Today’s News September 5, 2015

• The Failed Moral Argument For A "Living Wage"

  Submitted by Ryan McMaken via The Mises Institute,

  With Labor Day upon us, newspapers across the US will be printing op-eds calling for a mandated “living wage” and higher wages in general. In many cases, advocates for a living wage argue for outright mandates on wages; that is, a minimum wage set as an arbitrary level determined by policymakers to be at a level that makes housing, food, and health care “affordable.”

  Behind this effort is a philosophical claim that employers are morally obligated to pay “a living wage” to employees, so they can afford necessities (however ambiguously defined) on a single wage, working forty hours per week. This moral argument singles out employers as the morally responsible party in the living wage equation, even though the variables that determine a living wage go far beyond the wage earned.

  For example, as I discussed here, the living wage is a function not simply of the wage, but of the cost of housing, food, health care, transportation, and a myriad of other factors. Where housing costs are low, for example, the living wage will be lower than it would be in a place where housing costs are high.

  So, what matters is not the nominal wage paid by the employer, but the real wage as determined by the cost of everything that a wage is used to purchase.

  Why Is Only the Employer Responsible?

  So, if it’s the real wage that matters, why is there a fixation on the nominal wage itself? After all, wages, in real terms, could be increased greatly by forcing down food costs and rents. So, why is there not a constant drum beat for grocers to lower their prices to make necessities affordable? Why are activists not picketing outside grocery stores for their high prices? Why are they not outside KB Homes headquarters for KB’s apparently inhumane efforts at selling homes at the highest prices that the market will bear? Why are people not picketing used car dealers for not lowering their prices to make transportation affordable for working families? And why are gas stations strangely exempted from protests over the high cost of gasoline? Certainly, all of these merchants are just as instrumental in determining real wages as any employer. Grocers, landlords, home sellers, and the owner of the corner gas station can put a huge dent in the family budget when they allow their “greed” to impel them to charge the highest prices they can get away with in the market place.

  And yes, it’s true that plenty of activists regularly denounce landlords as “slumlords” or greedy capitalists for charging the highest rents the market will bear. And there are still plenty of activists who argue for price controls on rents and food. But they’re in a small minority nowadays. The vast majority of voters and policymakers recognize that government-dictated prices on food and housing lead to shortages. Setting a price ceiling on rents or home prices simply means that fewer housing units will be built, while setting a price ceiling on eggs, or milk or bread will simply mean that fewer of those staples will be brought to market.

  Such assertions are barely even debated anymore, as can be seen in the near-extinction of new rent-control efforts in the political sphere. You won’t see many op-eds this Labor Day arguing for price controls on fruit, gasoline, and apartments. You won’t see any articles denouncing homeowners for selling their homes at the highest price they can get, when they really should be slashing prices to make homeownership more affordable for first-time homebuyers.

  So, for whatever reason, homeowners, grocers, and others are exempt from the wrath of the activists for not keeping real wages low. The employers, on the other hand — those who pay the nominal wage — remain well within the sights of the activists since, for some arbitrary reason, the full moral obligation of providing a living wage falls on the employer.

  Were food prices to go up by 10 percent in the neighborhood of Employer X, who is responsible? “Why, the employer, of course,” the living-wage activists will contend. After all, in their minds, it is only the employer who is morally obligated to bring up real wages to match or exceed an increase in the cost of living.

  So while price controls on food, housing, and gasoline are generally recognized as a dead end, price controls on wages remain popular. The problem, of course, as explained here, here, here, and here, is that by setting the wage above the value offered by a low-skill worker, employers will simply elect to not hire low-skill workers.

  A Low Wage Is Unacceptable, but a Zero Wage Is Fine

  And this leads to the fact that when faced with high wages, employers will seek to replace employers with non-human replacements — such as these automated cashiers at McDonalds — or other labor-saving devices.

  But this phenomenon is simply ignored by the living-wage advocates. Thus, the argument that employers are morally obligated to not pay low wages becomes strangely silent in the face of workers earning no wage at all.

  Indeed, we see few attempts at passing laws mandating that employers hire human beings instead of machines. While it’s no doubt true that some neo-Luddites would love to see this happen, virtually no one argues that employers not be allowed to employ labor-saving devices. Certainly, anyone making such an argument is likely to be laughed out of the room since most everyone immediately recognizes that it would be absurd to pass laws mandating that a road builder, for example, hire people with shovels instead of using bulldozers and paving machines.

  Meanwhile, successes by living-wage advocates in other industries — where automation is not as immediately practical — have only been driving up prices for consumer goods. Yes, living wages in food, energy, and housing sectors will squeeze profits and bring higher wages for those who luckily keep their jobs, but the mandates will also tend to raise prices for consumers. This in turn means that real wages in the overall economy have actually gone down, thanks to a rising cost of living.

  All in all, it’s quite a bizarre strategy the living-wage advocates have settled on. It consists of raising the prices of consumer goods via increasing labor costs. Real wages then go down, and, at the same time, many workers lose their jobs to automation as capital is made relatively less expensive by a rising cost of labor. While the goal of raising the standard of living for workers and their families is laudable, it’s apparent that living wage advocates haven’t exactly thought things through.

   

  

  

  

  

  

• Common Core Or "Communist Core"

  You know things have become bad when… Common core is so wonderful that Lily Tang Williams, a Chinese-American mother of three who grew up in Communist China, says it reminds her of her oppressive, statist nature of her childhood education.

   

  “Communist” Core…

   

  Source: Freedomworks

  h/t Alt-Market.com

  

  

  

  

  

• Peter Schiff Warns: Meet QT – QE's Evil Twin

  Submitted by Peter Schiff via Euro Pacific Capital,

  There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing."  Now that QE is ready to move out…QT is prepared to take over.

   

  For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.

   

  Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.

   

  The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.

   

  But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT…as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies have been falling rapidly against the U.S. dollar that had been lifted by the belief that a tightening cycle by the Fed was a near term inevitability.

   

  It was speculated that China led the reversal, dumping more than $140 billion in Treasuries in just three months (through front transactions made through a Belgian intermediary – solving the so-called "Belgian Mystery") (China Dumps Record $143 Billion in US Treasurys in Three Months via Belgium, Zero Hedge, 7/17/15). The steep decline in the Chinese stock market has also sparked a flight of assets out of the Chinese economy. China has used FX sales as a means to stabilize its currency in the wake of this capital flight.

   

  The steep fall in the price of oil in late 2014 and 2015 also has led to diminished appetite for Treasuries by oil producing nations like Saudi Arabia, which no longer needed to recycle excess profits into dollars to prevent their currencies from rising on the back of strong oil. The same holds true for nations like Russia, Brazil, Norway and Australia, whose currencies had previously benefited from the rising prices of commodities.

   

  Analysts at Deutsche Bank see this liquidation trend holding for quite some time. However, new categories of buyers to replace these central bank sellers are unlikely to emerge. This changing dynamic between buyers and sellers will tend to lower bond prices, and increase bond yields (which move in the opposite direction as price). Citi estimates that every $500 billion in Emerging Markets FX drawdowns will result in 108 basis points of upward pressure placed on the yields of 10-year U.S. Treasurys (It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington, Zero Hedge, 8/27/15). This means that if just China were to dump its $1.1 trillion in Treasury holdings, U.S. interest rates would be about 2% higher. Such an increase in rates would present the U.S. economy and U.S. Treasury with the most daunting headwinds that they have seen in years. 

   

  The Federal Reserve sets overnight interest rates through its much-watched Fed Funds rate (that has been kept at zero since 2008). But to control rates on the "long end of the curve' requires the Fed to purchase long-dated debt on the open market, a process known as Quantitative Easing. The buying helps push up bond prices and push down yields. It follows then that a process of large scale selling, by foreign central banks, or other large holders of bonds, should be known as Quantitative Tightening.

