June 30, 2016

"Deutsche Bank Poses The Greatest Risk To The Global Financial System": IMF

Over three years ago we wrote "At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World" in which we introduced a bank few until then had imagined was the riskiest in the world.

As we explained then "the bank with the single largest derivative exposure is not located in the US at all, but in the heart of Europe, and its name, as some may have guessed by now, is Deutsche Bank. The amount in question? €55,605,039,000,000. Which, converted into USD at the current EURUSD exchange rate amounts to $72,842,601,090,000....  Or roughly $2 trillion more than JPMorgan's."

So here we are three years later, when not only did Deutsche Bank just flunk the Fed's stress test for the second year in a row, but moments ago in a far more damning analysis, none other than the IMF disclosed that Deutsche Bank poses the greatest systemic risk to the global financial system, explicitly stating that the German bank "appears to be the most important net contributor to systemic risks."

Yes, the same bank whose stock price hit a record low just two days ago.

Here is the key section in the report:

Read the entire article

June 29, 2016

Is A New Banking Crisis Imminent? Recent Rise In Delinquency Rates Is Shocking

The delinquency rate on loans is key in understanding banking. It answers one question: what percentage of loans is overdue for payment? The delinquency rate is by far the most useful indicator for “credit stress.” It seems, however, as if delinquency no longer counts. Few are paying attention to the quick and sudden rise of the delinquency rate. What does it tell us and is a new banking crisis imminent?

This Is What Happened after Janet Yellen Hiked the Fed Funds Rate in December

I have said it many times over and I will repeat it here: the last time around, it took Fed-chairman Alan Greenspan over two years and seventeen rate hikes to bring the Fed funds rate from a then all-time-low of 1% to 5.25%, before the U.S. economy suffered the worst recession since the 1930s. We are not so lucky this time.

Greenspan’s rate hikes didn’t affect delinquency rates straight away. Credit stress was subdued until a year after Greenspan’s last hike. Only in the first quarter of 2007, delinquency rates began to move higher. The reason is as clear as the water surrounding the Bahamas: in the years preceding the Great Recession credit growth was mainly focused on the U.S. housing market.

Credit growth was mostly driven by mortgage lending. Mortgages were generously provided by banks, but increasingly to subprime borrowers (subprime referring to their poor credit). Yet these subprime borrowers didn’t pay higher interest rates on their mortgages the moment Alan Greenspan began hiking rates. But as soon as their (promotional) teaser rates resetted, they started “feeling the Alan.” Delinquency rates went through the roof and the U.S. economy into recession.

Teaser rates, the low initial interest rate a borrower pays for the first few years, were responsible for the lag between Greenspan’s rate hikes and the 2008 recession.

Read the entire article

June 28, 2016

The End Game Of Bubble Finance - Political Revolt

During Friday’s bloodbath I heard a CNBC anchor lady assuring her (scant) remaining audience that Brexit wasn’t a big sweat. That’s because it is purportedly a political crisis, not a financial one.

Presumably in the rarified canyons of Wall Street, politics doesn’t matter much. After all, when things get desperate enough, Washington caves and does “whatever it takes” to get the stock averages moving upward again.

Here’s a news flash. That’s all about to change.

The era of Bubble Finance was enabled by a political abdication nearly 50 years ago. But as Donald Trump rightly observed in the wake of Brexit, the voters are about to take back their governments, meaning that the financial elites of the world are in for a rude awakening.

To be sure, the apparent lesson of the first TARP vote when the bailout was rejected by the House in September 2008 was that politics didn’t matter so much.

Wall Street’s 800 point hissy fit was all it took to prostrate the politicians. Indeed, the presumptive free market party then domiciled in the White House quickly shed its Adam Smith neckties and forced the congressional rubes from the red states to walk the plank a second time in order to reverse the decision.

There was a crucial predicate for this classic crony capitalist capture of the authority and purse of the state, however, that should not be overlooked. Namely, that in the mid-cycle period of the world’s 20-year experiment in central bank driven Bubble Finance the rubes had not yet come to fully appreciate that they were getting the short end of the stick.

