June 28, 2019

China's Rogue Regime

It is commonly accepted now that China is using its trade with the United States and other OECD countries to increase the size of its economy, which in turn will allow it to build its military to the point where it can attack the United States and other countries and hope to win. At its simplest, every Chinese container landed at the Port of Los Angeles contributes to a U.S. combat death at some point in time of China’s choosing. Every item of injection-moulded plastic from China picked off the toy shelves at Walmart contributes to a future U.S. combat death.

Some of our leaders seem to comprehend this but speak in a kind of code. Thus,Vice President Mike Pence told the West Point graduating class last month, “You will lead soldiers in combat. It will happen.” General James Mattis has made similar remarks. How can they be so certain that the size of the U.S. military won’t be enough to discourage a belligerent from disturbing the peace of the world?

Because that belligerent country is China and their intentions are as plain as day. Would a peaceful country continually bait Japan as China does?  This graph from the Japanese Foreign Ministry shows Chinese incursions into Japanese waters.

The sudden leap in incidents in 2012 was due to the rise of Xi Jinping as Supreme Leader, later uprated to Core Leader. All these incursions by Chinese fishing vessels are funded by the Chinese Government; it seems the budget is for 12 per month. This is the steady heartbeat of Chinese hate and enmity while they wait for the moment when they can attack.

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June 27, 2019

Stunning Exposé Offers New Details About China's Infiltration Of 8 Tech Giants

Over the past year, Western media organizations have published a non-stop stream of reports about "Operation Cloudhopper": The Chinese government's clandestine program to spy on and siphon economic secrets from some of the world's largest tech companies. 

We have shared some details of the program before: China's Ministry of State Security has worked with a shadowy group of hackers called 'Advanced Persistent Threat' 10 to infiltrate American and European enterprise tech firms using a very consistent MO: Hackers would infiltrate the cloud computing networks of 'managed service providers', then 'hop' from network to network', gaining entree to the networks of these firms' clients. Back in December, the US named some of the hackers suspected of working with APT10, and was backed up by Germany, New Zealand, Canada, Britain, Australia and other allies all issued statements.

Notably, the Chinese cyberespionage campaign continued even after Beijing and the Obama Administration agreed to a pact to cease all cyberespionage activities.

But as devastating as these attacks have been, the details have been kept under wraps, as corporate victims have pushed for their privacy to be protected. But for the first time since the US indicted the two suspected APT members, a sweeping Reuters investigation has laid out details of attacks, many of which have been previously reported, but not in quite as much depth.

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June 26, 2019

Exposing The Fed's False QE/QT Narrative With Its Own Data

It doesn’t take much calculation to see that the Fed’s position on quantitative tightening (QT) is blatantly inconsistent with its position on quantitative easing (QE). You only need to notice that the excerpts above, taken together, violate the following pair of postulates:

  1. When A and B are opposites, the effects of A should be opposite to the effects of B.
  2. QT is the opposite of QE.

So financial markets and the economy should respond significantly to both QE and QT—although in opposite directions—or they should respond to neither QE nor QT. To claim otherwise, as in the excerpts above as well as other similar communications, is like arguing that one of the two postulates is wrong in the context of the Fed’s bond portfolio. That seems unlikely, but not impossible. In particular, the first postulate falls short of being an absolute truth, reality sometimes being more complicated than we’d like it to be. Consider that Newtonian physics seemed absolute enough until Einstein came along.

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June 25, 2019

Ethereum Co-Founder Slams Facebook's Libra Token For Centralization

Ethereum co-founder Joseph Lubin said that Facebook’s Libra token is like “a centralized wolf in a decentralized sheep’s clothing” in an article published on tech news outlet Quartz on June 21.

The social media giant released the white paper for a its cryptocurrency dubbed Libra earlier this month to mixed reviews from experts in the cryptocurrency and blockchain industries and concern from government regulators.

In his article, Lubin notes that Libra’s white paper describes feelings common among many in the cryptocurrency community. It states that “sending money across the globe should be as simple and inexpensive as sending a message on your phone,” and “financial infrastructure should be globally inclusive and governed as a public good.”

