May 23, 2018

Bank Of England Issues Working Paper On Central Bank Digital Currencies

On May 18, the Bank of England released a staff working paper, laying out various scenarios of possible risks and financial stability issues of central bank digital currencies (CBDCs).

The paper constructs three models of CBDC depending on the sectors that have access to CBDC, from a narrow CBDC where access is limited to banks and non-bank financial institutions (NBFIs), to direct and indirect access extended to households and non-financial firms.

The Financial Institutions Access model is limited to banks and NBFIs, where financial institutions can interact directly with the central bank to purchase and sell CBDC in exchange for eligible securities. Financial institutions are not supposed to provide an asset to households and firms, which are entirely backed by central bank money.

The Economy-wide Access model assumes that access to CBDCs is granted to banks and NBFIs, households and firms. In this way, a CBDC can serve as money for all agents in the economy. While only banks and NBFIs can interact directly with the central bank to buy and sell CBDCs, the report says that “households and firms must use a CBDC Exchange to buy and sell CBDC in exchange for deposits.”

Within the Financial Institutions Plus CBDC-Backed Narrow Bank Access model access is again limited to banks and NBFIs. There is at least one financial institution that acts as a ‘narrow bank,’ which provides financial assets to households and firms that are fully backed by a CBDC but that does not extend credit.

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May 22, 2018

77 Million Square Feet Of Retail Space And Counting – America’s Retail Apocalypse Is Spiraling Out Of Control In 2018

In 2017 we absolutely shattered the all-time record for retail store closings in a single year, and this year it looks like we are going to shatter the record once again.  In fact, there are some that are projecting that up to 9,000 retail stores could close by the time that we get to the end of this calendar year.  Already, the amount of retail space that has shut down is simply jaw-dropping.  If you total up all of the retail store closings that have been announced so far in 2018, it accounts for 77 million square feet of retail space.  Let that number sink in for a bit.  Many shopping centers and strip malls around the country already have a post-apocalyptic feel to them, and more “space available” signs are going up with each passing day.  And in case you are tempted to think that I am making this figure up, here it is straight from Bloomberg

At last count, U.S. store closures announced this year reached a staggering 77 million square feet, according to data on national and regional chains compiled by CoStar Group Inc. That means retailers are well on their way to surpassing the record 105 million square feet announced for closure in all of 2017.

In the end, we could shatter the all-time record that was established just last year by 20 or 30 million square feet.

At moments such as this, the phrase “retail apocalypse” doesn’t really seem to fit the gravity of what is actually taking place.

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May 21, 2018

It's Not Stagflation... It's Inflationary Impoverishment

It is a matter of personal interest that it was my uncle, Iain Macleod, who invented the term stagflation shortly before he was appointed shadow chancellor in 1965. It is no longer used in its original context. From Hansard (the official record of parliamentary debates) 17 November that year:

We now have the worst of both worlds —not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation and history in modern terms is indeed being made.

The inflation that Iain was referring to was of wages, which were averaging an increase of 6.2%, and rising, and stagnation in production, which had declined from an index of 134 to 131. It was this divergence that gave him the opportunity to invent this portmanteau word. It has now passed into more common use to describe an economy that fails to respond to the stimulus of monetary inflation.

Its use in this context is therefore different from the original. The idea that stagflation exists as an economic phenomenon is only really true for neo-Keynesians, who view inflation as economically stimulative, and its failure to stimulate perplexing. In this sense it is frequently applied to conditions today, where massive monetary stimulus does not appear, so far at least, to have brought about the economic growth that might have been expected from it.

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May 18, 2018

"We Won’t Make Unilateral Concessions": China Denies It Offered To Slash U.S. Trade Gap By $200BN

Overnight, experts and pundits were stumped by the biggest geopolitical news from Thursday: how could China possibly - or feasibly - agree to a $200 billion cut in the US-China trade deficit, even if merely to placate President Trump. Speaking to Bloomberg, Victor Shih, a China politics and finance professor at the University of California in San Diego said earlier that he finds an agreement to cut the U.S. deficit by $200 billion "difficult to contemplate."

