Last week, NATO's supreme allied commander for Europe, General Philip Breedlove, suggested that Russia has effectively declared a no-fly zone in Syria.
That contention was supported by Moscow’s rather bold move to effectively instruct the US-led coalition to keep its planes out of the sky starting last Wednesday. Ultimately, The Kremlin has declared a monopoly on Syrian air space for the duration of Russia’s military campaign, marking an epic embarrassment for Washington, and serving notice to the anti-regime forces operating in Syria that there’s a new sheriff in town.
Well, don't look now, but in addition to the de facto no-fly zone, some experts are out suggesting that Russia is set to use its Black Sea fleet to enforce a blockade on the Syrian coast. Here's Sputnik:
Russia's Black Sea Fleet may be used in Syria to blockade the Syrian coastline and deliver armaments, as well as possibly deliver artillery strikes, the head of Russian State Duma's defense committee and former Black Sea Fleet commander Vladimir Komoyedov said.
"Regarding the large-scale use of the Black Sea Fleet in this operation, I don't think it will happen, but in terms of a coastal blockade, I think that it's quite [possible]. The delivery of artillery strikes hasn't been excluded; the ships are ready for this, but there is no point in it for now. The terrorists are in deep, where the artillery cannot reach," Komoyedov said.
Komoyedov added that the size of the naval grouping used in the operation will depend on the intensity of the fighting. He noted that currently, the navy's Mediterranean flotilla is currently sufficient for actions in the given area.
Komoyedov also said that auxiliary vessels will certainly be used in the operation against ISIL to deliver armaments as well as military and technical equipment.
Meanwhile, the aerial bombardment continues unabated as Russian warplanes have reportedly destroyed "a terrorist base in the woods" where tanks - which are ironically Soviet made- were stationed. Here's RT:
The Russian Air Force in Syria has conducted 25 sorties on 9 Islamic State installations in the last 24 hours, eliminating a disguised terrorist base equipped with tanks, a command center and a communication hub, the Defense Ministry reported.
Russian bombers taking off from Khmeimim airbase knocked out a terrorist base hidden in the woods near the city of Idlib, eliminating 30 vehicles, among which were several Soviet-made T-55 tanks.
“Six airstrikes hit the base, and the terrorists’ equipment was fully destroyed,” Konashenkov said.
And here's the video which purportedly shows the attack on the hidden ISIS base:
While according to Russian weatherwomen, mother nature is smiling on The Kremlin's efforts (via The Guardian):
It’s warm and sunny in Syria – and conditions are perfect for flying fighter jets and launching airstrikes, according to a weather report broadcast on Russian state television.
“Russian aerospace forces are continuing their operation in Syria. Experts say the timing for it was chosen very well in terms of weather,” said the forecaster in a segment aired on Rossiya 24 on Sunday, standing in front of a screen showing a Sukhoi Su-27 fighter jet with the words “flying weather”.
For those wondering how long it would be before an "accident" took place, "inadvertently" pitting Russian fighter planes against NATO, we got the answer on Monday as Turkey scrambled F-16s to the border after Russia allegedly violated Ankara's air space. Here's a bit of color from BBC:
Russia said the incident was a "navigational error" and that it has "clarified" the matter to Ankara.
Turkish jets patrolling the border were also "harassed" by an unidentified plane on Sunday, Turkey said.
Turkey, a Nato member, has called the Russian strikes a "grave mistake".
Turkish Prime Minister Ahmet Davutoglu told Turkish TV that the rules of engagement were clear, whoever violates its airspace.
"The Turkish Armed Forces are clearly instructed. Even if it is a flying bird, it will be intercepted," he said.
Only, that's not true, because the first time Ankara shoots down a Russian "flying bird", Erdogan will have a real war on his hands and will swiftly discover that while bombing air force-less Kurdish separatists with impunity is easy, dog fights with Russian fighter pilots are not, and just about the last thing Turkey needs with inflation soaring and the lira tumbling and elections looming is to go to war with Russia.
In any event, the situation is clearly escalating, and as the Russians get more bold with each passing NATO bluff and subsequent fold, the stakes get still higher. As hyperbolic as it may sound, the West is now one Erodgan miscalculation away from open warfare with Russia and Moscow looks to be just days away from enforcing a full naval blockade of what is rapidly becoming a Mid-East Kremlin colony.
Just as we warned previously, the bloodshed was only just beginning at Valeant (and others). Having put all its peers to shame in terms of price hikes, VRX shareholders appear anxious that the 'no-brainer' may just become the poster-boy example to be made of by an anxious-to-show-some-action Congress...
Wondering why the crash... read the gory details here.
Two weeks ago, and just before Janet Yellen hinted that "nominal interest rates cannot go much below zero" (so just a little, and exactly is a "little" in Fed speak?) Goldman explained that when it comes to a rate hike, the Fed should not only not hike in December (and certainly not October), but wait until mid-2016 before the first rate hike:
Q: What is your own view of the appropriate liftoff date?
A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.
Then overnight, Goldman's Jan Hatzius whose calls on an economic rebound and "above-trend" growth have been premature again and again, but whose calls on what the Fed should do are usually followed to the T by former Goldmanite and the person in charge of the NY Fed Bill Dudley, came out with another stunner.
After looking at the latest terrible US economic data which once again crushed hopes of a "decoupling", first confirmed by the terrible payrolls report and subsequently validated by the Atlanta Fed cutting its Q4 GDP from 1.8% to 0.9%, Goldman had this to say:
Further bad news on output and employment could potentially result in quite a large shift in the monetary policy outlook. When the starting point for growth is far above trend, a given slowdown merely delays the point at which the labor market hits full employment, inflation pressure rises more significantly, and standard monetary policy rules call for liftoff. But when the starting point for growth is only modestly above trend, as it probably is right now, the same slowdown might halt the move toward full employment and greater inflation pressure entirely. In that case, standard monetary policy rules might justify a continuation of the current zero-rate policy for much longer, well into 2016 or potentially even beyond. In this context, it is interesting that the reduced market-implied probability of liftoff in 2015 after Friday’s weak employment report mostly translated into a higher probability of liftoff not in 2016 but in 2017!
So for anyone still confused why the USDJPY carry trade is on fire today and is propping up the broader market, even as such "growth" stalwarts and AAPL, NFLX and VRX are in the red with the third quarter earnings season about to begin and confirm not only a revenue but an earnings recession, there is your answer.
On the heels of China's, Japan's, Brazil's, and Europe's Services PMI weakness (and US Manufacturing PMI and ISM weakness), Markit's US Services PMI printed 55.1 (missing exectations of 55.6) and dropping to its lowest since June. This catch-down to Manufacturing weakness suggests the mid-year bounce is well and truly dead as even Markit admits, "it remains unclear as to whether growth will weaken further as we move into Q4." Additionally, after its exuberant spike to 10 year highs in July, ISM Services continued to drop back (to 56.9 missing expectations) .
Services (blue) appear to catching down to Manufacturing (red) in the ISM and PMI surveys...
After spiking to 10-year-highs in July, ISM Services continues to slide back to reality. Even after adjustements ISM Services is ugly...
While employment rose modesly; prices paid, inventory sentiment, and business activity tumbled...
But New Orders crashed... most since Lehman
- *ISM’S HOLCOMB IS HOPEFUL MANUFACTURING IS NEARING BOTTOM
So hope is what we are waiting for.. that could be a problem.
On the inflation front, average prices charged decline for the second month running, which represented the first back-to-back declines in output charges since the survey began six years ago.
Looking ahead, service providers are optimistic about the business outlook, but the degree of positive sentiment dipped to its second-lowest since June 2012
The US economic growth slowed in the third quarter according the PMI surveys, down to around 2.2%. But this largely represents a payback after growth rebounded in the second quarter, suggesting that the economy is settling down to a moderate rate of growth in line with its long term average.
Hiring also remains relatively robust, albeit down from earlier in the year, again suggesting that the economy has shifted down a gear but remains in good health.
At the moment it remains unclear as to whether growth will weaken further as we move into the fourth quarter. However, with inflationary pressures waning, policymakers may have some breathing space to gauge the extent of any slowdown. Lower fuel costs helped push average prices charged for goods and services dropping at steepest rate for nearly five years.
The bounce in Q2 is over...
By Wolf Richter www.wolfstreet.com
Revenues of the companies in the S&P 500 have been declining all year. Companies and analysts blamed the strong dollar. They blamed China. They blamed oil, Greece, Japan, and a million other things. In the first quarter, revenues dropped 2.9% from a year earlier. In the second quarter they dropped 3.4%. And in the third quarter, according to FactSet, they’re expected to decline by 3.4%.