Read the entire article

June 27, 2016

We Just Witnessed The Greatest One Day Global Stock Market Loss In World History

More stock market wealth was lost on Friday than on any other day in world history.  As you will see below, global investors lost two trillion dollars on the day following the Brexit vote.  And remember, this is on top of the trillions that global investors have already lost over the past 12 months.  It is important to understand that the Brexit vote was not the beginning of a new crisis – it has simply accelerated a global financial crisis that started last year and that was already in the process of unfolding.  As I noted on Friday, we have been waiting for “the next Lehman Brothers moment” that would really unleash fear and panic globally, and now we have it.  The next six months should be absolutely fascinating to watch.

According to CNBC, the total amount of money lost on global stock markets on Friday surpassed anything that we had ever seen before, and that includes the darkest days of the financial crisis of 2008…

Worldwide markets hemorrhaged more than $2 trillion in paper wealth on Friday, according to data from S&P Global, the worst on record. For context, that figure eclipsed the whipsaw trading sessions of the 2008 financial crisis, according to S&P analyst Howard Silverblatt.

The prior one day sell-off record was $1.9 trillion back in September of 2008, Silverblatt noted. According to S&P’s Broad Market Index, combined market capitalization is currently worth nearly $42 trillion.

And of course many of the wealthiest individuals on the planet got absolutely hammered.  According to Bloomberg, the 400 richest people in the world lost a total of $127.4 billion dollars on Friday…

Read the entire article

June 24, 2016

The Amount Of Stuff Being Bought, Sold And Shipped Around The U.S. Hits The Lowest Level In 6 Years

When less stuff is being bought, sold and shipped around the country with each passing month, how in the world can the U.S. economy be in “good shape”?  Unlike official government statistics which are often based largely on projections, assumptions and numbers seemingly made up out of thin air, the Cass Freight index is based on real transactions conducted by real shipping companies.  And what the Cass Freight Index is telling us about the state of the U.S. economy in 2016 lines up perfectly with all of the other statistics that are clearly indicating that we have now shifted into recession mode.

If you are not familiar with the Cass Freight Index, here is a definition of the index from the official Cass website

Since 1995, the Cass Freight Index™ has been a trusted measure of North American freight volumes and expenditures. Our monthly Cass Freight Index Report provides valuable insight into freight trends as they relate to other economic and supply chain indicators and the overall economy.

Data within the Index includes all domestic freight modes and is derived from $25 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers. These companies represent a broad sampling of industries including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment. Annual freight volume per organization ranges from $1 million to over $1 billion. The diversity of shippers and aggregate volume provide a statistically valid representation of North American shipping activity.

Read the entire article

June 23, 2016

Disband the Fed: The Most Accurate Statement Yellen Could Make

Fed’s Yellen: US economy faces ‘considerable uncertainty’  … Federal Reserve Board Chairwoman Janet Yellen testifies before the Senate Banking, Housing and Urban Affairs Committee on June 21, 2016 in Washington on June 21, 2016 …  Federal Reserve Chair Janet Yellen warned Tuesday that the US economy faces “considerable uncertainty” from slower domestic activity and from a possible British vote to break with the European Union.  -Yahoo

Here’s a question: Why is the Senate listening to Janet Yellen about the economy?

It’s like the blind leading the blind.

The Senate has no idea what’s going on with the economy.

Neither does Yellen.

She was wrong about hiking rates. She was wrong about the direction of the market. And she’s been wrong about the economy as well. It’s going down not up.

The US is in the midst of a kind of depression.

And there’s no one economy anyway. The economy is made up of tens of millions of people. To generalize about them may be feasible but not necessarily accurate.

Read the entire article

June 22, 2016

Britain Doesn't Need The EU To Thrive

The United Kingdom will tomorrow vote either to leave or remain in the European Union. This is the most important European event of this century since it will likely have important domino effects for the rest of Europe.

A recent poll showed that if the UK could keep free trade with EU nations, the British people would vote overwhelmingly to leave the EU. To drum up support for staying in the EU, the UK government and quasi-government agencies, like the IMF and OECD, have issued continuous warnings about the costs of such a divorce. The IMF recently reiterated its forecasts that Brexit would have a significant negative effect on the UK economy with a drop in GDP anywhere between 1% and 9% over the long term.

The reality is that Brexit would probably only have a minor initial impact on trade or GDP and, on the contrary, would open up vast possibilities for the UK to exploit trade relations with other faster growing regions of the world without having to reach complex trade agreements that satisfy the vested interests of the other 28 members of the EU. 

