May 24, 2019

Vicious Cycle: The Pentagon Creates Tech Giants & Then Buys Their Services

The US Department of Defense’s bloated budget, along with CIA venture capital, helped to create tech giants, including Amazon, Apple, Facebook, Google and PayPal. The government then contracts those companies to help its military and intelligence operations. In doing so, it makes the tech giants even bigger.

In recent years, the traditional banking, energy and industrial Fortune 500 companies have been losing ground to tech giants like Apple and Facebook. But the technology on which they rely emerged from the taxpayer-funded research and development of bygone decades. The internet started as ARPANET, an invention of Honeywell-Raytheon working under a Department of Defense (DoD) contract. The same satellites that enable modern internet communications also enable US jets to bomb their enemies, as does the GPS that enables online retailers to deliver products with pinpoint accuracy. Apple’s touchscreen technology originated as a US Air Force tool. The same drones that record breath-taking video are modified versions of Reapers and Predators.

Tax-funded DoD research is the backbone of the modern, hi-tech economy. But these technologies are dual-use. The companies that many of us take for granted–including Amazon, Apple, Facebook, Google, Microsoft and PayPal–are connected indirectly and sometimes very directly to the US military-intelligence complex.

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May 23, 2019

World Trade War I: US Asks South Korea To Join Anti-Huawei Campaign

The bilateral trade war between the US and China is gradually becoming a global trade war of global geopolitical and commercial dominance between the US and Chinese spheres of influence.

Shortly after the two largest mobile phone companies in the UK decided against launching Huawei-built 5G phones this morning, and roughly around the time a bevy of Japanese tech and telecom companies including ARM Holdings, Panasonic and SoftBank all imposed a boycott on supplying Huawei with mission critical components joining Australia, and New Zealand as major US allies to end commercial relations with Huawei following the US decision to crack down on the Chinese telecom giant (see "Huawei Feels U.S. Squeeze in U.K., Japan as Partners Curb Business") the White House is now pressuring another critical Chinese trading partner - South Korea - to cease ties with Huawei.

According to the Chosun Ilbo newspaper, the US recently asked South Korean government to support and join its anti-Huawei campaign.

Forcing Seoul to pick sides in a fight it would rather stay out of - especially since both sides still bear a distinct grudge from the Korean war - the US delivered a message several times to S. Korea’s Foreign Ministry that "using Huawei products may cause security problems" and as a result, the US requested S. Korea’s "active" support of US policy toward China as South Korea is seen as an American ally.

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May 22, 2019

Yuan, Futures Slide On Reports Trump Administration Expands China Tech Blacklist

US equity futures are sliding as Asian markets open after a NYTimes report that the Trump administration is considering limits to a Chinese video surveillance giant’s ability to buy American technology.

Hangzhou Hikvision Digital Technology, a company controlled by the Chinese government, is now the world's largest supplier of video surveillance equipment, with internet-enabled cameras installed in more than 100 countries.

The move would effectively place the company on a United States blacklist, and as NYT notes, it also would mark the first time the Trump administration punished a Chinese company for its role in the surveillance and mass detention of Uighurs, a mostly Muslim ethnic minority.

And this escalation has sparked selling in stocks...

Congress and the administration have responded with other measures that may clamp down on Hikvision’s business. Congress included a provision in its 2019 military spending authorization bill that banned federal agencies from using Chinese video surveillance products made by Hikvision or Dahua.

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May 21, 2019

Beijing Warns Of "Unwavering Resolve" In Huawei Fight, Accuses Washington Of "Bullying & Blackmail"

As the anti-American sloganeering reaches an unprecedented level of froth (there's now an unofficial trade war 'fight song') across China, the Commerce Department has softened its anti-Huawei stance, calling for a 90-day reprieve  to allow American broadband companies more time to work out a 'Plan B'.

The delay will cover continued operation of existing networks and equipment, as well as support to existing handsets and other limited actions, according to Bloomberg.

But that's not even the biggest trade headline of the morning, as analysts wonder how Beijing will retaliate for the war on Huawei. Anyone who thinks Beijing won't respond is being naive, China's ambassador to the EU warned Tuesday. China will provide a "necessary response" to Washington's "wrong behavior."

"This is wrong behavior, so there will be a necessary response," Zhang Ming, China’s envoy to the EU, said in an interview in Brussels on Monday. "Chinese companies’ legitimate rights and interests are being undermined, so the Chinese government will not sit idly by."

