November 17, 2017

Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

In a moment of rare insight, two weeks ago in response to a question "Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?", we said that this was simply a "prelude to central bank funded universal income", or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what's to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of "solutions", as simply cutting interest rates won't well, cut it anymore, and in addition to more QE and forward guidance - both of which were used widely in the last recession - the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams', Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams' implicit admission that as a result of 9 years of Fed attempts to stimulate the economy - yet merely ending up with the biggest asset bubble in history - the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

Read the entire article

November 16, 2017

BoE Deputy Governor Gives Crazy Speech Warning Markets Have Underestimated Rate Rises

On 2 November 2017, the Bank of England raised rates for the first time in a decade and Sterling’s initial rise was promptly sold off by forex traders as we discussed.

The 7-2 vote by the Monetary Policy Committee was not the unanimous decision some had expected, while Cunliffe and Ramsden saw insufficient evidence that wage growth would pick up in line with the BoE’s projections from just over 2% to 3% in a year’s time. Ben Broadbent, MPC member, deputy governor and known to be a close confidant of Governor Carney, gave a speech today at the London School of Economics (LSE) in which he warned markets that Brexit issues didn’t necessarily mean that interest rates have to remain low.

Bloomberg reports that Broadbent stated that the Brexit impact on monetary policy depends on how it affects demand, supply and the exchange rate.

"There are feasible combinations of the three that might require looser policy, others that lead to tighter policy."

Which sounds alot like he doesn't know, although he stuck to the central bankers trusty tool, reassuring LSE students the Phillips Curve "still seems to have a slope".

According to the FT.

The deputy governor of the Bank of England has warned that financial markets have underestimated the chance of further interest rate rises. In a speech at the London School of Economics on Wednesday, Ben Broadbent said markets had placed too much emphasis on the idea that interest rates needed to be kept low in the face of Brexit uncertainty. The deputy governor said it was “uncertain” and “complex” to anticipate how Brexit would affect inflation. But he rejected the assertion that Brexit “necessarily implies low interest rates”.

Read the entire article

November 15, 2017

Venezuela Defaults On A Debt Payment – Is This The First Domino To Fall?

Did you know that Venezuela just went into default?  This should be an absolutely enormous story, but the mainstream media is being very quiet about it.  Wall Street and other major financial centers around the globe could potentially be facing hundreds of millions of dollars in losses, and the ripple effects could be felt for years to come.  Sovereign nations are not supposed to ever default on debt payments, and so this is a very rare occurrence indeed.  I have been writing about Venezuela for years, and now the crisis that has been raging in that nation threatens to escalate to an entirely new level.

Things are already so bad in Venezuela that people have been eating dogs, cats and zoo animals, but now that Venezuela has officially defaulted, there will be no more loans from the rest of the world and the desperation will grow even deeper…

Venezuela, a nation spiraling into a humanitarian crisis, has missed a debt payment. It could soon face grim consequences.

The South American country defaulted on its debt, according to a statement issued Monday night by S&P Global Ratings. The agency said the 30-day grace period had expired for a payment that was due in October.

A debt default risks setting off a dangerous series of events that could exacerbate Venezuela’s food and medical shortages.

Read the entire article

November 14, 2017

Emerging Market Junk Debt Issuance Surges To New Record As The "Search For Yield" Intensifies

It seems that the never-ending "thirst for yield" from the world's massive pension funds, combined with the ever-present "cash on the sidelines" problem, is driving the creation of yet another global financial bubble in emerging market junk bonds.  Alas, as the FT points out today, the world's largest fixed income investors can't seem to get enough of the risky paper as bond issuance by the most financially vulnerable countries has suddenly spiked to a all-time high of $75 billion just as spreads are tightening to all-time lows.

Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50 per cent year on year to the highest total on record, according to figures from Dealogic, a data provider.

The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40 per cent of the new debt syndicated in EM so far in 2017.