The impact of Brexit on trade has been grossly exaggerated. In today's world, a product has parts coming from all over the world. A BMW is only called German because of historical association. In reality, the steel in a BMW may come from Brazil or China, the upholstery from the UK, the engine from France, and the electronics from the USA. Labor costs are only 10% of a car and some may even be foreign labor. Also, profits are distributed to BMW shareholders and bondholders which are more likely to be sent to a hedge fund in Japan than to the mechanic in Dusseldorf. The world is massively economically integrated. Relatively free trade and free movement of capital is no longer an option for most countries, whether it is the UK or any of the other countries in the EU. That boat sailed years ago!

Read the entire article

June 21, 2016

Why A UK Billionaire Believes Brexit Would Be "Good For The UK"

The City of London and the pound would both benefit from the U.K. leaving the EU, says billionaire Peter Hargreaves. Brexit may knock the pound initially, but it would rebound, the co-founder of Hargreaves Lansdown — the largest U.K. retail broker, with more than $84.1 billion equivalent in assets — told Bloomberg Briefs' Geoff King in a June 17 interview.

Q: Why do you support "Leave"?

A: Every year in the EU it gets more political, it gets more legislative, more regulative; we don’t seem to get very much benefit from it. We will be far better out. The EU as an economic mark is declining in the world, when there were only nine countries in it was 30 percent of the world's GDP, now there are 28 it is only 17 percent. That's some serious decline. Other countries that are growing — India, parts of Africa, Brazil, China and even Russia — are the places we should be trading with.

Q: How do you counter strong economist/analyst support to remain?

A: There's a huge amount of vested interest, a lot people making these comments are politically motivated and also work for big banks that aren’t British. They’ve built these enormous dealing rooms and offices in the City of London and Canary Wharf and their bosses are saying we don't want to endanger this huge investment of ours. I don't think it will endanger that huge investment. You can't move the City of London to anywhere else in Europe. It's madness to suggest it. Frankfurt, the place everybody keeps talking about, only has a population of 700,000, it could not accommodate anything like the City of London. The City of London is absolutely guaranteed, it is bound to survive. The only center that could take over would be Zurich and that's not in the EU either. It's absolute drivel that the City of London will be affected. The City of London will go out and it will deal with these emerging economies in the Pacific Basin, Southeast Asia, Africa —  they're all going to want finance for different things. You can't set up the City of London anywhere else. It takes years, and during that time the City of London will have grown stronger. Any attempt at usurping it will fail.

Read the entire article

June 20, 2016

The Economy Is Not What It Seems

Over the past several years, I have repeatedly discussed the ongoing detachment between the economic reports versus what was happening in the actual underlying economy. Last year, I wrote:

“Currently, there is little evidence that is supportive of higher overnight lending rates. In fact, the current environment continues to support the idea of a  “liquidity trap” that I began discussing in 2013. To wit:

‘…a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.'”

The importance of a liquidity trap can not be dismissed as the feedback loop of monetary interventions negatively impact growth by misallocated capital to non-productive uses.

Despite mainstream economists hopes that somehow “this time will be different,” the ongoing massaging of economic data through seasonal adjustments to obtain better headlines did not translate into actual prosperity.  Of course, “reality” is a cruel mistress and despite ongoing hopes and overstatements, “fantasy” eventually gives way. 

The chart below shows the S&P 500 index with recessions and when the National Bureau of Economic Research dated the start of the recession.

Read the entire article

June 17, 2016

Brexit: All Eyes On European Banks

No One is Discussing the Real Issue

Those in the “leave” or “Brexit” camp are in the headlines citing a long list of understandable issues:  economic underachievement, immigration, lack of transparent democratic processes; frustration with challenges seemingly beyond the control of local governments. They fail, however, to mention the real issue that is a risk to today’s financial markets. 

The real issue should be known to Europe’s politicians and especially understood by its central bankers.   The real issue is debt and how its tentacles spread throughout Europe and indeed the world.  The Euro as a currency is not just flawed; it’s also the financial equivalent of a thermonuclear debt bomb.  Its many and terrible design failures make it dangerous.  Its designers and defenders either don’t want to acknowledge its shortcomings or, even worse, are simply unaware of them.  Let us explain.

