November 27, 2015

Age of Bubble Finance → Crackup Phase

Today, we have a rogue central bank. It’s destroyed honest price discovery in the money and capital markets.
I once said, “Invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries.”
You can say the same thing about Yellen today.
The Fed’s monetary injections, “puts” and safety nets under the price of risk assets now drive everything. Accordingly, investors ignore risk and mechanically “buy the dips.”
This irrationally inflates asset prices — that is, until the bubble becomes unsustainable and then splatters violently, as it has done twice already this century.
The vital core of capitalism is the capital markets. That’s where capital is supposed to be raised and allocated. It’s where future profits are rationally assessed and discounted. And it’s where entrepreneurs and business enterprises are honestly rewarded for their contributions to free market prosperity.

November 26, 2015

Dysfunction at the Fed

The Fed is About to Make Life Harder For Big Banks ... It's considering changes to its annual stress test. The Federal Reserve administers stress tests to the largest U.S. banks each year to see how they would fare in a hypothetically turbulent economy. The regulator is expected to make those tests more difficult to pass. No changes have officially been proposed but, as the New York Times reports, a senior official says that the Fed is considering different modifications. – Fortune

Dominant Social Theme: The Fed is on the job, always trying to make the banking system better and safer.

Free-Market Analysis: Fortune magazine gives us a heads up on what the Federal Reserve may soon mandate for banks, as can be seen in the excerpt above.

The test is actually fairly simple, though doubtless the details are complex. First the Fed figures out how much money a bank would lose in a volatile market. This number is removed from the bank's capital and if the result brings the total below the minimum requirement, then the bank is not considered to be in compliance.

Now the Fed wants to raise the minimum requirement – that is, the amount of capital a bank has to hold. Supposedly, this would make big banks "more resilient" and less likely to fail.

Read the entire article

November 25, 2015

Goldman Finally Looks At The Freight Charts, Raises Alarm About The "Broader Health Of The US Economy"

In the first days of November, we showed that global trade is in freefall with "China Container Freight At Record Low; Rail Traffic Tumbles, Trucking Slows Down." Now, Goldman has finally caught up, and writes that "indicators of freight activity—the volume of goods carried by truck, rail, air or ship—have slowed recently, raising concerns about the broader health of the US economy."
This is how Goldman finally admits what we have been saying for the past two years: the biggest threat to the US, and global, economy is the gradual and ever faster slowdown in trade, something which central banks are incapable of "printing."
Freight transportation data can be a useful gauge of activity in the goods-producing sectors of the economy, for obvious reasons. Products need to move from manufacturers to end consumers, and will be carried along the way by at least one of the four modes of transportation—truck, rail, air or ship—and frequently by multiple types (“intermodal” transport). The economic indicators measuring US transportation activity are also relatively transparent—counting things like the number of containers or rail cars—and in some cases quite timely. They are therefore popular among investors. Recently some of these measures have slowed, raising concerns about the broader health of the US economy.
And here is Goldman doing its best recap of our charting, using its own words:
  • Railcar traffic, for example, has been notably weak, falling by about 3% from a year earlier based on monthly data (Exhibit 1, left panel)

November 24, 2015

Ultimate Weapon in Existential Struggle: Using the TPP for Hostile Takeover of Mexican Agriculture

Resisting Monsanto, the world’s largest, most influential GMO giant, is an almost impossible task. The corporation boasts more back channels and revolving doors with national governments and regulators than just about any other company on the planet, not to mention a fearsome army of corporate lawyers and lobbyists.
Few countries are more aware of this fact than Mexico, where a small collective of activist groups, scientists, artists and gourmet chefs have been engaged in a titanic legal struggle with Monsanto. Although they keep winning crucial battles, the war is still likely to be won by Monsanto, thanks to one key weapon in its arsenal: the Trans-Pacific Partnership.
An Existential Struggle
For Mexican smallholders and consumers, the struggle with Monsanto & Friends is an existential one. In a 2013 ruling banning the cultivation of GMOs in Mexico, Judge Manuel Zaleta cited the potential risks to the environment posed by GMO corn. If the biotech industry got its way, he argued, more than 7000 years of indigenous maize cultivation in Mexico would be endangered, with the country’s 60 varieties of corn directly threatened by cross-pollination from transgenic strands.

