August 20, 2018

Tesla Shorts Up $1.2 Billion Since Musk "Going Private" Tweet As Saudis Plan Investment In Competitor

It was less than three weeks ago when we posted "Tesla Shorts Refuse To Cover Despite Suffering Massive Losses" in which we wrote that "Tesla shares rocketed higher on August 2, by almost $50, the day after the company reported its second-quarter results" and added that "despite the stock rising more than 15% immediately after the report, WSJ analytics showed that short sellers are standing their ground in the name despite an estimated $1.7 billion paper loss resulting from the violent move higher."

At the start of the month, and heading into Tesla earnings, there was about $10.5 billion in short interest according to S3 Partners. And as the below chart shows, Tesla has remained the most heavily shorted stock in the U.S. both before and after its report.

Of course, the pain for the shorts only spiked on August 7 when first the Saudi Sov. Wealth Fund announced a 5% stake, promptly followed by Musk tweeting his intention to take the company private at $420, which sent the stock just shy of its all time highs.

Still, the shorts refused to cover, because as the FT reported on Sunday, while the buyout plan pitched by Musk may have been nothing more than a way to "burn the shorts", something the SEC is now allegedly investigating, less than 4 per cent of the short positions have been closed since his tweet.

And in retrospect, good thing they did not because as the bizarre events in the subsequent days demonstrated, Musk's market manipulative tweet - it has since emerged that funding was not secured - may have been the catalyst to not only an SEC investigation, but the last nail of what has been one long, at times surreal emotional collapse for the Tesla CEO.

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August 17, 2018

5 Signs That Global Financial Markets Are Entering A Bear Market, And 11 Ways That You Can Get Prepared For The Chaos That Is Coming…

We haven’t seen carnage like this in the global financial marketplace in quite some time.  On Wednesday, U.S. stocks were down some, but things were much, much worse around the rest of the world.  Global banking stocks are plunging, emerging market stocks are cratering, and emerging market currencies continue their stunning decline.  This represents a dramatic change from the relative stability that we have seen throughout most of 2018.  It is almost as if someone flipped a switch once the month of August began, and the shakiness of global financial markets has many investors wondering what trouble fall will bring.  What we are witnessing right now is not a full-blown panic yet, but it definitely has the potential to turn into one.

The term “bear market” is being thrown around a lot lately, but a lot of people don’t understand what a “bear market” actually is.

A bear market is generally considered to be when we see a decline of 20 percent or more from the 52-week high, and after the carnage of this past week a lot of those thresholds are now being crossed.

It would probably be too early to call this a “global stock market crash”, but we are well on the way to getting there.  The following are 5 signs that global financial markets are entering a bear market…

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August 16, 2018

Yuan, Futures Jump On Report China Delegation Coming To US To Discuss Trade

The Yuan is surging, alongside S&P futures, while the Japanese Yen has erased its gains and US Treasury futures are slumping on a Bloomberg report that China's Vice Commerce Minister, Wang Shouwen, will lead a delegation to the U.S. in late August, the Ministry of Commerce says on website, adding that the visit comes at the invitation of the US.

Additionally, China reiterates that it opposes unilateralism and trade protectionism, and won’t accept any unilateral trade restriction measures. It also "welcomes communications and dialogue on the basis of equality and integrity."

The news is quickly being interpreted by the market as a possible thaw in the trade war tit-for-tat, and has sent H-shares sharply higher, while S&P futures jumped 10 points:

The news may explain why the PBOC fixed the onshore far stronger than the offshore yuan suggested, because as some desks have suggested, the last thing China will want when it comes to the US is a plunging Yuan.

So is this the end of the trade war? Hardly: after all, a Chinese delegation visited the US not that long ago, and just before Trump announced even more tariffs. Furthermore, why would Trump seek to end the "trade war" when the US is clearly winning based on the US vs Chinese stock market, and the divergence in economic growth.

For the time being, however, the market mood is clearly risk on.

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August 15, 2018

This Political Event Will Be Unlike Anything We've Seen In 50 Years

Do you ever feel—despite the supposed economic "recovery" of recent years—that something in America is still not quite right?

If so, you are not alone.

After all, how can things be "OK" when nearly half the men ages 18-34 now live with their parents—the highest level since the Great Depression?

How can it be "normal" when in one of America's richest cities (Seattle) there are now 400 unauthorized homeless camps under bridges and along freeway medians?

How can it be a "recovery" when 78% of the U.S. population now lives paycheck to paycheck, with essentially zero savings?

How can you explain things like the dramatic rise of the militant left-wing group ‘Antifa'... the resurgence of White Supremacists... and the booming popularity of the Democratic Socialists—they've doubled membership in recent months.

Sure, some people—CEOs, tech entrepreneurs, and other members of the "1%"—are doing great. There's never been a better time for wealthy Americans. But the truth is, for most people, the situation is getting much, much worse.

Today I want to share a few facts our politicians are afraid to tell you—including the secret reason why working class Americans have gotten dramatically poorer over the past 40 years.

I've never seen this information published anywhere else. It's a secret that explains why the rich are really getting so much richer—while everyone else is falling behind.

Once you understand this secret, you'll see why, for millions of Americans, a crisis is coming.

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August 14, 2018

That Escalated Quickly: The Emerging Market Currency Crisis Of 2018 Threatens To Destabilize The Entire Global Financial System

We haven’t seen emerging market currencies crash like this in over a decade, and analysts are warning that if this continues we could witness a devastating global debt crisis.  Over the past decade, there has been an insatiable appetite for cheap loans in emerging market economies, and a very substantial percentage of those loans were denominated in U.S. dollars.  When emerging market currencies crash relative to the U.S. dollar, lending dries up and servicing the existing loans becomes extremely oppressive, and that is precisely what we are witnessing right now.  This week, most of the top headlines in the financial media have been about the crisis in Turkey.  The Turkish lira fell another 8 percent against the U.S. dollar on Monday, and it is now down about 35 percent over the past week.  Overall, the lira has fallen 82 percent against the U.S. dollar in 2018, and this is putting an enormous amount of stress on the Turkish financial system

“It is about credit, since Turkey has been a huge borrower in global capital markets over the past number of years when the world’s central banks were encouraging investors to stretch for yield,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily market note. “Over half of the borrowing is denominated in foreign currencies, so when the lira sinks, debt-servicing costs and default risks rise inexorably.”