While noting the white paper’s claim that “People will increasingly trust decentralized forms of governance,” Lubin pointed out the need for users to trust Libra’s fiat currency and government bond backing, and merchants to trust that the network be responsibly run. Furthermore, Lubin also noted its centralized infrastructure:

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June 24, 2019

Bring on Higher Oil Prices: They’ll Boost the US Economy. Powell Sees it Too. A New Experience for the US

Powered by the iffy situation in the Persian Gulf, the Strait of Hormuz, and the Gulf of Oman, with attacks on tankers and now the downing of a US drone, the price of crude oil got a little nervous in recent days. WTI jumped about 6% today to over $57 a barrel.

But this was just a minor uptick in the overall scheme of things: The US, which has become the largest oil producer in the world, is in the middle of its second oil bust in five years:

These two oil busts are largely a consequence of surging US crude oil production. During the oil bust of 2014-2016, the price of WTI collapsed by over 75%, careening from $107 per barrel to a low of $27 per barrel in 18 months, before starting to rebound. In the process, a slew of oil-and-gas drillers filed for bankruptcy.

For a while it looked like the shale boom, where all the growth in production had come from, was running out of money, and therefore out of fuel. Production fell sharply from early 2015 through much of 2016, but then new money from Wall Street appeared, and production began to soar again, hitting new records all along the way.

Shale wells produce a variety of liquid hydrocarbons (they also produce gaseous hydrocarbons which are not included here). This production of crude oil and petroleum products soared from just over 7 million barrels per day (bpd) in 2010 to 16.6 million bpd currently, according to EIA data:

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June 21, 2019

Facebook’s New Libra Digital Currency, Trust Issues (Many), and Sovereignty

Facebook Inc. unveiled plans for a new, global financial system with a broad group of partners from Visa Inc. to Uber Technologies Inc. on board to create a cryptocurrency it expects will one day trade much like the U.S. dollar and inject a new source of revenue. Called Libra, the new currency will launch as soon as next year and be what’s known as a stablecoin–a digital currency that’s supported by established [fiat] government-backed currencies and securities [see Reuters on stablecoins here]. The goal is to avoid massive fluctuations in value so Libra can be used for everyday transactions across Facebook in a way that more volatile cryptocurrencies, like Bitcoin, haven’t been. To come anywhere close to matching the U.S. dollar for utility and acceptance, Libra will need to be widely trusted.

As we shall see below, trust issues are key to the entire venture. Friend-of-the-blog Matt Stoller has an Op-Ed in the New York Times that you should all read; he expands on how the “partnership” may work:

As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.

Needless to say, a privatized Central Bank will take some time to set up (Bloomberg also says the Libra Association’s Charter is not yet written). Facebook COO Sheryl Sandberg:

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June 20, 2019

Krieger: 'FacebookCoin' Is A Trojan Horse Of Corporate Oligarchy

I do not think Zuckerberg’s ultimate goal is running a stable coin, although he could live with that arrangement and benefit from it for as long as necessary. I think the main reason Facebook has structured the coin with fiat backing is to make it seem less threatening to the current monetary establishment and world governments. It’s a way of saying Facebook isn’t trying to compete with the current status quo, but rather make the status quo run more smoothly and efficiently. Then, once it has a foot in the door and gains traction amongst its massive user base, all Facebook has to do is wait until the current assortment of global governments and their respective central banks fail.
At that stage it can remove the fiat currency backing (who will want it anyway), and let FacebookCoin free float. With the credibility of global governments and central banks in the toilet by then, Facebook and its corporate oligarch partners will be in a prime position to take over a sizable chunk of worldwide payments using their own currency. In other words, this appears to be a long-term scheme by elements of corporate oligarchy to position themselves as an unelected and unaccountable future sovereign power.
All that said, I want to be clear about something. Just because the above represents a plausible scenario doesn’t mean it’ll work out that way. If enough people recognize the dangers of this scheme, it could very well be stopped in its tracks.
In this regard, I want to highlight one of the biggest threats posed by a financial system run by a corporate oligarchy. For one thing, there’s the ever-present issue of censorship. I understand why many in the “crypto” world are fine with FacebookCoin since they see it as a threat to state power and control, but this is myopic in my view. Let’s not forget who is silencing the voices of Americans online in 2019. It’s not the state, but rather Facebook, Google, Twitter, etc. If we allow these companies to gain control of payments, you can be sure the same sort of unaccountable blacklisting will follow in the world of transactions.
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June 19, 2019

