August 20, 2019

The latest sign that absolutely nothing makes sense

In the latest sign that absolutely nothing makes sense anymore, WeWork filed formal regulatory paperwork with the Securities and Exchange Commission last week, officially notifying the world that it will soon be going public.

If you haven’t heard of WeWork (or it’s parent– ‘The We Company’), it’s a real estate company that owns practically zero real estate.

Instead, they lease vast amounts of office space in commercial buildings on long-term contracts, and then sub-lease that space to individual tenants– often small businesses– with short-term contracts.

It’s essentially the same business model as Regus– which provides virtual office services, business addresses, and short-term office space, in pretty much every major city around the world.

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August 19, 2019

12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis over 20 years in the making, but with every passing day, SocGen's Albert Edwards - who first coined the term "Ice Age" to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity - is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan's great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a "Japanification" of every major bond market...

... Edwards said that what bond markets are telling us is "that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high."

Needless to say that's not good, not least of all because we now live in a world in which the bond universe with negative yields continues to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion...

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August 16, 2019

Hong Kong Activist Leader Calls For A Run On Chinese Banks Tomorrow

Prominent Hong Kong pro-independence political activist Chen Haotian has called for a run on Chinese banks, asking that everyone withdraw their money on the same day.

Haotian is a founding member and the convenor of the Hong Kong National Party.

Arguing that large scale protests have only led to injuries and escalating police brutality, Haotian believes another method could be used to severely undermine China’s influence – a good old fashioned run on the bank.

He suggested that another method could be used, namely, impacting the financial system,” reports China Press.

“He called on Friday (August 16) that Hong Kong citizens take out all bank deposits. The primary goal is Chinese banks, but he said other banks should also be targeted, otherwise Chinese banks can borrow money from other banks to solve problems.”

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August 15, 2019

Why The Dollar Rules The World - And Why Its Reign Could End

President Donald Trump wants a lower US dollar. He complains about the over-valuation of the American currency. Yet, is he right to accuse other countries of a “currency manipulation”? Is the position of the US dollar in the international monetary arena not a manipulation in its own right? How much has the United States benefitted from the global role of the dollar, and is this “exorbitant privilege” coming to end? In order to find an answer to these questions, we must take a look at the monetary side of the rise of the American Empire.

Trump is right. The American dollar is overvalued. According to the latest version of the Economist’s “ Big Mac Index,” for example, only three currencies rank higher than the US dollar. Yet the main reason for this is not currency manipulation but the fact that the US dollar serves as the main international reserve currency.

This is both a boon and a curse. It is a boon because the country that emits the leading international reserve currency can have trade deficits without worrying about a growing foreign debt. Because the American foreign debt is in the country’s own currency, the government can always honor its foreign obligations as it can produce any amount of money that it wants in its own currency.

Yet the international reserve status comes also with the curse that the persistent trade deficits weaken the country’s industrial base. Instead of paying for the import of foreign goods with the export of domestic production, the United States can simply export money.

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August 14, 2019

China Factory Output Weakest In 17 Years, Everything Missed

With currency turmoil and social unrest, China's economic assault tonight was supposed be the great equalizer - confirming that a few trillion here or there and everything looks awesome and happy, and not a tiny bit angry (and that the Americans are not to blame for everything).

Ahead of today's data, broadly speaking, macro data globally has been weak, but in China, recent credit growth numbers slumped and steel production slowed, suggesting graver concerns. And so here it is...

Finally, for a few minutes/seconds the world spiked after China set the yuan fix slightly stronger; we are not so impressed, nor is the yuan or US equity futures...

So with inflation spiking, currency crashing, social-unrest; will the PBOC flood the nation with cash to ensure happiness at October's CCP Anniversary?

It's just that the sugar high from the injection is getting shorter...

