September 3, 2015

Heresy! China Won't Stick To IMF, World Bank Lending "Religion" With AIIB

Back in April, China was flying high. The stock market had reached dizzying heights on the back of an unprecedented surge in margin debt, creating billions in paper profits for millions of farmers and housewives turned day traders. Around the same time, Beijing had accidentally pulled off a major diplomatic coup. The China-led Asian Infrastructure Investment bank had just wrapped up a wildly successful membership drive after a surprise decision by the UK to back the new venture opened the floodgates and emboldened other US allies who, despite Washington’s best efforts to convince them otherwise, decided to join up.
The effort to recruit members was in fact so successful, that Beijing went out of its way to dispel the notion that the new bank represented an attempt on China’s part to usher in a new era of yuan hegemony and rewrite the rules of the post-War global economic order. 
Despite the Politburo’s best efforts to toe the line between acknowledging the bank’s early success and unnerving Western members who, although happy to participate, are still acutely aware that a dying hegemon is still a hegemon and therefore would prefer it if Beijing didn’t rub the whole thing in Washington’s face, it was abundantly clear to everyone involved that the AIIB represented no less than a changing of the guard and a revolution against the US-dominated multilateral institutions that many emerging countries believe have failed to respond to seismic shifts in the global economy. 
Unfortunately for China, the AIIB was forced to take a back seat in terms of media coverage to the country’s dramatic equity market meltdown and, subsequently, to the devaluation of the yuan which, you’re reminded, will play an outsized role in any financing extended by the new lender. But as the carnage in financial markets grabs the headlines, the AIIB is quietly making preparations to officially commence operations and as Reuters notes, China is set to “rewrite the unwritten rules of global development finance” by doing away with certain conditionalities required by Western multilateral lenders. Here’s Reuters with the story:

September 2, 2015

The "Great Accumulation" Is Over: The Biggest Risk Facing The World's Central Banks Has Arrived

To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century. 
When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets. 
Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.
On Tuesday, Deutsche Bank is out extending their "quantitative tightening" (QT) analysis with a look at what’s ahead now that the so-called "Great Accumulation" is over. 

September 1, 2015

In The Month Of September 2015 We Officially Enter The Danger Zone

Is September 2015 going to be one of the most important months in modern American history?  When I issued my first ever “red alert” for the last six months of 2015 back in June, I was particularly concerned with the months of September through December, and not just for economic reasons.  All of the intel that I have received is absolutely screaming that big trouble is ahead.  So enjoy these last few days of relative peace and quiet.  I mean that sincerely.  In fact, that is exactly what I have been doing – over the past week I have not posted many articles because I was spending time with family, friends and preparing for the national call to prayer on September 18th and 19th.   But now as we enter the chaotic month of September 2015 I have a feeling that there is going to be plenty for me to write about.

At this time last month, I declared that we were entering “the pivotal month of August 2015“, and that is exactly what it turned out to be.  August was the worst month overall for stocks in three years, and it was the worst month of August for U.S. financial markets in 17 years.

Throughout history, there have only been 11 times when the S&P 500 has declined by more than five percent during the month of August.  When that has happened, the stock market has almost always fallen in September as well

Read the entire article

August 31, 2015

JPMorgan: "Nothing Appears To Be Breaking" But "Something Happened"

If you thought you were merely on the fence about being confused on the topic of the global economy, and how the Fed may be on the verge of a rate hike when on both previous occasions when financial conditions were here the Fed was launching QE1 and QE2, here is JPM's chief economist Bruce Kasman to make sure of that.
Something happened

The August turbulence in global markets has produced significant shifts, including a 6.6% fall in equity prices. The currencies of emerging market countries have depreciated substantially against the G-4, while emerging market borrowing rates for sovereigns and corporates have moved higher. Global oil prices have been whipsawed as have G-4 bond yields.