November 23, 2015

The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse

The 7th largest economy on the entire planet, Brazil, has been gripped by a horrifying recession, as has much of the rest of South America.  But it isn’t just South America that is experiencing a very serious economic downturn.  We have just learned that Japan (the third largest economy in the world) has lapsed into recession.  So has Canada.  So has Russia.  The dominoes are starting to fall, and it looks like the global economic crisis that has already started is going to accelerate as we head into the end of the year.  At this point, global trade is already down about 8.4 percent for the year, and last week the Baltic Dry Shipping Index plummeted to a brand new all-time record low.  Unfortunately for all of us, the Federal Reserve is about to do something that will make this global economic slowdown even worse.
Throughout 2015, the U.S. dollar has been getting stronger.  That sounds like good news, but the truth is that it is not.  When the last financial crisis ended, emerging markets went on a debt binge unlike anything we have ever seen before.  But much of that debt was denominated in U.S. dollars, and now this is creating a massive problem.  As the U.S. dollar has risen, the prices that many of these emerging markets are getting for the commodities that they export have been declining.  Meanwhile, it is taking much more of their own local currencies to pay back and service all of the debts that they have accumulated.  Similar conditions contributed to the Latin American debt crisis of the 1980s, the Asian currency crisis of the 1990s and the global financial crisis of 2008 and 2009.
Many Americans may be wondering when “the next economic crisis” will arrive, but nobody in Brazil is asking that question.  Thanks to the rising U.S. dollar, Brazil has already plunged into a very deep recession

November 20, 2015

The Party Is Over: Goldman Sees "Limited Equity Upside" As "Bernanke Put" Is Replaced With "Yellen Call"

This reliance on DMs has a simple explanation: Goldman expects that after three years of disappointment, the development markets are "about to turn the corner: "2016 could be the year EM assets put in a bottom and start to find their feet... there is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s."

Actually no, there isn't, for one simple reason: China has 300%+ debt/GDP and now the entire world is watching. In fact, as Goldman itself admits China's growth is likely about 2% (if not more) below the official, and quite bogus, 7% number. Which means it is all up to India, the same India where the first rumblings against Modi's cabinet were heard loud and clear recently.  In fact, in our modest opinion, if there is one country where the global DM slump will hit next, it is precisely the one country which is growing "faster" than China.

Furthermore, as Goldman itself notes, with oil prices set to continue dropping for at least the next 12 months, the hit to oil-exporting DMs will persist, and the reverse savings glut, aka Quantitative Tightening will continue to wreak havoc on capital flows and asset prices around the globe, all of which suggests that far from a rebound in 2016 GDP, we would expect global growth to drop below 3% for the first time since the financial crisis.

DM growth aside, it is more interesting what Goldman thinks will happen to the US. This is what it says: "We expect all DM economies to grow in 2016, but the US will be the first to grow GDP demand above potential."

Which brings us to the topic of this post: if the US economy does indeed grow "above potential" as Goldman expects, what does that mean for US capital markets? According to the firm, the shift in central bank posture in 2016 will be unprecedented, and instead of the "Bernanke Put" which pushed markets from 666 to over 2100 recently while the US economy kept deteriorating, will be replaced by the "Yellen Call."

Read the entire article

November 19, 2015

If The Economy Is Fine, Why Are So Many Hedge Funds, Energy Companies And Large Retailers Imploding?

If the U.S. economy really is in “great shape”, then why do all of the numbers keep telling us that we are in a recession?  The manufacturing numbers say that we are in a recession, the trade numbers say that we are in a recession, and as you will see below the retail numbers say that we are in a recession.  But just like in 2008, the Federal Reserve and our top politicians will continue to deny that a major economic downturn is happening for as long as they possibly can.  In this article, I want to look at more signs that a dramatic shift is happening in our economy right now.

First of all, let’s consider what is happening to hedge funds.  For many years, hedge funds had been doing extremely well, but now they are closing up shop at a pace that we haven’t seen since the last financial crisis.  The following is an excerpt from a Business Insider article entitled “Hedge funds keep on imploding” that was posted on Wednesday…

Read the entire article

November 18, 2015

When Tightening Leads to Easing

US Fed likely to tighten before year end ... The US Federal Reserve is on track to raise rates before year end, with a pick-up in economic activity and positive dialogue emerging from the central bank – Investor Daily

Dominant Social Theme: The economy is booming. Hike, hike, hike. It's all we can do.

Free-market Analysis: The tightening talk is picking up. Principal Global Investors manages some US$350 billion, much of it in retirement plans, and its officials "now assess the likelihood of a December rate rise at 54 per cent," according to Investor Daily. A March rise is assessed at 71 per cent.