CEO Of Germany's 2nd Largest Bank: In A Few Years We Will Notice The ECB's Experiment Was A Historical Mistake

“The cultural level of a nation is mirrored by its rate of interest: the higher a people’s intelligence and moral strength, the lower the rate of interest.” Thus declared economist Eugen von Böhm Bawerk, according to Richard Sylla and Sidney Homer’s classic tome A History of Interest Rates. By that logic, Europe is the domain of superhumans, as the overnight deposit rate has resided below zero since June 2014 and at negative 40 basis points since March 2016.

The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath.  Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:

Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”

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June 18, 2019

Evidence That The U.S. Economy Could Be Plunging Into A Very Deep Recession Is Rapidly Mounting

Not since 2008 have we seen so much bad economic data come rolling in all at the same time.  Even without a war with Iran, which by the way is looking increasingly likely with each passing day, it definitely appears that the U.S. economy is steamrolling toward recession territory.  The employment numbers for last month were abysmal, global trade has collapsed to the lowest level that we have seen since the last recession, and manufacturing numbers just keep getting worse and worse.  In fact, the New York Fed’s Empire State manufacturing index just suffered the worst one month decline in history

The New York Fed’s Empire State business conditions index took a sharp turn for the worse in June, falling into negative territory for the first time in more than two years.

The Empire State manufacturing index plummeted 26.4 points to negative 8.6 in June, the New York Fed said Monday. That’s a record decline. Economists had expected a reading of positive 10, according to a survey by Econoday.

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June 17, 2019

Wilbur Ross Warns Not To Expect A US-China Deal At G-20 Meeting

To anyone expecting a major breakthrough at the June 28-29 Osaka G-20 meeting, Wilbur Ross has a simple message: "Don't."

Speaking to the WSJ, US Commerce Secretary Wilbur Ross sharply played down prospects of a "major" trade deal if President Trump and China’s President Xi Jinping meet at the Group of 20 summit in Japan later this month (which they very well may not as Xi has yet to commit to a meeting which would show him at a power disadvantage to Trump), but nonetheless he said he believes the two sides will ultimately get back to negotiations.

"I think the most that will come out of the G-20 might be an agreement to actively resume talks,” Ross said in a phone interview Sunday. “At the presidential level they’re not going to talk about the details of how do you enforce a trade agreement."

So what is the best case scenario? Well: a return to square one, such diplomatic relations are now well in negative territory:  “The most that might come is new ground rules for discussion and some sort of schedule for when detailed technical talks might resume,” said Mr. Ross.

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June 14, 2019

Risk on, risk off.

One day after traders were greeted by a sea of green - on potential world war news - we are back to the sea of red as global stocks struggled and safe haven bets were back in play on Friday with German bond yields plumbing record lows after the latest dismal Chinese data dump sparked fears about the health of the global economy and concerns of a new U.S.-Iran confrontation intensified (which, by the way, was somehow bullish for risk yesterday).

Beijing May activity reported overnight was very weak and painted a fairly gloomy picture of the world’s second largest economy as the trade war with the United States starts to bite. May industrial output growth slowed to a more than 17-year low, the weakest since since 2002, and well below expectations, while fixed-asset investment also fell short of forecasts. Retail sales growth accelerated and surprised to the upside however.

Industrial Output for May: 5.0%, est. +5.4% (range +5.1% to +6.4%, 35 economists), down from +5.4% last month.

May retail sales +8.6% y/y; est. +8.1% April +7.2%

Jan.-May fixed-asset investment excluding rural households +5.6% y/y; est. +6.1% (range +5.2% to +6.5%, 34 economists). Jan.-April +6.1%

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June 13, 2019

Putin Sets The Table To Leave The Dollar Behind

This is twice that Russian President Putin has said on the global stage the Federal Reserve Note no longer deserves the status and privilege of “world reserve currency” that allows unlimited printing of the currency.

The first time he made mention he actually said that it was a threat to Russia’s national security.