"Even with a drastic reallocation of Chinese imports of energy, raw materials and airplanes in favor of the U.S., the bilateral trade deficit may reduce by $100 billion," he said. "A $200 billion reduction would mean a drastic reduction in Chinese exports to the U.S. and a dramatic restructuring of the supply chain."

On Friday morning we got the answer: the entire story was nothing more than the latest fake news concocted by a "US official" and then promptly spun by the US media without actual confirmation by China.

And so, the mystery of just how China would shrink its $200 billion trade deficit with the US died on Friday morning, when China gave the answer: it wouldn't, after Beijing denied it had offered the deficit-cutting package, just hours after it dropped an anti-dumping probe into U.S. sorghum imports in a conciliatory gesture as top officials meet in Washington.

“This rumor is not true. This I can confirm to you,” Chinese foreign ministry spokesman Lu Kang politely told a news briefing saying "the question is about some US officials who said China will cut the deficit. As I understand, the relevant consultations are ongoing and they are constructive,” he said, adding that he could not elaborate on the specifics of the negotiations.

Commentary posted in an article on WeChat accounts run by Xinhua News Agency and People’s Daily overseas edition was less restrained, and said that the offer to cut China's trade surplus with the U.S. is "nonexistent" and that reports that China accepted the U.S. demand to narrow the trade gap are “purely a misreading."

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May 17, 2018

Blowback Begins: EU To Ditch Dollar In Payments For Iranian Oil

The dollar’s collapse is nearing.  The European Union is planning to switch it’s payments to the Euro for its oil purchases from Iran, eliminating United States dollar transactions.

Just one more nail to the US dollar’s coffin.  Its collapse is all but imminent at this point. The EU has successfully found a way to scoff at potential future sanctions on Iran by openly defying the US; and as an “added bonus,” they’ve helped seal the dollar’s fate According to RT, a diplomatic source with the EU has told a news outlet of the decision. 

“I’m privy to the information that the EU is going to shift from dollar to euro to pay for crude from Iran,” said the diplomatic source. 

Brussels has been at odds with Washington over the US’s decision to withdrawal from the Iran nuclear deal, which was reached during the administration of Barack Obama. President Donald Trump has pledged to re-impose sanctions against the Islamic Republic as soon as he is able to do so. The Trump administration also has had plans to topple the current regime in Iran, according to leaked documents, and it looks like they’ve just given themselves the go-ahead:

The Washington Free Beacon has obtained a three-page white paper being circulated among National Security Council officials with drafted plans to spark regime change in Iran, following the US exit from the Obama-era nuclear deal and the re-imposition of tough sanctions aimed at toppling the Iranian regime.

The plan, authored by the Security Studies Group, or SSG, a national security think-tank that has close ties to senior White House national security officials, including – who else – National Security Adviser John Bolton, seeks to reshape longstanding American foreign policy toward Iran by emphasizing an explicit policy of regime change, something the Obama administration opposed when popular protests gripped Iran in 2009, writes the Free Beacon, which obtained a leaked copy of the circulating plans. –Zerohedge

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May 16, 2018

What's Trump's Real Trade Target: China Or Europe?

Do Trump's endless trade volleys and sanctions have a clear target? Consider the possibility it's the EU, not China.

Out of the blue, and with open rebuke form Democrats and Republicans, Trump reversed sanctions on China.

This was peculiar in and of itself, but his rationale raised more than a few eyebrows.

All of a sudden. Trump is concerned about "too many jobs lost in China"!

One can rationalize this is about Rotting Cherries, Spoiled Pork, and Car Inspections, but could it be there is more than meets the eye?

Iran Sanctions

Bloomberg reports Iran’s Door to the West Is Slamming Shut, and That Leaves China.

China is “already the winner,’’ said Dina Esfandiary, a fellow at the Centre for Science and Security Studies at King’s College in London, and co-author of the forthcoming ‘Triple Axis: Iran’s Relations With Russia and China’.

Turning East

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May 15, 2018

Orphan CDS, Manufactured Credit Events, Insufficient Deliverables: What The Hell Is Going On In The CDS Market?

Long gone are the days when the CDS market was naively seen as merely a simple hedge to long cash bond positions for vanilla investors (negative basis), or more conspiratorially, a means to naked short the bonds of distressed companies (as many alleged happened during the financial crisis) without being subject to squeezes, margin calls, or regulatory scrutiny courtesy of (what was once) a far more liquid and deep CDS market.