Principal Global Investors global chief economist Robert Baur believes US economic data now justifies a rate rise, we learn. US Federal Reserve Officials had contemplated a hike but Chinese market instability forced a hiatus.

Here's more:

Read the entire article

November 17, 2015

Nomi Prins: Crony Capitalism & Corruption - An Entirely Rigged Political-Financial System

Too big to fail is a seven-year phenomenon created by the most powerful central banks to bolster the largest, most politically connected US and European banks. More than that, it’s a global concern predicated on that handful of private banks controlling too much market share and elite central banks infusing them with boatloads of cheap capital and other aid.

Synthetic bank and market subsidization disguised as ‘monetary policy’ has spawned artificial asset and debt bubbles - everywhere. The most rapacious speculative capital and associated risk flows from these power-players to the least protected, or least regulated, locales.

There is no such thing as isolated 'Big Bank' problems. Rather, complex products, risky practices, leverage and co-dependent transactions have contagion ramifications, particularly in emerging markets whose histories are already lined with disproportionate shares of debt, interest rate and currency related travails.

The notion of free markets, mechanisms where buyers and sellers can meet to exchange securities or various kinds of goods, in which each participant has access to the same information, is a fallacy. Transparency in trading across global financial markets is a fallacy. Not only are markets rigged by, and for, the biggest players, so is the entire political-financial system.

Read the entire article

November 16, 2015

18 Numbers That Scream That A Crippling Global Recession Has Arrived

The stock market has been soaring, but all of the hard economic numbers are telling us that a major global recession is here. This is so reminiscent of what happened back in 2008. Back then, all of the fundamentals were screaming “recession” by the middle of that year, but the equity markets didn’t respond until later. It appears that a similar pattern is playing out right now. The trade numbers, the manufacturing numbers, the inventory numbers and even the GDP numbers are all saying that a very significant economic slowdown is happening, but stock traders haven’t gotten the memo yet. In fact, stocks had an absolutely great month in October. Of course just like in 2008, stocks will eventually catch up with reality. It is just a matter of time. The following are 18 numbers that scream that a crippling global recession has arrived…

None of the underlying issues that caused our problems back in 2008 and 2009 have been fixed. Instead, we just became even bigger and bolder with our mistakes. In the period between the last recession and today, we witnessed the greatest debt binge in the history of the planet. Now a lot of that debt is starting to go bad, and the Bank for International Settlements says that their “dashboard of risk is flashing red”. The following comes from a recent article in the Guardian entitled “Apocalypse now: has the next giant financial crash already begun?“…

Read the entire article

November 13, 2015

World's Largest Hedge Fund Dumped 31% Of Its US Equity Holdings In The Third Quarter

The world's biggest hedge fund, Ray Dalio's Bridgewater Associates got into some hot water in the past few months when it was accused by many members of the underperforming "hedge fund hotel" club for being the "risk parity" catalyst that sent the market tumbling in August, and perhaps for being the catalyst for the August 24 market crash.
And while the bulk of Bridgewater's asset are in various commodities and futures, most of which are never reported to the public, earlier today it did disclose its long holdings in public equities when it filed its latest 13F. Perhaps those accusing Bridgewater of being the market-moving catalyst did have a point, because after posting a total AUM of $10.8 billion at June, this total declined by a whopping 31% to just $7.5 billion as of September 30.
Here is what Brigewater was dumping (and adding).
Bridgewater sold 41% of its holdings in the world's two largest EM ETFs in the third quarter amid a rout in developing-nation assets.  Specifically, it cut its investments in Vanguard Group Inc. and BlackRock Inc.’s ETFs to a combined 104 million shares, from 175 million in the previous three-month period.
The value of the ETF holdings dropped more than 50 percent to $3.4 billion as a result of share price declines and the divestments.
In other words, if anyone is looking for the culprits behind the aggressive ETFlash Crash of August 24, Bridgewater may indeed be a good starting point.