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May 20, 2019

Huawei will not bow to US pressure: founder

Chinese telecoms giant Huawei is ready to deal with Washington’s crackdown and will reduce its reliance on US components, its founder told Japanese media.

President Donald Trump effectively barred Huawei from the US market on Wednesday and added it to a list which would restrict US sales to the firm amid an escalating trade war with Beijing.

“We have already been preparing for this,” Huawei founder and CEO Ren Zhengfei told a group of Japanese journalists Saturday in his first interview since Trump’s move.

Ren said Huawei would continue to develop its own components to reduce its dependence on outside suppliers.

Huawei is a rapidly expanding leader in 5G technology but remains dependent on foreign suppliers.

It buys about $67 billion worth of components each year, including about $11 billion from US suppliers, according to The Nikkei business daily.

The usually elusive Ren, 74, has come out of the shadows in recent months in the face of increasing pressure on his company.

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May 17, 2019

Trade Optimism Fizzles As China Says No Plans For More Talks

Well, it looks like President Trump finally did it. He finally pushed Beijing so hard on Huawei that they had no choice but to respond.

The Chinese weren't kidding when they warned that Washington's latest aggression toward Huawei - adding the Chinese telecoms giant to a blacklist that will make it extremely difficult, if not impossible, for Huawei to buy components from American companies - might crash trade talks.

Because after the Commerce Department formally added Huawei to the blacklist, the Chinese media and Chinese officials turned up the rhetoric, warning that there are no plans for another round of talks. Markets didn't take this well: Chinese stocks plunged 2.5% overnight on Friday - a big drop, though still not as bad as the 3% decline from last Monday,the market's worst day in three years. European shares didn't fare much better because, as one analyst explained to Bloomberg...

"The China state media commentaries fueled concerns that the U.S.-China trade disputes will prolong, deterring risk-taking," said Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo. "This issue will probably be one of the major market drivers for a while as U.S.-China trade war influences global economic conditions."

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May 16, 2019

China's Huawei, 70 Affiliates Blacklisted By US Commerce Department

Reuters reports that the U.S. Commerce Department is adding Huawei Technologies Co Ltd and 70 affiliates to its so-called "Entity List" - a move that will make it much more difficult for the telecom giant to buy parts and components from U.S. companies. U.S. officials said the decision would also make it difficult for Huawei to sell some products because of its reliance on U.S. suppliers.

Department of Commerce Announces the Addition of Huawei Technologies Co. Ltd. to the Entity List

WASHINGTON – Today, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce announced that it will be adding Huawei Technologies Co. Ltd. and its affiliates to the Bureau’s Entity List. This action stems from information available to the Department that provides a reasonable basis to conclude that Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interest. This information includes the activities alleged in the Department of Justice’s public superseding indictment of Huawei, including alleged violations of the International Emergency Economic Powers Act (IEEPA), conspiracy to violate IEEPA by providing prohibited financial services to Iran, and obstruction of justice in connection with the investigation of those alleged violations of U.S. sanctions.

The sale or transfer of American technology to a company or person on the Entity List requires a license issued by BIS, and a license may be denied if the sale or transfer would harm U.S. national security or foreign policy interests. The listing will be effective when published in the Federal Register.

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May 15, 2019

China 'Green Shoots' Are Dead - Retail Sales, Industrial Production, & FAI Slump

On the back of one better than expected soft survey PMI print, the world became convinced that as green shoots emerged, China was about to be reborn into magnificent credit-fuelled expansion and would save the world.

Tonight, that narrative died - everything missed expectations:

Retail sales rose just 7.2% (against +8.7% in March) - lowest since May 2003 (the 7.2% year-on-year rise in retail sales is actually weaker than all the estimates. The lowest was 7.5%, and the median was 8.6%)

Industrial Production growth slumped from a hope-filled +6.5% YTD YoY in March to 6.2%.

Fixed Asset Investment slowed to just 6.1% YoY.

Not green shoot-y!

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May 14, 2019

Gold, Bitcoin, & The Gigantic Global Debt Bubble

Today’s the first day in a long time financial markets appear willing to at least consider the reality of the geopolitical situation on the ground for what it is, as opposed to what most people would like it to be. As I’ve noted for months, the “trade war” is just one battle in a much larger, increasingly unstable struggle between the U.S. and China for global power and leverage to shape the next paradigm of world history.

A failure to appreciate how big this really is explains why investors have been so willing to swallow unrealistic happy talk from both sides. The risk that needs to be discounted in the market isn’t a risk of higher tariffs, but the risk of WW3. The U.S. and China were never going to sign a trade deal and blissfully return to the ways things were. That world is over. We now find ourselves in the very early days of a historic struggle to influence the future.