   

  Potentially making matters much worse, Janet Yellen has indicated the Fed's desire to allow its current hoard of Treasurys to mature without rolling them over. The intention is to shrink the Fed's $4.5 trillion dollar balance sheet back to its pre-crisis level of about $1 trillion. That means, in addition to finding buyers for all those Treasurys being dumped on the market by foreign central banks, the Treasury may also have to find buyers for $3.5 trillion in Treasurys that the Fed intends on not rolling over. The Fed has stated that it hopes to effectuate the drawdown by the end of the decade, which translates into about $700 billion in bonds per year. That's just under $60 billion per month (or slightly smaller than the $85 billion per month that the Fed had been buying through QE). Given the enormity of central bank selling, and the incredibly low yields offered on U.S. Treasurys, I cannot imagine any private investor willing to step in front of that freight train.

   

  So even as the Fed apparently is preparing to raise rates on the short end of the curve, forces beyond its control will be pushing rates up on the long end of the curve. This will seriously undermine the health of the U.S. economy even while many signs already point to near recession level weakness. Just this week, data was released that showed U.S. factory orders decreasing 14.7% year-over-year, which is the ninth month in a row that orders have declined year-over-year. Historically, this type of result has only occurred either during a recession, or in the lead up to a recession. 

   

  The August jobs report issued today, which was supposed to be the most important such report in years, as it would be the final indication as to whether the Fed would finally move in September, provided no relief for the Fed's quandaries. While the headline rate fell to a near generational low of 5.1%, the actual hiring figures came in at just 173,000 jobs, which was well below even the low end of the consensus forecast. Private sector hiring led the weakness, manufacturing jobs declined, and the labor participation rate remained at the lowest level since 1976. So even while the Fed is indicating that it is still on track for a rate hike, all the conditions that Janet Yellen wanted to see confirmed before an increase are not materializing. This is a recipe for more uncertainty, even while certainty increases overseas that U.S. Treasurys are troubled long term investments.

   

  The arrival of Quantitative Tightening will provide years' worth of monetary headwinds. Of course the only tool that the Fed will be able to use to combat international QT will be a fresh dose of domestic QE. That means the Fed will not only have to shelve its plan to allow its balance sheet to run down (a plan I never thought remotely feasible from the moment it was announced), but to launch QE4, and watch its balance sheet swell towards $10 trillion. Of course, these monetary crosscurrents should finally be enough to capsize the U.S. dollar.

  

  

  

  

  

• For "Fearful, Erratic Markets", China's Reserves Are The New Risk-On/Off Trigger: Goldman

  Don’t look now, but China’s FX reserves may become the market’s most important risk-on/ risk-off trigger. 

  Just as the world finally woke up – with the standard two or three year lag – to what we’ve been saying about an acute lack of liquidity in bond markets on the way to making corporate bond market liquidity the talk of the financial universe, so too has everyone suddenly realized why we began shouting about the death of the petrodollar last November. The drawdown of EM FX reserves – or, as Deutsche Bank calls it, the end of the “Great Accumulation” – means a withdrawal of liquidity from global markets and the cessation of the perpetual bid for US paper that had been sustained for years by the buildup of emerging markets’ war chests. 

  Now, between falling commodity prices and the global currency wars, the assets in those war chests are being sold, and that means the Fed faces a very, very difficult decision on whether to hike. 

  It also means that market participants will be watching EM FX reserves more closely than they have at any other time since the Asian Financial Crisis, and that, in turn means that data on reserves, and especially on China’s reserves, is set to become very important as a catalyst for risk-on/ risk-off behavior. On that note, we bring you the following commentary from Goldman out this morning.

  *  *  *

  From Goldman

  Following the RMB devaluation some weeks ago, markets have been erratic, fearful that the initial move was the beginning of a larger devaluation cycle that could disrupt global markets. We don’t believe this, in part because we think the RMB is close to our estimate of ‘fair value’, as we showed in a recent FX Views, so that the rationale for a bigger weakening does not look strong to us. That said, markets remain sceptical and are looking to August FX reserves, which will be published overnight (New York time) Sunday to Monday. Consensus (according to data collated by Bloomberg) expects total foreign exchange reserves to fall to $3,580bn from $3,651bn in July, a drop of -$71bn. We estimate valuation effects for the month around $21bn, driven mostly by the rise in EUR/$, which means that the underlying “flow” change in reserves would be -$92bn. Combining this with consensus for the August trade surplus ($49bn) and assuming that the current account surplus is lower due to service outflows, the underlying net capital outflows could be north of $100bn, which seems to us to be a reasonable approximation of market expectations. We think risks are skewed to the upside relative to this consensus estimate.

  Given how worried markets have been about China, a better-than-expected reserves number holds the potential for risk assets to rally as devaluation fears abate. That said, the next data point on FX reserves will not be the definitive word on flows, since PBoC FX reserves in recent quarters have not been a good predictor of “true” flows as measured by the Balance of Payments (BoP). In particular, the mapping from PBoC reserves to BoP flows went off track from Q4 last year, with PBoC reserves first over-predicting reserve accumulation in Q4 and Q1, by $50bn and $100bn respectively, and then under-predicting in Q2 (by $100bn). In other words, some caution will still be advised in drawing conclusions on flows, where we see the BoP data as the ultimate arbiter. Our EM strategy team has discussed the broader EM context here.

  An additional perspective can be gleaned by looking at official foreign exchange reserves in the rest of non-Japan Asia (NJA), where we also include information on forward books when that is available (Hong Kong, Philippines, Indonesia, Thailand, Malaysia, Korea, India and Singapore). Data for most countries are available through July, but the Bank of Thailand publishes weekly data for the bulk of August. We estimate FX-valuation-adjusted declines in reserves (including forward books) at -$9.2bn for Malaysia in July alone, at -$5.8bn for Thailand in July and August, at -$3.6bn for Indonesia and -$2.9bn for Hong Kong. These declines in official FX reserves are sizeable, and the example of THB suggests that depreciation pressures more generally may have risen materially. The look across the region therefore bolsters our view of potentially bigger outflows from China than is implied by consensus.

  

  

  

  

  

• Bread & Circuses: The Shady, Slimy & Corrupt World Of Taxpayer Funded Sports Stadiums

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Like pretty much everything in the modern U.S. economy, wealthy and connected people fleecing taxpayers in order to earn even greater piles of money is also the business model when it comes to sports stadiums. Many cities have tried to make voter approval mandatory before these building boondoggles get started, but in almost all cases these efforts are thwarted by a powerful coalition of businessmen and corrupt politicians. Sound familiar? Yep, it a microcosm for pretty much everything else in America these days.

  To get you up to speed, here are a few excerpts from an excellent Pacific Standard magazine article:

  Over the past 15 years, more than $12 billion in public money has been spent on privately owned stadiums. Between 1991 and 2010, 101 new stadiums were opened across the country; nearly all those projects were funded by taxpayers. The loans most often used to pay for stadium construction—a variety of tax-exempt municipal bonds—will cost the federal government at least $4 billion in taxpayer subsidies to bondholders. Stadiums are built with money borrowed today, against public money spent tomorrow, at the expense of taxes that will never be collected. Economists almost universally agree that publicly financed stadiums are bad investments, yet cities and states still race to the chance to unload the cash. What gives?  

   

  To understand this stadium trend, and why it’s so hard for opponents to thwart public funding, look to Wisconsin. Last month, Governor Scott Walker signed a bill to spend $250 million on a new basketball arena for the Milwaukee Bucks. (The true cost of the project, including interest payments, will be more than $400 million.)

  Isn’t Scott Walker supposed to be “Mr. Fiscal Conservative?”