Turkey’s economy, just like all of the other major economies around the world, is utterly dependent on the flow of credit, and now lending is becoming greatly restricted.

Meanwhile, any existing loans that were made during the lending spree of the past decade that are denominated in foreign currencies are going to be causing major problems.  The following comes from CNBC

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August 13, 2018

South African Rand Flash-Crashes 10% As Turkey Contagion Spreads

As Simon Black warned back in March, when Ramaphosa to push for the constitutional change required to confiscate white farmers' lands, this would guarantee a banking crisis for the country. Here's why - a lot of this land that the government wants to confiscate probably has quite a bit of bank debt.

Imagine – you just bought a farm for, say, 50 million rand (that’s about USD $3 million). And in order to do so, you took out a hefty loan from a South African bank.

Now the government comes along and steals your property.

Are you seriously going to keep paying the loan?

Of course not.

This means that the banks are going to be stuck with massive defaults and bad debts, leading to a wave of bank failures.

So in their crusade to bring Social Justice to South Africa, the government is effectively engineering a banking crisis in their country.

This is criminally stupid behavior that puts South Africa on the same path that Zimbabwe followed in the late 1990s.

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August 10, 2018

Tesla Board Confirms It Never Saw LBO "Financing Plan" From Musk

Three days into the Tesla "going private" saga, everyone continues to scramble for more information on the biggest wildcard in the entire equation: the "committed funding" as represented by Elon Musk: shareholders are asking where it is; bankers - i.e., those who should have arranged it - are asking where it is; even the SEC is asking where it is (and probing if Musk was being "truthful" with the alternative being stock manipulation which opens up Tesla to fraud lawsuits), and now Reuters reports that even the Tesla Board of Directors wants to know where it is.

According to Reuters, Tesla's board of directors is seeking more information from CEO Elon Musk about the finance for his plan to take the U.S. electric car maker private.

And here is the punchline: While Tesla's board has held multiple discussions about the proposal - as it documented in its statement on Wednesday - it has "not yet received a detailed financing plan from Musk and specific information on who will provide the funding."

As a reminder, in a statement on Wednesday, Tesla's board said its discussion with Musk "addressed the funding" for the deal, without offering more details. And now we know why: because it had none, and one increasingly wonders if the Board simply made up the fact that it had multiple discussions just to cover Musk's back.

But there is another big problem, if only from a timing/legal standpoint: if the board has no idea where the funding is coming from, there is no way it could have signed off on it, thereby "securing it", which means that all else equal, Musk's tweet that sent the stock price soaring was a fabrication.

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August 9, 2018

Bankrupt America: Bankruptcy Soars As The Country Grapples With An Unprecedented Debt Problem

America, you officially have a debt problem, and I am not just talking about the national debt.  Consumer bankruptcies are surging, corporate debt has doubled since the last financial crisis, state and local government debt loads have never been higher, and the federal government has been adding more than a trillion dollars a year to the federal debt ever since Barack Obama entered the White House.  We have been on the greatest debt binge in human history, and it has enabled us to enjoy our ridiculously high standard of living for far longer than we deserved.  Many of us have been sounding the alarm about our debt problem for a very long time, but now even the mainstream news is freaking out about it.  I have a feeling that they just want something else to hammer President Trump over the head with, but they are actually speaking the truth when they say that we are facing an unprecedented debt crisis.

For example, the New York Times just published a piece that discussed the fact that the bankruptcy rate among retirees is about three times higher than it was in 1991…

For a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.

The signs of potential trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years. Now, new research sheds light on the scope of the problem: The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers.

Read the entire article

August 8, 2018

Market Stunned After Musk Discloses Intention To LBO Tesla, Lawsuits Threatened

Update 10: After all that, nobody has any idea what just happened, and a word being increasingly thrown around is lawsuit. As Yahoo's Rick Newman writes, if the LBO deal described by Musk with "funding secured" is true, it’s a boon for shareholders. But if it’s not true, Tesla is in trouble, and shareholders may feel the pain.

“If funding is secured, then it’s a factual statement,” says John C. Coffee, director of the Center on Corporate Governance at Columbia Law School. “But if he can’t prove that, he’s in some danger of a big lawsuit because short sellers will be devastated by this.”

On Aug. 7, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” Those nine words sent the stock soaring from $342 to around $370, an 8% jump. Then the Nasdaq exchange temporarily halted trading in the shares, pending clarification of material news by the company.

About three hours after his momentous tweet, Musk posted a message to employees explaining his rationale for going private. He cited “wild swings” in the stock price and frequent attacks by short sellers as “a major distraction for everyone working at Tesla.” He cited Space X, the  rocket-launching company where Musk is also CEO, as an example of a privately owned company better able to focus on a complex long-term mission. “A final decision has not yet been made,” he said.

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August 7, 2018

"It's Been Crazy": Meet The Source Of China's Next Debt Crisis: Millennials With Credit Cards

Last October, when looking at the breathtaking growth in Chinese new debt, we pointed out the one segment where the danger was most acute: household debt, which in mid 2017 had surged by a whopping 43% in one year even as the growth across other debt categories was relatively stable.

In fact, as the next chart shows, Chinese households are on the verge of surpassing the nation's corporations as the biggest source of credit demand.

But what was behind the surge in household loan demand? As it turns out, it was merely the reality of China's surging prices coupled with stagnant incomes, forcing countless, mostly young Chinese residents to do what Americans have been doing for decades: charge it.

In a report on China's brand new infatuation with consumer credit, the FT highlights the case of Tom Wang, a graduate from a middle-ranked Chinese university, who struggling to find well-paid work after arriving in Shanghai turned to the only possible source to fund his spending: credit cards.

“Using credit cards did not feel like spending money, and the debt grew and grew,” said the 26-year-old, whose starting salary of Rmb3,000 ($470) a month could not cover rent and the consumption habits he called “irrational”, such as buying the latest smartphone.

To cover repayments and keep spending, Wang took on more debt,  borrowing Rmb60,000 over four credit cards , before turning to online lenders for a further Rmb70,000. The problem is that interest payments quickly “snowballed” to an untenable Rmb1,500 a month, eating up half of his entire pretax income.