The Global Debt Bubble

At the core of everything unsustainable and destabilizing about the “old world” we live in, lies the ever expanding global debt bubble. In early 2018, I wrote an opinion piece for The Hill titled, Bitcoin Isn’t the Bubble — the Global Financial System Is, in which I noted:

While we’re on the topic of bubbles, it seems the truly gigantic bubble in the world isn’t bitcoin, but rather the global debt market. This leviathan now stands at around $233 trillion, or 318 percent of global GDP. Even more troubling, an estimated $11 trillion of government debt now trades at negative yields. This means whoever is buying this paper is doing so despite the fact they are guaranteed to lose money on the “investment.” Much of this buying has been propelled by central banks which can print their own currency and buy debt indiscriminately. This is not characteristic of a healthy financial system (particularly so many years into a global recovery), but rather a zombie one that’s been artificially propped up since the financial crisis.

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May 13, 2019

Why One Bank Thinks That Much More Market Pain Will Be Needed To Close Any Trade Deal

Futures are sharply lower again after the weekend failed to provide any substantive evidence that the "constructive" tone suggested by both Steven Mnuchin and Liu He on Friday was present, and in fact, soundbites from both president Trump and Chinese media indicated that the latest trade war escalation may last well into 2020 without a resolution, with China potentially waiting to see if Joe Biden is be elected president, helping to resolve the trade war.

Yet while we now know how and why the trade talks unraveled so fast thanks to a detailed expose by the WSJ, which reports that "U.S. and Chinese governments both sent signals ahead of their trade talks in Washington last week that a pact was so near they would discuss the logistics of a signing ceremony" but "in a matter of days, the dynamic shifted so markedly that the Chinese deliberated whether to even show up after President Trump ordered a last-minute increase in tariffs on Chinese imports because the U.S. viewed China as reneging on previous commitments", the question remains what this means for markets.

While there have been various "hot takes" on what the latest escalation means for risk assets, with many suggesting that a "no deal" outcome potentially triggering a plunge in the S&P below 2,600 and forcing the Fed to cut rates, one of the better assessments of the future state of capital markets as a function of the ongoing trade war, comes from Bank of America's chief economist Ethan Harris, who in "Once more to the brink" writes that his "long-standing view on the trade war is that the Trump Administration wants deals and will compromise, but only after it extracts the maximum concessions." To Harris, this is a pattern of big demands and moderate concessions that we have seen play out repeatedly. And this case is no different: both the US and China want a deal, "but motivating the inevitable compromise requires some combination of market, economic and political pain."

Specifically, we have seen this framework play out in the past year in two ways:

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May 10, 2019

US Hikes China Tariffs After Talks Result In No Progress; China Vows To Retaliate

After much theatrics and 11th hour negotiations, the US more than doubled tariffs to 25% on more than $200 billion in good imports from China just after midnight on Friday in what has been dubbed the "most dramatic step yet" in Donald Trump’s crusade to extract trade concessions from Beijing, deepening a nearly two-year old conflict that has roiled global markets and impacted the world economy.

While the White House said in a statement that talks are set to resume Friday, setting the stage for a tense final day of negotiations between Liu He, China's vice premier and Robert Lighthizer, the US trade rep, Bloomberg reports that according to "close observers" there is little hope for any meaningful breakthroughs, especially since Liu does not have the authority to make any meaningful commitments, while an alleged phone call between Trump and president Xi yielded no positive results. It was also unclear, Bloomberg adds, whether China had resolved the internal debates that had led to last week’s rescinding of prior commitments to enshrine reforms agreed in Chinese law.

News that the US would hike tariffs, and set off a sequence of events that would most likely result in further escalation pushed US equity futures, treasury yields and the USDJPY lower around midnight.

In response to the tariff hike, China immediately said in a statement it "deeply regrets the latest tariff hike" and that it will be forced to take countermeasures against the US actions, but didn’t specify how, even as it said that it sill hopes the two sides can resolve issues via ongoing consultations.

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May 9, 2019

Amazon Hit By "Serious" Hack, Resulting In "Extensive" Fraud, Cash Stolen From Merchants

We recently documented  how Amazon has come under fire from its merchants for allegedly trying to undercut them on pricing and products. Now, the e-commerce giant is under scrutiny for a different reason: security. Amazon is now saying it was hit by an "extensive" fraud last year, revealing in court documents that hackers were able to transfer funds from merchant accounts over the course of six months, according to Bloomberg.

