Economics, Choosing the Right Policy in Real Time (What That’s Not Easy):
Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened.
The authors go on to conclude in the second part of their analysis:
In the end, we have shown that policy analysis in the very oversimplified world of DSGE models is a pretty difficult business. Contrary to what it may sometimes appear from listening to talking heads, deciding which policy is best is very rarely a slam dunk.
Dynamic Stochastic General Equilibrium modeling sure sounds amazing. That said let’s be blunt. If NASA suffered from comparable inaccuracy the manned spaceflight program would have been shut down by an endless series of Challenger-type catastrophes many years ago. With monetary forecasts this bad is it any wonder the American economy continually crashes and burns?
As I have noted before, yet it bears repeating, Prof. Reuven Brenner powerfully has called our current system to account:
[M]acro-economics is now [astrology’s] modern incarnation: Only instead of stars, macro-economists look at “aggregates” gathered religiously by governments’ statistical agencies – never mind if the country has a dictatorial regime, be it left, right or anything in between, or has large black markets, as Italy and Greece do, where tax evasion has long been the main national sport. So let us first forget about this “macro” stuff, whose beginnings are almost a century old, and offer a simple alternative for shedding light on the situation today and on possible solutions, hopefully demolish this modern pseudo-”science” once and for all.
Classical liberal economist Axel Kaiser anticipated this line of argument in his book Intervention and Misery: 1929 – 2008 by calling for the “end of the mystery [which] implies the end of the witch doctors and the definite defeat of the economic astrology that has prevailed in recent decades.”
This line of criticism, while apparently alien to the Fed, is nothing new. Hayek, in his Nobel Prize acceptance speech The Pretence of Knowledge tartly observed:
We have indeed at the moment little cause for pride: as a profession we have made a mess of things.
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.
That said, nobody, not even the great Hayek, nailed the problem better than did Hans Christian Anderson in The Emperor’s New Clothes:
One day, two rogues, calling themselves weavers, made their appearance. They gave out that they knew how to weave stuffs of the most beautiful colors and elaborate patterns, the clothes manufactured from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.
“These must, indeed, be splendid clothes!” thought the Emperor. “Had I such a suit, I might at once find out what men in my realms are unfit for their office, and also be able to distinguish the wise from the foolish! This stuff must be woven for me immediately.”
…
And now the Emperor himself wished to see the costly manufacture, while it was still in the loom. …
“Is not the work absolutely magnificent?” said the two officers of the crown, already mentioned. “If your Majesty will only be pleased to look at it! What a splendid design! What glorious colors!” and at the same time they pointed to the empty frames; for they imagined that everyone else could see this exquisite piece of workmanship.
“How is this?” said the Emperor to himself. “I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor?
…
So now the Emperor walked under his high canopy in the midst of the procession, through the streets of his capital; and all the people standing by, and those at the windows, cried out, “Oh! How beautiful are our Emperor’s new clothes! …
“But the Emperor has nothing at all on!” said a little child.
If the Fed is making policy based on consistently wrong predictions how good can its policy consistently be? If its forecasts consistently are wrong — as now is undeniable — on what is it basing policy? Guesswork (more pretentiously phrased as “discretion”)?
America deserves some candor. A frank admission of “guesswork” — even educated guesswork — would better our understanding of why American workers have been for the past 15 years, and are today, engaged in painful belt-tightening. And, forgive the heresy, just maybe there is a better way than guesswork.
Ylan Mui is, as she ought to be, far too politic to be so blunt. Thus it falls to me, in my role as the simpleton on this beat, to declare: The Emperor has no clothes.
I’d welcome being set straight if the Board of Governors is prepared to contest this simpleton. Surely Chair Yellen or Vice Chair Fischer — both first rate economists and authentically honorable public servants — will support the Brady-Cornyn Centennial Monetary Commission legislation lately approved by Chairman Hensarling’s House Financial Services Committee.
So let the Fed set me straight by entering the beautiful canopy of this Commission to make the case for the exceptional beauty of its handiwork. If, rather, the Fed raises objections to a Commission (to which it will appoint an ex officio commissioner)… perhaps my declaration is not, after all, that of a simpleton. In the event of Fed opposition Congress should be even more eager to enact this Monetary Commission.
I say the Emperor has no clothes. If clad, high time to parade their exceptional beauty.
Pass the Centennial Monetary Commission. Let’s see the Emperor’s clothes.