Europe’s banks are bigger, more leveraged, and more indebted than U.S. banks.  This means a smaller cushion to guard against unexpected losses.  Furthermore, the EU’s fragile financial system of massively overleveraged banks is choking on cross-border liabilities from other banks in a way that almost no one can truly quantify and even fewer understand.  Further complicating this issue, the governments that have borrowed in Euros are not free to print Euros to backstop their own banks.  Our concern is that this terrible flaw could spread far beyond the limited and understandable issues that divide Britain’s voters.  As we have argued many times (“Is Spain the Next Greece?” June 1st 2016), those countries with currencies pegged to the Euro are most at risk from its design flaws – Spain, Italy, and France, just to name a few.  But the debts of these countries’ banks to other banks, and frankly the debts of those banks to others, create the preconditions of systemic weakness not seen since the days after Lehman Brothers failed.

Read the entire article

June 16, 2016

15 Facts About The Imploding U.S. Economy That The Mainstream Media Doesn’t Want You To See

You are about to see undeniable evidence that the U.S. economy has been slowing down for quite some time.  And it is vital that we focus on the facts, because all over the Internet you are going to find lots and lots of people that have opinions about what is going on with the economy.  And of course the mainstream media is always trying to spin things to make Barack Obama and Hillary Clinton look good, because those that work in the mainstream media are far more liberal than the American population as a whole.  It is true that I also have my own opinions, but as an attorney I learned that opinions are not any good unless you have facts to back them up.  So please allow me a few moments to share with you evidence that clearly demonstrates that we have already entered a major economic slowdown.  The following are 15 facts about the imploding U.S. economy that the mainstream media doesn’t want you to see…

There is no debate any longer – the next economic crisis is already here.  This is so abundantly obvious at this point that even George Soros has been feverishly dumping stocks and buying gold.

We can argue about whether the U.S. economy started turning down in late 2015, early 2015 or late 2014, and it is good to have those debates.

But at the end of the day, what is far more important is what is ahead.  Fortunately, our downturn has been fairly gradual so far, and let us hope that it stays that way for as long as possible.

In much of the rest of the world, things are already in full-blown panic mode.  For instance, Venezuela was once the wealthiest nation in South America, but now people are literally hunting cats and dogs for food.

Absent a major “black swan event” of some sort, we won’t see that happening in the United States for at least a while yet, but without a doubt we are steamrolling toward a major economic depression.

Unfortunately for all of us, there isn’t anything that any of our politicians are going to be able to do to stop it.

Read the entire article

June 15, 2016

How Low Can Bond Yields Go? Lower

How low can bond yields go? Every day seems to provide fresh evidence that we really don’t know. But whatever your answer, between the gravitational pull of central bank debt purchases and a slowing global economy, the reality is: probably lower.

Milestones include unprecedented 10-year yields in Germany, Japan and the U.K. British government debt has returned 8.1% this year and the spread between 10-year gilts and comparable Treasuries is at the widest since 2006 on concern the U.K. may vote to leave the EU.

It may seem crazy that 11 sovereigns have negative-yielding five-year debt. Hard though it is to accept, bondholders aren’t playing the greater fool. Central banks are primed to push yields lower until they get results.

“It’s a mad scramble for defensive positions,” said Jack McIntyre, a bond manager with Brandywine Global Investment Management. “We’re competing against the world’s central banks” for bonds.

Trends in consumer prices haven’t acted as a brake. Inflation in advanced economies fell to 0.3% last year, the least since 2009 and down from 1.4% in 2014, according to IMF data.

Read the entire article

June 14, 2016

More Collateral Damage From Negative Interest Rates

Bankers in the Eurozone’s core nations, in particular Germany, are fast losing patience with the European Central Bank’s rampant forays into the markets and with its ambitions to drive interest rates deeper into the negative. That now includes Germany’s two largest banks, Deutsche Bank and Commerzbank, that are in a coordinated manner and apparently with the backing of the government counterattacking the ECB for its destructive policies.

But it’s one thing for bankers and politicians in one of Europe’s most financially conservative nations to express dismay; it’s quite another when the supposed biggest beneficiaries of ECB policy begin complaining. This is precisely what is happening in the Eurozone’s fourth largest economy, Spain.