The speed and magnitude of these movements is reminiscent of past episodes in which financial crises emerged or the global economy slipped into recession. However, nothing appears to be breaking. Global activity indicators have, on balance, disappointed but remain consistent with a modest pickup in the pace of growth. Additionally, despite the turbulence in financial markets, there is no sign of unusual stress in short-term funding markets or of a credit crisis in any large EM economy.
And just to ease the confusion somewhat, here is Kasman's attempt at explaining what many others had foreseen months, if not years, ago:

Read the entire article

August 28, 2015

Currency Depreciations Don’t Boost Exports as Much as They Used To

The export-less depreciation of the yen has opened a debate on the power of exchange rates to boost exports. This column presents new evidence on how the exchange rate elasticity of exports has changed over time and across countries, and how global value chains have affected it. The upshot is that greater integration in global value chains makes exports substantially less responsive to exchange rate depreciations.

Competitively valued exchange rates are often seen as crucial to promote exports (e.g. Freund and Pierola 2012, Eichengreen and Gupta 2013). However, in the aftermath of the Global Crisis, some episodes of large depreciations appeared to have had little impact on exports, the depreciation of the yen being the main example. This has led some observers to question the effectiveness of lower exchange rates (Financial Times 2015).

Figure 1 focuses on a sample of Central Eastern European countries and provides some suggestive preliminary evidence. The figure shows that those countries that are more tightly integrated in German supply chains (Poland, Hungary, Czech Republic and Slovakia) saw a much stronger flattening of the relationship between real effective exchange rate (REER) growth and export growth to Germany than those that are more loosely integrated in German supply chains (Bulgaria, Latvia, Lithuania, Romania, and Slovenia). While other factors were certainly at play, this evidence suggests that cross-border production linkages may contribute to reducing the effectiveness of depreciations to boost exports.

Read the entire article

August 27, 2015

Deflationary Collapse Ahead?

Both the stock market and oil prices have been plunging. Is this “just another cycle,” or is it something much worse? I think it is something much worse.

Back in January, I wrote a post called Oil and the Economy: Where are We Headed in 2015-16? In it, I said that persistent very low prices could be a sign that we are reaching limits of a finite world. In fact, the scenario that is playing out matches up with what I expected to happen in my January post. In that post, I said
Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:
  • The amount consumers can afford for oil
  • The cost of oil, if oil price matches the cost of production
This mismatch between rising costs of oil production and stagnating wages is what has been happening. The unaffordability problem can be hidden by a rising amount of debt for a while (since adding cheap debt helps make unaffordable big items seem affordable), but this scheme cannot go on forever.

Eventually, even at near zero interest rates, the amount of debt becomes too high, relative to income. Governments become afraid of adding more debt. Young people find student loans so burdensome that they put off buying homes and cars. The economic “pump” that used to result from rising wages and rising debt slows, slowing the growth of the world economy. With slow economic growth comes low demand for commodities that are used to make homes, cars, factories, and other goods. This slow economic growth is what brings the persistent trend toward low commodity prices experienced in recent years.

Read the entire article

August 26, 2015

Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks

On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market.

This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.

And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treasuy's long-end drop in yields has not been anywhere near as profound as the tumble in stocks. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation. 

Why is that?

We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China's devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasury's in the past two weeks. 

Read the entire article

August 25, 2015

BLACK MONDAY: The First Time EVER The Dow Has Dropped By More Than 500 Points On Two Consecutive Days

On Monday, the Dow Jones Industrial Average plummeted 588 points. It was the 8th worst single day stock market crash in U.S. history, and it was the first time that the Dow has ever fallen by more than 500 points on two consecutive days. But the amazing thing is that the Dow actually performed better than almost every other major global stock market on Monday.  In the U.S., the S&P 500 and the Nasdaq both did worse than the Dow. In Europe, almost every major index performed significantly worse than the Dow.  Over in Asia, Japanese stocks were down 895 points, and Chinese stocks experienced the biggest decline of all (a whopping 8.46 percent). On June 25th, I was not kidding around when I issued a “red alert” for the last six months of 2015. I had never issued a formal alert for any other period of time, and I specifically stated that “a major financial collapse is imminent“. But you know what? As the weeks and months roll along, things will eventually be even worse than what any of the experts (including myself) have been projecting. The global financial system is now unraveling, and you better pack a lunch because this is going to be one very long horror show.