The last time year-over-year revenues declined two quarters in a row was in 2009 during the Financial Crisis [read… Revenue Recession Spreads past Dollar, Energy]. Now there have been three quarters in a row of revenue declines.It’s tough out there.
Given this revenue debacle, corporate earnings growth has been shrinking. By Q2, it turned negative (-0.7%), according to FactSet. And in Q3, earnings “growth” dropped deeper into the negative, now estimated at -5.9%, despite all the expert financial engineering, share buybacks, and accounting tricks that companies have been leveraging with great skill and singular dedication.
But if US-based corporations blame the strong dollar, then foreign-based corporations should benefit from the strong dollar. It’s a zero-sum game: if one loses the other gains. We’ve already seen profits soar at Japanese corporations during the early phases of the yen devaluation in 2013 and 2014.
But that bonanza is over. Companies in other countries have been struggling too, despite the strong dollar that should have been beneficial to their non-dollar financial reports. And some of the deterioration has been reflected in global share prices, which have gotten hammered, including in Japan.
The MSCI AC world index, which captures large and mid-cap stocks across 23 developed markets and 23 emerging markets, has now been dropping for two quarters in a row – worst performance in four years.
Turns out, for the companies around the globe that comprise the MSCI AC, earnings “growth,” as measured by 12-month trailing earnings, is in even worse shape than for those in the S&P 500: by Q2, it was -7%!So this is a global thing.
It has not primarily been triggered by the strong dollar, but by a global slowdown in revenues caused by a global slowdown in demand.
The last two times that earnings of the S&P 500 companies reached this point – in Q1 of 2001 and in Q4 2007 – the US was already in a recession.
The National Bureau of Economic Research (NBER), which decides when a run-of-the-mill downturn becomes an official recession, hadn’t acknowledged the recessions at the time, but it did so later on. The same will be true during the next official recession. We’ll be told only after it’s too late.
This chart by Economics and Strategy at Bank National Financial shows how earnings growth for the S&P 500 companies, as measured by 12-month trailing earnings, has sharply deteriorated, and by Q2 was barely above zero. This is slightly higher than the FactSet numbers for Q2 (-0.7%). For the companies in the MSCI AC index, earnings shrank by 7%. I added the green and blue parallel lines, the arrows, and the red circles to highlight what was going on when the prior two earnings debacles hit: the beginnings of the 2001 recession and the glorious Financial Crisis:
The last time earnings of the companies in the MSCI AC were shrinking like this without a recession was in 1993. And according to the measure used by Bank National Financial, the last time earnings of the S&P 500 companies were close to zero without a recession was in 1998. But if FactSet is correct in its estimate for Q3 earnings growth (-5.9%), all bets are off.That just doesn’t happen without a US recession
The reason is simple: When corporate revenues and earnings tank, bad stuff starts happening. Companies curtail their investments further, and they cut expenses even more, all of which are a drag on the economy. And they whittle down their workforce, which drags down consumer demand even further.
This coincides with today’s high business inventories and inventory-sales-ratios. To bring inventories in line with lower demand, companies slash their orders, and this additional hit to demand ricochets up the supply chain.
These are normal business cycles. Recessions happen. They’re essential in what is left of the free-market system. It’s the process of cleaning up after a party, shutting down what doesn’t work, taking losses, wiping out debt through bankruptcies, and building the base for the next growth period.What’s different this time?
Interest rates are already at zero. The Fed’s balance sheet is weighed down by $4 trillion in QE assets. Companies have loaded up on debt, much of it high-risk junk bonds and leveraged loans, that many companies will not be able to service during leaner times. Governments at all levels, after years of deficit spending, are burdened with enormous amounts of debt, with for example, US gross national debt more than doubling since the onset of the Financial Crisis.
And when the recession materializes, all these chickens are going to come home to roost.
So now everyone is hoping for some kind of earnings miracle in 2016, however unlikely that may seem. As Bank National Financial put it – with a total lack of conviction:
The bottom-up consensus currently sees an earnings rebound of 7.4% for the constituents of the S&P 500 over the next 12 months and about 8% for the MSCI AC. But will it come?
We think earnings growth is possible in 2016, provided of course that a few things go right. First, the global economy needs to get out of its funk.”
But by the looks of it, the global economy is just now sinking deeper into “its funk.”
So the risks the Fed promised to banish from the globe suddenly return with a vengeance. Read… This Chart Truly Depicts a New, Terrible Trend in Jobs Mess
Here are some State Department talking points on Syria for cable news anchors:
1) Keep mentioning the barrel bombs.
Do not mention how their use was pioneered by the Israeli Air Force in 1948, and how they were used by the US Air Force in Vietnam in Operation Inferno in 1968. Keep repeating, “barrel bombs, barrel bombs” and stating with a straight face that the Syrian regime is using them “against its own people.” Against its own people. Against its own people. Against its own people.
2) Keep mentioning “200,000.”
(The UN estimates that 220,000 have been killed in the conflict since 2011.) Declare like you really believe it that this is the number of civilians the Syrian government of Bashar Assad has killed during the war. (Do not be concerned about any need to back the figure up. No one is ever going to call you on it publicly.)
Do NOT mention that around half of the war dead (estimates range from 84,000 to 133,000) are Syrian government forces waging war against an overwhelmingly Islamist opposition, and an additional 73,000 to 114,000 are anti-government combatants.
Do not discuss these figures because they would call into question the claim that the Syrian government is targeting and killing tens of thousands of civilians willy-nilly. (If feeling any qualms of conscience, recall Karl Rove’s immortal dictum that “We’re an empire now, and when we act, we create our own reality.”)
3) Keep mentioning the “Arab Spring” and how in 2011 Syrians peacefully mobilized to challenge the regime were violently repressed.
But don’t dwell on the Arab Spring too much. Realize that the State Department was actually shocked by it, particularly by its repercussions in Egypt, where democratization brought the Muslim Brotherhood to power before the US-backed military drowned its opponents in blood.
And recall but do NOT mention how in Bahrain, peaceful demonstrations by the majority Shiites against the repressive Sunni monarchy were crushed by a Saudi-led invasion force tacitly supported by the US. And NEVER mention that the bulk of the peaceful protesters in the Syrian Arab Spring want nothing to do with the US-supported armed opposition but are instead receptive to calls from Damascus, Moscow, and Tehran for dialogue towards a power-sharing arrangement.
Do NOT explain that the pro-democracy student activists and their allies fear most is the radical Islamists who have burgeoned in large part due to foreign intervention since 2011.
4) Keep mentioning the “Free Syrian Army” and the “moderate opposition” to give the impression that they actually exist in the real world.
Do NOT point out that the FSA organization is actually a joke; that its leaders live in Turkey; that its remaining units are headed by CIA officers; that US efforts to train over 5,000 FSA troops have been an utter failure; that the tiny group of 54 recently sent to the front were immediately captured by the al-Nusra Front and another 70 dispatched from Turkey immediately turned over their arms to that al-Qaeda-linked group; that their chief of staff has resigned protesting US incompetence; that Gen. Lloyd J. Austin III, the top American commander in the Middle East, told Congress last month that only “four or five” Syrians had been trained by the US to fight ISIL; and that the US-trained forces have been accused of multiple human rights abuses.
Do NOT mention these things. They are so totally embarrassing that the State Department officials responsible just want to curl up into a ball and roll into a corner. Your mission is to put a bright face on this and continue to pretend there’s something in Syria, supported by the US, that falls between the terrorists and the Assad regime.
5) Keep expressing consternation if not outrage that Russia is “interfering” in Syria. Scrunch up your face and act like you think it’s puzzling.
Do NOT mention that Syria is much closer to Russia than to the US and that Russia faces a much greater threat of Islamist terror than the US (in places like Chechnya and Dagestan that your viewers can’t locate on a map).
Downplay the fact that Russia has had a military relationship with Syria since the 1950s no more nor less legitimate that the US military relationship with Saudi Arabia. (And avoid any objective comparisons of the human rights records of Saudi Arabia and Syria since the former’s is manifestly so much worse than the latter’s!)
Do NOT imply any moral equivalence between Russia’s desire to prevent US-backed regime change in Syria and the US’s desire to inflict another Iraq or Libya-type regime change on that tragically war-torn country.
6) Keep treating the Assad regime as an obvious pariah, whose leader has “lost legitimacy.”
Say that with an air of authority, like you really believe that US presidents—like Chinese emperors of the past or medieval popes— enjoy so much “legitimacy” that they can confer this on, or remove it from, anybody else.
Study CNN anchor Chris Cuomo’s facial expressions and body language when he announces—so matter-of-factly, as a self-evident fact, as a done deal—that (come on, everybody!) “Assad hast lost legitimacy.”