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August 6, 2018

China Is Now Left With Just Three Options, And They Are All Equally Bad

Last Friday's forceful intervention by the PBOC, in which the central bank hiked the reserve requirement for FX forwards trading from 0% to 20%, was a warning shot at the gathering yuan shorts who managed to briefly send the Chinese currency below 6.90 against the dollar last week, after losing 4% of its value in the past month, and bringing the cumulative decline against the dollar to 10% since April, a far steeper drop than seen during the 2015 devaluation.

The yuan slide had come amid growing speculation that Chinese authorities are more willing to let their currency weaken along with market forces and an escalating trade war, at least for as long as they felt any capital account leakages are contained and manageable.

And yet, despite China's long overdue intervention - after all, once capital flight begins as new holes in the capital account are uncovered, it would be too late to prevent a repeat of the 2015 scenario - the debate about Chinese currency depreciation and what happens next with Chinese policy gathered pace, with ING last week proposing that this latest attempt to "nuke the shorts" is doomed to failure, just like previous unilateral FX interventions.

Over the weekend, JPMorgan echoed ING's skepticism, writing that despite Friday's PBoC announcement and despite the cumulative depreciation over the past two months, "the pressure on the Chinese renminbi to decline further against the dollar is unlikely to go away if trade tensions with the US escalate further from here."

Meanwhile, in a move that puzzled many China watchers, at the same time that the PBoC announced an increase in the reserve requirement ratio for fx forwards trading, China announced that it would implement tariffs on $60bn of imports in response to a threat by the US earlier this week to raise the tariff rate from 10% to 25% on $200bn of Chinese exports to the US, prompting some to speculate that the FX intervention was merely implemented to prevent a collapse in the yuan beyond 7.00 vs the dollar as the market freaked out about the latest Chinese retaliation.

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August 3, 2018

3% Treasuries, Say Hello To Trillion Dollar Deficits

In two months we will be in fiscal 2019 for the US government, and the OMB projects +$1 trillion/year deficits until 2021. Ten year Treasuries nosed over 3% today on news of some small but unexpected issuance, so where will rates go once deficits kick into high gear? And how will stocks discount higher rates, regardless of reason? Our answers below.

If the 10 Year Treasury were 4.0% at the end of 2019, would you expect US equities to be higher or lower then? It is easy enough to tell a story either way:

Bullish for stocks. Rising inflation caused by economic growth lifts both bond yields and corporate earnings. Companies push for greater efficiency to offset labor/materials costs, limiting margin erosion and (finally) increasing workforce productivity. PE multiples contract, but earnings growth more than offsets the decline and stocks rise.

Bearish for stocks. Rising inflation caused by escalating trade frictions lifts interest rates, but has a chilling effect on the economy and corporate earnings. The Federal Reserve likely avoids going full Volcker, and simply keeps rates constant in 2019 knowing an inflation-induced recession will take inflation lower without their having to become a political pariah. Multiples contract due to higher rates, but earnings are down 10% rather than the current forecast of +10%. The combination pushes US stocks lower.

Capital markets currently see the bull case as much more likely, and the other end of the yield curve – 2 Year Treasuries – supports that interpretation. It sits at 2.68% today, just 1 basis point off its post-Financial Crisis high, and has been moving upward all year. This is entirely consistent with the view that the Federal Reserve will respond to a strengthening US economy with higher rates through 2019. A trade war recession isn’t priced in at all.

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August 2, 2018

BOE Raises Interest Rates In Surprise Unanimous Decision

As expected by the market, the Bank of England raised interest rates only for the second time since the financial crisis, to the highest level since 2009, saying recent data confirmed the bank's view that the first quarter slowdown in UK growth was temporary.

Members of the BOE's Monetary Policy Committee voted unanimously for a 25 basis point increase, bringing the BoE’s benchmark rate to 0.75%, the highest since the onset of the global crisis.

While the outcome was widely expected, with the market pricing in the quarter point rate rise fully in the run-up to the meeting well in advance, the surprise was that the decision was unanimous, which adds a hawkish tilt to this decision according to several Wall Street analysts.

The unanimous decision is perplexing because the BOE spent the two years since Brexit to scare the nation just how perilous the economy is. And yet, here they are, with just 8 months left until the final Brexit divorce deadline, to announce how upbeat the central bank is on the country's outlook, and to upgrade its outlook for the coming year.

And it certainly was upbeat: "The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.”

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August 1, 2018

Five Trillion Dollars! Doomed US Pensions' Shortfall Now The Size Of Japan's Economy

Scores of public pensions across the United States are so massively underfunded that the shortfall is roughly equal to Japan's GDP - the world's third-largest economy, according to Moody's Investors Service.

State and local pension plans in the U.S. now have less than three- quarters of the money they need to meet their promised payouts, their lowest level since at least 2001, according to Public Plans Database figures weighted by plan size. In dollar terms the hole for state and local pensions is now $5 trillion, according to Moody’s Investors Service. -WSJ

If governments don't increase taxes, convince pensioners to take less than they were promised or divert funds from elsewhere, an increasing number of funds face insolvency, reports the Wall Street Journal

In Kentucky, for example, a major pension for state employees had around 16% of what it needs to fulfill its obligations based on 2017 fiscal year figures, according to the Public Plans database which tracks state and local pension funds. A Chicago municipal employee fund had less than 30% of what it needed during the same fiscal year, while New Jersey's state pension is so underfunded it faces insolvency in 12 years according to a Pew Charitable Trusts Study.

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July 31, 2018

US Treasuries, JGBs Rally As Bank Of Japan Shifts To "More Flexible" Bond-Buying Plan

After a few years of relative apathy, today's Bank of Japan statement is greeted with considerable anticipation as it may well have some significant impacts on global markets, judging by the last two weeks' action after hints at BoJ policy shifts.