Our world has not seen a day quite like Monday in a very, very long time. Let’s start our discussion where the carnage began…

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August 24, 2015

Summarizing The "Black Monday" Carnage So Far

We warned on Friday, after last week's China rout, that the market is getting ahead of itself with its expectation of a RRR-cut by China as large as 100 bps. "The risk is that there isn't one." We were spot on, because not only was there no RRR cut, but Chinese stocks plunged, with the composite tumbling as much a 9% at one point, the most since 1996 when it dropped 9.4% in a single session. The session, as profile overnight was brutal, with about 2000 stocks trading by the -10% limit down, and other markets not doing any better: CSI 300 -8.8%, ChiNext -8.1%, Shenzhen Composite -7.7%. This was the biggest Chinese rout since 2007.

The worst news is that the 3,500 level in the SHCOMP which until recently had been seen as a "hard barrier" for the PBOC, has now been breached, and not only is the Shanghai Composite red for the year after being up 60% a little over 2 months earlier (don't worry though: just like on Yahoo Finance Twitter everyone took profits at the highs), but nobody knows why the Politburo let stocks tumble and worst of all, how much further will it allow stocks to drop.

Elsewhere in Asia, equity markets traded with significant losses on what is being referred to as 'black Monday' amid increased growth concerns coupled with commodities falling to fresh 6 year lows and US stocks in correction, sparked a further sell-off in the region . The ASX 200 (-4.1%) declined by the most in 4 years, Nikkei 225 (-4.6%) and Hang Seng (-5.2%) also saw considerable losses with energy dragging the index lower. 10yr JGBs saw relatively muted trade and are up by 3 ticks.

Risk averse sentiment has dominated the price action in both Asia and Europe as the week kicks off, with Chinese equities again under heavy selling pressure as market participants were left disappointed by the lack of action by the PBOC to ease monetary conditions further. As a result, equity indices in Europe opened sharply lower (Euro Stoxx: -2.3%) and in spite of coming off the worst levels of the session, remain broadly lower, with materials and energy sectors underperforming amid the continued slump in commodity prices. The Dax was well below 10,000 at last check.

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August 21, 2015

Pathetic Spin from Goldman Sachs

A former Goldman Sachs executive just got named to an important job in the Federal Reserve systemand if you think that’s a problem then you just may be an anti-Semite. Or maybe it’s that you don’t appreciate diversity.
I’ve got no idea what communications operative decided to run with this inane spin (in my experience they’re nearly all dumb enough to do such a thing) but it has the potential to torpedo Steven Kaplan’s nomination. 
The issue is simple: it’s hard not to look at the events surrounding the 2008 financial market meltdown and ascribe some portion of blame to Goldman Sachs, the 800 pound gorilla on Wall Street. As Michael Lewis’ bookThe Big Short made plain, its bankers were selling mortgage-backed securities they were fairly certain would crater, while also allowing other customers to bet on precisely that outcome.
When the bottom fell out of the market, Goldman Sachs emerged more or less unscathed despite its exposure--largely thanks to a massive government bailout of AIG, which had sold them “insurance” on billions of dollars of their investments that turned out to be worthless, a fact that would have become evident had Goldman’s alleged geniuses given it even a cursory thought.  But they didn’t, in part because they knew that they were too important (or politically plugged in) to fail. Having a Goldman alum running the Treasury helped assuage any fears. 

August 20, 2015

After 6 Years Of QE, And A $4.5 Trillion Balance Sheet, St. Louis Fed Admits QE Was A Mistake

As you’re no doubt aware, the Fed is fond of using the research departments at its various branches to validate policy and analyze away bad economic outcomes. For instance, earlier this year, the San Francisco Fed came up with an academic justification for the now infamous double seasonally adjusted GDP print - they call it "residual seasonality." Then there’s the NY Fed, where researchers recently took to the bank’s blog to explain why, despite all evidence to the contrary, Treasury liquidity is "fairly favorable."

Be that as it may, someone will occasionally say something really inconvenient - like when, back in April, the St. Louis Fed warned that the American Middle Class was "under more pressure than you think," a situation the bank blamed on the diverging fortunes (literally) of the haves and the have nots in the post-crisis world. The implication - made clear in the accompanying graphics - was that QE was effectively eliminating the Middle Class.

Now, the very same St. Louis Fed (this time in the form of a white paper by the bank’s vice president Stephen D. Williamson), is out questioning the efficacy of QE when it comes to stoking inflation and boosting economic activity. 