These rare and new issuers have been lured into the market by attractive pricing — strong investor demand for EM debt has pushed pricing up and yields down, making it one of the best-performing assets globally in 2017.

According to Bloomberg Barclays indices, EM’s local currency-denominated sovereign debt has returned 10.4 per cent since the start of this year, while dollar-denominated debt has returned 7.6 per cent. By contrast, US Treasuries have returned 2.5 per cent while European nations’ debt has returned 0.9 per cent.

Read the entire article

November 13, 2017

This Is What A Pre-Crash Market Looks Like

The only other times in our history when stock prices have been this high relative to earnings, a horrifying stock market crash has always followed.  Will things be different for us this time?  We shall see, but without a doubt this is what a pre-crash market looks like.  This current bubble has been based on irrational euphoria that has been fueled by relentless central bank intervention, but now global central banks are removing the artificial life support in unison.  Meanwhile, the real economy continues to stumble along very unevenly.  This is the longest that the U.S. has ever gone without a year in which the economy grew by at least 3 percent, and many believe that the next recession is very close.  Stock prices cannot stay completely disconnected from economic reality forever, and once the bubble bursts the pain is going to be unlike anything that we have ever seen before.

If you think that these ridiculously absurd stock prices are sustainable, there is something that I would like for you to consider.  The only times in our history when the cyclically-adjusted return on stocks has been lower, a nightmarish stock market crash happened soon thereafter…

The Nobel-Laureate, Robert Shiller, developed the cyclically-adjusted price/earnings ratio, the so-called CAPE, to assess whether stocks are likely to be over- or under-valued. It is possible to invert this measure to obtain a cyclically-adjusted earnings yield which allows one to measure prospective real returns. If one does this, the answer for the US is that the cyclically-adjusted return is now down to 3.4 percent. The only times it has been still lower were in 1929 and between 1997 and 2001, the two biggest stock market bubbles since 1880. We know now what happened then. Is it going to be different this time?

Since the market bottomed out in early 2009, the S&P 500 has been on a historic run.  If this rally had been based on a booming economy that would be one thing, but the truth is that the U.S. economy has not seen 3 percent yearly growth since the middle of the Bush administration.  Instead, this insane bubble has been almost entirely fueled by central bank manipulation, and now that manipulation is being dramatically scaled back.

Read the entire article

November 10, 2017

"Lull Before The Storm" - Will China Bring An Energy-Debt Crisis?

It is easy for those of us in the West to overlook how important China has become to the world economy, and also the limits it is reaching. The two big areas in which China seems to be reaching limits are energy production and debt. Reaching either of these limits could eventually cause a collapse.

China is reaching energy production limits in a way few would have imagined. As long as coal and oil prices were rising, it made sense to keep drilling. Once fuel prices started dropping in 2014, it made sense to close unprofitable coal mines and oil wells. The thing that is striking is that the drop in prices corresponds to a slowdown in the wage growth of Chinese urban workers. Perhaps rapidly rising Chinese wages have been playing a significant role in maintaining high world “demand” (and thus prices) for energy products. Low Chinese wage growth thus seems to depress energy prices.

(Shown as Figure 5, below). China’s percentage growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was based on a Bloomberg Survey.

The debt situation has arisen because feedback loops in China are quite different from in the US. The economic system is set up in a way that tends to push the economy toward ever more growth in apartment buildings, energy installations, and factories. Feedbacks do indeed come from the centrally planned government, but they are not as immediate as feedbacks in the Western economic system. Thus, there is a tendency for a bubble of over-investment to grow. This bubble could collapse if interest rates rise, or if China reins in growing debt.

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November 9, 2017

New Potential Credit Risk Bombs: Exotic, ‘Nonlinear’ and Private Transactions

The Wall Street Journal has a story today on a new type of credit market transaction described as “nonlinear finance”. That label alone should send off alarms, since one assumes it is truth in advertising, a rare commodity in Big Finance. “Nonlinear” says that under certain scenarios, the price of the instrument goes “nonlinear,” as in behaves in a radically different, ungraceful manner or can be expected to have its price gap out if particular conditions are met. That would also suggest the instrument would be hard to hedge.

One of the reasons I can’t be as specific as I’d like, as Wall Street Journal readers pointed out, is the actual article is thin on details. However, that isn’t as surprising as it should seem. These trades sound a lot like the old CDOs, the ones that blew up so spectacularly in the crisis. Technically, those were asset-backed securities, or ABS CDOs.1 If you were reading the financial press before the crisis, the only reporter who recognized the importance and riskiness of CDOs was the Financial Times’ Gillian Tett, who doggedly kept after them and managed to ferret out critical bits of information. CDOs also became large enough as a product that there was some aggregate data, but it wasn’t terribly reliable (one huge problem was the potential for double-counting).

And it also makes sense that financiers would find a new bottle for the old CDO wine, since any investor would probably have a lot of ‘splaining to do if he were to invest in something that was sold as a CDO, even if that was a straight up description.

First to the critical bits of the Journal story, then more discussion as to how worried to be about this development. From the Journal:

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November 8, 2017

The World's Biggest Bubbles

We recently discussed (see here) Alberto Gallo’s (portfolio manager of Algebris Macro Credit Fund) shot at the $64,000 (more like trillion) question in his report “The Central Bank Bubble: How Will It Burst?”.

As we said at the time, one of our favourite parts of the report was “The Money Tree” infographic which explains how QE has benefited a plethora of investment strategies and created the bubble to end all bubbles.

Having outlined four scenarios which could prick the central bank bubble, Gallo has done some further work in which he identifies what he thinks are the fourteen largest bubbles in the world today. Helpfully, he also ranks them. From the Financial Sense website.

Many economists believe that it’s impossible to recognize bubbles before they pop. However, Alberto Gallo of Algebris Investments has compiled a list of the largest potential bubbles around the world today, ranked by degree of risk based on size, duration, percent appreciation, valuations, and the types of irrational behavior driving them higher. Financial Sense spoke with him…to discuss his research, the areas he believes are highest at risk, and how he's approaching the current investment environment…Right now, the risk is high in a variety of assets around the world. “We’re in a world where most assets are overvalued,” Gallo said, which means “in a world where almost everything looks like a bubble, the definition of a bubble has to be changed.”

Besides valuation, Gallo lists another ten characteristics which are “typically present” in today’s bubbles. These are:

This time is different
Fear of missing out
Sky is the limit
Flipping
No credit, no problem
Buy the dip
Borrow while you can
Bidding wars
The trend is your friend
Financial engineering

Read the entire article

November 7, 2017

Goldman's Asset Arm Takes Big Hit On Venezuelan Bond Bloodbath

The fallout from the Venezuelan bond restructuring has claimed a major victim in Goldman Sachs Asset Management, or rather some of the “muppets” who trusted Goldman to invest their money. However, the route which led Goldman to losing a chunk of client money wasn’t just a case of bad judgement, being riddled with the usual mixture of greed, questionable ethics and government intervention. As we detailed in “Goldman Accused Of Funding Maduro’s Dictatorship”.

Goldman controversially purchased $2.8 billion of 2022 bonds in May 2017 in the state-owned oil producer PDVSA, for about $865 million - or about 31 cents on the dollar. This prompted Julio Borges, President of the National Assembly and head of Venezuela’s opposition, to accuse Goldman of “aiding and abetting the country’s dictatorial regime.” Borges threatened that any future democratic government would not recognise or pay on the bonds. In true Goldman fashion, however, the deal was just too lucrative to pass up, or so it seemed at the time, as Goldman paid a then 30% discount to other Venezuelan bonds with a similar maturity.

Goldman’s ”defence” was that it did not buy the bonds directly from PDVSA, consequently it did not transfer funds directly to the Venezuelan regime.

To make matters worse, when the Trump White House extended sanctions against Venezuela over the Summer, including a ban on trading Venezuelan debt, Goldman’s bonds were mysteriously exempt. As we argued here.

“the logic is that if Goldman was forced to liquidate the bonds, or worse was stuck holding them as Venezuela went bankrupt, it would take a huge hit on the nearly $3 billion notional position. As such, Goldman's advisors to Trump made it quite clear that any sanctions against Venezuela would have to be Goldman Sachs revenue neutral first and foremost. That's precisely what happened.”

We have to acknowledge, however, that the next comment of ours was only half correct.

Read the entire article

November 6, 2017

The Federal Reserve Has Just Given Financial Markets The Greatest Sell Signal In Modern American History

Why have stock prices risen so dramatically since the last financial crisis?  There are certainly many factors involved, but the primary one is the fact that the Federal Reserve has been creating trillions of dollars out of thin air and has been injecting all of that hot money into the financial markets.  But now the Federal Reserve is starting to reverse course, and this has got to be the greatest sell signal for financial markets in modern American history.  Without the artificial support of the Federal Reserve and other global central banks, there is no possible way that the massively inflated asset prices that we are witnessing right now can continue.

The chart below comes from Sven Henrich, and it does a great job of demonstrating the relationship between the Fed’s quantitative easing program and the rise in stock prices.  During the last financial crisis the Fed began to dramatically increase the size of our money supply, and they kept on doing it all the way through the end of October 2017.

Unfortunately for stock traders, the Federal Reserve has now decided to change course, and that means that the process that has created these ridiculous stock prices is beginning to go in reverse.  In fact, according to Wolf Richter this reversal just started to go into motion within the past few days…

On October 31, $8.5 billion of Treasuries that the Fed had been holding matured. If the Fed stuck to its announcement, it would have reinvested $2.5 billion and let $6 billion (the cap for the month of October) “roll off.” The amount of Treasuries on the balance sheet should then have decreased by $6 billion.

And that’s what happened. This chart of the Fed’s Treasury holdings shows that the balance dropped by $5.9 billion, from an all-time record 2,465.7 billion on October 25 to $2,459.8 billion on November 1, the lowest since April 15, 2015

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November 3, 2017

Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists's Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

HOW BILLIONAIRES ARE HEDGING

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades. – Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

Read the entire article

November 2, 2017

Trump Picks Powell To Be Next Fed Chair

The White House has notified Federal Reserve governor Jerome Powell that President Donald Trump intends to nominate him as the next chairman of the central bank, according to a person familiar with the matter.

The president spoke with Mr. Powell on Tuesday, according to another person familiar with the matter who couldn’t describe what they discussed.


Mr. Trump said in a video last week that he had “somebody very specific in mind” for the job.

“It will be a person who hopefully will do a fantastic job,” Mr. Trump said in a video posted to Instagram, adding, “I think everybody will be very impressed.”

Modest reactions for now in USDJPY and gold...

However, WSJ notes that while President Trump had settled on Mr. Powell by Saturday, but people familiar with the process had cautioned that he could change his mind.

WSJ summarizes Powell's views as follows...

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November 1, 2017

Why Today's Big Fed Risk Is A "Dovish Surprise": One Trader Explains

In our preview of today's FOMC, we said there is virtually no way the Fed could surprise on the hawkish side, especially with Trump set to unveil Jay Powell as the new head of the Fed: after all, the December rate hike is over 80% priced in at this point. But what about the opposite - can the Fed surprise on the dovish side? That, according to Bloomberg macro commentator and former Lehman trader Mark Cudmore is the biggest risk today. As he writes, "growth is solid, but not spectacular. It would be a brave stretch for the committee to upgrade its outlook. The strong advance 3Q estimate was distorted by the impact of hurricanes on net exports and inventories. Far more probable is that the comments on inflation are tweaked to account for the fact that CPI is picking up slower than anticipated, while the preferred core PCE measure remains close to six-year lows."

Perhaps, but one also has to consider the possibility of a hawkish Fed surprise on Thursday, one in which Trump ignores the consensus and goes with Taylor, or Warsh. The good news here is that according to Morgan Stanley, no matter who the next Fed chair is, any pronounced market moves are to be faded.

But before we get there, we have to go through today's FOMC decision, which is why here is Cudmore's full Macro View preview of the only possible way Yellen can surprise markets:

There’s much greater potential for rates to fall than rise in reaction to the Fed decision and statement on Wednesday. 

The base case is for no major reaction in either direction. A December hike is already more than 80 percent priced with six weeks to run until the decision. There’s little room for a hawkish surprise to impact rates markets.

Fed officials won’t pre- commit, nor do they have any desire to unnecessarily lock themselves on a set path. They won’t guarantee a December rate rise.

Read the entire article

October 31, 2017

"This Could Be Huge": Gold Bar Certified By Royal Canadian Mint Exposed As Fake

The last time there was a widespread physical gold counterfeiting scare was in the summer of 2012 when as we reported the discovery of a single 10 oz Tungsten-filled gold bar in Manhattan's jewelry district led to a panic among the dealer community, which then resulted in local jewelry outlets discovering at least ten more fake 10-ounce "gold bars" filled with Tungsten. Fast forward to today when a similar instance of gold counterfeiting has been discovered, this time in Canada, and where the fake bar in question had been "certified" by the highest possible authority.

According to CBC, the Royal Canadian Mint is investigating how a sealed, "pure gold" wafer with proper mint stampings has emerged as a fake. According to the Canadian press, the one-ounce gold piece, which was supposed to be 99.99% pure, was purchased by an Ottawa jeweller on Oct. 18 at a Royal Bank of Canada branch. The problem emerged when tests of the bar showed it may contain no gold at all. And, when neither the mint nor RBC would take the bar back, jeweler Samuel Tang contacted CBC news.

"Who is going to make sure those [gold wafers] are real?" asked Tang. "I am worried there are more of those [gold wafers] out there, and no one knows."

Following the news, RBC felt an obligation to pick up the bar and returned it to the mint for testing, refunding Tang the $1,680 purchase price.

The Royal Canadian Mint said in a statement to CBC it is in process of testing the bar, "although the appearance of the wafer and its packaging already suggests that it is not a genuine Royal Canadian Mint product."

Read the entire article

October 30, 2017

Will America’s Prosperity Be Completely Wiped Out By Our Growing Debt?

The federal government is now 20.4 trillion dollars in debt, and most Americans don’t seem to care that the economic prosperity that we are enjoying today could be completely destroyed by our exploding national debt.  Over the past decade, the national debt has been growing at a rate of more than 100 million dollars an hour, and this is a debt that all of us owe.  When you break it down, each American citizen’s share of the debt is more than $60,000, and so if you have a family of five your share is more than $300,000.  And when you throw in more than 6 trillion dollars of corporate debt and nearly 13 trillion dollars of consumer debt, it is not inaccurate to say that we are facing a crisis of unprecedented magnitude.

Debt cannot grow much faster than GDP indefinitely.  At some point the bubble bursts, and when it does the pain that the middle class is going to experience is going to be off the charts.  Back in 2015, the middle class in the U.S. became a minority of the population for the first time ever.  Never before in our history has the middle class accounted for less than 50 percent of the population, and all over the country formerly middle class families are under a great deal of stress as they attempt to make ends meet.  The following comes from an absolutely outstanding piece that was just put out by Charles Hugh Smith

If you talk to young people struggling to make ends meet and raise children, or read articles about retirees who can’t afford to retire, you can’t help but detect the fading scent of prosperity.

It has steadily been lost to stagnation, under-reported inflation and soaring inequality, a substitution of illusion for reality bolstered by the systemic corruption of authentic measures of prosperity and well-being.

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