But the most-watched item in today's statement will be with regard Yield Curve Control (YCC) as recent source articles have suggested that the BoJ will discuss potential policy changes to its YCC framework on the basis of sustainability, not tightening, of monetary policy which could lead to an adjustment of the yield curve target - where the 10Y JGB trades - to allow a long-term natural rise. This is said to be the cause due to the central bank's admission that it may take even longer to hit the 2% price target, and therefore would need to ensure its policy measures can be sustained, while a policy tweak could also help alleviate some of the side-effects from its prolonged ultra-loose policy which has squeezed banks' profits.

And yet, few expect that the BOJ will make an explicit YCC determination today, as an increase in the JGB yield target appears unlikely at a time when it is expected to revise downward its inflation forecast; instead in consideration of the adverse side effects of its policy, the BoJ will likely declare at the end of its statement that, based on its analysis in its quarterly Outlook Report, that it will maintain its easing policy for an extended period but will conduct financial market operations and asset purchasing operations to address the mounting cumulative side effects.

And in case there is a negative reaction to this apparent 'tightening', one likely easing measure to deal with such side effects will include an overhaul of its JPY6 billion ETF purchasing operations, a shift from Nikkei 225-linked ETF to Topix-linked ETF, which would likely spur investors to follow suit in rebalancing their portfolios should this materialize.

And finally, while 'officially' The Bank of Japan has not shifted its bond-buying program's scope, in practice it has been tapering dramatically... forced by liquidity constraints in the market.

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July 30, 2018

"Now The Real Economic War Begins, With America And Europe Allied"

The US and EU account for over 50% of global GDP and have the world’s largest bilateral trade relationship, exchanging $1.1trln of goods and services annually; there’s no more integrated economic relationship on earth. One-third of world trade involves the US and EU - the US is humanity’s #1 customer, accounting for 18% of all imports, the EU is #2 at 15%.

Total US investment in the EU is 3x higher than its investment in all of Asia. EU investment in the US is 8x higher than its investment in India and China combined. The US and EU have 880mm people (12% of total population), $180trln of wealth (65% of global wealth) and own nearly all of humanity’s intellectual property.

To be sure, we have our differences, but heaven help this planet’s divided nations if we set those aside and seek material advantage.

“Mr. President, ladies and gentlemen, when I was invited by the President to the White House, I had one intention: I had the intention to make a deal today,” announced Jean-Claude Juncker, camera’s clicking, a media whir, history in the making. “And we made a deal today,” continued the President of the European Commission, as a shockwave circled the planet.

You see, throughout Europe’s timeless saga, never had a single politician cut a real deal on behalf of the entire continent, though not through any lack of effort. Many fought to attain the power of a united Europe - the Romans, Charlemagne, the short Frenchman with an ulcer, Austria’s most famous Adolph. Juncker’s unlike them all. He’s a creature of Europe’s modern union, a concept born of utter exhaustion, profound weakness.

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July 27, 2018

BOJ Offers To Buy Unlimited Bonds After Bizarre Delay As Yield Surge

While traders' attentions were as usual focused on the latest developments in China last night, around 9pm ET we pointed out that the real action was taking place in Japan, where the 10Y yield had blown out beyond the BOJ's designated range of 0.00%-0.10%...

... and had even crossed into the range above 0.11% where the BOJ traditionally launches its Fixed Rate Operation, also known as Unlimited Buying of JGBs beyond a given rate, something it did most recently on Monday morning (after a 7 month hiatus) when JGB yields also blew out sharply.

Which is why we were wondering when the BOJ would announce the latest "unlimited buying" operation to defend Japanese bonds from a further rout.

And it wasn't just us: so were all bond traders and central bank watchers, and yet the hours passed and still nothing from Kuroda.

Then, finally, just around 1am ET or 4 hours after the rout had started, the BOJ couldn't take it any more and announced the long overdue fixed-rate operation for the second time in 5 days after the 10-year yield rose to its highest level in more than a year.

While the BOJ's latest intervention resulted in a lot of relieved traders as the lack of any intervention almost convinced markets that Kuroda was willing to let the long end JGBs "slide", there was a difference: this BOJ offered to buy 10-year debt at 0.10% vs 0.11% at its previous operations. And also unlike Monday's operation, today the central bank actually did end up buying some 94BN yen worth of 10-year bonds.

Read the entire article

July 26, 2018

Tech Investors Start To Panic As Facebook’s Stock Price Plunges More Than 20 Percent

Is this the beginning of the fall of Facebook?  After announcing disappointing numbers for the second quarter on Wednesday, Facebook’s stock price plunged more than 20 percent in after-hours trading.  If that decline holds on Thursday, it will be the biggest stock price drop in Facebook’s entire history.  But the truth is that we will probably see the stock price bounce back a bit, because Wednesday’s crash was almost certainly an overreaction.  Unlike many other tech companies, Facebook is still making lots of money, and the number of users globally is still growing.  However, there are definitely some huge red flags.  In the U.S. and Canada the number of users is stagnant, and in Europe the number of users is actually declining.  Facebook’s user base is aging as many young people abandon the platform for trendier alternatives, and there is a growing backlash among conservatives against the tremendous censorship that we have seen in recent months.  People are hungry for an alternative, and if something more appealing comes along Facebook could ultimately suffer the same fate as MySpace very rapidly.

Stock prices tend to fall a lot faster than they go up, but what happened to Facebook on Wednesday was truly breathtaking…

Facebook lost about $130 billion in market value in just two hours, its steepest stock decline ever, after warning of slowing sales growth.

The stock, which plunged as much as 24% in after-hours trading Wednesday, had a cascading effect on competitors Snap and Twitter, which dropped, too. Traders are bracing for a decline in tech stocks when the markets open Thursday.

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July 25, 2018

The Regulation That Could Push Oil To $200

Oil prices could spike as high as $200 per barrel over the next 18 months, which would cause an “economic crash of horrible proportions,” according to a new report.

A research paper from economist and oil market watcher Philip K. Verleger predicts there could be a shortage of low-sulfur diesel fuel in 2020 as a result of regulations from the International Maritime Organization (IMO) aimed at cutting sulfur emissions. The regulations, due to take effect at the start of 2020, lowers the allowed concentration of sulfur in maritime fuels from 3.5 percent to just 0.5 percent.

Those rules have already sparked a scramble for low-sulfur options. But the current global refining capacity may not be able to churn out enough low-sulfur fuels to allow a smooth transition from high-sulfur fuels by the world’s shipping fleet.

The shipping industry accounts for about 5 percent of total global oil demand, and most ships burn heavy fuel oil that is high in sulfur. Switching over 5 percent of total demand to low-sulfur diesel and gasoil – a distillate similar to diesel – is a massive shift.

Ship-owners will have a few options: install expensive scrubbers to remove sulfur, switch to low-sulfur fuels such as diesel or gasoil, or switch over to LNG. Scrubbers and LNG are generally thought to be the most expensive options, requiring capital outlays to overhaul entire fleets.

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July 24, 2018

Venezuela Surpasses Weimar As Hyperinflation Expected To Hit 1,000,000% By Year End

Some readers may recall this headline from January 2018 "IMF Projects Venezuela Inflation Will Soar to 13,000 Percent in 2018."

This, it turns out was just a little bit off, because as we reported only two weeks ago, Venezuela's annualized inflation hit an annualized rate of 482,153%, with food prices soaring 183% in just one month.

Fast forward to today, when it's time for another "slight revision" because according to the latest IMF forecast released today, Venezuela’s hyperinflation by the end of the year will hit, drumroll, 1,000,000% as the government continues to simply print money to in hopes of filling the void of what was once the country's economy. Putting that number in perspective, the IMF believes that Venezuela inflation hit only 2,400% in 2017, according to a report published Thursday by Alejandro Werner, head of the IMF’s Western Hemisphere department.

The revised forecast means that as of right now, Venezuela's hyperinflation has officially surpassed the Weimar Republic's, where the highest recorded monthly inflation was a timid 29,500% (resulting in prices doubling ever 3.7 days).

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July 23, 2018

EU Parliament Study: Central Bank Digital Currencies "Will Reshape Competition" In Crypto Market

A study on issues of competition in fintech, commissioned by the European Parliament Committee on Economic and Monetary Affairs (ECON), was published July 20. It found that central bank-issued digital currencies could be a “remedy” for a lack of competition policy in the crypto sector:

“The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”

The study mentions cryptocurrencies like Bitcoin (BTC) as “technological and operational paradigms that are a source of disruption for the entire sector, including monetary policy and financial stability.” Other “disruptive and innovative applications” of new technologies include “AI, cloud computing, biometrics, digital identity, blockchain, cybersecurity, RegTech, internet of things (IoT), augmented reality.”

Private digital currencies are defined separately from central bank-issued digital currencies (CBDC), noting that the CBDCs differ by being based on a “conventional bilateral settlement with a trusted central party.

According to the study, since closed cryptocurrency systems require a supervisory authority, central banks could be considering using “permissioned cryptocurrency systems” to “complement or substitute” the currencies already used.

The study claims that CBDCs “will reshape the current competition level in the inter-cryptocurrency market” by adding to the pool of competitors:

Read the entire article

July 20, 2018

Trump's Trade War May Spark A Chinese Debt Crisis

There’s no chance China will cut its trade surplus with the U.S. in response to President Donald Trump’s tariff threats. For starters, Washington has made no specific demand to which Beijing can respond. But its efforts may have an unexpected side effect: a debt crisis in China.

The 25 percent additional tariffs on exports of machinery and electronics looked, at first blush, like a stealth tax on offshoring. The focus on categories like semiconductors and nuclear components, in which U.S.-owned manufacturers in China are strong, recalled Trump’s 2016 promise to tax “any business that leaves our country.”

It seems, though, that offshoring wasn’t the target after all. Now, with the imposition of new tariffs on low-value exports that mostly involve Asian value chains, the simple fact of selling cheap products that the U.S. buys has become the problem.

Either way, the administration appears set on shrinking its current-account deficit (which, at a moderate 2.4 percent of GDP, is far lower than the 6 percent clocked in 2006-7) just as the Federal Reserve raises interest rates. Distress has already been registered in China. On July 19, the yuan (also known as the renminbi) hit 6.80 to the dollar, the weakest in a year and 7 percent lower than at the end of May.

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July 19, 2018

China Launches Quasi QE To Support Banks And Sliding Bond Market

With the ECB's QE coming to an end at the end of the year (absent some shock to the market or economy), some traders have already been voicing concerns which central bank will step in and provide a backstop to the global fixed income market, especially once the BOJ joins the global tightening bandwagon (something it will soon have to as Japan is rapidly running out of monetizable securities, and just moments ago the BOJ announced it would trim its purchases of bonds in both the 10-25 and 25+ year bucket).

Today one answer emerged when China’s central bank - three weeks after its latest RRR cut - announced further easing measures, including the introduction of incentives that will boost the liquidity of commercial banks, helping them to expand lending and increase investment in bonds issued by corporates and other entities.

And in a surprising twist, in order to make sure that Chinese banks and financial institutions have ample liquidity, the PBOC appears to have engaged in quasi QE - using monetary policy instruments such as its medium term loan facility (MLF) - to support the local bond market and banks, especially those that have invested in bonds rated AA+ and below. Effectively, China will directly fund banks with ultra cheap liquidity, with one simple instruction: "increase bank lending and bond purchases." And since all Chinese banks are essentially state owned, what Beijing is doing is launching a form of stealthy QE, only one where it is not the central bank, but the country's various commercial banks that do the purchases... using central bank liquidity.

As a reminder, one month ago we noted that the spread between China's AAA and AA- rated bonds has spiked in the past three months, blowing out to levels not seen since August 2016, and an indication of the market's growing fears about the recent surge in Chinese corporate defaults.

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July 18, 2018

EU Fines Google Record $5 Billion In Android Antitrust Probe

Shares of Google parent Alphabet are in the red on Wednesday morning as European Union antitrust regulators unveiled a record €4.3 billion ($5 billion) fine against the tech giant for allegedly anti-competitive practices related to Google's Android operating system. The wide-ranging probes into Alphabet have been a primary focus of Margrethe Vestager, the bloc's famously aggressive competition commissioner, since she was first appointed to the role in 2014.

Wednesday's fine follows a then-record 2.4 billion euro ($2.8 billion) levied by Vestager last year over allegations that Google's search feature unfairly benefited its comparative-shopping service.

Of course, the size of the latest fine is certainly notable, and begs the question: Is the bloc using these fines to retaliate against the US tech industry and President Trump for his refusal to grant a permanent exemption to the EU from the US's tariffs on aluminum and steel imports? Like China, which is also employing similar "stealth" retaliatory measures, the bloc also has a massive trade surplus of roughly $150 billion with the US.

Others have speculated that the hefty fines and intense scrutiny are a result of resentments in the EU over the global dominance of the US tech industry. Bloomberg broke the story, and also pointed out that the expected fine is roughly equivalent to the annual contribution to the EU's budget made by the Netherlands.

The decision will bring the running total of fines levied against Alphabet to €6.7 billion, and could soon be followed by fines related to Google's online advertising contracts - the last of the three anti-trust probes against the company.

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July 17, 2018

Did Xi's Overly-Ambitious Goals Trigger US-China Trade War?

Talk of becoming world No.1 backfired, hurting even dinner tables...

Soon, all 1.4 billion Chinese will be feeling the pinch of Donald Trump's presidency an ocean away.

They will look at their dining table and notice their favorite dishes -- Chinese-style deep fried chicken, firecracker chicken and twice-cooked pork -- are all cooked with lots of oil, much of which is pressed from the seeds of American or Brazilian soybeans.

Similarly, many of China's pigs and chickens are raised on imported soybean meal, the residue left after oil extraction.

Doubanjiang, the chili-bean paste that determines the splendor of Chinese cuisine, also cannot be made without soybeans. Of the above mentioned dishes, cabbage is about the only ingredient the country can fully provide for itself.

President Trump last week imposed 25% punitive import tariffs on Chinese products, citing violations of intellectual property rights. Chinese President Xi Jinping responded immediately, slapping 25% retaliatory import tariffs on American products, including soybeans.

As a result of the soybean levy, the cost of food in China will jump, dealing a serious blow to Chinese farmers and eaters.

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July 16, 2018

China GDP Growth Slows After Record Contraction In Shadow Banking Credit

Following the largest contraction in 'shadow banking system' credit, and a record low for M2 growth, fears were building that China's economic growth prospects may lag expectations.

By way of background for tonight's economic data deluge, here are the lowlights.

The drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May's 8.3%, below consensus of 8.4%, and the lowest on record.

Both of which do nothing to help China's credit impulse. Investors see China's liquidity tightening...

Commenting on the ongoing slowdown in China's credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.

But before we shift to the market's perceptions, don't forget, China's trade surplus with the US just hit a Trump-tantrum-creating record high...

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July 13, 2018

European Powers Prepare To Ditch Dollar In Trade With Iran

While the White House’s frenzied anti-Iran campaign has entailed unprecedented attempts to twist the arms of the United States’ traditional European allies, the pressure may be backfiring – a reality made all the more clear by Russian Foreign Minister Sergei Lavrov’s claims that Europe’s three major powers plan to continue trade ties with Iran without the use of the U.S. dollar.

The move would be a clear sign that the foremost European hegemons – France, Germany, and the United Kingdom – plan to protect the interests of companies hoping to do business with Iran, a significant regional power with a market of around 80 million people.

Lavrov’s statement came as Trump insisted that European companies would “absolutely” face sanctions in the aftermath of Washington’s widely-derided sabotage of the six-party Joint Comprehensive Plan of Action (JCPOA).  On May 8, the former host of NBC’s “The Apprentice” blasted the agreement and said that the U.S. would reinstate nuclear sanctions on Iran and “the highest level” of economic bans on the Islamic Republic.

Speaking in Vienna at the ministerial meeting of the JCPOA, Lavrov blasted the U.S. move as “a major violation of the agreed-upon terms which actually made it possible to significantly alleviate tensions from the point of view of the military and political situation in the region and upholding the non-proliferation regime.”  He added that “Iran was meticulously fulfilling its obligations” at the time that Trump destroyed the U.S.’ end of the agreement.

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July 12, 2018

U.S. Consumers On An Unprecedented Debt Binge As Credit Card Debt Soars To An All-Time Record High

Americans are on an absolutely spectacular debt binge.  Does this mean that the economy is getting better, or does this mean that U.S. consumers are totally tapped out and are relying on borrowed money to make it from month to month?  On Monday, the Federal Reserve announced that total consumer credit in the United States increased by a whopping 24.6 billion dollars in May, which was far greater than the 12.4 billion dollar gain that economists were anticipating.  Total U.S. consumer credit has now hit a grand total of 3.9 trillion dollars, but it is the “revolving credit” numbers that are getting the most attention.  Revolving credit alone shot up by 9.8 billion dollars in May, and that was one of the largest monthly increases ever recorded.  At this point, total “revolving credit” has reached a brand new all-time record high of 1.39 trillion dollars, and credit card debt accounts for nearly all of that figure.

The optimists will tell us that this is yet another sign that the U.S. economy is booming, and hopefully they are correct.

But does it really make sense for U.S. consumers to go on a historic debt binge when much of the country is already drowning in debt and just barely scraping by from month to month?

In a previous article, I pointed out that U.S. consumers have been spending more money than they make for 28 months in a row.

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July 11, 2018

"We're In Uncharted Waters" - Stocks, Yuan, Commodities Slump As US-China Trade Wars Re-Escalate

Just when you thought it was safe to BTF Trade War Dip, a headline hits to remind you that President Trump is anything but done with China.

The new list marks the latest escalation of the trade war between the world’s two biggest economies.

And judging by the reaction in stocks and the yuan, it appears that the market's brilliant extrapolation of "no more trade wars" as a result of a 3 days silence (of which 2 was during the weekend) may have been wrong.

As Asia markets open, Dow Futs are down around 300 from the closing highs.

The US has released the list of $200 billion in Chinese products that could be subject to an additional 10% tariff, fulfilling President Trump's promises for further escalation of the burgeoning trade war between the US and China. Meanwhile, a senior US official reportedly told CNBC that China isn't seriously negotiating on trade, suggesting that the hoped-for negotiated settlement might not materialize - at least not anytime soon.

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July 10, 2018

The Root Of The Crisis: Every $1 Of Debt Generates Just 44c Of Economic Output

Exactly ten years ago, in the middle of the summer of 2008, the world was only two months away from the most severe financial crisis since the Great Depression.