The "serious" online attack included hackers breaking into about 100 seller accounts and moving cash from loans or sales into their own bank accounts. The hack took place between May 2018 and October 2018, according to Amazon’s lawyers.

Amazon said it was still looking into the compromised accounts and that it believed hackers changed the details on its Seller Central platform to bank accounts in their name. Amazon believes that the accounts were compromised by phishing techniques that looked for login information. Amazon has reportedly concluded its investigation of the incident.

Lawyers for the online retailer asked a judge in London to approve searches of account statements at Barclays and Prepay, two banks that "have become innocently mixed up in the wrongdoing." Amazon says that it needed the documents “to investigate the fraud, identify and pursue the wrongdoers, locate the whereabouts of misappropriated funds, bring the fraud to an end and deter future wrongdoing."

The filing doesn’t denote how the suspected wrongdoers were able to add new bank account information to merchant accounts. Amazon has issued more than $1 billion in loans to merchants and one of the units named in the filing was Amazon Capital Services U.K., a division of the company responsible for making these loans.

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May 8, 2019

Behind The Recent Crypto Surge? Chinese Banks Are Quietly Running Out Of Dollars

Cryptocurrencies have had a good run in recent weeks, as a sudden renewed demand has lifted all boats and taken Bitcoin back near $6000 this morning...

The catalyst has remained unclear - anticipation of an ETF? Growing institutional interest? Short-squeeze? Manipulation? Or, just plain old safe-haven flows as various nations around the world collapse into totalitarianism?

We may have found one, rather large, answer - from China, where, as SCMP reports, authorities have quietly begun 'soft' capital controls on foreign currency withdrawals

Chinese banks have increased their scrutiny of foreign-currency withdrawals and quietly reduced the amount of US dollars people are allowed to withdraw, tightening the country’s capital controls as the nearly year-long US-China trade war bites.

The issue was thrust into the spotlight on Friday when a viral video clip showed a bank cashier unable to answer a furious customer demanding to know why she was not allowed to withdraw US$200 from her dollar-denominated account, even though she was within her quota.

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May 7, 2019

The Dow Made A Miraculous 400 Point Recovery, But Now Renewed Trade Fears Are Sending Markets Plunging Once Again

If your head is spinning from the wild fluctuations that have shaken global financial markets, you are definitely not alone.  On Sunday, President Trump angrily threatened to hit China with enormous new tariffs, and it looked like hopes for a trade deal between the United States and China had collapsed.  Overnight, Chinese stocks had their worst session in three years, and many expected U.S. stocks to experience a similar plunge.  But then on Monday we learned that the Chinese had decided to move forward with trade talks this week anyway, and global financial markets started rebounding in a major way.  In fact, the Dow Jones Industrial Average rebounded more than 400 points

The Dow closed just 66 points lower on Monday, recovering from a plunge of as much as 471 points. The S&P 500 and Nasdaq also erased their sharp losses, ending just 0.5% lower.

The comeback signals investors don’t believe President Donald Trump’s surprise threat to impose higher tariffs on China will spark a painful deepening of the trade war. Optimists are even hoping an historic trade deal will still be reached.

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May 6, 2019

Trade Deal Dead: Trump Says 10% China Tariff Rising To 25% On Friday, Another $325BN In Goods To Be Taxed

So much for months and months of constant leaks, headlines, tweets, and press reports that US-China trade talks are going great, and are imminent amid an ocean of "optimism" (meant solely to sucker in amateurs into the most obvious bull headfake since 1987). 

Just after noon on Sunday, President Trump tweeted that 10% tariffs paid by China on $200 billion in goods will rise to 25% on Friday, and that - contrary to what he himself and his chief economist, Larry Kudlow has said for months, talks on a trade deal have been going too slowly.

And, just to underscore his point, Trump also threatened to impose 25% tariffs on an additional $325 billion of Chinese goods “shortly.”

With the tariff rate on numerous goods originally set at 10% and set to more than double in 2019, Trump postponed that decision after China and the US agreed to sit down for trade talks; following Trump's tweet it is now confirmed that trade talks have hit an impasse and that escalation will be needed to break the stalemate.

It was as recently as Friday that Vice President Mike Pence told CNBC that Trump remained hopeful that he could strike a deal with China (at the same time as he was urging for a rate cut from the Fed).

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May 3, 2019

China And Russia: Whoopin' Uncle Sam At His Own Game

Country A builds factories and plants, it employees zillions of people who manufacture things, it launches massive infrastructure programs, paves millions of miles of highways and roads, opens new sea lanes, vastly expands its high-speed rail network, and pumps profits back into productive operations that turbo-charge its economy and bolster its stature among the nations of the world.