In a speech at the International Economic Forum, in St. Petersburg, Russia, “Russian Davos”, President Putin reaffirmed his position regarding the Federal Reserve Note and it’s international role. For the record, we see the abuse of the Federal Reserve and the Federal Reserve Note, U.S. dollar, in similar light as President Putin. The current status of “world reserve currency” should not be allowed in this day and time. The absolute abuse of power, excessive power granted and the ability to shackle entire nations through the use of a currency that is not even their own should have never been allowed but it is way past time for this system to be dissolved.

In a speech at a plenary session, Mr Putin accused Washington of seeking to “extend its jurisdiction to the whole world.”

“But this model not only contradicts the logic of normal international communication. The main thing is, it does not serve the interests of the future.”

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June 12, 2019

Nintendo Reportedly Moved Switch Production Out Of China Over Trump's Tariff Threats

Offering yet another example of the trade war will inevitably drive more companies to move manufacturing out of mainland China and to Taiwan or Vietnam instead, Nintendo is shifting production of one of its most popular gaming consoles to limit the impact of US tariffs.

Per WSJ, Nintendo is moving some of its production of its Switch hand-held console to Southeast Asia from China to limit the impact of US tariffs on Chinese-made electronics. This comes as the company plans to update the popular Switch console with two new models later this year.

Since videogame console makers tend to sell their devices at thin margins, in the hopes of earning higher profits on sales of more lucrative games, the move suggests Nintendo is trying to avoid selling its Switch handheld consoles at a loss. Over the next two holiday seasons, Nintendo is facing stiff competition from Microsoft, with both companies offering competing devices.

The fact that Nintendo's decision comes just a day after a senior Foxconn executive said Apple's biggest manufacturing partner had the capacity to move its production outside of China presents an interesting and important message about how quickly global supply chains will change as the trade spat with China intensifies, said Bill Blain of Mint Partners.

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June 11, 2019

For The Equity Markets To Keep Rallying, This Has To Happen...

With markets now pricing in at least three rate-cuts and expectations for a July cut surging to over 80%, belief in a pre-emptive "insurance" cut is now consensus - and The Fed had better not disappoint.

However, as Bloomberg's Ye Xie warns, while, historically, preemptive Fed rate cuts have tended to boost the stock market, this time may be different.

Any student of stock market history would tell you that the Fed’s "insurance" cuts in 1995-1996 and 1998 did extend the bull market and economic expansion.

What’s different this time is that the front-end of the yield curve is much more deeply inverted than in the 1990s. In other words, markets have more aggressively discounted policy easing. With Fed fund futures pricing in about 70 basis points of cuts by year-end, the FOMC has a high bar to keep equity investors happy without fomenting recession fears

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June 10, 2019

Chinese Exporters Dodge US Tariffs With Fake 'Made In Vietnam' Tags

Chinese exporters who are hoping to evade tariffs as high as 25% on some of their goods are hoping to capitalize on the explosion of exports from Vietnam to the US - and not by simply and legally routing their products through Vietnam as a legal transshipment point, but by masking their true origins, provoking fears that the US might seek to punish the Vietnamese for failing to crack down on this type of fraud.

On Sunday, Vietnam released a statement pledging to increase penalties on trade-related fraud. It was one of the first times an Asian government has ever alleged such misbehavior, and comes after Vietnamese authorities found dozens of fake product origin certificates and illegal transfers presumably by Chinese companies trying to sidestep US tariffs on everything from agriculture to textiles, according to Bloomberg.

The crackdown comes as Vietnam has emerged as one of the fastest growing sources of American imports.

One member of the Vietnamese national assembly's economic committee said the government is worried it could provoke the wrath of the US if it doesn't crack down on the flow of mislabeled Chinese products. The sheer magnitude of the jump in Vietnamese exports has prompted some to question how much of this could possibly be due to legitimate commerce.

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June 7, 2019

Huawei Signs Contract To Build 5G Network In Russia

In a sign that Huawei is increasingly reliant on adversaries of NATO and the West to bolster its grip om global 5G dominance as Washington conspires to run it out of the west, the Guardian reports that the Chinese telecoms giant has struck a deal with an unlikely ally, Russian Telecoms giant MTS, to develop a 5G network in Russia over the coming year.

According to the Guardian, the agreement was signed on the sidelines of a meeting between Chinese leader Xi Jinping and Russian president Vladimir Putin in Moscow, on the sidelines of a critical annual Russian economics forum.