- When Every Option In The Financial System Is Grounded In Absurdity, It's Time To Look Elsewhere
Submitted by Simon Black via SovereignMan.com,
If you’ve ever picked up a copy of The Economist magazine, you’ve probably heard of the Big Mac Index.
This is an interesting tool where a bunch of reporters from around the world are forced to go into McDonalds and find out the price of a Big Mac in local currency.
In Santiago, Chile, for example, a Big Mac runs 2,100 Chilean pesos, which is around $3. Meanwhile the average price for a Big Mac in the United States is $4.79.
This suggests that the US dollar is substantially overvalued against the Chilean peso.
It’s the same story across most of the world. In Russia, a Big Mac costs 107 rubles, which is just over $1.50.
The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world.
There are some subtle differences, but McDonalds generally serves the same pink foam disguised as beef wherever you go. So in theory it should all cost the same.
When a Big Mac is too cheap or too expensive, this suggests that the currency is either undervalued or overvalued against the US dollar.
Now I’d like to add a new way of comparing currencies: airfare.
As I travel around the world, I often buy what are known as round-the-world tickets (RTW).
RTW tickets are issued by airline alliances like OneWorld or Star Alliance, and they’re typically very cost effective.
RTW is just like it sounds. You fly, for example, from London to Chicago to Shanghai to Dubai and back to London, all for one special fare.
It’s a cheap, easy way to see the world.
But I’ll let you in on a little secret that I’ve picked up over the years: the price of a RTW ticket varies dramatically depending on the city where you start.
As an example, I just researched a OneWorld RTW ticket with the following itinerary:
Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg – London – Los Angeles.
Six different cities around the world on five continents.
Now, if I start and stop that itinerary in Los Angeles, the price for a business class ticket is $14,164.60.
That’s not a bad price for a business class experience. But if we experiment a little bit, something interesting happens.
Starting and stopping the journey in Los Angeles means that OneWorld prices my ticket in US dollars.
But it’s also possible to fly the same route by shifting the cities. For example, instead of starting/stopping in LA, I can start/stop in Sydney.
So the route becomes Sydney- Bangkok – Hong Kong – Johannesburg – London – Los Angeles – Sydney.
It’s the same flights to the same six cities, I just start/stop in a different place.
Here’s what’s crazy: if I start/stop in Sydney instead, the price changes. Now instead of $14,164.60, it’s $15,272 Australian dollars, which is about $10,900 USD.
So the same six flights now cost you 23% less.
Note that the RTW ticket is always priced in the local currency of the city where you start.
And unlike the Big Mac Index where the results are skewed by the costs of ingredients, property, and labor, here you’re comparing the exact same product.
I did the same with each city on the list, and the most incredible difference came when I started and stopped the trip in Johannesburg.
Johannesburg – London – Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg.
Flying to the exact same cities, the price is now 81,395 South African Rand.
Based on current exchange rates, this is just barely over $6,000.
In other words, you pay over $14,000 by starting/stopping in LA, and just $6,000 to start/stop in South Africa, even though you’re visiting the exact same six cities on the exact same flights in the exact same business class cabin.
What’s even more amazing is that if you do the exact same itinerary from LA in economy class, the price is $7,545.
So that means that if someone flies from LA, they’ll pay more to fly in coach than someone starting in Johannesburg pays to fly in business.
Clearly, you’d be better off buying a separate ticket to South Africa and beginning your RTW journey from there.
Or you could spend about $200 and get a ticket to Vancouver, and start a RTW from Vancouver, which costs about $10,000 in business class and gives you a $4,000 savings.
Now, I’m not here to tell you about how to save money on airfare (though I hope you give it a try).
The bigger idea is that it’s clear that the US dollar is painfully overvalued against nearly every currency in the world.
Right now the dollar appears to be the “safe” place to put your money. However, this isn’t based on anything.
The fundamentals for the US dollar are terrible, but people keep dumping money into it like trained monkeys simply because nothing else in financial markets makes any sense.
To be clear, I fully expect the dollar to get even stronger as even more trained monkeys pile into US dollar assets.
But it’s important to show that this perception of ‘safety’ is based on a complete myth. Every credible fundamental suggests that the dollar is dangerously overvalued.
In the long run these things tend to equalize, and the dollar’s strength may end up being the biggest bubble of all.
Of course, it raises the question– if not the US dollar, then which currency is the safe haven? The euro is garbage, the Chinese are fighting a depression, Japan is a disaster.
And that’s precisely the point.
When every option in the financial system is grounded in absurdity, the only solution is to start looking for safety outside of it.
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