Country B has the finest military in the world, it has more than 800 bases scattered across the planet, and spends more on weapons systems and war-making than all the other nations combined. Country B has gutted its industrial core, hollowed out its factory base, allowed its vital infrastructure to crumble, outsourced millions of jobs, off-shored thousands of businesses, plunged the center of the country into permanent recession, delivered control of its economy to the Central Bank, and recycled 96 percent of its corporate and financial profits into a stock buyback scam that sucks critical capital out of the economy and into the pockets of corrupt Wall Street plutocrats whose voracious greed is pushing the world towards another catastrophic meltdown.

Which of these two countries is going to lead the world into the future? Which of these two countries offers a path to security and prosperity that doesn’t involve black sites, extraordinary rendition, extrajudicial assassinations, color-coded revolutions, waterboarding, strategic disinformation, false-flag provocations, regime change and perennial war?

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May 2, 2019

Americans Can't Afford To Buy A Home In 70% Of The Country

Even at a time of low interest rates and rising wages, Americans simply can’t afford a home in more than 70% of the country, according to CBS. Out of 473 US counties that were analyzed in a recent report, 335 listed median home prices were more than what average wage earners could afford. According to the report from ATTOM Data Solutions, these counties included Los Angeles and San Diego in California, as well as places like Maricopa County in Arizona.

New York City claimed the largest share of a person's income to purchase a home. While on average, earners nationwide needed to spend only about 33% of their income on a home, residents in Brooklyn and Manhattan need to shell out more than 115% of their income. In San Francisco this number is about 103%. Homes were found to be affordable in places like Chicago, Houston and Philadelphia.

This news is stunning because homes are considerably more affordable today than they were a year ago. Although prices are rising in many areas, they are also falling in places like Manhattan. Unaffordability in the market has been the result of slower home building and owners staying in their homes longer. Both have reduced the supply of homes in the market.

And the market may continue to create better conditions for buyers. Affordability could improve because of the fact that homes are out of reach for so many seekers, according to Todd Teta, chief product officer at ATTOM Data Solutions. Today’s market is also more affordable than it was a decade ago, before the crisis. Home prices were about the same prior to the crisis, even though income adjusted for inflation was lower.

"What kept the market going was looser lending standards, so that was compensating for affordability issues," Teta said. Since then, standards have toughened (for now, at least).

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May 1, 2019

Chinese Drugmaker Discloses $4.4 Billion Accounting Fraud

It looks like China's unstoppable default tsunami is about to claim its latest corporate victim...and thanks to lax oversight that allowed the company to get away with what appears to be a staggering accounting fraud, thousands of unsuspecting investors might be left holding the bag.

According to Bloomberg, Kangmei Pharmaceutical Co., one of China’s largest listed drugmakers, revealed on Tuesday that it had overstated its cash holdings by $4.4 billion. Unsurprisingly, the revelation, which immediately exposed the company to be teetering on the brink of insolvency, sent its shares and bonds tumbling. Its shares, which are a constituent of MSCI's global index, plunged by the 10% daily limit. Its 2.4 billion yuan ($356 million) notes due in 2022 dropped by as much as 60 yuan (about $9).

It's just the latest example of why investors must be wary of Chinese companies due to lax regulations, even as its equity and bond markets are becoming increasingly internationalized. The company's revelation came four months after it revealed that Chinese authorities had launched an investigation into the company.

One of BBG's sources said the restatement is 'unprecedented' in the history of Chinese security markets.

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April 30, 2019

Countries Around The World Are Bringing Gold Home

European Central Bank’s President Mario Draghi recently announced that the ECB would be required to approve any management of gold reserves within the euro zone countries. The statement was specifically directed at two Italian members.

Why was Italy singled out? According to the Wall Street Journal, Italian citizens are preparing to take control of Italy’s gold reserves. During the past few years, a multitude of small investors lost billions of dollars due to the failure of several Italian banks. The Bank of Italy is seen as an elitist, inefficient entity indifferent to the needs of ordinary people. Deputy Prime Minister Luigi Di Maio is leading the attack against Italy’s central bank, along with the “5 Star Movement” and the nationalist “League,” all of whom blame the countries financial woes on the incompetence of the central bank.