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August 13, 2019

Middle Class Death Spiral: Consumers Have Never Been In More Debt, And Bankruptcies Are Surging

This wasn’t supposed to happen.  During the relative economic stability of the past few years, the middle class was supposed to experience a resurgence, but instead it has just continued to be hollowed out.  The cost of living has risen much faster than wages have, and as a result hard working families all over America are being stretched financially like never before.  Even though most of us are working, 59 percent of all Americans are currently living paycheck to paycheck, and almost 50 million Americans are living in poverty.  In a desperate attempt to continue their middle class lifestyles, many Americans have been piling up mountains of debt, and it has gotten to the point where we have a major crisis on our hands.

According to the New York Post, the total amount of debt that U.S. households have accumulated is about to cross the 14 trillion dollar mark for the first time ever…

Meanwhile, record American household debt, near $14 trillion including mortgages and student loans, is some $1 trillion higher than during the Great Recession of 2008. Credit card debt of $1 trillion also exceeds the 2008 peak.

Americans are spending heavily, again — and often recklessly, say analysts.

This is the exact opposite of what U.S. consumers should be doing.  We can see signs of a fresh economic slowdown all around us, and consumers should be feverishly trying to get out of debt as fast as they can.

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August 12, 2019

Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket

For those who have grown bored with the ongoing US-China trade war whose escalation was obvious to all but the dumbest BTFD algos, the biggest news of the past week was that yet another Chinese bank was bailed out by the Chinese government - the third in the past three months - and a substantial one at that: with over 1.4 trillion yuan in assets ($200BN), Hang Feng Bank's nationalization was certainly large enough to make a dent on the Chinese financial system and on the Chinese Sovereign Wealth Fund, which drew the short straw and was told to bailout the troubled Chinese bank (more here).

Hang Feng's bailout followed those of Baoshang and Bank of Jinzhou, which means that 3 of the top 4 most troubled banks have now been either nationalized by an SOE or seized by the government, which is effectively the same thing.

Of course, to regular readers this development was hardly surprising, especially after our post in mid-July when we saw the $40 trillion Chinese banking system approach its closest encounter with the proverbial "Lehman moment" yet, when inexplicably the four-day repo rate on China’s government bonds (i.e., the cost for investors to pledge their Chinese government bond holdings for short-term funding) on the Shanghai exchange briefly spiked to 1,000% in afternoon trading.

While some attributed the surge to a fat finger, far more ominous signs were already present, and in the aftermath of the Baoshang failure, which has sent Chinese banking stocks tumbling, one-day and seven-day weighted average borrowing rates had remained low thanks to huge central bank cash injections - such as the 250BN yuan we described back in May  - longer tenors such as the 1 month repo have marched sharply higher.

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August 9, 2019

China "Faces The Worst Of Both Worlds" As PPI Deflation Arrives While Food Inflation Soars

As if China did not have its hands full with a trade war, a plunging yuan and growing civil unrest in Hong Kong, which is fast becoming the potential epicenter for the next global crisis (and which Steve "The Big Short" Eisman thinks is the next black swan), it now also has deflation to worry about at a time when its ability to boost liquidity in the system is severely limited... or maybe it's soaring inflation China should be concerned about.

On Friday, China's National Bureau of Statistics reported that the Producer Price Index (PPI), i.e. factory prices, fell 0.3% in July from a year ago, missing the modest 0.1% decline expected by analysts. This was the first annual decline in China's PPI in three years - since August 2016 - and just like back then, was largely the result of tumbling commodity prices which in turn depressed both manufacturing and raw material goods prices. And with oil sliding, and iron ore plunging, not to mention the whole trade war thing, it does not seems like a rebound is imminent at all. 

Worse, since PPI is closely linked to corporate profitability, the decline suggests that China is badly lagging in the credit impulse arena despite having started off 2019 with a bang and some of the biggest increases in Total Social Financing on record.

So what's the big deal: China has always been able to boost inflation, all it had to do was turn on the credit spigot and inject a few trillion in new bank and shadow loans into the economy.

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August 7, 2019

Gold Hits Record Highs!

Gold hit record highs in a number of currencies this week as trade war worries, geopolitical uncertainty and expectations of a slowing economy drove investors to seek safe haven.

While the yellow metal has soared in USD terms in recent weeks, as global geopolitical tensions rise and the "policy-maker idiocy" proxy spikes ($15 trillion of negative-yielding debt)...

More trade war tension was a big driver in the gold rally, but the recent surge in gold prices isn’t an isolated event. The yellow metal has been rallying for months. The yellow metal is up 17% since last December when plunging stock markets drove the Fed to initiate the “Powell Pause.”

The trade war isn’t the only factor pushing gold higher. For instance, Brexit uncertainty is driving the yellow metal up in the United Kingdom. The gold price in British pounds has skyrocketed 25% since May.

Generally weak economic data is also driving investor worry. Despite assurances from Powell and US government officials that the American economy is strong, the data tells a different story. Even as Powell was assuring us the domestic economy is fine, and the Fed’s worries are all global, we got more gloomy economic numbers. Data showed the ISM manufacturing index dropped to 51.2% in July. That’s the lowest level since mid-2016. Construction spending also declined by 1.3% in June. Meanwhile, jobless claims climbed modestly by 8,000 to 215,000 at the end of July.

Philips Futures analyst Benjamin Lu told CNBC he thinks all of the uncertainty will lead to more Fed rate cuts.

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August 6, 2019

Will China Retreat Into Itself?

It’s never easy to gauge what exactly is happening in China, or why the CCP Politburo takes the decisions it does. Today, or overnight, is no exception to that. However, one thing that appears certain, but which I don’t see reflected in all the analyses, is that Beijing pushing the value of the renminbi (yuan) down below 7 to the USD in one fell swoop, is a major setback for Xi Jinping and his government.

Yes, China may have given up hope of reaching positive conclusions in its trade talks with the US. And yes, some may think, even in China itself, that devaluing the currency is a tool that can be useful in a potential currency war. But there’s another side to this coin. It’s not even about the value itself, or the change in it, it’s the heavy-handed way it’s executed.

China wants, and desperately needs too, for the yuan to be a force in global financial markets. In very simple terms this is true because if it then wants to buy something, it can simply print the money for it. But only about 1% of global trade today is executed in yuan. That is not nearly enough. It means China needs dollars and euros, all the time. And devaluing the yuan means the country needs even more of those.

You’d almost think: why would you want to do that? What are the long-term prospects for a move like this? You’re telling forex markets that the value of the yuan is not trustworthy, because if Xi or the PBOC decides in the next five minutes that it should go up or down by 10% or 20%, they can do it. The Fed and ECB also have tools to manipulate their currencies (re: interest rates), but none of that magnitude.

The crux of the dilemma probably lies in the Belt and Road Initiative (BRI), which I’ve been saying for years is just China’s way to sell its overcapacity and overproduction abroad. Sure, there may be loftier goals, and surely in the glitzy brochures, but the fact remains that China has tried to be an economic miracle, doing in 10 years what took the US a century, and it never slowed down its growth, at least not voluntarily, even if that might have been a wise move.

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August 5, 2019

Fed Rate Cut – Too Little, Too Late, As Trump Hikes Tariffs

We had also warned previously the current extension of the market, combined with overbought conditions, was due for a reversal. That reversal has indeed begun, and short-term sell signals have been triggered.

“As we have noted over the last few weeks, the very tight trading range combined with negative divergences also does not historically suggest continued bullish runs higher without some type of corrective action first.”

This past week, a disappointing cut by the Fed, and increased tariffs on China from the White House, provided the catalysts needed for a very quick market rout.

Again, this is something we discussed over the last couple of weeks with our RIAPRO subscribers previously (30-Day Free Trial). The analysis led us to previously trimming our long positions slightly, and increasing our cash holdings, heading into the Fed announcement.

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August 2, 2019

Mission Accomplished: Rate Cut Odds Surge After Tariff Announcement, Just As Trump Wanted

Earlier today, we wrote a post titled "What Would It Take For The Fed To Not Cut Again?", with Goldman providing a stylized answer, although in retrospect, the post should have been titled "What Would It Take For The Fed To Cut Again", as that is what the market was far more concerned about after yesterday's hawkish Powell press conference.

In any case, Goldman hinted at the one specific catalyst that could force the Fed to cut more: "We also see risks in the other direction, especially on a significant escalation of tariffs against China."

To this, we said that "if an acceleration in the trade war with China is what the Fed will need to cut more, it's pretty clear what that means for the chances of any trade deal between Washington and Beijing, since even Trump now understands that if he keeps escalating trade war with China, Powell will have no choice but to eventually cut to 0% (and lower)."

Just a few hours later, we were proven right in suggesting that an escalation in the trade war is inevitable and imminent when Trump tweeted that he would hike tariffs on $300BN in Chinese imports to 10% starting September 1, ending the tentative ceasefire with Beijing with a bang, and sending risk prices sharply lower.

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August 1, 2019

“The Stock Market Started To Fall In July…”

Will we look back on the month of July as a critical turning point for the stock market?  During the first half of 2019, stock prices soared to record high after record high even though we just kept getting one number after another that indicated that a new economic slowdown was starting.  Because of the disappointing performance of the U.S. economy, it was believed that we would see a rate cut from the Federal Reserve on Wednesday, and that is precisely what happened.  But instead of rejoicing, investors started to panic a bit, and the Dow Jones Industrial Average ended the day down 333 points.  We will get into why that happened in just a little bit.  But without a doubt it seems quite odd that the Fed’s very first rate cut since December 2008 actually caused stocks to go down.  On a historical basis, interest rates are already very low right now, and so this greatly limits what the Fed will be able to do once the next recession officially begins.  Of course most investors are not concerned with such considerations.  What they really want is for interest rates to be pushed all the way to the floor as quickly as possible, and so they were quite disappointed with what they heard from Fed Chairman Jay Powell on Wednesday.

But considering the fact that we haven’t seen a rate cut in more than a decade, the truth is that investors should have been thrilled by what happened.  When interest rates go down, that tends to promote more economic activity

As expected, the Fed lowered its federal funds rate by a quarter-percentage point to a range of 2% to 2.25%. The move is likely to ripple through the economy and financial system, nudging down rates for credit cards, home equity lines and auto loans and theoretically sparking more economic activity. While the rate cut should aid borrowers, it will frustrate savers who were just starting to benefit from higher bank account yields.

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July 31, 2019

China Manufacturing PMI Stuck In Contraction As Services Hit 2019 Lows

Despite record credit injections and endless easing, China's economic survey data goes from bad to worse.

While China Manufacturing PMI managed a de minimus gain from 49.4 to 49.7, it remains in contractionary territory for the 7th month in the last 9.

China Services PMI continued to slide, back to its lowest since 2018.

Confirming global weakness seen in Japanese and European PMIs.

In a seemingly desperate reach, Bloomberg notes that the stronger result (49.4 to 49.7) signaled some optimism is emerging in the Chinese economy in spite of lingering uncertainty over trade talks and domestic demand.

PMI data improves as “the government’s tax cuts have helped improve growth slightly,” Yao Shaohua, economist at ABCI Securities Co. in Hong Kong.

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July 30, 2019

Is Bitcoin A Store Of Value? Experts Weigh In On 'Digital Gold'

It’s hard to tell who was the first to coin - pun intended - Bitcoin as “digital gold,” underlining the idea that Bitcoin is a good store of value. To understand the community leaders’ thoughts about digital gold nowadays, we asked Binance’s  Changpeng Zhao, award-winning technology leader Jonathan Reichental, the  United Nations’ Susan Oh, Singularity University’s David Obran and other outstanding experts. 

The phrase “digital gold” possibly came into more widespread use after The New York Times journalist Nathaniel Popper's book, "Digital Gold," was published in 2015. Google searches for the term “Bitcoin digital gold” peaked in December 2017, when the leading cryptocurrency’s price hit record highs around $20,000 per coin.

Well before Bitcoin was born, computer scientist Nick Szabo wrote a proposal for “bit gold,” laying out a concept for secure digital money that is often referred to as Bitcoin’s predecessor.

After 10 years of existence, the question of whether or not Bitcoin can in fact be considered “digital gold” continues to be debated in the industry. Yes, Bitcoin is designed to be scarce, but when discussing it as a potential store of value, many point to Bitcoin’s historical volatility as an argument against doing so. 

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