(Chris is your model. He’s the State Department’s pleasantly vapid headed scion-of-privilege poster boy, whose occasional dark flashes of indignation—especially those directed towards anyone questioning the official talking points on Russia—embody the attitude Foggy Bottom seeks to encourage in the corporate press.)
Do NOT remind viewers that the Syrian government is internationally recognized, holds a UN seat, retains cordial relations with most nations, and is engaged in a life-and-death struggle against people who enslave, crucify, behead, bury alive, and burn alive people and want to replace Syria’s modern secular government with a medieval religious one intolerant of any diversity.
7) Keep insisting that the Assad regime somehow is responsible for, and even in league with, the al-Qaeda-linked al-Nusra Front and ISIL.
Since this makes no logical sense, just have faith in the ignorance of the viewership and its disinclination to distinguish one Arab from another and to assume that they’re all linked in ways that aren’t worth even trying to sort out. Imply that by staying in power (and not complying with Obama’s demand that he step down) Assad has actually invited the presence of radical Islamists to his country, or provoked their emergence.
Do NOT mention that al-Qaeda offshoots have proliferated globally since the US invaded and wrecked Iraq in 2003, in a war based entirely on lies, and that there was no al-Nusra Front or ISIL until the US set out to effect regime change throughout the Middle East. Do NOT let on that State Department PR strategy is precisely to obfuscate the real causal relationship, and to impute to the beleaguered Assad phenomena actually generated by US aggression in the region.
8) Keep treating Russian President Vladimir Putin as America’s Enemy Number One, an ally of a Syrian government that US has said must go, deploying force in Syria to bolster Assad rather than (as Moscow claims) to target ISIL.
Do NOT lend any credence to the Russian assertion that the Syrian Army is the force best placed to defeat ISIL. Do NOT point out the incongruity of the US invading and attacking countries from Pakistan to Libya since 2001 while expressing alarm that Moscow is (after much hesitation) taking action against Islamist terrorists at Damascus’s invitation.
9) Do not harp on the past, revisit history, or attempt to place the contemporary situation in Syria in perspective. Do NOT complicate the storyline by mentioning Damascus’s cooperation in the “War on Terror” and the US use of Syrian torture chambers in its “special renditions” program after 2001. Do NOT mention Syria’s large Christian minority or its historical support for Assad’s Baath party, which was co-founded by a Syrian Christian.
* * *
Please keep everything simple, following the examples set by MSNBC’s “Morning Joe” Scarborough and CNN’s Cuomo, and inculcate in the mind of the viewer that Assad is the main problem and most horrible actor in the Syrian situation. Tell them that Putin, while striving to revive the tsarist empire, is backing Assad as a loyal ally and using his military to prolong his rule that Washington condemns rather than (as he states) taking action against ISIL.
If you do all this, you will demonstrate your loyalty to the State Department, the bipartisan foreign policy consensus, the military-industrial complex, the One Percent, your advertisers, your producers and editors, and the unsung heroes behind the scenes who arrange your teleprompter scripts.
You too could be an Andrea Mitchell, or Christiane Amanpour, posturing as an “expert” while trotting out our talking points. And even after they’re exposed as bullshit, you won’t have to say you’re sorry. People will soon forget anyway.
Those unconscionable barrel bombs! 200,000 civilians killed by the illegitimate regime! US support for the moderate opposition! Russia up to no good, supporting Assad and not really targeting ISI!. Russian moves “worrisome” (whereas US moves are not.)
While gold remains unchanged, silver prices are surging higher this morning as crude oil jumps supposedly on geopolitical tensions...
but technical resistance looks key...
Silver is breaking above its 100-day moving-average and Crude is pulling
away from its 50-day moving average (after being glued to it for a
Last week, at the same time that Gartman was calling for a "bear market" set to push stocks to 1420-1500 and where "rallies are to be sold" (leading to a face-ripping market rally), Goldman finally capitulated on its year end 2100 price target for the S&P, downgrading both its EPS forecast for the S&P500 and its price target for US stocks for the next two years.
In addition to this being another clear interim market bottom call, what Goldman - which traditionally is at the forefront of the Wall Street penguin brigade - did, was to break the seal on bearish calls by all other sellside "strategists" who are nothing more than glorified trend followers, especially once they have the cover of Goldman. Which is also why we concluded our post from last week documenting Goldman's call by saying "expect the rest of the sell-side penguins to follow shortly with their own year-end S&P price target "revisions" lower."
Sure enough, moments ago Bank of America did just that when in a note by Savita Subramanian, the bank also known as the Bank of Countrywide Lynch as a result of its "successful" pre and post-bailout mergers, cut its S&P500 target from 2100 to 2000, saying "Today, we are further lowering our 2015 year-end target to 2000 (-5%) and are cutting our 12-month return forecast from 14% to 8% chiefly driven by a higher equity risk premium" apologetically adding that "while most of our models still point to further upside for US equities, we see increasing risks to our bullish outlook."
And just like Gartman had a "bold" forecast earlier, so does BofA: "the next 12-18 months could see a rebound in global economic growth, or could see an economic shock."
And just in case hedging every possible outcome in a world in which central banks have lost credibility isn't enough, here is one more: "a third scenario might be something we have seen so far this year, significant downward revision by a thousand cuts, which has hardly been good for stock returns."
In our fair value model, we revised our 2016 S&P 500 bull and bear case EPS from $142/$96 to $135/$95, which has brought our normalized 2016 EPS to $115 from $119 (-3%). We also raised our equity risk premium (ERP) assumption from 425bp to 450bp. As a result, the implied year-end S&P 500 fair value has gone from 2164 to 2000 (-8%). For next year, we now assume a flat ERP of 450bp from 400bp previously.
So S&P 500 EPS can be $135... or $95. Got it.
Done laughing yet? Good. Here is some more deep thoughts from BofA on the two perfectly hedged probabilities:
The bear case: an economic shock derails a fragile economy
Outside of an exogenous geopolitical event, an economic shock would most likely be tied to credit – and performance of the most credit sensitive economies, EM, reflects this building risk, in our view. Even in the US, with deleveraged household and corporate balance sheets, strains are still evident. While investment grade credit remains healthy, our high yield team expects fundamentals to further deteriorate, and the HY Distress Ratio, a good leading indicator, corroborates this view (Chart 3). Lower credit availability could continue to weigh on growth, which is already anemic – note that the number of companies with negative earnings has started to creep higher, another leading indicator of weak market returns (Chart 18). Corporations engineering EPS growth via buybacks has closed in on record highs (Chart 21), but longer term growth prospects may be challenged by their reluctance to reinvest in businesses (seen in depressed capex/R&D spend). Outside the US, the slump in commodity prices and manufacturing sectors may mean that expectations are not low enough, particularly in EM, which now make up over half of global GDP.
The bull case: a rebound in growth
The bull case is more aligned with our economists’ current outlook, where they see stable to improving growth in developed markets. This requires that China’s economy does not collapse. While this view has been increasingly challenged, the fact that sentiment and positioning remain very bearish suggests that much of the uncertainty is reflected in asset prices, and relief could result in a significant rebound in stock prices. The question becomes, at what price will investors step in and buy stocks?
* * *
And now that Savita has done hedging her call just in case Gartman goes super bearish again and sends the S&P above 2,100 on short notice, here is the real bearish message:
The cycle map is broken: "Some signals suggest we have only recently passed the early part of the economic cycle, while other indicators argue we are much later in the cycle. Our checklist still suggests the cycle isn’t over, with more indicators still looking favorable than unfavorable, but some signal are starting to roll over and warrant close monitoring to determine if this really is the beginning of the end."
So late-stage cycle coupled with "No near-term catalysts, near-term returns could be muted"
Given the current headwinds, we see few catalysts for a big rally over the next couple of months. Not only are the technical weak, but our Global Quant Strategists’ Global Wave model also suggests weak near-term returns. Additionally, as mentioned above, our shortterm estimate revision model just flipped back to negative, 3Q earnings results and commentary may be less likely to inspire confidence (consensus expects -3% y/y), the Fed lift-off has been delayed until December, we have yet to see meaningful improvement in global growth, and FX and commodity volatility is likely to remain elevated.