  The story of what’s happening in Milwaukee is remarkable, if not already familiar. Step one: A down-on-its-luck team is purchased by a group of billionaire investors. Step two: The owners nod to their “moral responsibility” to keep the team in its hometown,while simultaneously lobbying for a new stadium. Step three: The team threatens to abandon its hometown for greener pastures—and newer facilities—in another city. Step four: The threat scares up hundreds of millions of public dollars in stadium financing. Step five: The new stadium opens, boosting the owners’ investment, while sloughing much of the financial risk onto taxpayers. As New York Times columnist Michael Powell wrote, “From start to desultory end, Milwaukee offered a case study in all that is wrong with our arena-shakedown age.”

   

  That’s not to say the Bucks plan was entirely unopposed. Last year, a coalition of religious and community groups known as Southeastern Wisconsin Common Ground tried to fight the arena proposal. It called for a voter referendum on the bond issue, and lobbied for money to improve Milwaukee’s public parks and playing fields. Powell explains the rest:

   

  The local business community—which includes several members who have ownership shares in the team—dismissed such ideas as impractical. “The Bucks took control of the strategy from the start,” said Bob Connolly, a member of Common Ground. “They pushed the referendum idea right to the side.” Months later, when Common Ground leaders turned to usually friendly local foundations for more funding, they found themselves turned away. You are, they were told several times, too political.

   

  The lesson is clear: It is incredibly difficult to fight these projects. And Milwaukee is not alone. In St. Louis, for example, a judge recently struck down a city ordinance requiring voters to approve public spending on a new stadium for the Rams. Back in June, when Glendale, Arizona, tried to back out of its atrocious dealwith the National Hockey League’s Coyotes, the team quickly slapped the city with a lawsuit. Meanwhile, in building a new billion-dollar home in Minneapolis, the Minnesota Vikings found a loophole around a state law mandating that all public spending on sports teams be put to a vote.

   

  Not surprisingly, publicly funded stadiums face the least opposition in cities with strong growth coalitions, which Eckstein and Delaney define as the “institutionalized relationship between headquartered local corporations and the local government.” A coalition can claim to represent the interests of a community—not an outrageous claim on its face, since it comprises the powerful and prominent local leaders—while shielding team owners from both direct criticism and grassroots opposition. This is precisely what’s happening in Milwaukee. Here’s the Times’ Powell again:

   

  The hedge fund owners proved deft with ownership shares, handing these out to prominent Wisconsin businessmen and Republicans, including the developer Jon Hammes. Hammes has become national finance co-chairman for Walker, a Republican presidential candidate. The Capital Times recently reported that a political action committee connected to Hammes contributed $150,000 to the governor in late spring. 

   

  Economists have proposed antitrust lawsuits against leagues and stricter naming rights for teams, as Slate suggested in March, but neither idea has gained much traction. A Florida proposal would have shared team revenues with the public—a somewhat radical idea that Deadspin boldly declared “The Best Idea for Stadium Financing We’ve Ever Heard“—but it was quickly deemed illegal.

  Sharing revenues with the taxpayers funding the stadium: Illegal.

  Blatantly corrupt private-public partnership cartels: Perfectly legal.

  Two words: Banana Republic.

  In case you forgot the ultimate casino-gulag partnership of them all…

  America in 2013: Florida Football Stadium Named After a Private Prison Company

  Now here’s the always brilliant John Oliver on the issue. Enjoy:

  

  

  

  

  

• What Happens Next?

  Just like in 1929, The Dow just dropped 13%, bounced, and is retesting the lows… as all the ‘experts’ comfort a restless investor crowd

   

  

   

  So what happens next?

   

  

   

  Remember – it’s different this time… again.

   

  Charts: Bloomberg

  

  

  

  

  

• The Season Of The Glitch (Or "Why Retail Investors Have No Chance")

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  Over the past two months, more than 90 Wall Street Journal articles have used the word “glitch”. A few choice selections below:

  Bank of New York Mellon Corp.’s chief executive warned clients that his firm wouldn’t be able to solve all pricing problems caused by a computer glitch before markets open Monday.

  – “BNY Mellon Races to Fix Pricing Glitches Before Markets Open Monday”, August 30, 2015

   

  A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

  – “A New Computer Glitch is Rocking the Mutual Fund Industry”, August 26, 2015

   

  Bank says data loss was due to software glitch.

  – “Deutsche Bank Didn’t Archive Chats Used by Some Employees Tied to Libor Probe”, July 30, 2015

   

  NYSE explanation confirms software glitch as cause, following initial fears of a cyberattack.

  – “NYSE Says Wednesday Outage Caused by Software Update”, July 10, 2015

   

  Some TD Ameritrade Holding Corp. customers experienced delays in placing orders Friday morning due to a software glitch, the brokerage said..

  – “TD Ameritrade Experienced Order Routing, Messaging Problems”, July 10, 2015 

  Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?”  Welcome to the Big Leagues of Investing Pain.

  What happened last Monday morning, when Apple was down 11% and the VIX couldn’t be priced and the CNBC anchors looked like they were going to vomit, was not a glitch. Yes, a flawed SunGard pricing platform was part of the proximate cause, but the structural problem here – and the reason this sort of dislocation WILL happen again, soon and more severely – is that a vast crowd of market participants – let’s call them Investors – are making a classic mistake. It’s what a statistics professor would call a “category error”, and it’s a heartbreaker.

  Moreover, there’s a slightly less vast crowd of market participants – let’s call them Market Makers and The Sell Side – who are only too happy to perpetuate and encourage this category error. Not for nothing, but Virtu and Volant and other HFT “liquidity providers” had their most profitable day last Monday since … well, since the Flash Crash of 2010. So if you’re a Market Maker or you’re on The Sell Side or you’re one of their media apologists, you call last week’s price dislocations a “glitch” and misdirect everyone’s attention to total red herrings like supposed forced liquidations of risk parity strategies. Wash, rinse, repeat.

  The category error made by most Investors today, from your retired father-in-law to the largest sovereign wealth fund, is to confuse an allocation for an investment. If you treat an allocation like an investment… if you think about buying and selling an ETF in the same way that you think about buying and selling stock in a real-life company with real-life cash flows… you’re making the same mistake that currency traders made earlier this year with the Swiss Franc (read “Ghost in the Machine” for more). You’re making a category error, and one day – maybe last Monday or maybe next Monday – that mistake will come back to haunt you.

  The simple fact is that there’s precious little investing in markets today – understood as buying a fractional ownership position in the real-life cash flows of a real-life company – a casualty of policy-driven markets where real-life fundamentals mean next to nothing for market returns. Instead, it’s all portfolio positioning, all allocation, all the time. But most Investors still maintain the pleasant illusion that what they’re doing is some form of stock-picking, some form of their traditional understanding of what it means to be an Investor. It’s the story they tell themselves and each other to get through the day, and the people who hold the media cameras and microphones are only too happy to perpetuate this particular form of filtered reality.

  Now there’s absolutely nothing wrong with allocating rather than investing. In fact, as my partners Lee Partridge and Rusty Guinn never tire of saying, smart allocation is going to be responsible for the vast majority of public market portfolio returns over time for almost all investors. But that’s not the mythology that exists around markets. You don't read Barron’s profiles about Great Allocators. No, you read about Great Investors, heroically making their stock-picking way in a sea of troubles. It’s 99% stochastics and probability distributions – really, it is – but since when did that make a myth less influential? So we gladly pay outrageous fees to the Great Investors who walk among us, even if most of us will never enjoy the outsized returns that won their reputations. So we search and search for the next Great Investor, even if the number of Great Investors in the world is exactly what enough random rolls of the dice would produce with Ordinary Investors. So we all aspire to be Great Investors, even if almost all of what we do – like buying an ETF – is allocating rather than investing.