The 5 Star Movement is asking Italy’s Parliament to approve measures that would allow private banks to sell their share in The Bank of Italy at 1930’s prices. Taking it a step further, they are also demanding that ownership of the Bank of Italy’s 2,451.8 tons of gold be taken over by the country’s citizens and spent on populist policies. The current value of these gold reserves is $102 billion.

If these laws are passed, investors would be able to sell gold and greatly deplete the central bank’s reserves. As Giorgia Meloni of the Brothers of Italy states, “The gold belongs to the Italians, not the bankers.”

Italy’s lawmakers hold a different view and are warning against any action that will upend the sovereignty of the central bank’s policies. Such expropriation of government gold would not be tolerated.

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April 29, 2019

JPMorgan: We Are Fast Approaching The Point Where Banks Run Out Of Liquidity

Last week we first noted that something unexpected has been going on in overnight funding markets: ever since March 20, the Effective Fed Funds rate has been trading above the IOER. This was unexpected for the simple reason that it is not supposed to happen by definition.

As a reminder, ever since the financial crisis, in order to push the effective fed funds rate above zero at a time of trillions in excess reserves, the Fed was compelled to create a corridor system for the fed funds rate which was bound on the bottom and top by two specific rates controlled by the Federal Reserve: the corridor "floor" was the overnight reverse repurchase rate (ON-RRP) which usually coincides with the lower bound of the fed funds rate, while on top, the effective fed funds rate is bound by the rate the Fed pays on Excess Reserves (IOER), i.e., the corridor "ceiling."

Or at least that's the theory. In practice, the effective FF tends to occasionally diverge from this corridor, and when it does, it prompts fears that the Fed is losing control over the most important instrument available to it: the price of money, which is set via the fed funds rate. And ever since March 20, this fear is front and center because as shown in the chart below, starting on March 20, the effective Fed Funds rate rose above the IOER first by just 1 basis point, and then, last Friday spiked as much as 4 bps above IOER.

To explain this bizarre phenomenon in which the EFF has been trading well above IOER in defiance of all of the Fed's monetary orthodoxy, we laid out several possible explanations, including that i) money market outflows around the April 15 tax deadline date and elevated GC repo rates; ii) the continued decline in excess reserves, and most ominously iii) another acute dollar shortage  developing across the US banking system.

One day later, PrismFP picked up on this topic and elaborated on the third, and most notable point, concluding that "there has been a dollar funding/shortage issue brewing under our nose for months; it is just coming to fruition now because we are noticing the DXY breaking out higher. In other words, with FHLB’s selling less FF’s, participants are forced to pay a higher rate to find funds, and that drives rate differentials towards the Dollar." Some other notable observations from his latest note which we laid out last week:

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April 26, 2019

European Equities May Benefit As $1 Trillion In U.S. Buybacks Vanish Into Thin Air

European equities may start to finally see some love, as they are now positioned to take advantage of one significant coming tailwind from the U.S., according to Bloomberg. Over the next 12 months, US stocks are going to lose a significant amount of support that they have received from buybacks, as the nearly $1 trillion buyback bonanza that has fueled stock purchases in the United States starts to come to an end, according to Sanford C. Bernstein strategists.

This could be an area where European stocks, due to their low dependence on buybacks, could see help as a result.

Bernstein strategists led by Inigo Fraser-Jenkins said:

 “This would remove one advantage of U.S. equities over Europe. As the buyback support is reduced it will make a stronger relative case for Europe.”

And the decision of the U.S. central bank to hold off on rate increases may have temporarily reduced concerns about debt hurting equities, but the topic is still on the table and credit spreads are expected to keep widening over the next year.

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April 25, 2019

UK Borrowing Surpasses Most Other Countries

The rate at which UK institutions, households and businesses are borrowing money is greater than that of all other OECD countries.

This fact is alarming some economists not only because the rate of UK borrowing is high against the country’s GDP, but, as Statista's Katharina Buchholz points out, it also because households, business and state coffers are running a deficit simultaneously for the first time since the 1980s.

Yet, a lot of the of the money borrowed is going into the housing market that is currently booming in the UK, therefore potentially creating valuable assets for citizens in the future. The same is true for the state, with some economists claiming investment in the future to be more important than a positive net lending score, according to reporting by the Financial Times.

The opposite of this attitude can be observed in OECD countries like Germany, where the government is among those pursuing a radically different borrowing strategy aimed at reducing debt. The country with the lowest borrowing rate in the OECD was Ireland.

Not included in the data by the OECD are overseas investments by Britons as well as foreigners’ financial business in the UK. Here, another troublesome statistic emerges. While the UK had been running a net profit for overseas lending and borrowing in the past, the situation has reversed since the financial crisis.