Of particular note in recent months has been rapid, and often confounding, propagation of manufactured credit events in which a CDS is triggered - usually after some collusion between the issuing company and one or more hedge funds - without causing an acceleration in the issuer's debt obligations, as discussed recently in the case of Hovanian, in which the CDS surges benefiting one or more hedge funds and/or the company while impairing others, or a manufactured CDS "orphaning", as was the case more recently with McClatchy, in which a CDS suddenly found itself with no reference securities and plunged to 0, in the process sparking a profit bonanza for hedge fund Chatham which had sold the CDS.

And while manufactured credit events remain niche events for a very select group of highly sophisticated investors, several recent events have prompted Barclays to write an extensive analysis looking at the details and motivations for such events, while addressing potential changes to the ISDA Definitions to reduce their likelihood, including adding a multiple holder requirement and excluding missed affiliate payments from the definition of a Failure to Pay credit event. Furthermore, in the context of the McClatchy event, Barclays' credit analysts also examined the latest, most recent development in the CDS marketplace – a potential manufactured orphaning – and how this may be more difficult to address from a definitions perspective.

Why the sudden focus among some of Wall Street's most active CDS trading desks? Because as Barclays says "we believe that failure to address these issues could lead to a loss of confidence in the CDS market, particularly as an indicator of fundamental credit and default risk, and ultimately to lower levels of trading activity."

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May 14, 2018

Europe Keeps Buying Iran Oil, But Banks May Hinder Trade

In the days following the U.S. withdrawal from the Iran nuclear deal, Iran’s European customers continue to buy Iranian oil and are in no immediate rush to replace volumes, but some refiners and traders have flagged financing issues as having the potential stop to crude trade with Iran.

After the U.S. walked out of the Iran deal, the U.S. will be targeting Iran’s crude oil sales, and sanctions previously lifted under the deal will be re-imposed following a 180-day wind-down period, the U.S. Treasury said.

European buyers are not in an immediate rush to replace Iranian supplies due to that wind-down period, with sanctions expected to kick in in November. All buyers report that they are complying and will comply with any sanctions imposed on Iranian trade, and some of them expect that banking issues will arise from the sanctions, such as the availability of trade finance.

Marta Llorente, a spokeswoman for Spanish oil company Cepsa, one of Iran’s customers in Europe, told Reuters:

“At this moment, our trading activity is business as usual.”

Italy’s Eni also continues to buy Iranian oil and it is buying 2 million barrels of oil per month from Iran under a deal that expires at the end of the year.

“We’re doing nothing,” said the head of trading at another European customer of Iran’s. “It’s wait and see. If we’re forced to reduce, we will. Iranian is not the only crude,” the manager told Reuters.

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May 11, 2018

Playing US Sanctions: China Walks A Fine Line In Iran

Chinese businessman Sheng Kuan Li didn’t worry about sanctions when he decided in 2010 to invest $200 million in a steel mill in Iran that started producing ingots and billet within months of the lifting of punitive measures against the Islamic republic as part of 2015 international nuclear agreement with Iran.

With no operations in the United States, Mr. Li was not concerned about being targeted by the US Treasury.

Mr. Li, moreover, circumvented financial restrictions on Iran by funding his investment through what he called a “private transfer,” a money swap that was based on trust and avoided regular banking channels.

In doing so, Mr. Li was following standard Chinese practice of evading the sanctions regime by using alternative routes or establishing alternative institutions that were in effect immune.

To be able to continue to purchase Iranian oil while sanctions were in place, China, for example, established the Bank of Kunlun to handle Chinese payments.

The Chinese experience in circumventing the earlier sanctions will come in handy with Beijing rejecting US President Donald J. Trump’s renewed effort to isolate Iran and force it to make further concessions on its nuclear and ballistic missiles programs as well as the Islamic republic’s regional role in the Middle East by walking away from the 2015 agreement and reintroducing punitive economic measures.

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May 10, 2018

Another Step Towards Collapse Of The Petrodollar

For the past year and half a major topic throughout the alternative press has been the new Chinese oil futures contract settled/priced in yuan. The fact that China is directly challenging the Federal Reserve Note, U.S. dollar, is quite a significant change. For those that have been paying attention this new futures oil contract is nothing more than the next step in China moving completely away from the Federal Reserve Note, and the “world reserve currency” system and towards a multi-polar world with several currencies being used for international trade.

Ken Schortgen, Jr., The Daily Economist, recently penned an article about Nigeria approving a currency swap agreement with China, stating,

It has been a little more than a month since China officially began offering oil futures contracts denominated in the Yuan currency, but early results continue to be positive for this contract to over time take more and more market share from the West and the Petrodollar.  And with Iran, Qatar, and even Venezuela having already agreed to buy and sell their oil in currencies other than the dollar, a new currency swap agreement signed on May 3 between Nigeria and China could mean that a fourth OPEC nation could also soon be leaving the Petrodollar.

The Central Bank of Nigeria (CBN) has signed a currency swap deal worth about $2.5 billion with the People’s Bank of China to provide adequate local currency liquidity for transactions between national businesses, The Punch newspaper reported on Thursday, citing a high-ranking official from the Central Bank of Nigeria (CBN). Sputnik News.

While China pursued currency swaps as far back as 1997, during the “Asian financial crisis”, none of the agreements were ever activated. That all changed with the global financial meltdown in 2008. China began actively pursuing, and instituting, direct currency swaps and even went so far as to open “Renminbi Clearing Centers” around the world including Canada, the backyard of the U.S..

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May 9, 2018

It's A Perverse World Where Stocks Rally On "The US vs The Rest Of The World"

BoE's Grand Plan, ESG and Air France calling Macron's Bluff

Its Bank of England day tomorrow and you just got to wonder if it’s all going according to Mark Carney’s Grand Plan. Since his mumble-swerve on rate hikes because of weaker economic data 3 weeks ago – which prompted lots of hair pulling, unreliable boyfriend comments, and bafflement on what the BOE can do - the pound has crashed through the floor versus the dollar and wobbled badly on the Euro. Well done Mr Carney – it’s the most effective way to keep the currency down and the UK competitive!

While the UK is already in enough trouble from the Tories ability to turn a simple goodbye Europe into a Brexit political clusterf**k of monumental proportions.. (OK, I’m being flippant, but Brexit really doesn’t matter….) what’s not to like about weaker sterling – unless you were planning a holiday abroad? In the absence of any monetary policy tools left in the box – cos you can’t cut rates when they’ve already been cut to nada (unless you are Japan or Switzerland, and the UK clearly is not) - then currency games are the only way.

So get over the “disappointment” of no hike tomorrow and get on with it.. Although, its worth wondering what it means for the UK’s place in this “Macro Aligned Synchronised Global Recovery..” Or is it another sign the global recovery is stalling…? (More than a few of my clients will call and ask “what economic recovery???”) – One day they may erect a monument to central banks and carve into it: “They created a desert and called it peace…”

Elsewhere, it’s a perverse world where stocks rally on the US versus the rest of the World re Iran. Its’ certainly bad news for the Iranians – the Yooropeens and Theresa Might can bleat about it being unfair, but no sane investor or rational business is going to risk a single penny on Iran. The ESG implications are just too painful to contemplate…

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May 8, 2018

"Creating Wealth" Through Debt Is The West's Finance-Capitalist Road

Volumes II and III of Marx’s Capital describe how debt grows exponentially, burdening the economy with carrying charges.

This overhead is subjecting today’s Western finance-capitalist economies to austerity, shrinking living standards and capital investment while increasing their cost of living and doing business.

That is the main reason why they are losing their export markets and becoming de-industrialized.

What policies are best suited for China to avoid this neo-rentier disease while raising living standards in a fair and efficient low-cost economy? The most pressing policy challenge is to keep down the cost of housing. Rising housing prices mean larger and larger debts extracting interest out of the economy. The strongest way to prevent this is to tax away the rise in land prices, collecting the rental value for the government instead of letting it be pledged to the banks as mortgage interest.

The same logic applies to public collection of natural resource and monopoly rents. Failure to tax them away will enable banks to create debt against these rents, building financial and other rentier charges into the pricing of basic needs.