The deal will see “the development of 5G technologies and the pilot launch of fifth-generation networks in 2019-2020." MTS said in a statement on Wednesday.

In a statement, Huawei’s Chairman Guo Ping said he was "very happy" with the agreement "in an area of strategic importance like 5G."

During the meeting in Moscow, Putin repeatedly praised Xi as a "close friend," noting that they had met nearly 30 times over the past six years. The trip is Xi’s eighth to Russia since 2012.

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June 6, 2019

The US Economy's Dirty Big Secret

There is a dirty little secret in economics today: the United States has benefited – and continues to benefit – from the global slump.

The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.

Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style. But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?

The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.

Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.

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June 5, 2019

The Fed Has No Choice But To Return To Ultra-Low Interest Rates

The current boom is heavily built on credit. This is because in today’s fiat money regime central banks, in close cooperation with commercial banks, increase the quantity of money by extending loans – loans that are not backed by ‘real savings’. The artificial increase in the supply of credit pushes market interest rates downwards – that is, below the levels that would prevail had there been no artificial increase in bank credit supply.

As a result, savings decline, consumption increases and, investment takes off, and a “boom” gets going. However, such a boom can only last so long. Its continuation rests on more and more credit being fed into the system, provided at ever lower interest rates. The last ten years provide a good illustration: The Fed’s lowering of interest rates and monetary expansion in the financial and economic crisis 2008/2009 has helped the banking industry to get back to its business of churning out more and more credit (see chart a).

As credit recovered, and stock and housing prices began to rise again (see chart b). The Fed succeeded in re-establishing the ‘asset price inflation regime’. In December 2015, however, the monetary policy makers in Washington D. C. decided to take away the punch bowl by beginning to raise interest rates. Until December 2018, the Fed had brought back the Federal Funds Rate to a band of between 2.25 to 2.5 per cent. Where to go from here?

The Fed has signaled recently that it wants to take a break as far as any further interest rate decisions are concerned. Financial markets have their own view, though: They seem to expect that the Fed’s hiking cycle is already over, and that the central bank will sooner or later lower interest rates again. The likelihood that this expectation will turn out to be correct is quite high: As the Fed wishes to keep the boom going, it has no choice but to return to the policy of suppressing interest rates.

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June 4, 2019

Multi Billion Fund Blocks Redemptions

In a moment of financial serendipity, earlier today we tweeted that as a result of the sudden collapse in the market's most crowded positions (which as we noted over the weekend, now face the biggest risk of a wipe out), "hedge fund redemption requests re-emerge."

It turns out we were very much spot on, because just a few hours later, the Financial Times reported that Neil Woodford, the UK's equivalent of David Tepper, has blocked redemptions from his £3.7bn equity income fund after serial underperformance led to an investor exodus, "inflicting a serious blow to the reputation of the UK’s highest-profile fund manager."

The freeze on redemptions, exactly five years after Woodford opened his eponymous fund management group, underlines his increasingly precarious position. It follows a steady stream of investor outflows, which have occurred each month for two years, with the fund shrinking by two-thirds to £3.7bn since a peak of £10.2bn in May 2017.

The severity of this latest hit to the hedge fund industry can not be underscored enough. The FT quoted a veteran fund manager who has known Woodford for more than 20 years, who said that "this is one of the bigger events for the UK asset management industry of the last decade. A bonfire of reputation and a terrible moment for investor confidence."

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June 3, 2019

Chinese Bank With $105 BN In Assets On Verge Of Collapse

While the western world (and much of the eastern) has been preoccupied with predicting the consequences of Trump's accelerating global trade/tech war, Beijing has had its hands full with avoiding a bank run in the aftermath of Baoshang Bank's failure, scrambling to inject massive amounts of liquidity last week in the form of a 250 billion yuan net open market operation to thaw the interbank market which was on the verge of freezing, and sent overnight funding rates spiking and bond yields and NCD rates higher.

Unfortunately for the PBOC, Beijing is now racing against time to prevent a widespread panic after it opened the Pandora's box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar.

And with domino #1 down, the question turns to who is next, and will they be China's Lehman.

This was the question we asked last Thursday, when we published a list of regional banks that have delayed publishing 2018 reports, the biggest red flag suggesting an upcoming bank solvency "event."

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