  The key letter in an ETF is the F. It’s a Fund, with exactly the same meaning of the word as applied to a mutual fund. It’s an allocation to a basket of securities with some sort of common attribute or factor that you want represented in your overall portfolio, not a fractional piece of an asset that you want to directly own. Yes, unlike a mutual fund you CAN buy and sell an ETF just like a single name stock, but that doesn’t mean you SHOULD. Like so many things in our modern world, the exchange traded nature of the ETF is a benefit for the few (Market Makers and The Sell Side) that has been sold falsely as a benefit for the many (Investors). It’s not a benefit for Investors. On the contrary, it’s a detriment. Investors who would never in a million years consider trading in and out of a mutual fund do it all the time with an exchange traded fund, and as a result their thoughtful ETF allocation becomes just another chip in the stock market casino. This isn’t a feature. It’s a bug.

  What we saw last Monday morning was a specific manifestation of the behavioral fallacy of a category error, one that cost a lot of Investors a lot of money. Investors routinely put stop-loss orders on their ETFs. Why? Because… you know, this is what Great Investors do. They let their winners run and they limit their losses. Everyone knows this. It’s part of our accepted mythology, the Common Knowledge of investing. But here’s the truth. If you’re an Investor with a capital I (as opposed to a Trader with a capital T), there’s no good reason to put a stop-loss on an ETF or any other allocation instrument. I know. Crazy. And I’m sure I’ll get 100 irate unsubscribe notices from true-believing Investors for this heresy. So be it.

  Think of it this way… what is the meaning of an allocation? Answer: it’s a return stream with a certain set of qualities that for whatever reason – maybe diversification, maybe sheer greed, maybe something else – you believe that your portfolio should possess. Now ask yourself this: what does price have to do with this meaning of an allocation? Answer: very little, at least in and of itself. Are those return stream qualities that you prize in your portfolio significantly altered just because the per-share price of a representation of this return stream is now just below some arbitrary price line that you set? Of course not. More generally, those return stream qualities can only be understood… should only be understood… in the context of what else is in your portfolio. I’m not saying that the price of this desired return stream means nothing. I’m saying that it means nothing in and of itself. An allocation has contingent meaning, not absolute meaning, and it should be evaluated on its relative merits, including price. There’s nothing contingent about a stop-loss order. It’s entirely specific to that security… I want it at this price and I don’t want it at that price, and that’s not the right way to think about an allocation.

  One of my very first Epsilon Theory notes, “The Tao of Portfolio Management,” was on this distinction between investing (what I called stock-picking in that note) and allocation (what I called top-down portfolio construction), and the ecological fallacy that drives category errors and a whole host of other market mistakes. It wasn’t a particularly popular note then, and this note probably won’t be, either. But I think it’s one of the most important things I’ve got to say.

  Why do I think it’s important? Because this category error goes way beyond whether or not you put stop-loss orders on ETFs. It enshrines myopic price considerations as the end-all and be-all for portfolio allocation decisions, and it accelerates the casino-fication of modern capital markets, both of which I think are absolute tragedies. For Investors, anyway. It’s a wash for Traders… just gives them a bigger playground. And it’s the gift that keeps on giving for Market Makers and The Sell Side. 

  Why do I think it’s important? Because there are so many Investors making this category error and they are going to continue to be, at best, scared out of their minds and, at worst, totally run over by the Traders who are dominating these casino games. This isn’t the time or the place to dive into gamma trading or volatility skew hedges or liquidity replenishment points. But let me say this. If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily “news”. You’re going to be whipsawed mercilessly by these Hollow Markets, especially now that the Fed and the PBOC are playing a giant game of Chicken and are no longer working in unison to pump up global asset prices.

  One of the best pieces of advice I ever got as an Investor was to take what the market gives you. Right now the market isn’t giving us much, at least not the sort of stock-picking opportunities that most Investors want. Or think they want. That’s okay. This, too, shall pass. Eventually. Maybe. But what’s not okay is to confuse what the market IS giving us, which is the opportunity to make long-term portfolio allocation decisions, for the sort of active trading opportunity that fits our market mythology. It’s easy to confuse the two, particularly when there are powerful interests that profit from the confusion and the mythology. Market Makers and The Sell Side want to speed us up, both in the pace of our decision making and in the securities we use to implement those decisions, and if anything goes awry … well, it must have been a glitch. In truth, it’s time to slow down, both in our process and in the nature of the securities we buy and sell. And you might want to turn off the TV while you’re at it.  

  

  

  

  

  

• Here Are The "Unlikely" Cities Bloomberg Says Will Drive The US Economy

  Back in May we highlighted a report from Georgetown that endeavored to show which college majors were most likely to help students land high-paying jobs upon graduation. 

  While this would be important under any circumstances, it’s especially important today. Why? Two reasons, i) far from a steady creator of breadwinner jobs, the US economy routinely churns out bartenders and waiters, while the BLS has a habit of “vanishing” the jobless and creating what we’ve called a “statistical mirage” which makes it appear as though unemployment is falling even as the labor force participation rate plunges to multi-decade lows, and ii) graduates are now leaving school with more debt than ever and without decent employment, that debt burden leads to all manner of problems including the postponement of household formation. 

  The report was unequivocal. To wit: “STEM (science, technology, engineering, and mathematics), health, and business majors are the highest paying, leading to average annual wages of $37,000 or more at the entry level and an average of $65,000 or more annually over the course of a recipient’s career.”

  Setting aside the glaring question of whether one wants to count $37,000 a year as “high paying,” the point is that STEM jobs are apparently where it’s at these days unless you plan to become a bulge bracket CEO, a benchmark rate manipulator, or perhaps a doctor. And for anyone out there wondering where the best STEM jobs are, Bloomberg has you covered. Below, find the graphics (which you can click on to access the interactive versions) and some attendant commentary from Bloomberg:

  

  

  From Bloomberg:

  A decade ago, Richard Myers was the director of the Department of Genetics at the Stanford University School of Medicine, where he enjoyed the fruits of a rich endowment and his pick of faculty members and graduate students. So he left behind some befuddled scientists when, in 2008, he left Palo Alto, Calif., for Huntsville, Ala., to launch an independent research lab, the HudsonAlpha Institute.

   

  “‘My God, you’re leaving Stanford for Alabama?’” Myers recalls colleagues asking. “‘What’s wrong with you?’”

   

  Huntsville may not seem like an obvious place to base a center for genomics, a branch of biology concerned with DNA sequences that requires expensive hardware and even greater investment in human capital. Alabama ranks in the bottom 10 U.S. states for educational attainment and median income.

   

  Yet Huntsville, nestled in a hilly region in the northern part of the state, turns out to be a great place to recruit high-tech workers. As of May 2014, 16.7 percent of workers in the metropolitan area held a job in science, technology, engineering, or mathematics—STEM, for short—making it the third most technical workforce in the country after San Jose, Calif., and Framingham, Mass., a Bloomberg analysis of Labor Department statistics shows.

   

  Huntsville is one of a growing number of smaller U.S. cities, far from Silicon Valley, that are seeking to replace dwindling factory jobs by reinventing themselves as tech centers. Across the Midwest, Northeast, and South, mayors and governors are competing to attract tech companies and workers. 

   

  Much more in the full post here

  

  

  

  

  

• "This Time May Be Different": Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns

  Early last month, Bloomberg observed that plunging currencies were “handcuffing bankers from Chile to Colombia.” The problem was described as follows:

  Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.

   

  That’s because the deepening price slump is also dragging down currencies in Colombia and Chile — a swoon that’s fanning inflation and tying policy makers’ hands.

  That was six days before China’s decision to devalue the yuan. 

  Needless to say, Beijing’s entry into the global currency wars did nothing to help the situation and indeed, since the yuan devaluation, things have gotten materially worse. The real, for instance, has plunged 10.5%, the Colombian peso is down 6.6%, the Mexican peso is off 4.4%, and the Chilean peso is down a harrowing 8% (thanks copper). And again, that’s just since China’s devaluation.

  Meanwhile, plunging commodity prices, falling Chinese demand, and depressed global trade aren’t helping LatAm economies. Just ask Brazil, where the sellside GDP forecast cuts are coming in fast (Morgan Stanley being the latest example) now that virtually every data point one cares to observe shows an economy that’s sliding into depression.