U.S. and European business schools are part of the problem, not part of the solution. They teach the tactics of asset stripping and how to replace industrial engineering with financial engineering, as if financialization creates wealth faster than the debt burden. Having rapidly pulled ahead over the past three decades, China must remain free of rentier ideology that imagines wealth to be created by debt-leveraged inflation of real-estate and financial asset prices.

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May 7, 2018

Why One Hedge Fund Thinks Tesla Is Worth $0: The Full Presentation

With Elon Musk's public behavior becoming increasingly erratic, irrational and bizarre - just over the weekend trolling Warren Buffett that he is "super serious" about attacking Berkshire's Candy moat, just hours after he threatened Tesla shorts with "unreal carnage" in a tweet that some have alleged is a violation of securities laws - the Tesla bears have been getting increasingly more vocal.

And it's not just Jim Chanos: while the famous Enron nemesis remains certain that Elon Musk's resignation and Tesla's doom  are just a matter of time, others have been increasingly aggressive about their skepticism, so much so that Tesla is now the most shorted stock in the US market, much to Elon's volatile chagrin.

Yet while most shorts believe there is at least some value in Elon Musk's car company, Mark Spiegel of Stanphyl Capital Management is convinced that when the dust settles, Tesla will be "a zero" (whether or not Musk will be "bankwupt" is another matter). He made this clear rather early on, in fact on the front cover, of his 156 page slideshows that he delivered at the Kase Learning short selling conference.

While we present the whole powerpoint below, here is the exec summary and some of the bigger picture observations:

3 Broad Reasons Why The Equity in Tesla Is Worth “Zero”

  1. Tesla’s financials are horrible and worsening even BEFORE massive competition begins arriving later this year
  2. Tesla has no “moat” of any kind and in fact now possesses trailing technology in all facets of its business
  3. A “bet on Elon” is a bet on someone who can’t be trusted -he has a long track record of making hugely misleading statements

A snapshot of the company's current financials:

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May 4, 2018

US-China Trade Talks End Without A Deal After Trump Hikes Deficit Cut Demand

Moments ago, the US trade delegation led by Treasury Sec. Steven Mnuchin, and which included Commerce Sec. Wilbur Ross, US Trade Rep. Robert Lighthizer, and White House trade adviser Peter Navarro, left China after two days of U.S.-China trade discussions ended on Friday without a concrete deal, only an agreement to keep on talking.

On Friday afternoon, China’s official Xinhua News Agency reported that both sides reached a consensus on some trade issues, without providing details. More importantly, they acknowledged major disagreements on some matters and will continue communicating to work toward making more progress.

The biggest surprise, according to the FT, is that heading into the talks the US delegation asked China to cut the bilateral trade deficit by $200BN by 2020, reduce tariffs and cut subsidies for emerging industries, according to a document seen by the Financial Times.

The surprise is that the revised $200BN target is already double the $100BN amount that President Trump demanded just two months ago be wiped from last year’s $337BN US deficit in goods and services. According to the document, the US aimed to cut the deficit by $100bn in the year beginning June 1, and by a further $100bn between June 2019 and May 2020.

Some more details on the list of US demands from the WSJ:

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May 3, 2018

Are Russian Bonds Toxic Waste Or Golden Eggs?

One man’s toxic waste is another man’s golden goose.  A new round of economic sanctions imposed on Russia last month by the U.S. is creating havoc in investment circles.  A recent article by Ben Aris at Russia Insider describes Russian debt assets as ‘toxic waste again.’

That doesn’t mean these Russian debt assets actually are bad investments, just that those who currently hold them have to get rid of them because the rules have changed.

And they are no longer legally allowed to own them.

Because of that what were one minute the darling of the investment world instantly turned into garbage, selling if anyone can find a buyer at discounts even Crazy Eddie would blanche at.

All the previous sanctions imposed on Russian companies had only affected new securities – listings of new shares or bonds. Existing securities were unaffected.

Not now. The Specially Designated Nationals And Blocked Persons List (SDN List) released on April 6 not only sanctions those listed, it bans any investor with US exposure (European banks with US branches count) from doing any business with the sanctioned names. Investors were supposed sell all their stocks, bonds and debt within 30 days – i.e. before May 7.

This has sent the market for Russian securities into the floor.

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