The first shot across the bow came from Francisco González, the president of Spain’s second biggest bank, BBVA, who moaned a couple of weeks ago that the ECB’s negative interest rate policy “is killing banks.” Now, a new complaint has emerged, this time from someone who actually has a seat on the ECB’s board: the governor of the Bank of Spain, Luis María Linde.

A Dangerous Dependence

In the latest edition of the Bank of Spain’s Economic Bulletin, Linde cautioned about one of the primary effects of the ECB’s monetary medicine on Spanish households: the growing dependence of Spanish household wealth on the performance of Spain’s stock market. While Linde describes this trend as a “side-effect” of ECB policy, the reality is that pushing savers into riskier investments — in particular, into stocks — was always one of the overarching goals of central banks’ financial repression.

Read the entire article

June 13, 2016

This Is What The Unprecedented Chinese M&A Scramble In America Looks Like

The raging need for Chinese oligarchs and corporations to park their cash offshore, and as far away as possible from the the mainland and the risk of sudden, sharp (10%-15%) devaluation, has resulted in not only an epic Vancouver housing bubble, or the predicted parabolic surge in bitcoin price (which has soared by 50% in just a few weeks), but an unprecedented M&A spree for US-based assets. We profiled as much in late March in a post titled "Eight Things The Chinese Are Scrambling To Buy In America."

And while overall M&A in the US is down substantially YTD, sliding 28% by volume (but only 4% in number of deals) mostly as a result of the volatile market in the early part of the year as well as the chilling effect of Congressional crackdown on tax-inversion deals (such as the pulled Pfizer-Allergan mega-merger), and the lack of any blockbuster mega-cap (>$25 billion) deals, China not only refuses to go away, but the level of Chinese cross-border M&A chasing after US targets is literally off the charts.

Here are the details from Goldman:

Cross-border, while down in aggregate, continues to gain share at 34% of total YTD volumes (a 6-year high). While the distribution of acquirers and targets remains relatively well diversified, one trend has been increased Chinese volumes. Notably, China has accounted for 26% of global cross-border activity YTD, which is nearly 3x higher than the next highest year (2013).

Read the entire article

June 10, 2016

George Soros Is Preparing For Economic Collapse – Does He Know Something That You Don’t?

Why is George Soros selling stocks, buying gold and making “a series of big, bearish investments”?  If things stay relatively stable like they are right now, these moves will likely cost George Soros a tremendous amount of money.  But if a major financial crisis is imminent, he stands to make obscene returns.  So does George Soros know something that the rest of us do not?  Could it be possible that he has spent too much time reading websites such as The Economic Collapse Blog?  What are we to make of all of this?

The recent trading moves that Soros has made are so big and so bearish that they have even gotten the attention of the Wall Street Journal

Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.

Soros Fund Management LLC, which manages $30 billion for Mr. Soros and his family, sold stocks and bought gold and shares of gold miners, anticipating weakness in various markets. Investors often view gold as a haven during times of turmoil.

Hmmm – it sounds suspiciously like George Soros and Michael Snyder are on the exact same page as far as what is about to happen to the global economy.

You know that it is very late in the game when that starts happening…

Read the entire article

June 9, 2016

Soros Returns To Trading With "Big, Bearish" Bets On Economic Turmoil

One month ago, we were stunned to report that none other than billionaire Carl Icahn had taken the net exposure of his hedge fund, Icahn Enterprises, from a modest net 25% short - his recent negative bias on the market was hardly a secret - to a practically apocalyptic, 149% net short which is about as close to betting on a market crash as one could get. 

Then last month, billionaire trader Stanley Druckenmiller warned that “the bull market is exhausting itself” and in a presentation titled "The Endgame", he explained why he too is dumping equities and buying gold.

It turns out Icahn and Druck weren't the only iconic traders betting on a market crash.

In a stunning one-two revelation, the WSJ reports that after a nearly decade-long hiatus, not only has George Soros returned to trading, "lured by opportunities to profit from what he sees as coming economic troubles", but that he has personally directed "a series of big, bearish investments", meant to profit from the coming economic turmoil .