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April 24, 2019

Why Chinese Banks Are Running Out Of Dollars

Following the biggest quarterly credit injection in Chinese history, it is safe to say that China's banks are flush with yuan loans. However, when it comes to dollar-denominated assets, it's a different story entirely. As the WSJ points out, in the past few years, a funding problem has emerged for China’s biggest commercial banks, one which is largely outside of Beijing’s control: they’re running low on US dollars so critical to fund operations both domestically and abroad.

As shown in the chart below, the combined dollar liabilities at China's four biggest commercial banks exceeded their dollar assets at the end of 2018, a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.

The reversal is the result of just one bank: Bank of China, which for many years held more net assets in dollars than any other Chinese lender, ended 2018 owing $72 billion more in dollar liabilities than it booked in dollar assets. The other "top 3" lenders finished the year with more dollar assets than liabilities, even though their net dollar surplus has shrunk substantially in the past five years.

And yet, as everything else with China, there is more than meets the eye: as the WSJ reports looking at Bank of China's annual report, the bank's asset-liability imbalance is more than addressed by dollar funding that doesn’t sit on its balance sheet. Instruments like currency swaps and forwards are accounted for elsewhere.

This is reminiscent of the shady operations discussed recently involving Turkey's FX reserves, where the central bank has been borrowing dollar assets from local banks via off balance sheet swaps, which it then used to prop up and boost the lira at a time of aggressive selling of the local currency. It is safe to assume that the PBOC has been engaging in a similar operation.

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April 23, 2019

Do You Remember The Oil Crisis And “Stagflation” Of The 1970s? In Many Ways, 2019 Is Starting To Look A Lot Like 1973…

The price of gasoline is rapidly rising, economic activity is slowing down, the Middle East appears to be on the brink of war, and Democrats are trying to find a way to remove a Republican president from office.  In many ways, 2019 is starting to look a lot like 1973.  For many Americans, the 1970s represent a rather depressing chapter in U.S. history that they would just like to forget, but the truth is that if we do not learn from history it is much more likely that we will repeat our mistakes.  And without a doubt, right now a lot of things are starting to move in a very ominous direction.

“Stagflation” was a term that was made popular in the 1970s, and it occurs when there is a high rate of inflation but economic growth is declining or stagnant.

The U.S. hasn’t had a serious bout with stagflation in quite a while, but it appears that we may be moving in that direction.

Let’s talk about the slowdown in the economy first.  On Monday, we learned that sales of existing homes in the U.S. were way down in March

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April 22, 2019

Oil Surges As Washington Prepares To End Iranian Crude-Export Waivers

Expectations that the Trump administration would extend export waivers on Iranian oil have been dashed after the Washington Post reported late Sunday that Secretary of State Mike Pompeo was preparing to announce on Monday that the US would move to end the exemptions early next month, when the initial 180-day waivers offered to eight countries are set to expire. The news sent oil prices surging in early Easter Monday trade.

Unsurprisingly, crude futures for May delivery climbed as much as 74 cents to $64.74/bbl in New York on the news the US would end the practice of allowing certain countries to import Iranian oil without facing sanctions. Meanwhile, front-month Brent futures topped $74 a barrel, their highest level since Nov. 1.

On Monday morning, Pompeo plans to announce that as of May 2, the State Department will no longer grant sanctions waivers to any country importing Iranian crude or condensate, WaPo said. WSJ, Reuters and others later confirmed the WaPo report.

The decision to end the waivers will impact recipients in different ways: Three of the eight countries that were granted the 180-day waivers back in November - Greece, Italy and Taiwan - have already reduced their Iranian oil imports to zero.

The other countries that will need to cut off imports or face serious repercussions include China, India, Turkey, Japan and South Korea. As of now, China and India are the largest importers of Iranian oil, and if they don't swiftly act to cut down on their imports, bilateral relations with the US could suffer.

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April 19, 2019

Nearly Everyone Is A Socialist Now - Just The Way The Elites Want It

The expansionary phase of the global economy is almost certainly ending. A combination of excessive debt and trade protectionism is likely to become economically and politically destabilising. If, as seems increasingly likely, the world is destined for another credit and economic crisis, the colour of the political establishment will shape outcomes. This article examines the political scene and concludes that socialist puppet-masters will use the opportunity in an attempt to crush capitalism.

In 1975, I watched from the Strangers’ Gallery the debate in the House of Commons when the Referendum Act for membership of the Common Market was in its second reading. It was to be the first referendum ever held in the UK, and as one would imagine was contentious for that reason. The Labour government of the day had laid an act before Parliament for a referendum to ratify the European Communities Act of 1972, in other words, the UK’s membership of the Common Market.