  Of course a plunging currency, FX pass through inflation, and a soft outlook for growth is a pretty terrible place to be in if you’re a central bank, but that’s exactly where things stand for the “LA-5” (believe it or not, that’s not a reference to the Lakers, it’s short for Brazil, Chile, Colombia, Mexico, and Peru), who very shortly will be forced to decide whether the risks associated with further FX weakness outweigh those of hiking rates into a poor economic environment.

  For Goldman, the outlook is clear: LatAm central banks will, in “stark” contrast to counter-cyclical measures adopted during the crisis, hike in a desperate attempt to shore up their currencies and control inflation. 

  First, we have the test:

  The LA-5 economies are, once again, being tested. They currently face an acute external shock involving a combination of: low (likely for long) commodity prices, incoming monetary policy normalization in the US, and weaker CNY and growth in China with the latent risk of a sharper economic slowdown. 

  The last time these countries were tested, they had sufficient room to maneuver counter-cyclically:

  The Global Financial Crisis of 2008-09 (GFC) provided almost the perfect applied experiment to test the shock-absorbing capacity of the new institutional framework. And the results were remarkably positive. The spike in risk aversion in the initial stages of the crisis was followed by sizeable capital outflows from EMs. Yet, officials across the LA-5 did not attempt to stop the hemorrhage of capital and the ensuing pressures on local currencies by hiking interest rates or by tightening fiscal belts (which would have been the classic pro-cyclical response of the past). To the contrary, the authorities managed to loose fiscal stances and cut interest rates aggressively to support domestic demand, letting exchange rates depreciate significantly along the way. 

  This time around, however, policy flexibility is severely constrained:

  Financial conditions are very accommodative and most currencies are now slightly in undervaluation territory. Initial conditions differ considerably from those prevalent at the beginning of the GFC. Broad financial conditions are, on average, more accommodative today than before (lower real rates and currencies that underwent large adjustments since mid-2013 and are now, on average, slightly undervalued versus domestic fundamentals). Furthermore, with the notable exception of Mexico, inflation has been accelerating across the region (Exhibit 3) and is now tracking above the respective targets, the fiscal stances are on average weaker, and external imbalances are generally wider. 

   

  
  

  And the crisis – at least as it relates to LatAm, is actually more acute:

  Arguably, these combined shocks may pose greater risks to the region compared to the challenges faced during the GFC as the later was largely a DM centered event. In fact, current external headwinds have compounded the effects of domestic developments in places (e.g., Brazil and to some extent Chile), imparting a sizeable adverse shock to sentiment and a negative impulse to growth across the LA-5 economies. 

  With less policy flexibility and a more acute crisis, comes a divergent response:

  Against this backdrop, the continuation of a bearish FX market may be soon followed by higher policy rates, despite admittedly sluggish real business cycles all across the region. That is, a pro-cyclical monetary reaction may be imminent in a number of places – Chile, Colombia, Mexico, and Peru. Policy pro-cyclicality is knocking on the door. 

   

  
  

  What’s particularly interesting here is that round after round of the type of counter-cyclical policy measures Goldman suggests saved the LA-5 in the wake of the 2008 meltdown have not only failed to resuscitate the global economy, but have in fact contributed to the current worldwide deflationary supply glut that is at least partially to blame for the economic malaise plaguing EMs and the attendant pressure on commodity currencies.

  That pressure has now put LatAm’s financially integrated countries in the position of having to hike rates even as the outlook for their economies – the same economies which were presumably saved by counter-cyclical post-crisis measures – deteriorates. Meanwhile, if the Fed hikes, it will only put further pressure on EM FX, which could serve to drive inflation still higher, prompting a still more hawkish EM CB response which would in turn put still more pressure on their underlying economies. 

  In the end, Goldman concludes that should LatAm resort to pro-cyclical measures to shore up their currencies at the expense of their economies, it will represent a return to the policies adopted by EMs during the Asian Financial Crisis. This would appear to provide the final piece of evidence we need to conclusively determine that all pundit/analyst protestations aside, we have indeed turned back the clock two decades and sit on the verge of another outright emerging market meltdown. And on that note, we’ll give the final word to Goldman:

  The LA-5 economies have already spent part of their policy ammunition fighting the initial stages of the current turmoil. In the meantime, a number of economies are still grappling with visible domestic (inflation/fiscal deficits) and external (current account deficits) imbalances. Therefore, the room to ease policy further, i.e., to adopt counter-cyclical policies, is now much more limited than in the past. To the contrary, in some cases monetary tightening may be needed (despite weaker real business cycles) in order to continue to attract foreign capital, anchor domestic currencies and preserve the integrity of the respective inflation targeting frameworks. Hence, we may soon enter a period of weaker FX and higher policy and market rates: i.e., market dynamics that would resemble more the 1997 Asian Financial Crisis (where the authorities hiked rates to stabilize the respective domestic currencies despite the recessionary real sector dynamics) rather than the 2008-09 Global Financial Crisis (where weakening currencies coincided with sharply declining short-term interest rates). 

  

  

  

  

  

• Martin Armstrong "Astonished" At Hillary Email Scandal

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  

  The most incredible aspect of Hillary’s e-mail scandal is the media’s total dismissal of a simple fact — Hillary DID NOT use the government’s e-mail system — she used her own. She claimed she was unaware that you could have two e-mails on one phone. That alone shows that she is not qualified to be president.

  Nonetheless, that can ONLY mean that she sent top-secret e-mails through her personal e-mail service. All of her discussions with foreign governments whom donated to her charity were also in her private e-mails.

  If you work for the government and opt to send all OFFICIAL e-mails through your private unsecured server because you assumed you could only have one: wouldn’t you assume that national security comes before personal e-mails?

  This is just amazing. Obviously, Hillary has lied about the e-mails for how did she conduct business as part of her job without using a government system? If you had to choose between the two, it would seem that the country should come first.

  Now her staff is taking the Fifth Amendment and refusing to testify. Obviously, the only reason to take the Fifth requires the risk of a crime.

  

  

  

  

  

• What Does It Mean If The Fed Hikes… And If It Doesn't

  Today’s jobs report was supposed to be a tiebreaker for the Fed’s September rate decision, giving fed funds and eurodollar traders some respite after a summer that has been a gut-wrenching, dramamine-chewing rollercoster. It did not, in fact it boosted uncertainty, with the probability of a September rate hike rising from 26% to 30%.

  

   

  In other words, any hope for clarity was promptly dashed with a job report that once again was both bad and good, depending on one’s bias.

  Which means that the September 17th decision will come to the absolute wire, with little if any guidance available in the 13 days left until what may be the Fed’s first rate hike in 9 years… or not.

  Here is an oddly accurate explanation of what it means if the Fed does hike rates on September, and alternatively, what it means if Yellen punts once again, and leaves the decision to the October or December meeting, or just punts to 2016 and onward altogether. As a reminder, Goldman does not expect the Fed to hike on September 17.

  On Wall Street only 2 things matter: interest rates and earnings. Everything else is noise unless it impacts rates and earnings. No-one impacts interest rates more than the Fed. So the Fed’s September 17th rate hike decision is a big deal.

   

  Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.

   

  As noted above, a rate hike with a stroke ends this era. So:

   

  If they don’t hike…

  • It’s an admission that Wall Street threatens to reverse the recovery on Main Street
  • It will lead to a short-term relief rally on Wall Street
  • It will be relatively positive for EM/commodities/resources, as it unwinds the higher US growth/rates/dollar narrative
  • It will be positive for higher-yielding assets
  • It will be positive for growth > value, as the Fed is confirming the deflationary recovery
  • In short, if the Fed’s failure to hike does not lead investors to completely abandon hope on growth and scurry into gold, cash & volatility, then look for the “barbell of 1999” to reemerge: Über-growth & Über-value were massive outperformers after the Asia crisis (Chart 9).

  

   

  If they do hike…

  • Watch the long-end
  • If the long-end concurs with the Fed’s view of economic recovery, then banks, cyclicals and value stocks will receive a bid. Asset allocation toward “strong dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth
  • If the long-end rallies, signaling a policy mistake, then cash, volatility, gold & defensive growth will be the way to go.

  Most importantly, if the long-end rallies, it’s almost over and get ready to bail on any outperforming long-end position, as the reaction itself will signal the beginning of the end of the fiat regime.

  

  

  

  

  

  

• The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play

  The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.”

  Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”

  So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:

  … the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.

   

  … while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.

   

  Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.

  (Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)

  So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?

  Readers will recall that just yesterday we explained why “Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands” in which we quoted BofA a rates strategist who said that “now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations.“

  We also said this:

  “in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, “suddenly” pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan’s QQE going.

   

  The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ’s going not only in 2016 but also 2017 and onward. The answer: less and less.

  Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.

  We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.“

  

  This was our summary:

  The BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGB event for the market to realize just how little actual natural buyers and sellers exist.

  That said, our conclusion, which was not to “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business” may have been a tad premature.

  The reason: overnight the IMF released a working paper written by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday… and then some.

  Here is Bloomberg’s summary of the paper:

  The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.

   

  There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.

  Here are the excerpts from the paper:

  We construct a realistic rebalancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.

   

  … there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ’s current pace of JGB purchases may become an issue.

  Back to Bloomberg:

  While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.

  Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.

  Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only “high quality collateral” assets are JGBs, and as a result of the large scale JGB purchases by the JGB, “a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity.”

  To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.

  For those surprised by the IMF’s stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:

  So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.

  

  As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: “under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015.”

  

   

  This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:

  given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.

  

   

  Then there are the liquidity issues:

  As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.

  This, too, is precisely what we warned yesterday would be the outcome: “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day.”

  The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.

  

  The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ’s Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: “the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases.”

  But the biggest risk is not what else the BOJ could monetize – surely the Japanese government can always create “monetizable” kitchen sinks… but what happens when the regime shifts from the current buying phase to its inverse:

  As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.

  When considering that by 2018 the BOJ market will have become the world’s most illiquid (as the BOJ will hold 60% or more of all issues), the IMF’s final warning is that “such a change in market conditions could trigger the potential for abrupt jumps in yields.”

  At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.

  But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that “the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation“, what’s worse for Abe is that the countdown until his program loses all credibility has begun.

  What happens then? As BNP wrote in an August 28-dated report, “Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09.”

  And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.

  But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ – the one central banks whose bank monetization is keeping the world’s asset levels afloat now that the ECB has admitted it is having “problems” finding sellers – will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.

  It’s all downhill from there, and not just for Japan but all other “safe collateral” monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.

  But there’s no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.

  Source: IMF

  

  

  

  

  

• Weekend Reading: View From The Edge

  Submitted by Lance Roberts via STA Wealth Management,

  Earlier this week, I posted a fairly in-depth look at the recent correction to try and determine whether this is simply just a correction in a bull market, or potentially something worse. To wit:

  "But the underlying fundamental and economic data have been weak for some time, yet the market continued its unabated rise. The Bulls have remained firmly in charge of the markets as the reach for returns exceeded the grasp of the underlying risk. It now seems that has changed. For the first time since 2007, as we see initial markings of a potential bear market cycle.

   

  The first chart below shows the long-term trend of the market."

  

  "The bottom part of the chart is the most important. For the first time since 2000 or 2007, the market has now registered a momentum based "sell" signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 "corrections" and suggests the current correction may be more significant."

  I continue to suspect that the weak market internals, deterioration in earnings and a generally weak economic backdrop that odds reside with the "bears" for now. However, we have all been surprised by what happens "next" particularly when the Federal Reserve stands at the helm. 

  With that in mind, and a dismal August month now behind us, our weekend reading list once again takes a look at the markets from the seemingly "edge of the cliff."

  ---

  THE LIST

  1) Don't Blame China For Market Woes by Ben Stein via CBS News

  "August is the cruelest month.

   

  A good chunk of my savings disappeared as the stock market convulsed, and we're down at some points by well over 10 percent. Why did it happen?

   

  The pundits and analysts appeared and said it was because of the Chinese devaluation and possible serious weakness in China. This, in turn, would devastate U.S. exports, supposedly, to China and sink the ship of our prosperity."

  Read Also: Jim Chanos – 5 Things About China by Linette Lopez via Business Insider

   

  2) Bad August Months Lead To Worst Septembers by Anora Mahmudova

  ""In the 11 instances since 1945 when the S&P 500 fell more than 5% in August, September returns were negative 80% of the time, averaging a decline of 4%, said Sam Stovall, U.S. equity strategist at S&P Capital IQ.

   

  History is a good guide, but not necessarily a gospel,"

  

  Read Also: Why This Market Sell-Off Could Keep Going by Paul Lim via Time

   

  3) Nobody Panic – This Is Just A Retest by Ron Insana via CNBC

  "Of course, if the market's internal strength deteriorates further on the second wave down, it could be indicative of something more serious.

   

  But right now, we haven't seen any sign of that, so panic would be premature.

   

  It has long been my view that U.S. stocks are in the midst of a secular, or long-term, bull market that is likely in its 5th or 6th inning.

   

  Prior to this correction, it had been 46 months since U.S. markets had suffered a pullback of more than 10 percent. Corrections occur, on average, every 18 months, so this was long overdue."

  Read Also: This Is The Start Of The Sell Off by Bill Bonner via ContraCorner

   

  4) If The Market Hits This Level, Then Get Nervous by Heather Long via CNN Money

  "Time will tell who is right. But remember that we live in an era where computer trading dominates the American stock market. The "robots" that are making a lot of trading calls aren't sitting around pondering China's economy. They are paying attention to whether stocks fall below key levels.

   

  What are those levels? No one knows exactly. But these two metrics are worth watching. If these thresholds are crossed, both computer and human traders will consider it a game-changer point."

   

  

  Also Read: How To Survive A Market Crash by Brett Arends via MarketWatch

   

  5) Why Fear Dominates Investors Sentiment by John Shmuel via Financial Post

  "One difference is that corporate balance sheets and the U.S. economy remain strong. Another is that China, which has been a large source of fear recently, still has significant policy tools available to help it spur growth and calm markets there and, by extension, around the world.

   

  'This episode does not match equity declines in the major sustained financial crises of the last 20 years,' Oxford Economics said.

   

  That does not mean that markets can't go lower. Canaccord notes that the current correction has two analogs in the 1998 and 2011 corrections, with the former preceding a rise in U.S. interest rates and the latter being driven by worries over China and emerging markets."

  Read Also: Don't Buy The Stock Market Dip This Time by Jeff Erber via Real Clear Markets

  ---

  Other Reading

  Market Still Isn't Where Its Going by Joe Calhoun via Alhambra Partners

  If You Need To Reduce Risk, Do It Now by John Hussman via Hussman Funds

  Best Tweets In August by Meb Faber via Meb Faber Research

  Recession Odds Surge To Highest Since 2011 via ZeroHedge

  This Is The Worst Environment For Investors By Jesse Felder via The Felder Report

  ---

  "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the time to sell." – John Templeton

  Have a great weekend.