Read the entire article

June 8, 2016

Artificial Intelligence and Employment

The substitution of human labour by artificial intelligence and robots is a keenly debated topic. Some claim that a substantial share of jobs is at risk, while others argue that computers and robots will lead to product innovations and hence to unimaginable new occupations. This column uses a survey of Japanese firms to examine the impact of AI-related technologies on business and employment. Overall, firms expect a positive impact on business but a negative impact on employment. Firms with a highly skilled workforce, however, have a more optimistic view than firms with lower skilled employees.

Since the second half of the 1990s, productivity growth has accelerated in the US due to the Information Technology (IT) Revolution. However, the productivity effects of traditional types of IT were exhausted by mid-2000 (e.g. Fernald 2015). Today, the impacts of artificial intelligence (AI) and robotics―referred to as the Fourth Industrial Revolution―on the future economy and society is attracting attention, and many speculative arguments have arisen regarding the possible effects of the Fourth Industrial Revolution. In particular, the substitution of human labour by AI and robots is being hotly discussed.

The Japanese government has begun efforts to develop and diffuse AI and robotics technologies. The Robot Revolution Initiative Council was established in 2014 and has published a report, New Robot Strategy, which includes a five-year action plan to realise the robot revolution. The Artificial Intelligence Research Center was established in the National Institute of Advanced Industrial Science and Technology (AIST) in 2015 to promote development of AI-related innovations. The Japan Revitalization Strategy 2016, which is the core growth strategy of Abenomics, places the Fourth Industrial Revolution at the top of the growth policy agenda.

The Impact of AI and Robotics on Employment

Read the entire article

June 7, 2016

Something Big That Always Happens Right Before The Official Start Of A Recession Has Just Happened

What you are about to see is major confirmation that a new economic downturn has already begun.  Last Friday, the government released the worst jobs report in six years, and that has a lot of people really freaked out.  But when you really start digging into those numbers, you quickly find that things are even worse than most analysts are suggesting.  In particular, the number of temporary jobs in the United States has started to decline significantly after peaking last December.  Why this is so important is because the number of temporary jobs started to decline precipitously right before the last two recessions as well.

You see, when economic conditions start to change, temporary workers are often affected before anyone else is.  Temporary workers are easier to hire than other types of workers, and they are also easier to fire.

In this chart, you can see that the number of temporary workers peaked and started to decline rapidly before we even got to the recession of 2001.  And you will notice that the number of temporary workers also peaked and started to decline rapidly before we even got to the recession of 2008.  This shows why the temporary workforce is considered to be a “leading indicator” for the U.S. economy as a whole.  When the number of temporary workers peaks and then starts to fall steadily, that is a major red flag.  And that is why it is so incredibly alarming that the number of temporary workers peaked in December 2015 and has fallen quite a bit since then…

In May, the U.S. economy lost another 21,000 temporary jobs, and overall we have lost almost 64,000 since December.

If a new economic downturn had already started, this is precisely what we would expect to see.  The following is some commentary from Wolf Richter

Read the entire article

June 6, 2016

Goldman Finds That China's Debt Is Far Greater Than Anyone Thought

When it comes to China's new credit creation, at least the country is not shy about exposing how much it is. To find the credit tsunami flooding China at any given moment, one just has to look up the latest monthly Total Social Financing number which include both new bank loans as well as some shadow banking loans. As we reported in April this amount had soared to a record $1 trillion for the first quarter ...

... although as we followed up last month, it tumbled in April as suddenly Beijing slammed the brakes on uncontrolled credit expansion. It is unclear why, although the following chart may have had something to do with it: increasingly less of credit created is making its way into the broader economy.

No matter the reason for these sharp swings in credit creation, one thing that was taken for granted by all is that unlike China's GDP, or most of its "hard" macroeconomic data, at least its credit creation metrics were somewhat reliable, and as such provided the best glimpse into Chinese economic inflection points.

That appears to no longer be the case.

In an analysis conducted by Goldman's MK Tang, the strategist notes that a frequent inquiry from investors in recent months is how much credit has actually been extended to Chinese households and corporates. He explains that this arises from debates about the accuracy of the commonly used credit data (i.e., total social financing (TSF)) in light of an apparent rise in financial institutions’ (FI) shadow lending activity (as well as due to the ongoing municipal bond swap program).