Williamson says the theory behind QE is "not well-developed", and calls the evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes "mixed at best."

Read the entire article

August 19, 2015

If History Is Any Indication, Junk Bonds And Copper Are Telling Us Exactly Where Stocks Are Heading Next

Yields on the riskiest junk bonds are absolutely soaring and the price of copper just hit a fresh six year low.  To most people, those pieces of financial news are meaningless.  But if you understand history, and you are aware of the patterns that immediately preceded previous stock market crashes, then you know how how huge both of those signs are.  During the summer of 2008, junk bond prices absolutely cratered as junk bond yields skyrocketed.  This was a very clear signal that financial markets were about to crash, and sure enough a couple of months later it happened.  Now the exact same thing is happening again.  The following comes from a Wall Street On Parade article that was posted on Tuesday entitled “Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08“…
According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets. 
Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.
Read the entire article 

August 18, 2015

23 Nations Around The World Where Stock Market Crashes Are Already Happening

You can stop waiting for a global financial crisis to happen.  The truth is that one is happening right now.  All over the world, stock markets are already crashing.  Most of these stock market crashes are occurring in nations that are known as “emerging markets”.  In recent years, developing countries in Asia, South America and Africa loaded up on lots of cheap loans that were denominated in U.S. dollars.  But now that the U.S. dollar has been surging, those borrowers are finding that it takes much more of their own local currencies to service those loans.  At the same time, prices are crashing for many of the commodities that those countries export.  The exact same kind of double whammy caused the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s.

As you read this article, almost every single stock market in the world is down significantly from a record high that was set either earlier this year or late in 2014.  But even though stocks have been sliding in the western world, they haven’t completely collapsed just yet.

In much of the developing world, it is a very different story.  Emerging market currencies are crashing hard, recessions are starting, and equity prices are getting absolutely hammered.

Posted below is a list that I put together of 23 nations around the world where stock market crashes are already happening.  To see the stock market chart for each country, just click the link…

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August 17, 2015

Goldman Weighs In On America's Pension Ponzi: Contributions Must Rise $100 Billion Per Year

Over the past several months, we’ve taken a keen interest in the deteriorating condition of state and local government finances in America. 

Moody’s move to downgrade the city of Chicago to junk in May put fiscal mismanagement in the national spotlight and indeed, the Illinois Supreme Court ruling that triggered the downgrade (in combination with a subsequent ruling by a Cook County court which struck down a bid to reform the city’s pensions), effectively set a precedent for other states and localities, meaning that now, solving the growing underfunded pension liability problem will be that much more difficult. 

Just how big of a problem is this you ask? Well, pretty big, according to Moody’s which, as we noted last month, contends that the largest 25 public pensions are underfunded by some $2 trillion

It’s against that backdrop that we present the following graphic and color from Goldman which together demonstrate the amount by which state and local governments would need to raise contributions to "bring plans into balance over time."

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August 14, 2015

Spain Hit by Trade Suits, a Bitter Foretaste of TTIP

US brokerage firm Schwab Holdings and Malta-based OperaFund Eco-Invest Sicav have lodged a new international complaint against the Spanish State over its recent cuts to renewable energy subsidies. The case will be heard in the International Center for Settlement Investment, a Washington DC-based investment arbitration institution that is a member of the World Bank.

It is the 19th complaint to date against the Spanish state over its cuts to renewable energy subsidies, propelling Spain to third place in the global leader board of nations facing Investor-State Dispute Settlement (ISDS) suits. In fact, the only two countries facing more suits are the two bugbears of international capital Venezuela (24 complaints) and Argentina (20).

As I wrote in The Global Corporatocracy is Just a Pen Stroke Away From Completion, the “investor-state dispute settlement” provision is what would give the new generation of trade treaties such as Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP), and Trade in Services Agreement (TISA) their “claws and teeth.”

It effectively allows privately owned overseas corporations to sue entire nations if they feel that a law lost them money on their investment… Cases do not get heard in a court of law, under the scrutiny of a judge and jury, but rather in front of arbitration panels made up of three professional arbitrators — one representing the company, one representing the country and the other chosen by the first two to sit as president of the panel.

None of these arbitrators are trained judges; they are private individuals often representing some of the biggest international corporate law firms, mostly from the U.S. and Europe.