  

  

  

  

  

• Dow Drops To 17-Month Lows As Hope-Filled Dead-Cat-Bounce Dies

  The last 2 weeks in markets…

  And to all those who took Cramer's advice to buy the dips…

   

  Some big moves this week…

  • Dow Industrials lowest weekly close since April 2014
  • Dow Transports lowest weekly close since May 2014
  • S&P 500 lowest weekly close since Oct 2014's Bullard lows
  • Nikkei dumped over 7% this week – worst week since April 2014
  • Utilities collapsed 5.1% this week – worst week since March 2009
  • Financials lowest weekly close since Oct 2014's Bullard lows
  • Biotechs lowest weekly close since Feb 2015
  • Investment Grade Corporate Bond Spreads worst since June 2013
  • Treasury Curve (2s30s) flattened 6bps today – biggest drop in 2 weeks.
  • JPY strengthened 2.4% on week against the USD – strongest week since August 2013 (up 4.5% in 3 weeks) – major carry unwind!
  • AUD plunged 3.5% on week against the USD – worst week since January 2015 and worst 4-weeks since Oct 2014 – China proxy

  So before we start, Japan was really ugly…

  

   

  And some context for the US equity index drops…

  

   

  With everything red year-to-date… (and since the end of QE3, only Nasdaq is clinging to the green)

  

   

  A quiet Friday before Labor Day weekend provided no juice for momo ignition and apart from a brief algo-driven pop on payrolls, stocks were a one-way-street lower…until the late-day VIX-smash ramp which closed ugly…

  

   

  And Futures show an ugly night turned even uglier…

  

   

  On the week, evereything is red…

  

   

  Dow Futures give us some context for the last 2 week's moves. Bounce dies at Fib61.8% retracement, breaks through 50% and makes lower high as today tested post Black-Monday lows…

  

   

  FANG is FUBAR… (post FOMC Minutes)

  

   

  Financials continues to get hammered (as investors rushed to the safety of Homebuilders this week!?!) – but the panic-buying in the last hour saved it from being a lot worse…

  

   

  Utilities had their worst week since March 2009..

  

   

  But financials have further to fall to catch up with counterparty risk…

  

   

  Just as we saw lasty Friday, VIX was smashed lower in the last hour… which makes perfect sense given Monday is a holiday and China reopens after 3 days of being closed during extreme moves in EM FX and global equity markets…

  

   

  After some VIX complex shenanigans midweek, SPY continues to coverge down to XIV (though the latter is also being squeezed to lows).

  

   

  Since the FOMC Minutes, gold and the long bond are modest losers and stocks big losers…

  

   

  Investment Grade Credit spreads rose 4bps this week, ending with the widest weekly close since June 2013

  

   

  This is why it matters!! Bye Bye Buybacks

  

   

  Thank to today's plunge, Treasury yields ended the week lower after China closed… Note that 2Y is unch today, 10Y -3.5bps, 30Y -4.5bps

  

   

  with a dramatic 6bps 2s30s curve flattening on the day (post-payrolls)

  

   

  The US Dollar ended the week unchanged against the majors… but that hid the stunning moves in JPY (USDJPY dropped 2.4% on the week – its worst since Auguist 2013) and AUD (-3.6% – biggest weekly drop in 8 months, worst 4-week drop in a year)…

  

   

  Commodities on the week were a mixed bag with crude up on the week and copper notably lower overnight to negative. Gold & Silver modestly lower… The 8-10ET period remains insanely volatile…

  

   

  Crude had a wild week as Monday and Tuesday's idiocy and noite today's pump'n'dump after rig counts unexpectedly declined…

  

   

  And finally before everyone points out how crazy the bond yields are relative to stocks etc… and the 'economy' – perhaps it was stocks that were wrong all along!!

  

   

  Charts: Bloomberg

  Bonus Chart: Nikkei joins SHCOMP and SPX in the red for 2015…

  

   

  Bonus Bonus Chart" "Just one wafer thin 25bps rate hike"

  h/t @RudyHavenstein

  

  

  

  

• Chinese Roulette

  Sunday night looms…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• No Inflation Friday: The Government Admits Its Own Statistics Are Phony

  Submitted by Simon Black via SovereignMan.com,

  In an article that first appeared in Fortune magazine on December 10, 2001, Warren Buffett penned a great letter about falling prices:

  “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying– except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

  He’s right. Any rational human being actually LIKES falling prices.

  We enjoy getting a great deal, and we like it when our money goes further.

  To Buffett’s point, investors are a major exception and prefer investing when prices go up, i.e. their money buys less of a high quality asset.

  But there’s one more giant exception that Buffett didn’t mention: economists.

  Economists quiver in fear at the prospect of falling prices.

  They call it ‘deflation’, and it’s a force so dreaded that central bankers have threatened to drop bricks of cash from helicopters in order to prevent it.

  Instead, economists prefer INFLATION, i.e. that the things you buy become more expensive.

  We can look at official statistics to get a sense of inflation, but these numbers are totally meaningless.

  When I was a kid, my father earned enough money to support his family with a single salary.

  We had a house, a car, an occasional vacation, and we never missed a meal. All on one income.

  But those days are long gone. Now it’s almost obligatory to live in a dual-income household just to make ends meet.

  The official statistics never paint this picture.

  They focus on some palatable number, telling us the inflation rate is 2%, and then adjust their computational methods to derive that figure.

  In fact, the US federal government has changed the way it calculates inflation at least twenty times since the mid 1980s.

  And it’s obvious that they have a huge incentive to do so.

  The #1 expense of the federal government today is the mandatory entitlement programs that are paid out to seniors in the US– primarily Social Security.

  It’s nearing $1 trillion annually and eats up a third of all tax revenue.

  The government is required by law to increase the amount of money paid to Social Security recipients each year through what’s called a COLA, or cost of living adjustment.

  Essentially they’re adjusting your monthly Social Security payment to keep up with inflation. Or at least, the inflation that they’re willing to admit.

  This is where they have a huge incentive to fudge the numbers.

  If the real rate of inflation is 5%, but they only give a 2% COLA, the government saves 3%. That’s almost $30 billion.

  (Ironically this is 3x the size of the annual budget for the Department of Labor, which is responsible for calculating the inflation statistics.)

  But by doing this the government is effectively stealing from seniors.

  There’s actually been a new law proposed in Congress to prevent this from happening anymore.

  It’s known as HR 3074, and it was written “for the purpose of establishing an accurate Social Security COLA. . .”

  So even the government admits that their inflation numbers are a bunch of baloney.

  But sadly, according to the legislative watchdog GovTrack.us, this bill has a 0% chance of being passed. So I wouldn’t expect a solution anytime soon.

  In fact, this problem will likely get worse given how transfixed economists are on the deflation threat.

  Their concern is that the Chinese economic slowdown and currency devaluation will cause a wave of falling prices around the world.

  But there’s a very curious effect at work here that most people forget:

  It’s entirely possible (and now very likely) to have BOTH inflation AND deflation. At the same time.

  Assets and investments can fall, while at the same time the prices of retail goods and services rise.

  In other words, the value of your investment portfolio goes down, but your grocery bill goes up.

  It’s also important to point out that not all prices rise and fall equally.

  Gas prices may be down from a year ago in the US. But as the recently-released Hotels.com Hotel Price Index shows, hotel prices are up sharply.

  Salt Lake City: 8%. Raleigh: 5%. Portland: 9%. Washington DC: 5%. Los Angeles: 8%.

  I’ve seen the effects of this dual inflation/deflation phenomenon as I’ve traveled around the world in places like Argentina, Greece, and Indonesia.

  It is a very real threat. And it may now be coming to US shores.

  But everyone is focused exclusively on the deflation side.

  You’ll get laughed at in financial circles if you mention the word ‘inflation’ anymore. It’s being completely ignored… even denied.

  They’re pretending like half the problem doesn’t even exist, which is seriously foolish.

  Inflation is a long-term disease. Quarter by quarter the numbers may change. But over the long run it’s like a cancer, slowly eating away at your lifestyle.

  It’s not a question of either/or. It’s not a debate over inflation VS. deflation. It’s only a matter of WHEN we’ll end up with BOTH. And how well you’re prepared for it.

  

  

  

  

  

• #Wynn-ing? Casino Magnate Joins Trump Campaign

  In yet another somewhat surreal twist in The Donald’s path to The White House, Fox Business reports the long, sometimes contentious relationship between Donald Trump and Steve Wynn has taken another turn, with the Las Vegas casino magnate serving as an unofficial adviser to Trump’s presidential campaign. Having known each other for 30 years, Fox’s Gasparino notes that they have clashed in the past (Wynn on Turmp in 1998 “He’s a fool,” and Trump on Wynn “he’s a very strange guy.”) but in recent years both have been critical of the leftward tilt of the Democratic Party and president Obama.

  

  As Fox Business reports,

   People close to both men say Trump has been in constant contact with Wynn in recent weeks as his insurgent campaign to win the Republican 2016 presidential nomination continues to pick up steam—something press officials representing Trump and Wynn would not deny. These people say Wynn has offered advice and counsel to Trump on various issues, including whether Trump would rule out a third-party run, as he is expected to do later this afternoon.

   

  “They are talking regularly,” said one GOP operative with first-hand knowledge of the conversations. “Trump calls and asks Steve ‘how am I doing,” and then Steve tells him.”

   

  Michael Weaver, a spokesman for Wynn, told FOX Business that Wynn “speaks regularly to many of the candidates and whenever possible gives his best thoughts and ideas to them.  He and Mr. Trump have known each other socially for many years.   His conversations with Mr. Trump have not been much different than his conversations with the other candidates.”

   

  Weaver added: “I’m aware that he suggested to Mr. Trump that a third-party run would be unwise.”

   

  Likewise, Trump spokeswoman Hope Hicks also would not deny the discussions. “They have been friends for 30 years and they have always had a great relationship,” she told FOX Business.

  Despite some tensions over the 30 years they have known each other, Gasparino reports, the two have more recently patched up their relationship.

  According to one published report, Trump attended Wynn’s wedding, and according to people who know both men, the relationship has flourished to the point that Trump is now in nearly constant contact with Wynn about his presidential campaign.

   

  Trump’s choice of Wynn, the head of Wynn Resorts, as an unofficial political adviser seems odd since the casino tycoon isn’t known for his political acumen, but according to GOP operatives, it fits in with the temperament of Trump’s campaign. At least so far, Trump has eschewed the normal trappings of a major presidential campaign. He hasn’t hired top political advisers, and according to one GOP operative, he hasn’t commissioned one private poll to weigh voter sentiment.

  *  *  *

  Of course, if you believe Paull Farrel, none of this matters – the market is done no matter what…

  A mega crash is coming, dropping half off its peak, down below Dow 5,000. Not just another 1,000-point correction like last month. But a heart-stopping collapse coinciding with the 2016 elections … then a long systemic recession … probably lasting till the 2020 presidential election, maybe longer … no matter who’s in the White House, Doanld Trump, Jeb Bush or Hillary Clinton.

  

  

  

  

  

• "It's All Gold"- Saudi King Arrives In DC, Books All Rooms At The Four Seasons

  Over the past month or so, we’ve spent quite a bit of time detailing the effect the death of the petrodollar has had on Saudi Arabia’s financial position. Recapping briefly, Riyadh’s move to Plaxico itself in an effort to bankrupt the US shale space late last year has forced the kingdom to draw down its petrodollar reserves to ensure that ordinary Saudis aren’t affected by plunging crude. Add in a proxy war (or two) and you get a budget deficit of 20% to go along with the first current account deficit in ages. The cost of maintaining the riyal’s peg to the dollar doesn’t help either. 

  

  The situation described above has caused the Saudis to tap the debt market to help fill the gap and indeed, some estimates show the country’s currently negligible debt-to-GDP ratio climbing by a factor of 10 by the end of next year. 

  But make no mistake, all of the above should not be mistaken as a suggestion that the Saudis aren’t rich – very rich, and if you had any doubts about that, consider the following description from Politico of King Salman’s arrival in Washington for his first meeting with President Obama:

  In anticipation of King Salman bin Abdulaziz of Saudi Arabia’s stay, the Four Seasons hotel in Georgetown has done some redecorating — literally rolling out red carpets in order to accommodate the royal’s luxurious taste.

   

  Eyewitnesses at the property have seen crates of gilded furniture and accessories being wheeled into the posh hotel over the past several days, culminating in a home-away-from-home fit for the billionaire Saudi monarch, who is in Washington for his first White House meeting with President Barack Obama tomorrow.

   

  “Everything is gold,” says one Four Seasons regular, who spied the deliveries arriving at the hotel. “Gold mirrors, gold end tables, gold lamps, even gold hat racks.” Red carpets have been laid down in hallways and even in the lower parking garage, so the king and his family never have to touch asphalt when departing their custom Mercedes caravan.

   

  
  

   

  The guests staying at the 222-room hotel for the next couple of days are all part of the 79-year-old king’s entourage of Saudi diplomats, family members and assistants, one source said; a full buyout of the entire property was reserved for the visit. Guests who had booked to stay at the Four Seasons during the royal visit have apparently been moved to other luxury hotels in town. A call to the Four Seasons confirmed the hotel is sold out Thursday, Friday and Saturday nights.

   

  King Salman, who ascended the throne in January, has a habit of displacing commoners for his own comforts; this summer, during a sojourn to the French Riviera, his eight-day stay forced the closure of a popular beach, enraging locals. Salman rolls deep, with a reported 1,000-person delegation joining him for his seaside August vacation.

   

  Wall St. Journal reporter Carol Lee snapped this photograph of Salman’s entourage arriving at Andrews Air Force Base on Thursday:

  Saudis seem to have enough vehicles for King Salman’s visit – the car fleet parked at Joint Base Andrews pic.twitter.com/Gk4aLzuVL2

  — Carol Lee (@carolelee) September 3, 2015

  The king will reportedly discuss a number of rather pressing issues with the Obama administration including Riyadh’s involvement in Yemen, where, as we detailed on Thursday, a former US counterterrorism “success story” is now on the verge of splitting into two separate countries. Of course the Iran nuclear deal will also come up, especially in light of the fact that, as The New York Times noted earlier this week, “Republicans are considering legislative options to counter the deal, including the possible reimposition of sanctions the agreement is supposed to lift,” now that the President has secured the support he needs to sustain a veto of a GOP challenge.

  Perhaps more importantly, the two leaders will also discuss Syria and oil prices, with the latter issue now having a rather outsized impact on America’s shale producers as well as on US majors’ capex plans. Needless to say, the real question from a geopolitical perspective is whether Obama and King Salman come to any closed-door agreements on Syria where, as Al Jazeera delicately puts it, the US and Saudi Arabia are set to orchestrate a “managed political transition.”

  

  *  *  *

  Meanwhile, over at The White House blog:

  

  

  

  

  

• Meanwhile In Submerging Markets: An FX Bloodbath

  Things were already bad enough for emerging markets going into August. Persistently low commodity prices, slumping demand from China, depressed global trade, and a “diminutive” septuagenarian waving around a loaded rate hike pistol in the Eccles Building had served to put an enormous amount of pressure on the world’s emerging economies.

  And then, the unthinkable happened. 

  No longer able to watch from the sidelines as the export-driven economy continued to buckle from the pain of the dollar peg, China devalued the yuan. What happened next was nothing short of a bloodbath. The carnage is documented below.

  First note that just moments after the PBoC’s yuan move we said the following:

  Biggest immediate loser from China’s devaluation: Brazil

  — zerohedge (@zerohedge) August 11, 2015

  Well sure enough, with the exception of the kwacha, the Belarusian ruble, and the tenge (which went to a free float overnight late last month), that has proven to be demonstrably correct as you can see from the following overview of EM FX performance since China’s deval:

  

  And here’s the big picture which also shows that EM FX has fallen 16 of the last 18 weeks with this week being the worst stretch since March:

  

  Now just imagine what this will look like if the Fed pulls the trigger…

  

  

  

  

  

  

Digest powered by RSS Digest