Tang adds that while it is clear that banks’ investment assets and claims on other FIs have surged, it is unclear how much of that reflects opaque loans, and also how much such loans and off-balance sheet credit are not included in TSF. By the very nature of shadow lending, it is almost impossible to reach a conclusion on these issues based on FIs’ asset information.

Read the entire article

June 3, 2016

Goldman Unveils The FX Doom Loop: Turns "Outright Negative" On Yuan Due To "Weak Link"

Today, Goldman has released a note which lays out precisely this relationship in what it calls the "RMB-FOMC Monetary Policy Loop", but before we introduce yet another firm's realization of just how circular the relationship between central banks and markets has become, here is Goldman's abrupt reversal on what it think will happen to the Yuan in the near-future, because as Goldman's Robin Brooks - who has been relentless bullish on the USD - now says that "we shift to an outright negative view on the RMB, in line with this week's Asia Views and our bearish RMB forecast."

The reason for Goldman's sudden bearishness is "because there is a weak link in China’s management of its currency."

This is how it explains the link:

"To be sure, the government has clearly communicated a shift in focus to a trade-weighted currency basket, de-emphasizing the signal that the bilateral exchange rate versus the Dollar carries. But domestically, the only signal that matters is $/CNY, so that higher fixings could easily re-ignite capital flight, as households and firms anticipate a faster pace of depreciation."

 One need look no further than the recent spike in bitcoin driven by Chinese buying to see this in action, as the local have been scared out of their wits by relentless PBOC intervention in the FX market. Goldman goes on:

Read the entire article

June 2, 2016

The SEC Fines a Private Equity Firm for Broker-Dealer Fee Violations. Are KKR, Apollo, Blackstone, TPG, Carlyle and Lots of Others on Its Hit List?

We’ve been writing for some time about the peculiar failure of the SEC to target private equity firms for acting as unregistered broker-dealers. The agency has finally roused itself and has fined an itty bitty firm, Blackstreet Capital Management. Needless to say, it’s not clear whether the agency is simply putting the industry on notice that it needs to clean up its act and register if they continue to collect transaction fees from portfolio companies, or whether it is warming up for larger enforcement actions.

If the latter, it would be a very big deal, because this is considered to be a serious violation of securities laws and the punishment is therefore hefty: dollar for dollar for the amount of fees impermissibly charged. The SEC applied the classic dollar-for-dollar formula in the case of Blackstreet. If you read the order, the total amount to be disgorged of $2,339,000 is the sum of the transaction fees of $1,877,000 (p. 5), plus the impermissible operating partner fees of $450,000 (p. 5), plus the political contributions of $12,000 (p. 6).

We discussed in a 2014 post how widespread this misconduct is:

The Bloomberg story acknowledges that the billions in fees collected by the PE industry over decades appear to have been illegal, noting that an SEC official “…signaled in a speech last year that transaction fees the private-equity industry had been taking for decades may have been improper because the firms weren’t registered as broker-dealers….

The industry flack also claims that the billions paid in transaction fees were not for broker-dealer services (although the argument is so absurd it doesn’t seem to be made with much enthusiasm). Yes, Washington DC is a generally fact-free zone, but let’s look at the language from an actual transaction agreement:

Read the entire article

June 1, 2016

Japan Is First To Panic; Won’t Be The Last

The most widely-reported result of the recent G-7 meeting was Japan’s attempt to convince the other major economies to admit that a crisis is imminent and take appropriately radical steps. The response seems to have been a bunch of blank stares. As India’s Business Standard noted:

G7 pact offers minimal cover for Abenomics reset

A Group of Seven compromise offers minimal cover for Shinzo Abe. The Japanese prime minister’s plan to revitalize the world’s third-largest economy needs fresh impetus. Abe didn’t get as much international backing as he might have liked from hosting the rich nations’ club. But, the summit communique can, just about, be spun his way.

Abe’s counterparts, understandably, do not share his view that the world risks another Lehman Brothers-style financial crisis. That is important because Abe has inexplicably committed to raising the country’s sales tax next April, a surefire way to choke off recovery – unless a shock of this scale emerges.

So Japan — which, remember, has already borrowed eye-popping amounts of money, increased its central bank balance sheet by more as a percent of GDP than have either the Fed or ECB, and pushed interest rates on most of its government bonds into negative territory, all to no avail — has decided to act on its (manifestly justified) sense of panic by starting a new round of deficit spending:

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