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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