At the time, the size of the US economy as measured by Gross Domestic product was around $14.8 trillion– by far the largest in the world.

And the US national debt back then was about 64% of GDP– roughly $9.5 trillion.

Fast forward a decade and take a snapshot of the same numbers:

US GDP has grown nearly 35% to $19.9 trillion.

But the national debt has soared 122% to over $21 trillion.

The debt-to-GDP ratio in the United States is now 106%, meaning that the national debt is larger than the size of the entire US economy. Yet the debt keeps growing. Rapidly.

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July 9, 2018

Chinese Refiner Halts US Oil Purchases, May Use Iran Oil Instead

With the US and China contemplating their next moves in what is now officially a trade war, a parallel narrative is developing in the world of energy where Asian oil refiners are racing to secure crude supplies in anticipation of an escalating trade war between the US and China, even as Trump demands all US allies cut Iran oil exports to zero by November 4 following sanctions aimed at shutting the country out of oil markets.

Concerned that the situation will deteriorate before it gets better, Asian refiners are moving swiftly to secure supplies with South Korea leading the way. Under pressure from Washington, Seoul has already halted all orders of Iranian oil, according to sources, even as it braces from spillover effects from the U.S.-China tit-for-tat on trade.

"As South Korea's economy heavily relies on trade, it won't be good for South Korea if the global economic slowdown happens because of a trade dispute between U.S and China," said Lee Dal-seok, senior researcher at the Korea Energy Economic Institute (KEEI).

Meanwhile, Chinese state media has unleashed a full-on propaganda blitzkrieg, slamming Trump's government as a "gang of hoodlums", with officials vowing retaliation, while the chairman of Sinochem just become China's official leader of the anti-Trump resistance, quoting Michelle Obama's famous slogan "when they go low, we go high." Standing in the line of fire are U.S. crude supplies to China, which have surged from virtually zero before 2017 to 400,000 barrels per day (bpd) in July.

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June 29, 2018

Brandon Smith: "Trade War Provides Perfect Cover For The Elitist Engineered Global Reset"

The political left doesn't seem to have an intelligent grasp of economic issues in the slightest.  I'm not seeing any critical discussion from leftist media outlets or pundits on fiscal uncertainties, and the only reaction that is common from them is that they hope that the trade war results in the financial downfall of the US so that Trump can be voted out in 2020.  They may very well get their wish, but they seem to imagine themselves celebrating at the end of the disaster, and I predict they'll be so concerned with their own financial survival that they won't have time to celebrate...

The initial reaction in conservative circles to the trade war was unfortunately overconfident denial, with many refusing to call the situation a “trade war” at all and some predicting an end to the conflict before it began. Obviously those assumptions are proving incorrect.

Now that acceptance of the trade war as a reality is setting in, the Trump bandwagon is doubling down and embracing blind enthusiasm for what they assume will be a victorious outcome, no matter how long it takes. Though the team-geopolitics mentality is enticing in some ways, I don’t find much in the facts and evidence department to support the notion of America winning a global trade war. As I outlined in my article America’s Debt Dependence Makes It An Easy Economic Target, as long as the U.S. retains historic levels of debt on a government, corporate and consumer level, and as long as we remain addicted to foreign investment in that debt, trade war opponents have all the ammunition they need.

The argument I now see regurgitated over and over is that this trade war has actually been "going on for decades", and only now do we “have a president with the guts to do something about it.” I’m not sure where this nonsense meme was started, but it’s everywhere.

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June 28, 2018

Lynn: "There Will Be A Financial Crash... And Trump Will Be Blamed"

I’m of the opinion that many today are throwing the “baby out with the bathwater” when they claim the conservative versus liberal (right vs. left) construct is phony, or bogus.

Conservatives have lost political ground because they have accepted the moral premises of the Political Left. However, liberals use deception to hide their real motives while, simultaneously, blackmailing conservatives by means of conservative values.

How typical was the mainstream media’s “poor immigrant children” narrative that played the emotional heartstrings of dummies everywhere, like violins.

In the immigration debate, as in the gun control polemic, liberals don’t actually care for the children; at least not in the ways they profess.  They instead callously use the “children” as a means to consolidate their political power.

This explains why liberals never rejoiced for the offspring of lawless invaders when Trump signed the executive order to keep illegal immigrant families together. Instead, they claimed Trump “caved” before the [manufactured] “humanitarian and political crisis”. It’s also why children still attend schools in gun-free zones, while anti-gun protester David Hogg is protected by armed guards; because he’s more important than the other children now.

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June 27, 2018

Yuan Tumbles To 6-Month Lows As SGH Warns China Will Seek To Reduce US Treasuries "Appropriately"

The 'weaponized' yuan continues its collapse - back above 6.6 per USD for the first time since December and down 6% from the March highs.

Chinese stocks are fading at the open after yesterday's bounce in Shenzhen and CHINEXT (tech-heavy) indices...

And this comes shortly after Bloomberg reports that, according to a macro-research firm SGH Macro Advisors, China is girding for a full-scale trade war, and U.S. Treasuries may not be immune to the skirmish.

President Xi Jinping presided over a meeting of China’s highest decision-making body for the first time to discuss China-US relations, according to Sassan Ghahramani, CEO of SGH Macro Advisors, in a note to clients.

At a subsequent two-day meeting, Xi reportedly spent over two hours talking about U.S.-China relations and called on all provinces and ministries to be prepared for a full-scale trade war, according to Ghahramani.

Chinese officials have concluded it appears inevitable the U.S. will impose tariffs on $34 billion worth of Chinese goods on July 6, and will respond accordingly with tariffs of their own.

Contrary to reports last week, SGH's understanding is there have been no talks between the Commerce Departments of the two sides.

In the short term, officials expect the currency will weaken due to trade concerns.

The PBOC also will refrain from increasing holdings of U.S. Treasuries and, in fact, will seek to reduce them "appropriately," Ghahramani writes.

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June 26, 2018

Things Just Went Nuclear In Our Trade War With China, And A Giant Shockwave Is About To Hit The U.S. Economy

It is difficult to find the words to describe just how serious America’s trade war with China is becoming.  As you will see below, the two largest economies on the entire planet are on a self-destructive course that almost seems irreversible at this point.  The only way that this trade war is going to come to a rapid conclusion is if one side is willing to totally submit and accept an extremely bitter and humiliating defeat on the global stage, and that is not likely to happen.  So in the short-term, and probably beyond that, we are going to experience a tremendous amount of economic pain.  In fact, if one wanted to create a recipe for economic disaster, it would be hard to beat having the Federal Reserve dramatically raise interest rates at the exact same time that the U.S. government is starting trade wars with all of the other major economic powers simultaneously.  Unless something drastically changes in the very near future, there is no way that the U.S. is going to be able to get through this without experiencing severe pain.

Many had hoped that President Trump would settle down after the initial salvos in this new trade war, but instead on Sunday evening we learned that he has decided to go nuclear.  The following comes from CNBC

President Donald Trump plans to bar many Chinese companies from investing in U.S. tech and to block additional technology exports to China, The Wall Street Journal reported on Sunday evening, citing people familiar with the matter.

The two measures are set to be announced by the end of the week, and are intended to counter Beijing’s Made in China 2025 — a Chinese initiative to be a global leader in technology.

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June 25, 2018

Fearful Of "Triggering" Trump, China Begins Downplaying "Made In China 2025"

Trump's unorthodox policies appears to be bearing fruit.

Amid a barrage of constant tit-for-tat escalations which are finally beginning to spillover into markets - a necessary condition for Trump's negotiating strategy to be taken seriously by America's trading partners as Goldman explained at the start of the month - Reuters reports that Beijing has begun "downplaying" Made in China 2025, the state-backed industrial policy that has provoked alarm in the West and is the core reason behind Washington’s complaints about the country’s technological ambitions.

Halting China's relentless technological advance, much of which is on the back of reverse-engineered, "merged & acquired", or simply stolen US technologies, is the reason for the latest developments out of Washington, which according to media reports will see the Trump administration enforce rules that bar companies with at least 25% Chinese ownership from buying U.S. firms with “industrially significant technology."

To be sure, Trump's attempt to reduce the Chinese trade surplus with the US is just one aspect of Trump's complaint over US-Chinese relations: with a full-blown trade war looming amid U.S. President Donald Trump’s threats to impose tariffs on up to $450 billion in Chinese imports, his administration has fixed on Beijing’s signature effort to deploy state support to close a technology gap in 10 key sectors.

And, in what is a sign that these threats and diplomatic bluster are working, Beijing is increasingly mindful that its rollout of the ambitious plan has triggered U.S. backlash.

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June 22, 2018

Germany Has Made Over 3 Billion Profit From Greece's Crisis Since 2010

Germany has earned around 2.9 billion euros in profit from interest since the first bailout for Greece in 2010.

As KeepTalkingGreece reports, this is the official response of the Federal Government to a request submitted by the Green party in Berlin.

The profit was transmitted to the central Bundesbank and from there to the federal budget.

The revenues came mainly due to purchases of Greek government bonds under the so-called Securities Markets Program (SMP) of the European Central Bank (ECB).

Previous agreements between the government in Athens and the eurozone states foresaw that other states will pay out the profits from this program to Greece if  Athens would meet all the austerity and reform requirements. However, according to Berlin’s response, only in 2013 and 2014 such funds have been transferred to the Greek State and the ESM. The money to the euro bailout landed on a segregated account.

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June 21, 2018

Chinese Investments In The US Plunge By 92%

Coming amid the escalating trade war between the US and China, many were quick to blame the collapse in Chinese investments in the US on tensions surrounding protectionism. And indeed, according to research firm Rhodium Group, China’s direct investments in the U.S. plunged in the first half of 2018 as Chinese companies completed acquisitions and greenfield investments worth only $1.8 billion, a 92% drop over the past year, and the lowest level in seven years.

The reality, however, is that this has little to do with the Chinese trade spat, and everything to do with China's crackdown on outbound M&A and conglomerate "investments" which as we said back in 2015, were just a thinly veiled scheme to cover capital outflows.

Rhodium confirms as much:

The rapid decline in Chinese FDI in the U.S. was driven by a “double policy punch” -- Beijing cracking down on rapid outbound investment and the U.S. government increasing scrutiny on Chinese acquisitions through the Committee on Foreign Investment as well as taking a more confrontational stance toward economic engagement with China in general.

The investment tracker is based on collection and aggregation of data on individual transactions, including acquisitions, greenfield projects, and expansions.

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June 20, 2018

Deutsche Bank's Troubles Raise Worries About The Future Of The Euro Zone

The euro banking sector is huge: In April 2018, its total balance sheet amounted to 30.9 trillion euro, accounting for 268 per cent of gross domestic product (GDP) in the euro area. Unfortunately, however, many euro banks are in lousy shape. They suffer from low profitability and carry an estimated total bad loan exposure of around 759 billion euro, which accounts for roughly 30 per cent of their equity capital.

Share price developments suggest that investors have lost quite some confidence in the viability of euro banks’ businesses: While US bank stocks are up 24 per cent since the beginning of 2006, the index for euro-area bank stocks is still down by around 70 per cent. Perhaps most notably, ’Germany’s two largest banks, Deutsche Bank and Commerzbank, have lost 85 and 94 per cent, respectively, of their market capitalization.

With a balance sheet of close to 1.5 trillion euro in March 2018, Deutsche Bank accounted for around 45 per cent of German GDP. In international comparison, this an enormous, downright frightening dimension. It is mostly the result of the bank still having an extensive (though not profitable) footprint in the international investment banking business. The bank has already started reducing its balance sheet, though.

Beware of big banks — this is what we could learn from the latest financial and economic crises 2008/2009. Big banks have the potential to take an entire economy hostage: When they get into trouble, they can drag everything down with them, especially the innocent bystanders – taxpayers and, if and when the central banks decide to bail them out, those holding fiat money and fixed income securities denominated in fiat money.

Banking Risks

For this reason, it makes sense to remind ourselves of the fundamental risks of banking – namely liquidity riskand solvency risk –, for if and when these risks materialise, monetary policy-makers can be expected to resort to inflationary actions. In fact, to fend off these risks from materialising, central banks have committed themselves to pursuing chronically inflationary policies.

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