... even as "signs of stress are starting to percolate, particularly in the high yield market"
While "Outside of the US, most major economies have increased their leverage"
Decoupling again? "Global growth expectations have come down"
Hardly: "Many parts of US economy have already been feeling pain from weak demand & investment"
No spending for growth: "Investment is weak outside of intellectual property products"
Just buybacks: "Share buybacks are near record levels, and have helped boost EPS"
Which has unleashed a revenue and profits recession: "The earnings front: falling revisions, more co’s with (-) EPS, management going dark"
And the continued strength of the dollar means more pain ahead: "ISM has come down, and stronger dollar has hurt US exports"
But, there is a silver, or rather green, lining: "most indicators don’t suggest a collapse, and we see evidence of green shoots"
So optimism dented, but "no collapse." Got it - almost as soundbity as Goldman's "flat is the new up."
Once again the corporatocracy wins as the so-called "Trojan horse" Trans-Pacific Partnership (TPP) trade agreement has been finalized. As WSJ reports, the U.S., Japan and 10 countries around the Pacific reached a historic accord Monday to lower trade barriers to goods and services and set commercial rules of the road for two-fifths of the global economy, officials said.
For the U.S., the TPP (reportedly) opens agricultural markets in Japan and Canada, tightens intellectual property rules to benefit drug and technology companies, and establishes a tightknit economic bloc to challenge China’s influence in the region (likely forcing their hand into separate trade agreements).
However, Obama is likely to face a tough fight to get the deal through Congress (especially in light of presidential candidates' opposition).
The US, Japan and 10 other Pacific Rim economies have reached agreement to strike the largest trade pact seen anywhere in two decades, in what is a huge strategic and political win for US President Barack Obama and Japan’s Shinzo Abe.
The deal, if approved by Congress, will mark an effective expansion of the North American Free Trade Agreement launched two decades ago to include Japan, Australia, Chile, Peru and several southeast Asian nations.
The trade deal has been in the works since 2008 but has been stymied by politically sensitive disputes, including a fight between the U.S. and Japan over the automobile industry.
Beyond that, however, it represents the economic backbone of the Obama administration’s strategic “pivot” to Asia and a response to the rise of the US’s chief rival, China, and its growing regional and global influence. It is also a key component of the “third arrow” of economic reforms that Mr Abe has been pursuing in Japan since taking office in 2012.
Biotechs, among others, are the big winners...
In pharmaceuticals and other industries, U.S. officials sought a deal that would be acceptable to other countries and as many members of Congress as possible, without triggering the outright opposition of a major business group. Many Democratic lawmakers and groups backing generic drugs and less expensive medicine didn’t want any more than five years of exclusivity for biologic drugs, and it wasn’t immediately clear if the compromise in the TPP would satisfy their concerns.
One of the last disputes to be resolved pitted Australia against the U.S., which was seeking up to 12 years of protection for biologic drugs against generic imitators. The two countries reached a complicated compromise that provides at least five and potentially up to eight years of exclusivity for biologics. Chile, Peru and other countries remained concerned about adding to the price of drugs through long exclusivity periods, according to people following the talks.
In another last-minute deal, Canada and Japan agreed to increase access to their tightly controlled dairy markets, allowing some American dairy products in, but New Zealand also persuaded the U.S. to accept more of its milk products. The sour milk fight caught the attention of Congress, where Sen. Ron Wyden (D., Ore.) and Rep. Paul Ryan (R., Wis.), two lawmakers overseeing trade policy, demanded that dairy producers in their states gain more access to Canadian consumers, a sensitive concession for Canada during its own election season.
But critics remain vocal...
U.S. labor unions and their allies among consumer and environmental groups are among the biggest critics of the TPP. The left-wing opposition has prevented Mr. Obama from getting many fellow Democrats—already skeptical of the deal’s benefits to U.S. workers—to support his trade policy.
An array of Republican lawmakers object to provisions that would strengthen the influence of labor groups, impinge on the ability of tobacco companies to fight against packaging rules and other laws overseas, and possibly harm local industries, from dairy farmers to sugar.
So it isn't over yet... (as The FT reports)
The deal announced on Monday by trade ministers from the 12 countries still must be signed formally by the countries’ leaders and ratified by their parliaments. In the US Mr Obama is likely to face a tough fight to get the deal through Congress next year, especially as presidential candidates like Republican frontrunner Donald Trump have argued against the TPP.
Only a handful of Democrats support Mr. Obama’s trade policy, and Republican support is unpredictable in the 2016 election year, depending on the stance of presidential candidates and new leadership in the House. As it is, the deal can’t go to a vote before Congress until early next year.
The odds of passage in Congress will hinge in large part on the final language in a number of provisions, ranging from the strengthening of rights for labor unions to whether U.S. cigarette companies will face special limitations within TPP countries.
“I will carefully scrutinize it to see whether my concerns about rushing into a deal before meeting all U.S. objectives are justified,” Sen. Orrin Hatch (R., Utah), chairman of the Senate Finance Committee, said in a statement Sunday before the deal was completed.
Critics around the world have also lambasted the deal for being negotiated in secret and being biased towards corporations, criticisms that are likely to be amplified when the national legislatures seek to ratify the TPP in the months to come.
* * *
Finally, as we detailed previously, the most troubling aspect of the TPP, asserts Ellen Brown, is the Investor-State Dispute Settlement (ISDS) provision, which “first appeared in a bilateral trade agreement in 1959.” Brown continues:
According to The Economist, ISDS gives foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever the government passes a law … that [negatively impacts] corporate profits — such things as discouraging smoking, protecting the environment or preventing nuclear catastrophe.
Imagine a scenario in which the U.S., coming to its senses about climate change, imposes a revenue-neutral carbon fee on fossil energy. According to provisions of the TPP, a fossil-fuel company in a signatory nation could then sue the U.S. for lost profits, real or imagined.
The threat is not idle. In 2012, the U.S.’s Occidental Petroleum received an ISDS settlement of $2.3 billion from the government of Ecuador because of that country’s apparently legal termination of an oil-concession contract. Currently, the Swedish nuclear-power utility Vattenfall is suing the German government for $4.7 billion in compensation, following Germany’s phase-out of nuclear plants in the wake of Japan’s Fukushima disaster.
The ISDS provisions of the TPP are insidious: the means by which signatory nations voluntarily surrender national sovereignty to the authority of corporate tribunals, without appeal, and apparently without exit provisions. No wonder the negotiations are secret.
Packaged as a gift to the American people that will renew industry and make us more competitive, the Trans-Pacific Partnership is a Trojan horse. It’s a coup by multinational corporations who want global subservience to their agenda. Buyer beware. Citizens beware.
Two weeks after Beijing shifted to a new currency regime in an effort to bring about a managed yuan devaluation, we explained why it really all comes down to the death of the petrodollar. When China began to burn through its FX reserves in a frantic attempt to put the deval genie back in the bottle, the world suddenly awoke to what it means when emerging markets begin burning through their rainy day funds.
Of course the reserve burn had been unfolding for quite sometime. That is, China’s epic UST liquidation was simply the most dramatic example of a dynamic that was already at play. As Deutsche Bank noted, the “Great Accumulation” ended months ago, as the world’s emerging economies began to dip into their USD war chests to defend against commodity currency carnage and the attendant capital outflows.
Nowhere is this more apparent than in Saudi Arabia, where Riyadh has been forced to tap the SAMA piggy bank amid the largely self inflicted pain from slumping crude, the war in Yemen, and the necessity of maintaining social order by preserving the lifestyle of everyday Saudis. Now, as the fiscal deficit balloons to 20% of GDP and falling crude prices put the kingdom on the path to a current account nightmare, reserves have fallen to their lowest levels in 32 months. Here’s Bloomberg:
Saudi Arabia’s net foreign assets fell to the lowest level in more than two years in August and demand for loans among private businesses slowed, as the kingdom grappled with oil prices below $50 a barrel.
Falling for a seventh month in a row, net foreign assets held by the central bank dropped to $654.5 billion, the lowest since February 2013. That compares with $661 billion in July, the Saudi Arabian Monetary Agency said in its monthly report. Credit to private businesses grew 8.4 percent, the slowest rate since 2011.
The biggest Arab economy is showing signs of strain after oil prices tumbled about 50 percent over the past 12 months, pushing authorities to search for savings and sell bonds for the first time since 2007. The government, so far, has been short on specifics on how it will reduce spending, though planners are said to be considering measures long viewed as off-limits or unnecessary, including phasing out fuel subsidies and investing in renewable energy.
The uncertainty may slow demand for loans for the rest of the year, Dima Jardaneh, Dubai-based senior economist at investment bank EFG-Hermes, said by phone. “Until there is more clarity on issues like government spending cuts, there will be a lot of wait-and-see attitude from the private sector.”
Importantly, any meaningful intervention on the part of Riyadh in Syria will only serve to increase the SAMA strain.
For those interested in getting a read on where things are headed both in terms of global monetary policy and geopolitics, watch the Saudi FX reserve figure closely as it not only serves as a guide to how long the kingdom can hold out in the literal war against the Houthis in Yemen and the figurative war against the US shale complex, but also proxies (along with Chinese reserves of course) for the extent to which the quantitative tightening thesis is playing out in EM.
It was just last Tuesday, when the market was poised for continued deterioration, that the long-awaited savior for the bulls emerged when Gartman turned mega-bearish again, warnings that a "Bear Market Will Take S&P To 1420-1550." Specifically, everyone favorite comic flip-flopper said "there are still many who deny that this is a bear market, but it is that and we fear that it has a good distance to the downside yet to travel. Merely to get to “The Box” shall take the S&P to 1420-1550! Rallies are to be sold; weakness is not to be bought."
This announcement proceeded to unleash one of the biggest market rallies in recent months,
It appears that all that is now over, and overnight, the bear market has been called off when Gartman flopped yet again, this time with his latest "bold" call, and has, once again, turned "bullish of stocks" calling that end of the "bearish run in global stocks." To wit:
SHARE PRICES TURNED VIOLENTLY AND SHARPLY HIGHER FRIDAY here in the US, in Canada and in Europe, and they have continued to strengthen in Asian share dealing. Further as believers in and followers of “Reversal” days on the charts we are this morning making the bold… indeed, for us, the very bold … statement that the bearish run in global stocks is over; that the bearish run to the downside in US shares is over and that we are henceforth to err bullishly of shares, diametrically opposed to the position we have had for the past several months wherein we erred steadily… almost relentlessly… bearishly. We made the change from manifestly bearish of commodity prices to one that was incipiently bullish of them several weeks ago, and we made the shift from having been even more manifestly bearish of crude oil for the past many months to one incipiently bullish instead, and we are now finishing the trifecta as we turn bullish of stocks.
You know what to do.
If you don't think these definitions apply, please check back in a year.
The mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households. A recent Atlantic article fleshed out the zeitgeist with survey data that suggests the Great Middle Class/Nouveau Proletariat is also waking up to a future of downward mobility: The Downsizing of the American Dream: People used to believe they would someday move on up in the world. Now they’re more concerned with just holding on to what they have.
I dug into the financial and social realities of what it takes to be middle class in today's economy: Are You Really Middle Class?
The reality is that the middle class has been reduced to the sliver just below the top 5%--if we use the standards of the prosperous 1960s as baseline.
The downward mobility isn't just financial--it's a decline in political power, control of one's work and income-producing assets. This article reminds us of what the middle class once represented: What Middle Class? How bourgeois America is getting recast as a proletariat.
The costs of trying to maintain a toehold in the upper-middle class are illuminated in these recent articles on health and healthcare--both part of the downward mobility:
This reappraisal of the American Dream is also triggering a reappraisal of the middle class in the decades of widespread prosperity: The Myth of the Middle Class: Have Most Americans Always Been Poor?
And here's the financial reality for the bottom 90%: declining real income:
Downward mobility excels in creating and distributing what I term social defeat: In my lexicon, social defeat is a spectrum of anxiety, insecurity, chronic stress, powerlessness, and fear of declining social status.
One aspect of social defeat is the emptiness we experience when prosperity does not deliver the promised sense of fulfillment. Here is one example: A recent sociological study compared wealthy Hong Kong residents’ sense of contentment with those of the immigrant maids who serve the moneyed Elites. The study found that the maids were much happier than their wealthy masters, who were not infrequently suicidal and depressed.
The maids, on the other hand, had a trustworthy group – other maids they met with on their one day off – and the coherent purpose provided by their support of their families back home.
Downward mobility and social defeat lead to social depression. Here are the conditions that characterize social depression:
1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.
2. Part-time and unemployed people are marginalized, not just financially but socially.
3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.
4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.
5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.
6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.
7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.
8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.
9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.
10. A loss of hope in the young generations as a result of the above conditions.
If you don't think these apply, please check back in a year. We'll have a firmer grasp of social depression in October 2016.
Former US army colonel and Chief of Staff for Colin Powell, Lawrence Wilkerson unleashed a most prescient speech on the demise of the United States Empire.
As Naked Capitalism's Yves Smith notes, Wilkerson describes the path of empires in decline and shows how the US is following the classic trajectory. He contends that the US needs to make a transition to being one of many powers and focus more on strategies of international cooperation.
The video is full of rich historical detail and terrific, if sobering, nuggets, such as:
"History tells us we’re probably finished.
The rest of of the world is awakening to the fact that the United States is 1) strategically inept and 2) not the power it used to be. And that the trend is to increase that."
Wilkerson includes in his talk not just the way that the US projects power abroad, but internal symptoms of decline, such as concentration of wealth and power, corruption and the disproportionate role of financial interests.
Wilkerson also says the odds of rapid collapse of the US as an empire is much greater is generally recognized. He also includes the issues of climate change and resource constraints, and points out how perverse it is that the Department of Defense is the agency that is taking climate change most seriously. He says that the worst cases scenario projected by scientists is that the world will have enough arable land to support 400 million people.
Further key excerpts include:
“Empires at the end concentrate on military force as the be all and end all of power… at the end they use more mercenary based forces than citizen based forces”
“Empires at the end…go ethically and morally bankrupt… they end up with bankers and financiers running the empire, sound familiar?”
“So they [empires] will go out for example, when an attack occurs on them by barbarians that kills 3000 of their citizens, mostly because of their negligence, they will go out and kill 300,000 people and spend 3 trillion dollars in order to counter that threat to the status quo. They will then proceed throughout the world to exacerbate that threat by their own actions, sound familiar?…This is what they [empires] do particularly when they are getting ready to collapse”
“This is what empires in decline do, they can’t even in govern themselves”
Quoting a Chinese man who was a democrat, then a communist (under Mao) then, when he became disenchanted, a poet and writer…”You can sit around a table and talk about politics, about social issues, about anything and you can have a reasonable discussion with a reasonable person. But start talking about the mal-distribution of wealth and you better get your gun” ….”that’s where we are, in Europe and the United States”.
When the Fed effectively telegraphed its new reaction function last month, the FOMC served notice to the world that it was not only acutely aware of what’s going on in emerging markets, but also extremely worried about the possibility that hiking rates could end up triggering something far worse than the “tantrum” that unfolded across EM in 2013.
The dire scenario facing the world’s emerging economies has by now been well documented.
In short, slumping commodity prices, depressed raw materials demand from the Chinese growth engine, a slowdown in global trade, and a loss of competitiveness thanks to the yuan devaluation have conspired with a number of idiosyncratic, country-specific political risk factors to wreak havoc on EM FX and put an immense amount of pressure of the accumulated stash of USD-denominated reserves.
For the Fed, this presents a serious problem. Hiking rates has the potential to accelerate EM capital outflows and yet not hiking rates does too. That is, a soaring dollar will obviously ratchet up the pressure on EM FX but then again, because the uncertainty the FOMC fosters by continuing to delay liftoff contributes to a gradual capital outflow, not hiking rates endangers EM as well.
As we’ve been keen to point out, DM central banks aren’t operating in a vacuum. That is, if a policy “mistake” serves to tip EM over the edge, the crisis will feed back into the world’s advanced economies forcing DM central banks to immediately recant any and all hawkishness. For more evidence of EM fragility and the link between an emerging market meltdown and DM stability, we go to FT:
Emerging economies risk “leading the world economy into a slump”, with lower growth and a rout in financial markets, according to the latest Brookings Institution-Financial Times tracking index.
Released ahead of the annual meetings of the International Monetary Fund and World Bank in Lima, Peru, the index paints a much more pessimistic outlook than the fund is likely to predict later this week.
According to Eswar Prasad of Brookings, weak economic data across most poorer economies has created “a dangerous combination of divergent growth patterns, deficient demand, and deflationary risks”.
The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.
The extreme weakness in the emerging market component of the Tiger growth index shows that data releases have been significantly weaker than their historic averages.
Divergence is almost as important as a new trend highlighted in the index, however, with India emerging as a bright spot and commodity importers such as Brazil and Russia mired in recession.
Because emerging economies are now much more important in the global economy and growth rates are still higher than their developed counterparts, global growth is still hovering around 3 per cent, close to its long-term average.
The concern, according to Mr Prasad is that the slump in emerging economies’ confidence will infect advanced economist in the months ahead.
Of course the trouble in EM portends a drain in global FX reserves. This is what Deutsche Bank has dubbed the end of the "Great Accumulation" and, all else equal, it's a drain on global liquidity as exported capital from commodity producers turns negative. Here's BNP on what the picture looked like in Q2:
The Q2 2015 COFER (Currency Composition of Foreign Exchange Reserves) report from the IMF contained some key changes. For the first time, the IMF reported the list of 92 countries that are providing reserve allocation data. Importantly China started reporting its FX allocations for the first time, although still on a partial basis, with the goal of increasing the reported portfolio to full coverage of FX reserves over the next two to three years. A full inclusion of China would push the share of allocated to total reserves over 80%, making COFER reserve allocation data much more representative and relevant for analysing EM FX reserve management trends.
On a valuation adjusted basis, we estimate that total foreign exchange reserve holdings declined by USD 107bn in Q2. The IMF no longer reports the split between advanced and emerging economies but it’s very likely that much of this decrease was due to EM FX intervention.
In other words, the dynamics that have propped up the global financial system for decades are now unwinding and at a much more fundamental level than what occurred in 2008. Emerging markets are now liquidating their USD cushions and a combination of low commodity prices and hightened political risks threatens to set the world's most important emerging markets back decades.
Importantly, it's no longer a matter of whether DM central bankers can correct the problem by adopting policies that will serve to boost global demand, but rather if the world's most vaunted central planners can keep things from completely unraveling and on that note we close with the following from the above cited Eswar Prasad:
"The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent, especially when it is acting in isolation and when a large number of countries are resorting to the same limited playbook."
For those who may be unfamiliar - which would mean roughly 90% of the US population who believe the Federal Reserve is a national park - Ben Bernanke was Fed chairman from 2006 until 2014. He is better known as the Fed chairman who never launched a tightening cycle during his tenure. He is best known for not only bailing out Wall Street from the folly of his and his predecessor's bubble-creating monetary policy and boosting the Fed's balance sheet to $4.5 trillion, but also for the following selection of quotes:
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.
7/1/05 – Interview on CNBC
INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?
BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.
7/1/05 – Interview on CNBC
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?
BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.
The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.
The Federal Reserve is not currently forecasting a recession.
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.
3/16/09 – Interview on CBS’s 60 Minutes
It’s absolutely unfair that taxpayer dollars are going to prop up a company (AIG) that made these terrible bets, that was operating out of the sight of regulators.
The forecast we have is for the economy, in terms of growth, to begin to turn up later this year, but initially not to grow at the rate of potential, which means that unemployment and resource slack will continue to rise into 2010. We think that the unemployment rate will probably peak early in 2010 and then come down relatively slowly after that. Um, currently, we don’t think it’s going to get to 10 percent, we’re somewhere in the 9’s, but clearly, that’s way too high.
A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.
... Or summarized:
And then earlier this year, when we learned that Bernanke's memoir titled "The Courage To Act" is coming out, he added another quote:
“When the economic well-being of their nation demanded a strong and creative response, my colleagues at the Federal Reserve, policymakers and staff alike, mustered the moral courage to do what was necessary, often in the face of bitter criticism and condemnation. I am grateful to all of them.”
Why do we bring this up?
First, tomorrow Ben Bernanke will be on CNBC's Squawk Box to promote his book, the same CNBC which from a credible financial channel has metamorphosed into an outlet whose only purpose is to cheerlead the stock market and get as many people invested in the next and final Ponzi as possible. He will also discuss the disastrous state of the post-post-bubble economy and the latest plunge in payrolls.
Second, today as part of the same book promotion tour (supposedly because nobody wants to pay Bernanke $250,000 to listen to an hour of bullshit now that the Fed no longer has credibility) he had this exchange with the USA Today's Susan Page:
Q. Should somebody have gone to jail.
Bernanke: Yeah, yeah I think so. I have objected for a long time - the Department of Justice is responsible for that.
A quick tangent here: in March 2013 former US Attorney General Eric Holder told Senator Chuck Grassley that the size of some institutions is so big "that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large."
Nuf said. Continuing with Bernanke's answer:
Bernanke: A lot of [the DOJ's] efforts have been to indict or threaten to indict financial firms. Now financial firm, of course, is a legal fiction. It's not a person, you can't put a financial firm in jail. It would have been my preference to have more investigation of individual actions as obviously everything that went wrong, or was illegal, was done by some individual not by an abstract firm.
So something like the Federal reserve being an "abstract firm" versus people like Ben Bernanke who were actual individuals?
The whole thing is 4:20 into the exchange.
We thoroughly agree with Bernanke that more people who were responsible for the biggest economic collapse in history should have gone to jail, starting, of course, with Ben Bernanke himself.
However, as even Bernanke himself now points out, with the entire judicial and legislative system now a supreme farce, explicitly in the pocket of corporations and Wall Street banks, we aren't holding our breath.
Then again, after the next, and final financial crash - one that wipes out the paper wealth of America - and the one that finally destroys the central-bank/central-planning model, putting an end to Keynesian economics as well as fiat currency, ironically the safest place for people like Bernanke as the revolutionary mob approaches would be, well, jail.
We doubt the irony of this will be appreciated by Ben.
This week provided further evidence that the bursting global Bubble has progressed to a critical juncture, afflicting Core markets and economies. Ominously, few seem aware of the profound ramifications – or even the unfolding hostile market backdrop. Even many of the most sophisticated market operators have been caught off guard. There is, as well, scant indication that Federal Reserve officials appreciate what’s unfolding.
I was again this week reminded of an overarching theme from Adam Fergusson’s classic, “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar German”: throughout that period’s catastrophic monetary inflation, German central bank officials believed they were responding to outside forces. Somehow they remained oblivious that the trap of disorderly money printing had become the core problem.
Dr. Williams’ comment, “It's okay to have the party. It’s okay to get the party going…”, would be laughable if it were not so tragic. At this point, let’s hope the true story of this period gets told. I’m trying: monetary policies for almost 30 years now have been disastrous, a harsh reality masked by epic global market Bubbles.
It’s incredible that confidence in central banking has proved so resilient, though this dynamic no doubt revolves around a single – and circular - dynamic: “whatever it takes” central banking has thus far succeeded in sustaining securities market inflation. And it’s astounding that central bankers at this point are professing “It’s ok to get the party going.” The central bankers’ beloved Party is going to get crashed.
My mind this week also drifted back to a CBB written weeks after the tragic 9/11/2001 attacks. Shock had hit the markets, confidence and the real economy. Officials were determined to stimulate. I recall writing something to this effect: “If stimulus is deemed necessary, please rely on some deficit spending rather than monkeying with the financial markets. Market intervention/manipulation is such a slippery slope.” Back then no one had any idea how far experimental monetary policy could slide into the dark caverns of the deep unknown. Economic, financial, terror, geopolitical – or whatever unanticipated risk that might arise – all-powerful central bankers had an answer that would make things right.
I read with keen interest a Q&A with Jim Grant (Grant’s Interest Rate Observer) reproduced at Zero Hedge. Like others, I’m a big fan of Jim’s writing and analysis.
Question: “So what’s next for the global financial markets?”
Grant Answers: “The mispricing of biotech stocks or corn and soybeans is of no great consequence to financial markets at large. Interest rates are another matter. They are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.”
It’s apropos to expand on Grant’s comments. Overnight lending rates and Treasury yields are the pillar for a broad range of rates and market yields – at home as well as abroad. Had the Fed, as in the past, restricted its operations – and market distortions – to Treasury bills, I would be much less apprehensive. If the Fed limited its rate-setting doctrine to responding to real economy variables the world would today be a less unstable place.
Instead, the Fed over recent decades nurtured securities market inflation and even turned to targeting higher market prices as its prevailing reflationary policy instrument. Importantly, the Fed and central bankers later resorted to the full-fledged manipulation of broad market risk perceptions. This was a game-changer. Essentially no risk was outside the domain of central bankers’ reflationary measures. As such, audacious markets could Party on, gratified that central bankers had relegated hangovers to a thing of the past.
Key aspects of central bank experimentation over time bolstered global risk assets and, in the end, fomented a historic global financial Bubble. First, by slashing rates all the way to zero, the Federal Reserve and others imposed punitive negative real returns on savers. Part and parcel to the Bernanke Doctrine, rate policies incited unprecedented global flows to equities, corporate bonds and EM bonds and equities. Meanwhile, dollar devaluation spurred historic (“Global Reflation Trade”) speculative excess and leveraging, especially destabilizing for susceptible commodities and EM complexes. Literally Trillions flooded into EM markets and economies, spurring Trillions more of further destabilizing domestic “money” and Credit expansion. Fiasco.
Over-liquefied global markets were conspicuously unstable. Repetitious Fed (and global central bank) responses to fledgling “Risk Off” Bubble dynamics along the way solidified the perception that “whatever it takes” central banks were prepared to fully backstop global securities markets. The summer of 2012 demonstrated to what extent concerted global policy measures would go in response to nascent financial crisis in Europe. Faith in the central bank market backstop became complete in 2013; a bout of market “Risk Off” had the Fed delaying “lift-off” and Bernanke reassuring markets that the Fed was prepared to “push back against a tightening of financial conditions.” It had essentially regressed to the point where a high-risk Bubble backdrop had central bankers telegraphing their willingness to invoke the “nuclear option” (open-ended QE/“money” printing) to blunt incipient market risk aversion.
"Moneyness of Risk Assets" has been fundamental to my “global government finance Bubble” thesis. Policy measures transformed risk perceptions throughout the markets, with global financial assets coming to be perceived as highly liquid and safe stores of wealth (money-like). It may have appeared subtle but it was nonetheless revolutionary. Post-mortgage finance Bubble reflationary measures fomented unprecedented global securities markets distortions. Central bank purchases launched Treasury, agency and global sovereign debt prices to the stratosphere. “Money” flooded into global equities funds, pushing stock prices to record highs. The EFT industry exploded to $3.0 TN, matching the bloated hedge fund industry. The global yield chase coupled with over-liquefied markets ensured record corporate debt issuance. The easiest borrowing conditions imaginable stoked stock buybacks, M&A and other financial engineering
The global financial Bubble evolved to be systemic in nature. So long as global financial conditions remained extraordinarily loose and market prices continued inflating, an expanding global economy appeared to underpin booming securities markets.
The bullish consensus has been convinced that central bankers saved the world from crisis (the “100-year flood”) and securely placed the world recovery on a solid trajectory. I’m sure they have instead fomented catastrophe. Empirical research quantifies central bank impact on market yields in the basis points. Such research would surely also claim QE has had minimal impact on equities prices. Equities are not seen as overvalued. No one it seems sees comparable excesses to 1999 or 2007.
I will make an attempt to concisely state my case. Central banks have convinced market participants that they can ensure liquid (and continuous) markets. Markets perceive that the Fed and global central banks have the willingness and capacity to backstop securities markets. While impossible to quantify, these perceptions have become fully embodied in securities markets around the globe. Importantly, central bank assurances and market perceptions of boundless central bank liquidity are today fundamental to booming global derivatives markets.
Following the 2008 crisis, I expected U.S. and global equities to trade at lower than typical multiples to earnings and revenues. After all, risk premiums would be expected to remain elevated based on recent history. I believed mortgage securities would trade at wider spreads to Treasuries. I thought that, after the market collapse and economic crisis, investors would view corporate debt cautiously. Moreover, I expected counter-party concerns to weigh on derivatives markets for years to come.
I did not anticipate that do “whatever it takes” central banking would overpower the world. Zero rates for seven years and a $4.5 TN Fed balance sheet weren’t in my thinking - because they certainly weren’t in the Fed’s (recall the 2011 “exit strategy”). A $30 TN Chinese banking system would have seemed way far-fetched. Besides, there were indications that Washington had at least learned the crucial lesson of “too big to fail” and moral hazard.
In reality, they learned all the wrong lessons. Traditional central banking was turned on its head. Reckless “money” printing was let loose. Foolhardy market manipulation became the norm. The role played by leveraged speculation and derivatives trading in the 2008 market meltdown was disregarded. And somehow “too big to fail” was transposed from goliath financial institutions to gargantuan global securities markets. And it’s now coming home to roost.
There’s a perilous misperception that central bankers have mitigated market risk. They have instead grossly inflated myriad risks – market, financial, economic, social and geopolitical. As for market risk, Trillions were enticed to global risk markets under false premises and pretense – certainly including specious central bank assurances. And there is the multi-hundreds of Trillions global derivative marketplace that operates under the presumption of liquid and continuous markets. Importantly, central bank manipulation – of market prices and perceptions – fomented the type of excesses that virtually ensures a crisis of confidence.
Individuals can hedge market risk. The broader marketplace, however, cannot effectively hedge market risk. There is simply no one with the wherewithal to shoulder the market attempting to offload risk. Yet central bankers have convinced the marketplace that do “whatever it takes” includes a promise of market liquidity. And this perception of boundless liquidity has ensured a booming derivatives “insurance” marketplace.
There’s a crisis scenario that’s not far-fetched at this point. Fear that global policymakers are losing control spurs risk aversion. The sophisticated leveraged players panic as markets turn illiquid. The Trillions-dollar trend-following and performance-chasing Crowd sees things turning south. Worse still, illiquidity hits confidence in the ability of derivative markets to operate orderly. In short order securities liquidations and derivative-related selling completely overwhelm the market.
It comes back to a momentous flaw in contemporary finance: Markets do not have the capacity to hedge market risk. Indeed, the perception that risks can easily be offloaded through derivative “insurance” has been instrumental in promoting risk-taking. Never have markets carried so much risk. And never have markets been as vulnerable to an abrupt change in perceptions with regard to central banker competence, effectiveness and capabilities.
A Friday morning Bloomberg (Tracy Alloway) article was appropriately headlined “It’s been a Terrible Week for the Credit Market,” included a series of notable paragraph subtitles: “It started in high yield…”, “Glencore made it worse…”; “Then the quarter ended on a down note…”; “And attention turned to investment grade…”; “The pain intensified…”; “What happens next.” A Friday afternoon Bloomberg (Sridhar Natarajan and Michelle Davis) headline read “Credit Investors Bolt Party as Economy Fears Trump Low Rates.” According to Bloomberg, the average junk bond yield this week surged 40 bps to 8.30%, with Q3 junk bond losses the second-worst quarter going back to 2009. This week also saw investment-grade CDS jump to a more than two-year high.
It’s worth noting that the markets were (again) at the brink of disorderly in early-Friday trading. “Risk Off” saw stocks under significant pressure. The dollar/yen traded to 118.68, near August panic lows, before rallying back above 120 late in the day. Treasuries were in melt-up mode. And despite bouncing 4.1% off of Friday morning trading lows, bank stocks ended the week down 1.5%. Underperforming ominously, the 3.8% rally from Friday’s lows still left the Securities Broker/Dealers down 3.1% for the week. Earlier in the week, Glencore worries spurred the first serious “counter-party” concerns in awhile.
October 2 – Reuters (Christopher Condon Craig Torres): “Federal Reserve Vice Chairman Stanley Fischer said he doesn’t see immediate risks of financial bubbles in the U.S., while raising concerns that the central bank’s policy tool kit is limited and untested. ‘Banks are well capitalized and have sizable liquidity buffers, the housing market is not overheated and borrowing by households and businesses has only begun to pick up after years of decline or very slow growth,’ Fischer said… Still, he warned that ‘potential shifts of activity away from more regulated to less regulated institutions could lead to new risks.’ Created a century ago in response to recurring banking crises, the Fed has taken a renewed interest in identifying potential systemic financial threats since the global meltdown of 2008-09…”
Today’s paramount systemic financial threat is not new. Risk is now high for a disorderly – Party Crashing - “run” on financial markets. At the minimum, global markets will function poorly as faith in central banking begins to wane.
By Chris at www.CapitalistExploits.at
Following right along from "Letters from a Hedge Fund Manager - Part I", today we have "part deux" as a follow up for you...
Date: 10 December 2014
Subject: There Will Be Blood - Part II
Let me be clear: I am no expert on shale wells. I'm not even an "almost" expert in the shale sector. If you called me an idiot when it comes to shale drilling, I wouldn't argue with you. With that caveat out of the way, I'm going to generalize about the shale sector (anyway).
In oil and gas, most of the money is spent up front in acquiring the drilling rights and putting the well into production. You then have revenue and hopefully some profit in the period afterwards, as the well produces for you. Unfortunately, shale wells are very different from conventional wells. Shale wells see the vast majority of their total production in the first two years after they are drilled. This means that you have to keep drilling more wells just to stay at a constant level of production. In many ways this is akin to a hamster wheel - except you can never get off - or your production collapses. If you want to grow production, you need to drill even more wells - all of which see significant declines after two years.
Let me show this by using some data from WPX Energy (WPX: USA):
Basically, in order to keep production roughly constant, they borrowed a bunch of money, spent a bunch of money and lost globs of money in the process - yet production remained constant. Amazingly, this is a $2.5 billion dollar company. Don't feel bad for WPX. Their numbers aren't all that different from plenty of other shale companies.
In essence, since shale wells have a short lifespan of intensive production and they are highly leveraged to the prevailing energy price over this peak production period - particularly since the land acquisition and drilling expenses are already sunk costs. What if you drill a well based on $100 oil and it's at $60 today? Hope you hedged your production. What about all the money you borrowed to buy future drilling sites that are no longer economic to produce?
Here's the thing - I have this hunch that, excluding a handful of the best "plays", much of the shale being drilled was never all that profitable, even when oil was at $100. Given the high initial costs of acquiring land and drilling a well, much of the profitability accounting for a well depends on the shape of the decline curve. Given how young the shale industry is and how imprecise the data can be, I suspect that many of these companies have been aggressive in their assumptions - especially if they need the capital markets to fund their dreams.
If your well production declines by 70% in the first 24 months, adding 10 weeks to that duration doesn’t sound like much, but it lowers the depletion, depreciation and amortization cost per barrel by almost 10%. More importantly, it dramatically increases the IRR and NPV of each well - which are important benchmarks for lenders. Unfortunately, as an equity investor, good luck trying to determine the actual economics of each well, when you have: misleading data, changing production across the whole company and all sorts of one-time costs lumped in with operating expenses.
Instead, a whole bunch of investors seem to have taken comfort in the high single digit yields offered on short dated bonds issued by these shale companies - along with an ingrained belief that oil prices would remain constant or rise. Now with oil prices declining, all sorts of lenders are having a "whoops moment." In fact, I wonder if the financial system on the verge of having another "WHOOPS! moment"?
In Part III, we will look at just how much debt is tied to this sector - for starters, it's not just the high yield debt that is suddenly flashing danger.
When subprime first got wobbly in 2007, there was a small panic followed by the "all clear" from Wall Street analysts. You literally had a year to prepare for the fallout, before prices followed. Despite a bunch of media coverage on this topic, I don't think that most people appreciate the true magnitude of what may happen if oil stays at these prices.
Remember, all of this is very long-term bullish for energy prices. This shakeout will set the stage for the next boom, but first, there will be all sorts of pain experienced in sectors that do not even appear linked to the energy sector. I suspect that this pain, will be the major theme for 2015.
The collapse in oil prices, leading to massively uneconomic projects being mothballed and those that are economic being "value adjusted", actually opens up some very interesting opportunities once this all unravels itself like the ball of yarn that it is.
PS: If you don't want to miss the next "There Will Be Blood" writeup then leave your email address here to receive the next letter straight in your inbox.
"The bubble is bursting. And if oil stays where it is, the worst is yet to come." - Spencer Cutter, Bloomberg Intelligence
- Shanghai Gold Exchange withdrawals were 65.681 tonnes of gold during the week ended September 25, 2015.
- Total gold withdrawals on the Shanghai Gold Exchange year to date are 1,958 tonnes.
- Withdrawals on the Shanghai Gold Exchange are running 37.2% higher than last year and 17.88% higher than 2013’s record withdrawals.
- Hong Kong gold kilobar withdrawals pass 565 tonnes in 2015.
- Chinese President Xi Jinping admits “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals”
Shanghai Gold Exchange
The Shanghai Gold Exchange (SGE) delivered 65.681 tonnes of gold during the week ended September 25,2015. During prior trading week ended September 18 2015, the SGE withdrawals were 63.22 tonnes of gold.
The two week total of withdrawals is 128.90 tonnes of gold and the year to date total is 1,958 tonnes, for an annualized run rate of approximately 2,650 tonnes.
Shanghai Gold Exchange vs. Global Mining Production
Total global gold mining production in 2014 was 2,608* tonnes. The volume of gold withdrawn on the Shanghai Gold Exchange this year is pacing to be about 2,650 tonnes or roughly equivalent to the total global mining production of last year. This leaves little or no mining supply to satisfy global gold demand in India (expected 2015 gold demand of about 1,000 tonnes) and the rest of the world.
Shanghai Gold Exchange and HongKong Kilo Bar Withdrawls vs. Global Mining Production
Through September 25 2015, Shanghai Gold Exchange withdrawals are 1958 tonnes and through September 30, 2015 Hong Kong Kilo bar withdrawals (see below) are 565 tons.
Combined year to date the withdrawals on both exchanges are 2,523 tonnes through the first nine months of 2015. Modest projections could take the combined gold withdrawals from Hong Kong Kilo bars and the Shanghai Gold Exchange to 2,900 tonnes in 2015.
Shanghai Gold Exchange Withdrawals vs. Comex Deliveries
In “Silver and Gold Short and Long Positions on Comex” we noted:
Comex is a place where banks trade gold and silver they don’t have to banks who buy gold and silver they don’t want.
These following two charts illustrate the point:
Two Week Withdrawals on the Shanghai Gold Exchange in September 2015 vs. Comex 2014
Withdrawals on the Shanghai Gold Exchange were 137 tonnes during the two week period ended September 18, 2015, compared to just 85 tonnes delivered in all of 2014 on Comex.
Shangahai Gold Exchange Withdrawals vs Comex Deliveries of Gold 2008-2015
The chart illustrates that paper market vs. physical market natures of the Comex and Shanghai Gold Exchanges.
China is becoming the center of the Asian gold world. A $16 billion China Gold Fund was announced in May and the Shanghai Gold Exchange continues to establish itself as viable competitor to the gold trading centers in London and Chicago. China’s gold imports, trading and mining production are one of the cornerstones of China’s de-dollarization/Yuan strengthening initiatives that focuses no so much on selling U.S. Treasuries but creating alternative financial systems like the Asian Infrastrucure Investment Bank.
China is widely believed to be making a play for inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) Program later this year. If China fails to gain inclusion in the SDR, its recent initiatives to strengthen its currency and gain greater acceptance of the Yuan may provide a strong alternative to the IMF regime.
China Updates its Gold Holdings
China recently announced their first update to their official gold holdings since 2009. The People’s Bank of China announced that their gold holdings had climbed from 1054 tons to 1658 tons, making China the fifth largest gold holding nation in the world.
China chose to incude six years worth of gold accumulation (over 600 tons) all in the month of June.
Last month China reported that they added 19.3 tons (610,000 ounces) of gold to their reserves in July bringing their total to 1,677 tons (53.93 million ounces). Earlier this month the PBOC updated their August gold reserves, indicating that they had added 16 tonnes of gold to their reserves, bringing their total to over 1693 tonnes.
Chinese gold reserves grew by 16 tonnes in August.
China’s recent update to its gold holdings put it in fifth place among gold holding nations.
Many suspect that China has far more gold than they have reported. Click here for an explanation on where China’s gold might be.
Chinese President Xi Jinping recently confirmed the practice of moving the People’s Bank of China’s reserve assets to other entities in China: “some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals” This might explain where some of China’s gold hoard, that many suspect they posses but have not reported as reserves, may be located.
* * *How does all that gold get to China?
The Bank of China also recently joined the auction process at the London Bullion Market Association where the price of gold is determined.
In addition, the Chicago Mercantile Exchange futures contract for Hong Kong Kilobars has experienced withdrawls of an average of more than five tons of gold a day since it began in mid March earlier this year. As of September 30, 2015, over 535 tonnes of gold have been withdrawn pursuant to this program since March 2015 for an annualized run rate over 1,200 tonnes of gold a year.
COMEX Hong Kong Gold Kilobar Withdrawals Through September 30, 2015
Comex Hong Kong gold kilo bar withdrawals have passed 565 tonnes since March 2015 and passed 18 tonnes on three trading days in September.
The Bank of China also recently joined the auction process at the London Bullion Market Association where the price of gold is determined.
China is the world’s largest gold producer:
China is the world’s largest gold producer with mining production over 2,000 tons the past five years. China has mined 228.7 tons of gold during the first six month of 2015.
Volume of Gold Withdrawals on the Shanghai Gold Exchange
Shanghai Gold Exchange Withdrawals for the week ended September 25, 2015, were over 65 tonnes.
The volume of withdrawals of gold on the Shanghai Gold Exchange as of September 25, 2015, is running 37.2% higher than 2014 during the same period and 17.9% higher than 2013’s record pace.
Withdrawals of gold as of September 25, 2015, on the Shanghai Gold Exchange are running 37% higher than last year and 18% higher than the record pace set in 2013.
In addition to the vibrant Shanghai Gold Exchange and increasing world leading gold mining production, China is also the world’s largest gold importer. Here is a chart showing the volumes of gold traded on the Shanghai Gold Exchange vs. gold imported through Hong Kong as of July 2015.
China also imports unreported amounts of gold through Shanghai.* * *
All charts, other than those labeled “Smaulgld”, courtesy of Nick Laird.
*Gold Mining Production Source:2014 Gold Year Book published by CPM Group. There are various estimates of global gold mining production ranging from 2,600 tons to 3100 metric tons.
Shanghai Gold Exchange Data source GoldMinerPulse