The debate was not about membership, but the precedent of holding a referendum and its potential to undermine parliament’s sole right to take decisions on behalf of the people. In those days, MPs made proper speeches, not the time-limited five or so minutes permitted by Mr Speaker. A debate of this sort was worth listening to.

I was struck by the similarities of argument put forward by the two greatest parliamentary orators of the day. Michael Foot was the doyen of the extreme left in the Labour Party, and Enoch Powell was said to be on the extreme right (he wasn’t – he was a staunch free marketeer: more on this to follow). From their different perspectives their arguments were almost identical, and both spoke eloquently without notes.

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April 18, 2019

Huawei CEO Compares 5G To "Nuclear Bomb", Warns US Against Tech Cold War

Huawei CEO Ren Zhengfei has lashed out at the United States and specifically President Trump in interviews with Germany's Wirtschaftswoche and Handelsblatt newspapers at a key moment that Germany is mulling whether to allow the Chinese company's ultra-high speed 5G internet technology under a proposed "no spy agreement"

Zhengfei likened Trump's recent remarks delineating 5G as a threat that requires to US to stay "guarded from the enemy, and we do have enemies out there" as full of exaggerated fears akin to a "nuclear bomb".  Zhengfei said in an interview that “Unfortunately, the US sees 5G technology as a strategic weapon,” and added, “For them it is a kind of nuclear bomb.”

Currently, the US, Australia, New Zealand, and even Japan have issued blanket bans on the Chinese company's technology from being sold or implemented in their countries. And other so-called "Five Eyes" intelligence sharing countries the UK and Canada are reportedly strongly considering a ban.

Germany this week has indicated there are no plans in place to prevent the Chinese telecommunications giant from participating in building Germany's ultra-high speed 5G internet.

Zhengfei told German news outlets that he's assured the country’s telecommunications regulator that no surveillance "backdoors" on its 5G equipment in the country would be possible. 

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April 17, 2019

It’s Only April, And U.S. Retailers Have Already Closed More Stores Than They Did ALL Of Last Year

If the U.S. economy is in good shape, why have retailers already shuttered more stores than they did in all of 2018?  Not only that, we are also on pace to absolutely shatter the all-time record for store closures in a single year by more than 50 percent.  Yes, Internet commerce is growing, but the Internet has been around for several decades now.  It isn’t as if this threat just suddenly materialized.  As Internet commerce continues to slowly expand, we would expect to see a steady drip of brick and mortar stores close, but instead what we are witnessing is an avalanche.  If the U.S. economy really was “booming”, this wouldn’t be happening.  But if the U.S. economy was heading into a recession, this is precisely what we would expect to see.

Last year, U.S. retailers closed 5,864 stores.

That was a rather depressing number, but here we are in April 2019 and we have already surpassed it.  The following comes from CNN

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March 25, 2019

A Different View Of Venezuela's Energy Problems

It would be easy to write a story about Venezuela’s energy problems and, in it, focus on the corruption and mismanagement that have taken place. This would make it look like Venezuela’s problems were different from everyone else’s. Taking this approach, it would be easy to argue that the problems wouldn’t have happened, if better leaders had been elected and if those leaders had chosen better policies.

I think that there is far more behind Venezuela’s financial and energy problems than corruption and mismanagement.

As I see the story, Venezuela realized that it had huge oil resources relative to its population, back as early as the 1920s. While these oil resources are substantial, the country misestimated how high a standard of living that these resources could support. To try to work around the issue of setting development goals too high, the country chose the path of distributing the benefits of oil exports in an almost socialistic manner. This socialistic approach, plus increased debt, hid the problem of a standard of living that could not really be supported for many years. Recent problems in Venezuela show that these approaches cannot be permanent solutions. In fact, it seems likely that Venezuela will be one of the first oil-exporting nations to collapse.

How the Subsidy from High-Priced Exported Oil Works 

Oil is a strange resource. The cost of oil production tends to be quite low, especially for oil exporters. The selling price is based on a world oil price that changes from day to day, depending on what some would call “demand.” The difference between the selling price and the cost of extraction can make oil exporters rich. In a sense, this difference might be considered an “energy surplus” that is being distributed to the economies of oil exporters. The greater the energy surplus being distributed, the greater the quantity of goods and services (made with energy products) that can be purchased from outside the country with the hard currency that is made available through the sale of oil.

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