November 12, 2015

4 Harbingers Of Stock Market Doom That Foreshadowed The 2008 Crash Are Flashing Red Again

So many of the exact same patterns that we witnessed just before the stock market crash of 2008 are playing out once again right before our eyes.  Most of the time, a stock market crash doesn’t just come out of nowhere.  Normally there are specific leading indicators that we can look for that will tell us if major trouble is on the horizon.  One of these leading indicators is the junk bond market.  Right now, a closely watched high yield bond ETF known as JNK is sitting at 35.77.  If it falls below 35, that will be a major red flag, and it will be the first time that it has done so since 2009.  As you can see from this chart, JNK started crashing in June and July of 2008 – well before equities started crashing later that year.  A crash in junk bonds almost always precedes a major crash in stocks, and so this is something that I am watching carefully.
And there is a reason why junk bonds are crashing.  In 2015 we have seen the most corporate bond downgrades since the last financial crisis, and corporate debt defaults are absolutely skyrocketing.  The following comes from a recent piece by Porter Stansberry
So far this year, nearly 300 U.S. corporations have seen their bonds downgraded. That’s the most downgrades per year since the financial crisis of 2008-2009. The year isn’t over yet. Neither are the downgrades. More worrisome, the 12-month default rate on high-yield corporate debt has doubled this year. This suggests we are well into the next major debt-default cycle.
Another thing that I am watching closely is the price of oil.

November 11, 2015

TPP – A Recipe for Financial Market Contagion

In response to the mantra, repeated ad nauseam in the media, of “Too Big To Fail”, activists around Occupy Wall Street developed “TIBACO” – that is, too interconnected, big, and complex to oversee.
By reframing the issue that large banks, insurance companies, and hedge funds hold positions in so many areas of the market that it is impossible to engage in any type of effective oversight, it becomes clear that the problem is a financial industry out of control. “Too big to fail” argues that big banks that are so essential to the adequate functioning of the global economy that they need the government to provide a backstop to whatever activities they pursue. TIBACO, on the other hand, makes the case that the system needs to be disaggregated to allow for effective regulatory oversight and to prevent trusts and monopolization.
It’s this framework – TIBACO – that should guide any analysis of the TPP’s financial services chapter, which is outside of ISDS, the most important, and of course, least reported on, part of the TPP. This chapter recreates the condition for an explosion of financial industry consolidation – magnifying the effects of a future financial crisis.
There are two clear issues with the TPP’s financial services chapter:
1) It mandates that nations – particularly Vietnam and Malaysia- – treat foreign banks in the same manner that they treat their own domestic banks. This will give rise to rapid market consolidation dominated by predominantly American financial firms.
2) It will mandate the partial privatization of Japan Post’s life insurance business – by far the largest untapped life insurance market in the world, with over $1.2 trillion in assets (total life insurance assets in the US were $3.2 trillion in 2011).
Read the entire article 

November 10, 2015

We Have Never Seen Global Trade Collapse This Dramatically Outside Of A Major Recession

If you have been watching for the next major global economic downturn, you can now stop waiting, because it has officially arrived.  Never before in history has global trade collapsed this dramatically outside of a major worldwide recession.  And this makes perfect sense – when global economic activity is increasing there is more demand for goods and services around the world, and when global economic activity is decreasing there is less demand for goods and services around the world.  So far this year, global trade is down about 8.4 percent, and over the past 30 days the Baltic Dry Index has been absolutely plummeting.  A month ago it was sitting at a reading of 809, but now it has fallen all the way to 628.  However, it is when you look at the trade numbers for specific countries that the numbers become particularly startling.
Just within the last few days, new trade numbers have come out of China.  China accounts for approximately one-fifth of all global factory exports, and for many years Chinese export growth has helped fuel the overall global economy.
But now Chinese exports are falling.  In October, Chinese exports were down 6.9 percent compared to a year ago.  That follows a decline of 3.7 percent in September.
The numbers for Chinese imports are even worse.  Chinese imports in October were down 18.8 percent compared to a year ago after falling 20.4 percent in September.  China’s growing middle class was supposed to help lead a global economic recovery, but that simply is not happening.

November 9, 2015

Goldman Now Thinks "The Economy Might Start To Overheat Unless Growth Slows From The Current Pace"

Remember when a month ago Goldman "called it" on the question whether there would be a rate hike in 2015, when, in response to the rhetorical question of "What is your own view of the appropriate liftoff date?" chief economist Jan Hatzius said the following:
A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.
Well, the gambit worked and while the "rate hike delay thesis" sent markets soaring in October on one after another piece of bad news as "bad news was good news", the tables have now turned, and following the "stellar" October jobs report, it is time to attempt "good news is good news" for a change, and engage in the most hypocritical game of revisionist history, and pitch a rate hike as the bullish catalyst this economy has needed all along - because if only the Fed has raised rates in 2009 instead of engaging in QE2, Twist, QE3 and keeping ZIRP until now, the middle class would be thriving... just ignore the S&P at 2100.
So here comes Goldman, not two months after it said that the Fed should think about easing, with what can only pass for Sunday evening humor saying that 7 years to the day after it landed on the zero bound on December 16, 2008, the Fed will hike because, "the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace".