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U.S. Oil Glut: How High Can It Go?

By EconMatters


Oil Glut Build in PAD3 Gulf Coast

As expected, EIA today reported for week ending April 17, U.S. crude-oil inventories gained 5.3 million barrels to 489 million barrels, which is still the highest in at least 80 years, according to the EIA. Looking closer at each PAD region, almost all the inventory adds occurred in Gulf Coast PAD3; meanwhile, Cushing, OK added 738,000 barrels.  Although 738,000 does not seem that bad by itself, Cushion is now is sitting at 62.2 million barrels of oil in storage (vs. a year ago inventory at 26 million barrels) , a new record high since April of 2004


Source: EIA, week ending April 17, 2015


Read: API Data Show More Inventory Build In U.S. Crude, Gasoline And Distillate



Gulf Coast Oil and Gasoline 

The better news is that gasoline stockpiles fell 2.1 million barrels to 225.7 million barrels, the lowest level this year.  Again, Gulf Coast accounts for almost all the drawdown in gasoline.  Distillate stocks were essentially flat rising by 395,000 barrels to 129.3 million barrels.


Products Export Demand Not As Robust

Since U.S. does not ban petroleum products export, the money trade is to move oil away from Cushing, which is the pricing point for NYMEX WTI, to lift WTI price, and into the refineries on the Gulf Coast converting to products like gasoline and diesel to be exported fetching higher prices.


So it looks the new pipeline capacity around Cushing is doing its job moving oil glut from Cushing to Gulf Coast. EIA reported refining capacity utilization fell 1.1% to 91.2%, which is still quite high by historical standard. But judging from the flip flop between the crude and gasoline inventory numbers, the product export demand most likely has not been as robust as expected.    




Read: Slight Production Declines Hide Bigger Oil Storage Issues



Domestic Gasoline Demand Rising

One bright spot is the rising gasoline demand.  Although this is to be expected with the 'new normal' of ~ $50 oil, it nonetheless could suggest certain underlying strength of the U.S. economy.



Read: More Thoughts on the Current Oil Market


How High Can You Go?

Right now the question is how high can oil inventory go?  Oil market got a little bit encouragement when EIA reported a very slight production decline of 18,000 barrels a day.  But that decline came from Alaska, while production in the Lower 48, where shale oil is, stayed unchanged.






For now, EIA still estimates that total U.S. crude oil production will fall by 57,000 barrels per day (bbl/d) in May.  WTI closed at $56.33 while Brent was at $62.80 today.  I think these prices are enough to get the shale E&Ps excited.  Remember, many smaller E&Ps are starving for cash and need to produce just to cover interest expense and meeting payrolls.  So we might actually see a halt or even a slight production drop as EIA predicted, but it may become short-lived if oil prices stabilize or go above current levels.

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"Blew" Chips: 3M Latest To Miss, Guide Lower On "Strong Dollar, Mixed Global Economy"

If one steps back from the adjusted, non-GAAP EPS "beats" reported by companies this earnings season which benefit from what is set to be a record quarter of stock buybacks and an unprecedented drop in consensus expectations, Q1 earnings season for the "blue chips" so far has truly "blown", with revenue declines announced at IBM (12th in a row), McDonalds, Coke, and earlier today Procter & Gamble also reporting that its sales have fallen for fifth straight quarter. And then moments ago "diversified global tech" bellwether 3M reported that its sales declined 3.2% year-on-year to $7.6 billion. The company also missed its EPS, and adding insult to injury, "the company now expects earnings to be in the range of $7.80 to $8.10 per share versus $8.00 to $8.30 per share previously."

Why? Blame the soaring dollar which is taking away from US corporate profitability and giving to European, Japanese and any other geographic region that is actively crushing its currency. That, and the fact that there continues to be no global recovery (thanks Chinese hard landing).

From the company:

We are executing well against a more challenging economic backdrop in early 2015,” said Inge G. Thulin, 3M’s chairman, president and chief executive officer. “The stronger U.S. dollar negatively impacted sales and earnings in the first quarter, and global economic growth was mixed. Despite these near-term challenges, we grew organically in all business groups and all geographic areas, and expanded operating margins by nearly a full percentage point.”

Surprisingly, unlike Netflix, 3M doesn't realize that it can merely "add back" FX losses to non-GAAP EPS:

The company noted that foreign currency impacts reduced first-quarter pre-tax earnings by approximately $90 million or the equivalent of $0.10 per share. For 2015 in total, 3M now expects foreign currency impacts to reduce earnings by $0.35 to $0.40 per share versus a prior expectation of negative $0.20 per share.

All of this is happening even as the company "affirmed its expectation of 90 to 100 percent free cash flow conversion."  In other words, every dollar in cash flow will be promptly returned to shareholders.

The problem is that in Q1 3M generated $1.1 billion from operating activities and returned $1.5 billion in the form of dividends and buybacks. And even with that it was unable to beat.

Which makes one wonder: have we reached the tipping point where shareholder friendly action no longer leads to a quick and easy boost in company shares?

Frontrunning: April 23

  • Clinton charities will refile tax returns, audit for other errors (Reuters)
  • China Warns North Korean Nuclear Threat Is Rising (WSJ), or another country realizes war is the only "exit"
  • Shares, euro sag after euro zone PMIs disappoint (Reuters)
  • China Manufacturing Gauge Drops to Lowest Level in 12 Months (BBG)
  • Deutsche Bank Said to Pay $2.14 Billion in Libor Case (BBG), or roughly a €20,000 per banker "get out of jail" fee
  • Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges (WSJ)
  • Can This Oil Baron’s Company Withstand Another Quake? (BBG)
  • Bad for Q1 GDP: Raytheon sales fall amid weak U.S. defense spending (Reuters)
  • Aramark CEO Tops U.S. Executives With $800,000 Plane Tab in 2014 (BBG)
  • Half of U.S. Fracking Companies Will Be Dead or Sold This Year (BBG)
  • Democrats blast U.S. House Benghazi probe as out to get Clinton (Reuters)
  • Pentagon to Open Silicon Valley Office, Provide Venture Capital (WSJ)


Overnight Media Digest


* China's top nuclear experts have increased their estimates of North Korea's nuclear weapons production well beyond most previous U.S. figures, suggesting Pyongyang can make enough warheads to threaten regional security for the U.S. and its allies. (

* Petrobras finally put a price tag on the impact of a corruption scandal, writing off $2.1 billion due to alleged graft, in addition to a $14.8 billion asset-impairment charge.(

* FCC staff threw up a significant roadblock to Comcast Corp's proposed acquisition of Time Warner Cable Inc , recommending a procedural move that could potentially sink one of the media industry's biggest mergers in years. (

* The Pentagon plans to open its first office in Silicon Valley in an effort to tap commercial technology to develop more advanced weapons and intelligence systems. (

* E-commerce site has yet to launch its marketplace, but it has landed a $600 million valuation and has been lauded for its business model. (



Navinder Singh Sarao, A UK trader accused of contributing to the 2010 "flash crash" in equity markets began a fight against extradition on Wednesday. He was granted bail in a London court as allegations that he played a role in triggering a dramatic plunge in equity prices revived anxiety in Washington over shortcomings in the workings of the world's largest stock market.

Chief Executive Dave Lewis claimed Tesco was not only over the worst of the crisis triggered by a 250 million pound profit overstatement last September but said there were tentative signs of recovery.

Gamblers are starting to favour Labour's Ed Miliband to become the next prime minister as opinion polls show no sign of a decisive swing back to the Conservatives.

Warren East, the former head of Arm Holdings, will become chief executive of Rolls-Royce, replacing John Rishton, who shocked investors on Wednesday by saying will step down in July.

HSBC is determined to shake off shareholder complaints and stand by its chairman and chief executive as it braces for at its annual meeting on Friday.



* Critics of the proposed merger with Time Warner Cable Inc say that Comcast Corp's attitude toward compliance paints a picture of an already huge company that uses its heft to its advantage. (

* European antitrust regulators are striking at Gazprom's core, going after the Russian energy giant's pricing policies and its politically hued control over natural gas pipelines. But market forces, more than regulatory pressures, are stacking up against the company, as it struggles to maintain its earnings power and geopolitical heft. (

* On Wednesday, Google Inc unveiled its long-awaited phone service, called Project Fi, putting the search giant in competition with Verizon Communications Inc , AT&T Inc and other wireless service providers. In addition to new turf, the service is an attempt to blend several communication tools and the multiplying ways of calling people - cellular calls, online calls like those offered by Skype - into a single phone number and service. (

* The Justice Department has begun a criminal investigation of the guardrail maker Trinity Industries and is examining the company's relationship with the Federal Highway Administration, according to people with knowledge of the effort. (

* The dispute between Verizon Communications Inc and some of the most popular and prominent TV networks escalated on Wednesday when Disney said that the new, slimmer FiOS cable offering violated agreements with all of its cable networks. (

* Facing pressure from consumer groups, Home Depot Inc said it would discontinue use of a potentially harmful chemical in its vinyl flooring by the end of the year. (




- New trading accounts hit 3.3 million last week after China allowed stock investors to open multiple A-share accounts, data from the country's official clearing house showed. That was a 93.8 percent jump from the month before.


- China Everbright Group and its subsidiaries including Everbright Securities Co Ltd have set up an internet financing company, the state-run newspaper said, joining the rush by firms to tap into the booming online finance sector.


- China's business hub Shanghai dealt with 7,688 intellectual property rights cases in 2014, up 15 percent from a year earlier, the city's Higher People's Court said on Wednesday.


- China plans to increase the amount of central government documents translated into foreign languages to boost ties with other countries, the official translation bureau said.

- China's northern Hebei province has fined six wastewater treatments plants nearly 20.5 million yuan ($3.3 million) for discharging excessive pollutants. China is cracking down on industrial pollution in a bid to tackle high levels of air, water and soil contamination.


- China's land demand is easing as the wider economy cools, the official newspaper said, citing the country's Ministry of Land and Resources. Public building land supply was 609,900 hectares last year, down 18.8 percent from 2013, it added.


The Times

* Investors dump Tesco as 'bumpy ride' looms

Hopes of a swift recovery at Tesco Plc were dashed by a "reality check" yesterday as the struggling supermarket chain warned of a long, slow rebuilding task after reporting the biggest loss recorded by a British retailer. (

* Tracksuited trader on 'flash crash' charge pays 5 mln pounds bail

A British trader accused of causing the stock market to crash and wiping hundreds of billions off the value of U.S. shares in minutes paid 5 million pounds ($7.52 million) of his own money to win bail yesterday. (

The Guardian

* Standard Chartered appoints former GCHQ chief to fight crime

Standard Chartered Plc has attempted to demonstrate how seriously it is taking its crackdown on wrongdoing by appointing the former head of GCHQ, Iain Lobban, to a committee set up to advise its board on financial crime.(

* Brussels accuses Gazprom of unfair pricing of gas in eastern Europe

Europe's anti-trust regulator has accused Russia's massive gas monopoly, Gazprom, of unfair pricing practices in Moscow's former satellite states of eastern Europe, launching a legal dispute that could result in multibillion-euro fines for the Kremlin's giant energy company. (

The Telegraph

* Greek markets hit by jitters as Athens fights emergency cash raid

Greek markets have tanked to their lowest level since the country underwent a private sector debt restructuring in 2012, on fears the government will run out of cash to pay its public sector wage bill and service international debts. Athens stocks dipped towards 700 in early morning trading, after the country's deputy finance minister said his government faced at least a 400 million euros ($428.84 million) shortfall to make wage and pensions payments in April. (

* UK set-top box maker Pace bought by US firm for 1.4 bln pounds

Pace Plc, the British set-top box maker, is to be bought by U.S. telecommunications firm Arris Group for $2.1 billion. The deal will see shareholders in Yorkshire-based Pace receive 1.325 pounds in cash and 0.1455 Arris share for each share held, leaving them with a 24 percent stake in the new group. (

Sky News

* Belfry owner tees up 150 mln pounds Gleneagles offer

The owner of The Belfry has made a formal offer to buy Gleneagles that values the venue of last year's Ryder Cup at more than 150 million pounds. KSL Capital Partners, a U.S.-based private equity firm, is one of two remaining bidders for Gleneagles, the 850-acre site in Perthshire which is home to the globally renowned golf course.(

* Bank of America slapped with 13.3 mln pounds UK fine

The City watchdog has imposed a fine of almost 13.3 million pounds on Bank of America's Merrill Lynch International for incorrectly reporting millions of financial transactions. The fine, the highest imposed by the regulator on such an issue, also took into account a further 121,400 transactions it failed to report, the FCA said.

The Independent

* Sky shares rocket to 14-year high as operating profits hit 1 bln pounds mark

Shares in Rupert Murdoch's Sky Plc have pushed through 11 pounds for the first time in 14 years as it reported its strongest third-quarter numbers for 11 years. (

Futures Unexpectedly Red Despite Disappointing Economic Data From Around The Globe

Today is shaping up to be a rerun of yesterday where another frenzied Asian session that has seen both the Shanghai Composite and the Nikkei close higher yet again (following the weakest Chinese HSBC mfg PMI in one year which in an upside down world means more easing and thus higher stocks) has for now led to lower US equity futures with the driver, at least in the early session, being a statement by the BOJ's Kuroda that there’s a "possibility" the Bank of Japan’s 2% inflation target will be delayed and may occur in April 2016.

This official admission of failure (first of many) by the central bank that it won't be able to reach 2% inflation by its stated year-end goal, clearly reduces expectations of additional easing on April 30, according to Shinkin Asset Management. And in a world without EPS growth (and outright revenue declines) in which every PE multiple expansion turn is driven by some incremental central bank easing (preferably sooner rather than later), less easing is bad for risk, which may explain why US futures are red, if only for now: we fully expect a momentum ignition wave in the USDJPY to promptly push the pair above 120, and take the S&P with it to new all time highs on nothing but correlation algos, either at the usual ramp time of 8:30 am or just before the US market open.One just has to think like a criminal algo.

Meanwhile, "recovering" Europe also fired the first shot across the QE bow, reminding everyone that soaring stock markets have nothing to do with the underlying economies, as Europe's PMIs disappointed across the board. As Goldman summarizes, the Euro area flash composite PMI fell by 0.5pt to 53.5 in April, below consensus expectations of a modest gain (Cons: 54.4, GS: 54.2). This was the first decline since November. The manufacturing and services subcomponents were both weaker on the month, declining 0.3pt and by 0.5pt respectively. On a national level, composite PMIs for April fell both in Germany (by 1.2pt) and in France (by 1.3pt).


As closer look at Asia reveals that that equities mostly rose with Chinese bourses at the forefront, in the wake of further disappointing Chinese data. Chinese HSBC flash Mfg PMI tumbled to a 12-month low at 49.2 vs. Exp. 49.6, the 4th consecutive month of contraction. Shanghai Comp (+0.4%) and Hang Seng (-0.4%) traded higher for most of the session as the data supports the case for more government easing. Nikkei 225 (+0.3%) extended on its 15yr peak after finishing yesterday’s session above 20,000 for the first time since Apr’00. JGBs fell after prices followed through yesterday’s global fixed income sell-off, although further downside was capped by a poor 40yr auction which attracted the lowest b/c since Aug’14.

Despite opening modestly higher, European equities have been dragged lower following a slew of lacklustre Eurozone PMI data with German and France setting a downbeat tone for the session after missing expectations on manufacturing, services and composite readings. This has also been coupled with underperformance in tech names after Ericsson posted a disappointing pre-market update, ASML paring yesterday’s gains and Texas Instruments in the US posting a disappointing after-market update, while Allianz warned of a potential stock market crash. Additionally, concerns over Greece continue to linger with reports in Handelsblatt suggesting the ECB’s patience has been tested and there are no agreements with Greece on the horizon.

From a fixed income perspective, Bunds have seen a pullback of yesterday’s heavy Gilt-inspired losses, with the move to the upside also provided a boost by the softness seen in European equities.

In FX markets, the USD-index was initially seen higher in earlier trade before being dragged lower to relatively unchanged levels alongside the softness seen in US yields. Elsewhere, AUD remains softer in the wake of the disappointing Chinese HSBC flash manufacturing PMI, with NZD also weaker following dovish rhetoric from RBNZ’s Asst. Gov. McDermott, who said weaker demand and prices would prompt consideration of a rate cut. Finally, UK retail sales weighed on GBP after missing expectations with the ONS saying the 6.2% drop in fuel sales in March was the largest since April 2012.

In the commodity complex, WTI and Brent crude futures have seen a minor extension of yesterday’s DoE-inspired losses with
energy newsflow overall relatively light. In precious metals markets, spot gold and silver trade relatively unchanged, while copper
has pared its overnight losses stemming from the disappointing Chinese data. Elsewhere, iron ore prices rose by the most since
2012 as BHP Billiton is set to curb the pace of its iron ore expansion program.

In summary: European shares remain lower though off intraday lows, with the tech and insurance sectors underperforming and utilities, telco outperforming. Euro-area, French, German, Chinese manufacturing PMI data all below estimates. U.K. retail sales fall vs forecast gain. Greece hasn’t discussed “Plan B” with creditors, official says. The German and Swedish markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with zinc, nickel underperforming and silver outperforming. U.S. jobless claims, continuing claims, Markit U.S. manufacturing PMI, Bloomberg consumer comfort, Kansas City Fed index, new home sales due later.

Market Wrap

  • S&P 500 futures down 0.3% to 2093.8
  • Stoxx 600 down 0.6% to 406.6
  • US 10Yr yield down 3bps to 1.95%
  • German 10Yr yield down 3bps to 0.14%
  • MSCI Asia Pacific up 0.1% to 154.9
  • Gold spot up 0.2% to $1189.9/oz
  • Eurostoxx 50 -0.5%, FTSE 100 +0.1%, CAC 40 -0.8%, DAX -1.1%, IBEX -0.3%, FTSEMIB -0.6%, SMI +0.2%
  • Asian stocks rise with the Kospi outperforming and the Sensex underperforming.
  • MSCI Asia Pacific up 0.1% to 154.9; Nikkei 225 up 0.3%, Hang Seng down 0.4%, Kospi up 1.4%, Shanghai Composite up 0.4%, ASX up 0.1%, Sensex down 0.6%
  • Euro up 0.18% to $1.0744
  • Dollar Index up 0.01% to 97.94
  • Italian 10Yr yield up 0bps to 1.4%
  • Spanish 10Yr yield down 0bps to 1.37%
  • French 10Yr yield down 3bps to 0.38%
  • S&P GSCI Index down 0.2% to 425.8
  • Brent Futures down 0% to $62.7/bbl, WTI Futures down 0.2% to $56/bbl
  • LME 3m Copper down 0.1% to $5906.5/MT
  • LME 3m Nickel down 0.7% to $12585/MT
  • Wheat futures up 0.5% to 501.3 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

  • European stocks are seen lower after Eurozone PMIs paint a dreary picture of the area’s economy
  • Furthermore, Greece continues to remain a key issue ahead of tomorrow’s Eurozone finance minister meeting, while the ECB are said to be getting frustrated with the lack of Greek progress
  • Looking ahead, today sees the release of US Initial Jobless Claims, New Home Sales, EIA NatGas storage change as well as a host of large cap US earnings with 50 S&P 500 Co.’s due to report
  • Treasuries gain with bunds and gilts as manufacturing reports showed slowing growth in China and Europe; approach of month-end could provide support before FOMC and 2Y/5Y/7Y auctions next week.
  • Greece and its creditors haven’t discussed having the country miss a payment to the IMF or default as agreement over bailout disbursements remains beyond reach, a senior Greek government official said
  • Markit/HSBC’s China manufacturing PMI fell to a 12-month low in April, suggesting government efforts to cushion a slowdown are yet to revive the nation’s factories
  • Markit’s euro-area services PMI fell to 53.7 from 54.2 in March; manufacturing PMI fell to 51.9 from 52.2; gauges for both industries also signaled slower growth in Germany and France
  • U.K. retail sales fell 0.5% in March vs estimate for 0.4% gain; separate figures showed the budget deficit in the fiscal year ended March narrowed more than officials thought
  • BOJ’s Kuroda said there is possibility that timing of achieving central bank’s 2% inflation target will occur early in FY16 rather than FY15
  • Kuroda also said letting central bank’s JGB holdings mature is a possible exit step; raising rate on excess reserves, conducting money market operations also possible steps
  • A stock market crash is possible as equity prices and real economy are diverging, Allianz management board member and CEO designate Oliver Baete says in an interview with Manager Magazin
  • Allianz CEO Diekmann says that problems at Pimco not yet over; while situation has stabilized, there are still net outflows and this will probably not change for the year
  • Sovereign bond yields mostly lower. Asian stocks gain, European stocks, U.S. equity-index futures fall. Crude oil lower, gold higher, copper little changed

US Event Calendar

  • 8:30am: Initial Jobless Claims, April, est. 287k (prior 294k)
  • Continuing Claims, April 11, est. 2.290m (prior 2.268m)
  • 9:45am: Markit U.S. Manufacturing PMI, April preliminary, est. 55.7 (prior 55.7)
  • 9:45am: Bloomberg Consumer Comfort, April 19 (prior 46.6)
  • 10:00am: New Home Sales, March, est. 515k (prior 539k)
  • New Home Sales m/m,  March, est. -4.5% (prior 7.8%)
  • 11:00am: Kansas City Fed Mfg Activity, April, est. -2 (prior -4)

DB's completes the overnight event summary

Regular readers will know we think bonds are in a bubble, however we think it’s a necessity bubble. There is so much debt outstanding across the globe, especially in the developed world, that to keep the system afloat and solvent we need to have a bubble in fixed income. I'm not convinced we'll look back on April 21st/22nd 2015 as the big turning point in global yields but when you're in a bubble you have to be mindful that it will pop at some point. As a minimum it’s been an interesting move. Completing the bond move story, US 10yrs weakened in sympathy closing 7bps higher at 1.979% but periphery bonds did rally with Spain (-7.9bps), Italy (-6.1bps) and Portugal (-8.3bps) tightening to 1.364%, 1.387% and 1.985% respectively.

Following on from the moves in bond markets yesterday, 10y Treasury (-1.2bps) yields have clawed back some of those losses, although bond markets across Asia are some 2-10bps wider generally. Much of the attention is on China and Japan however where the flash April manufacturing PMI’s are out. The numbers make for slightly disappointing reading with both China (49.2 vs. 49.6 expected) and Japan (49.7 vs. 50.7 expected) coming in below market. The reading for China in particular is the lowest since April last year and will add to the argument that more stimulus is needed despite the recent RRR cut. Despite dropping shortly following the print, both the Shanghai Comp (+0.21%) and CSI 300 (+0.24%) have recovered, while the Nikkei (+0.29%) is firmer. Credit markets in both regions are 1-2bps better off.

Moving on, yesterday’s earnings reports in the US along with some slightly better than expected data helped support a modest rise in equity markets. The S&P 500 (+0.51%) and Dow (+0.49%) both closed up while the Dollar (+0.04%) was more or less unchanged – although it was once again much of the focus in earnings calls yesterday. The market appeared encouraged by earnings out of both McDonalds (+3.1%) and Coca Cola (+1.3%) yesterday, while post-market close releases from Facebook (miss) and EBay (beat) should provide some of the early direction in trading today after declining 4% and rising 4% in aftermarket trading respectively. Facebook’s results appeared to sum up much of the trend we’ve highlighted so far. Despite reporting a beat in profits, revenues came in below expectations as management cited that advertising revenue gains of 46% could have been as much as +55% had it not been for currency fluctuations.

US housing data yesterday proved to be supportive. Existing home sales in March rose +6.1% mom and well ahead of expectations (+3.1%). The reading was in fact the highest jump since December 2010 – reflective perhaps of a weather related rebound - while the annualized 5.19m rate is the highest since September 2013.The FHFA housing index for February also showed similar encouraging signs, as the +0.7% mom print came in above the +0.5% market expectations.

Closer to home yesterday, equity markets were a tad more mixed as the DAX (-0.60%) declined, Stoxx 600 (-0.03%) closed more or less unchanged and the CAC (+0.36%) finished higher. The Euro (-0.10%) closed lower for the third consecutive day, while Greek equities (+2.08%) and 3y yields (-223bps) rebounded – which we’ll touch on later. Despite the selloff in bond markets and fairly mixed performance in equity markets credit had a better day as Crossover finished 7bps tighter.

Data was fairly thin on the ground yesterday, with just a worse than expected flash April Euro area consumer confidence reading (-4.6 vs. -2.5 expected) to speak of. Rather it was the release of the Bank of England minutes that grabbed most of the headlines. With Gilts selling off as mentioned, the Pound also rose +0.74% and +0.85% against the Dollar and Euro respectively following the more hawkish tone to come out of the text. Despite voting unanimously (9-0) in favour of keeping rates on hold, two members noted that the decision was ‘finely balanced’. More telling however, comments that the Gilt curve is ‘exceptionally flat’ and that sterling appreciation could be feeding through into inflation ‘more quickly’, implied perhaps that there is less downward pressure on prices to come and perhaps a faster than expected rise in inflation.

On the subject of Central Banks, the Swiss National Bank yesterday reduced the number of sight deposit accounts that are exempt from its negative interest rate, exposing them to the -0.75% deposit rate enacted back in January. A spokeswoman for the SNB suggested that the move was ‘made not principally due to monetary policy imperatives, but on grounds of equal treatment’. The news caused the Swiss Franc to close 1.6% lower versus the Euro.

Onto Greece now, yesterday we heard what we had largely come to expect this Friday as head of the Eurogroup Working Group, Thomas Weiser, said that ‘there won’t be a new list in Riga, but over the course of May it must finally be reached’. Perhaps of more interest however and with various conflicting views on the matter, Wieser also noted that ‘the liquidity situation in Greece is already a little tight, but it should be sufficient into June’. Meanwhile, along with the ECB approving another €1.5bn in ELA funding, Greek Deputy Finance Minister Mardas suggested that the decree forcing state entities to move reserves to the Bank of Greece should raise €2.5 (higher than previous reports we’ve seen), covering obligations due in May.

Turning over to today’s data, there’s a bit more activity this morning with the April flash manufacturing, services and composite PMI’s for the Euro area, France and Germany to look forward to. UK will again be some focus with retail sales and public sector net borrowing data for March due up. Over in the US this afternoon, the April flash manufacturing PMI will be important, while jobless claims, new home sales and the Kansas City Fed manufacturing activity index are also due. On the earnings front, Amazon, Caterpillar, Google, Microsoft, General Motors and Proctor and Gamble are the highlights.

Chinese Stocks Surge After Lowest Manufacturing PMI In A Year

Great News, the Chinese manufacturing economy is contracting at its fastest pace in a year... at least that is the reaction in the Shanghai Composite. After selling off from the open, when HSBC China Manufacturing PMI printed a considerably worse than expected 49.2 - the lowest since April 2014 - stocks took off, energized the future easing expectations that are assured to come from a PBOC now hell-bent on providing speculative tools for any- and every-one just to keep the populace from revolting.


PMI prints the lowest in a year...


Not very pretty under the hood either...


With employment now in contraction for almost 3 years and deflationary pressures evident in input and output prices (both driven by stronger Yuan and over-capacity thans to easy money mal-investment)


And Stocks take off...


Welcome to the new normal China.


Charts: Bloomberg

A Practical Utopian’s Guide To The Coming Collapse: David Graeber On "The Phenomenon Of Bull$hit Jobs

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Graeber’s argument is similar to one he made in a 2013 article called “On the Phenomenon of Bullshit Jobs”, in which he argued that, in 1930, economist John Maynard Keynes predicted that by the end of the century technology would have advanced sufficiently that in countries such as the UK and the US we’d be on 15-hour weeks. “In technological terms, we are quite capable of this. And yet it didn’t happen. Instead, technology has been marshalled, if anything, to figure out ways to make us all work more. Huge swaths of people, in Europe and North America in particular, spend their entire working lives performing tasks they believe to be unnecessary. The moral and spiritual damage that comes from this situation is profound. It is a scar across our collective soul. Yet virtually no one talks about it.”


But what happened between the Apollo moon landing and now? Graeber’s theory is that in the late 1960s and early 1970s there was mounting fear about a society of hippie proles with too much time on their hands. “The ruling class had a freak out about robots replacing all the workers. There was a general feeling that ‘My God, if it’s bad now with the hippies, imagine what it’ll be like if the entire working class becomes unemployed.’ You never know how conscious it was but decisions were made about research priorities.” Consider, he suggests, medicine and the life sciences since the late 1960s. “Cancer? No, that’s still here.” Instead, the most dramatic breakthroughs have been with drugs such as Ritalin, Zoloft and Prozac – all of which, Graeber writes, are “tailor-made, one might say, so that these new professional demands don’t drive us completely, dysfunctionally, crazy”


Graeber believes that since the 1970s there has been a shift from technologies based on realising alternative futures to investment technologies that favoured labour discipline and social control. Hence the internet. “The control is so ubiquitous that we don’t see it.” We don’t see, either, how the threat of violence underpins society, he claims. “The rarity with which the truncheons appear just helps to make violence harder to see,” he writes.


– From the Guardian article: David Graeber: ‘So Many People Spend Their Working Lives Doing Jobs They Think are Unnecessary’

Embarrassingly, it was only very recently that I became familiar with the writings of David Graeber, an author, anthropologist and professor at the London School of Economics. I read a decent amount, and very few writers connect with me in the way Mr. Graeber does. Of course, I don’t agree with everything he says (if you ever find yourself in total agreement with someone else there’s a problem), but I promise he will make you think. That’s worth a lot in the propagandized and dumbed down culture we inhabit.

About a month ago, I read an extremely thought provoking excerpt from his 2013 book, The Democracy Project: A History, a Crisis, a Movement. The piece was titled, A Practical Utopian’s Guide to the Coming Collapse, and I strongly suggest you read it.

Immediately after I read that, I  found him on Twitter and began following. Today, I came across a profile of him published by the Guardian, and I was once again reminded of how much I enjoy his thought process. So much so, that I decided to dedicate an entire post to him and encourage all of you to explore his work. Here are some excerpts from the Guardian article:

A few years ago David Graeber’s mother had a series of strokes. Social workers advised him that, in order to pay for the home care she needed, he should apply for Medicaid, the US government health insurance programme for people on low incomes. So he did, only to be sucked into a vortex of form filling and humiliation familiar to anyone who’s ever been embroiled in bureaucratic procedures.


At one point, the application was held up because someone at the Department of Motor Vehicles had put down his given name as “Daid”; at another, because someone at Verizon had spelled his surname “Grueber”. Graeber made matters worse by printing his name on the line clearly marked “signature” on one of the forms. Steeped in Kafka, Catch-22 and David Foster Wallace’s The Pale King, Graeber was alive to all the hellish ironies of the situation but that didn’t make it any easier to bear. “We spend so much of our time filling in forms,” he says.


“The average American waits six months of her life waiting for the lights to change. If so, how many years of our life do we spend doing paperwork?”


The matter became academic, because Graeber’s mother died before she got Medicaid. But the form-filling ordeal stayed with him. “Having spent much of my life leading a fairly bohemian existence, comparatively insulated from this sort of thing, I found myself asking: is this what ordinary life, for most people, is really like?


Capitalism isn’t supposed to create meaningless positions. The last thing a profit-seeking firm is going to do is shell out money to workers they don’t really need to employ. Still, somehow, it happens.”

This is a very important point. How does this happen? My answer is that our political and economic system is in fact a centrally planned oligarchy masquerading as a free market.

Graeber’s argument is similar to one he made in a 2013 article called “On the Phenomenon of Bullshit Jobs”, in which he argued that, in 1930, economist John Maynard Keynes predicted that by the end of the century technology would have advanced sufficiently that in countries such as the UK and the US we’d be on 15-hour weeks. “In technological terms, we are quite capable of this. And yet it didn’t happen. Instead, technology has been marshalled, if anything, to figure out ways to make us all work more. Huge swaths of people, in Europe and North America in particular, spend their entire working lives performing tasks they believe to be unnecessary. The moral and spiritual damage that comes from this situation is profound. It is a scar across our collective soul. Yet virtually no one talks about it.”


But what happened between the Apollo moon landing and now? Graeber’s theory is that in the late 1960s and early 1970s there was mounting fear about a society of hippie proles with too much time on their hands. “The ruling class had a freak out about robots replacing all the workers. There was a general feeling that ‘My God, if it’s bad now with the hippies, imagine what it’ll be like if the entire working class becomes unemployed.’ You never know how conscious it was but decisions were made about research priorities.” Consider, he suggests, medicine and the life sciences since the late 1960s. “Cancer? No, that’s still here.” Instead, the most dramatic breakthroughs have been with drugs such as Ritalin, Zoloft and Prozac – all of which, Graeber writes, are “tailor-made, one might say, so that these new professional demands don’t drive us completely, dysfunctionally, crazy”


Graeber believes that since the 1970s there has been a shift from technologies based on realising alternative futures to investment technologies that favoured labour discipline and social control. Hence the internet. “The control is so ubiquitous that we don’t see it.” We don’t see, either, how the threat of violence underpins society, he claims. “The rarity with which the truncheons appear just helps to make violence harder to see,” he writes.


He quotes with approval the anarchist collective Crimethinc: “Putting yourself in new situations constantly is the only way to ensure that you make your decisions unencumbered by the nature of habit, law, custom or prejudice – and it’s up to you to create the situations.” Academia was, he muses, once a haven for oddballs – it was one of the reasons he went into it. “It was a place of refuge. Not any more. Now, if you can’t act a little like a professional executive, you can kiss goodbye to the idea of an academic career.”


Why is that so terrible? “It means we’re taking a very large percentage of the greatest creative talent in our society and telling them to go to hell … The eccentrics have been drummed out of all institutions.” Well, perhaps not all of them. “I am an offbeat person. I am one of those guys who wouldn’t be allowed in the academy these days.” Indeed, he claims to have been blackballed by the American academy and found refuge in Britain. In 2005, he went on a year’s sabbatical from Yale, “and did a lot of direct action and was in the media”. When he returned he was, he says, snubbed by colleagues and did not have his contract renewed. Why? Partly, he believes, because his countercultural activities were an embarrassment to Yale.


His publications include Fragments of an Anarchist Anthropology (2004), in which he laid out his vision of how society might be organised on less alienating lines, and Direct Action: An Ethnography (2009), a study of the global justice movement. In 2013, he wrote his most popularly political book yet, The Democracy Project. “I wanted it to be called ‘As if We Were Already Free’,” he tells me. “And the publishers laughed at me – a subjunctive in the title!” But it was Debt: The First 5,000 Years, published in 2011, that made him famous and has drawn praise from the likes of Thomas Piketty and Russell Brand. Financial Times journalist and fellow anthropologist Gillian Tett argued that the book was “not just thought-provoking but exceedingly timely”, not least, no doubt, because in it Graeber called for a biblical-style “jubilee”, meaning a wiping out of sovereign and consumer debts.


At the end of The Utopia of Rules, Graeber distinguishes between play and games – the former involving free?form creativity, the latter requiring participants to abide by rules. While there is pleasure in the latter (it is, to quote from the subtitle of the book, one of the secret joys of bureaucracy), it is the former that excites him as an antidote to our form?filling red-taped society.


He is suggesting that, instead of being rule-following economic drones of capitalism, we are essentially playful. The most basic level of being is play rather than economics, fun rather than rules, goofing around rather than filling in forms. Graeber himself certainly seems to be having more fun than seems proper for a respected professor.

David Graeber’s latest book was recently published and is titled, The Utopia of Rules.

*  *  *

For related articles, see:

Ex-CIA Officer Claims that Open Source Revolution is About to Overthrow Global Oligarchy

Networks vs. Hierarchies: Which Will Win? Niall Furguson Weighs In.

The Comcast/Time Warner Merger and the War Between Centralization and Decentralization


American Assault Death Exceptionalism

USA! USA! USA! America is still the most exceptionally violent nation in the OECD world. However, it appeasrs that crown is being removed as 'Peak violent assault death' seems to have hit in the late-1970s.



With the collapse in violent assault deaths, one wonders why the Land of The Free is militarizing its police at an unprecedented pace; and the military feels the need to practice "homeland response drills."



The Euthanasia Of The Saver

Submitted by Eric Matias Tavares of Sinclair & Co.

The Euthanasia Of The Saver


What have been the economic consequences of ultra-low interest rates? The answer might not be as hopeful as you may think.

While better known for the role of government in stimulating the economy, John Maynard Keynes, one of the most influential economists of the 20th century, also provided the intellectual framework for a big reduction in interest rates with two goals in mind: to reduce economic inequality and to achieve full employment.

Here’s what he had to say about the “rentier” (a quasi-Communist term for “saver”) in Chapter 24 of his seminal book “The General Theory of Employment, Interest and Money”, published in 1936. It requires some effort to go through it (and even more to comprehend it, if at all) but because it influences so much of the current economic thinking it is worth it [our emphasis in bold]:

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

(...) Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. (…) For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital.

(…) The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

(…) I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.

(…) I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”

Indeed, no revolution was needed. Interest rates have generally declined over the last 30 years. However, the latest (last?) phase of this decline has been largely caused by unprecedented intervention from the world’s leading central banks in the form of ultra-low interest rates and successive rounds of quantitative easing, where trillions in primarily government securities have been purchased.

As a result, capital has been cheapened indeed. At this point there are almost €3 trillion worth of European bonds that have negative yields. If he were alive today, Keynes would no doubt be applauding all of this and giving high fives to his central bank followers.

Now, in the 1930s, with the Western world reeling from the effects of the Great Depression, perhaps it was understandable that a leading economist should became enamored with the virtues of central planning in lieu of the "cumulative oppressive power of the capitalist", particularly when glancing over the propaganda of the Fascist and Communist regimes of those days and their impressive (and false) economic achievements.

But policymakers today, with the benefit of hindsight, should have known better. At the very least two lost decades in Japan should have been sobering enough.

Well, six years after the implementation of ultra-low interest rate policies on both sides of the Atlantic we should have enough data to figure out whether they are working or not.

And so far, neither of Keynes’ objectives has been achieved: employment growth since the 2008 crisis remains uncharacteristically sluggish, despite substantial gains in asset prices, and income inequality has surged to the point of concerning even Federal Reserve Chair Janet Yellen (actually, we were blown away by how similar what she had to say about this topic is to what Keynes described in the aforementioned Chapter 24).

So who is benefiting from these policies?

In November 2013 the McKinsey Global Institute published a very insightful discussion paper titled “QE and ultra-low interest rates: Distributional effects and risks.” It should be required reading for anyone with an interest on this topic. As a teaser, here are some of the graphs that highlight major income distribution consequences of central bank intervention since 2007.

Estimated cumulative change in net interest income (USD bn, converted at constant 2012 exchange rate): 2007–12
Source: McKinsey Global Institute.

According to McKinsey, governments and non-financial corporations have been the primary beneficiaries of ultra-low interest rates. Why? Because they are the largest net borrowers in the economy.

And borrowing they did, with government debt ratios rising sharply over the period; no good Keynesian would have used this extra cash to repair government finances. Not to be outdone, corporate managers also levered up, using the proceeds from debt issues to buy back their shares - lots of them, which has been one of the pillars of the big equity bull market we are in.

The impact on the banks varied greatly depending on geography: American banks have largely gained from low interest rates, British banks have suffered losses as a result and in the Eurozone they have been hugely detrimental to banks’ profitability.

The ones who have undoubtedly lost out were those quintessential Keynesian villains: the savers. These include pension funds and life insurance companies, households and foreign investors. The medicine prescribed by the central banks to correct their “bad” ways has cost them billions. And given that yields have continued to go down since McKinsey's report was published, their misery has only increased. More high fives from Keynes!

And yet, even within those groups the impact has been uneven. Who in the household segment is suffering the most because of ultra-low interest rates? The retirees, of course.

The following graph shows just how disproportionate this impact has been in the US:

Annual net interest impact for the average US household (USD bn, % 2007 income)
Source: McKinsey Global Institute.

And there you have it. It is the “baby boomers” who have suffered the most as the result of ultra-low interest rate policies. These folks worked hard all their lives, created the most prosperous generation the world has ever seen and now they are rewarded with virtually nothing on what they managed to save over the years. Try explaining to them that on top of that their central banker wants to prop up the inflation rate - in other words, what they pay for goods and services.

Keynes, as far as we can tell, did not explicitly factor demographics into his theory of employment. Depriving an ageing population of the income they earn on their accumulated savings will leave them with less funds available for consumption.

What is a retiree to do? Keep on working. According to the BLS, in the US the only group which has managed to increase its employment-to-population ratio is the 65 years or older, going from 20% in June 08 to 23% in March 15. In comparison, men aged 16-64 decreased from 81% to 77% and women aged 16-64 from 69% to 66% over the same period.

But the younger ones are not only facing greater competition for jobs from their elderly; they may also need to step in and take care of them at some point. Furthermore, their pension plans are not doing that great either. While the value of the assets which have been invested for their retirement has gone up, so has the discounted value of the bills they will have to pay (lower interest rates = higher present value).

Surely none of this can galvanize their "propensity to consume", as claimed by Keynes. And neither will be paying for all those government debts to stimulate the economy.

So how do hardcore Keynesians react to all this evidence?

Like they always do: claiming the reason why such policies are failing is because they haven’t been as robust as they should be. We need more and with more vigor! Therefore, you are now hearing talk about even lower negative interest rates, taxation on deposits and banning cash transactions.

It seems like they don’t want you as a saver just euthanized; they want you buried as well.

Here Is The Dollar Value Of Your State's Land

When it comes to estimating the value of the US economy, the math is relatively simple (at least according to economists) - it is the sum of the value added outputs of every class of enterprise, which is better known as the Gross Domestic Product. Likewise, when it comes to calculating the value of assets, whether financial, such as stocks, or real, such as one's house, the best representation is through the markets, i.e., a clearing mechanism that reveals what someone is willing to pay for such an asset.

But what about the value of just the land one's house sits on? Or all the land of the state, or the entire United States?

That is the answer that Dept of Commerce economist William Larson set off to find out. His answer: a whopping $23 trillion (as of 2009), more than $5 billion greater than the entire US GDP. That is the BEA's estimate for the 1.89 billion acres of land that make up the 48 contiguous states of the US and the District of Columbia. The number is a land estimate only and excludes any improvements such as buildings, infrastructure and bodies of water. It is also down about 24% from the prior peak-bubble high just over $26 trillion hit in 2006.

How did he make his assessment? According to the WSJ, Larson's calculation used satellite images to determine each type of land, including farms, forests and developments.

For undeveloped land he used comparable farm-land values to estimate prices. For developed land, he relied on estimates of land quality, home values and property attributes within a given Census tract. Larson believes his values are correct within a 10% margin of error.

Developed land is typically sold in a bundle with buildings or structural improvements, and it can be difficult to disentangle the two.


Undeveloped land in rural areas can be even trickier to price because it’s not often bought and sold . For some federal land acquired in the Louisiana Purchase, the last transaction was in 1803, when the seller was a fellow named Napoleon.


“Land has long been recognized as a primary input in production and as a store of wealth,” wrote Mr. Larson, an economist at the Federal Housing Finance Agency. “Despite its fundamental role in nearly all economic activity, there is no current and complete estimate of the value of the land area of the United States.”

Furthermore, the analysis doesn’t account for the changes in value due to the shale-gas activity in the Midwest and elsewhere.

Here are the more notable findings from his paper, via the WSJ:

  • The federal government owns 24% of all land, worth a collective $1.8 trillion. (That’s 8% of the country’s total value, or around 10% of the total outstanding federal debt.)
  • Just 5.8% of U.S. land is developed, but that land accounts for 50.7% of the total value.
  • Almost half, 47%, of U.S. land is used for agriculture.
  • Besides New Jersey, three other states have land worth an average of at least $100,000 an acre: Rhode Island, Connecticut and Massachusetts. At least a quarter of the land in those four states is developed.
  • Land in 24 states, including Wisconsin, Texas and Maine, is worth less than $10,000 an acre, on average.
  • In Nebraska, 92.7% of land is used for agriculture, the most of any state.
  • Nevada has the largest share of federal land, covering 86.8% of the state. Connecticut has the least, just 0.1% of the state’s area.

As for the key answer, namely "what is the dollar value of my state", there are two answers. One is the total absolute value for the state, shown on the table below, and which has California, Texas and New York in the top three places...


... or the average value per acre in any given state. Clearly there is a substantial difference.


As laid out on a map:

One caveat: while D.C. is clearly the smallest evaluated territory, at just 40 acres, it has the highest value per acre of any US state: some $1.05 million. So take the above findings with a grain of salt.


BoJ QE Exit "Out Of The Question," Former Official Says As Morgan Stanley Talks JGB Liquidity

We’ve long said that a dramatic and sustained spike in JGB yields would be catastrophic for Japan, whose central bank is onboarding the entirety of gross issuance onto its balance sheet and whose government is running what is effectively the largest ponzi scheme the world has ever known. Here’s WSJ summing up the situation: 

Japan’s government debt is roughly 240% of gross domestic product, according to the latest International Monetary Fund figures. That is the highest in the developed world, and many analysts contend that rising interest rates could stress the government’s finances with higher borrowing costs and hamper the banking system by causing Japanese lenders to see large capital losses on the pile of government bonds they hold.

Given this scenario, the logical conclusion is that there is no viable exit strategy for the BoJ, a sentiment that was echoed this week by Japan’s former chief of foreign exchange policy at the Ministry of Finance who told Bloomberg that unwinding QE simply isn’t an option:

Makoto Utsumi, who oversaw foreign-exchange policy at the Ministry of Finance from 1989-1991, said the Bank of Japan’s expansion of its balance sheet into debt with an average remaining maturity of up to 10 years makes it impossible for Kuroda to pare stimulus “for the foreseeable future” without causing bond yields to surge. Speculation that the BOJ will accelerate its note purchases helped push two-year yields below zero percent on Wednesday for the first time since January.


“The thought of exit itself is a nightmare for Japan, not whether it’s premature to talk about it,” Utsumi, 80, said in an interview in Tokyo on April 15. “There is no choice but to keep issuing bonds for financing, and with buying of longer dated JGBs, a natural exit is out of question as is unwinding.”

Meanwhile, the very same asset purchases that have driven down yields have ironically created the conditions for a sudden spike. As we’ve discussed on numerous occasions, BoJ purchases have sucked nearly all liquidity from the JGB market causing traders to report widening bid-asks and increased volatility. If market depth collapses then the impact on price of any one trade is magnified, increasing the chances that a few sellers could create carnage in the market and effectively collapse the entire house of cards in relatively short order. As such, it isn’t entirely clear how an “exit” will ever really work. Indeed, even the most optimistic (in terms of betting on Abenomics to free Japan from deflation) analysts acknowledge that JGB liquidity is impaired to the point of absurdity and will be the “major theme” going forward. Here’s some color from a recent Morgan Stanley note:

Our economics team expects the BoJ to start winding back QQE from October 2016, and cannot rule out a commencement of tapering as early as the first quarter of next year under an economic bull-case scenario of oil prices rebounding strongly and wages providing a solid boost for consumption. Markets are likely to start focusing greater attention on improving macroeconomic conditions and the prospect of BoJ tapering as the inflation rate climbs from this summer onwards, but our base-case scenario is for JGB yields to climb only gradually through the end of 2015, with BoJ operations to continue providing substantial support until tapering actually gets under way.

The underlying inflation rate looks likely to hover around zero through this summer, thereby fueling hopes for further BoJ easing. However, the inflation rate should start climbing year- on-year once the impact of previous falls in oil prices begins to drop out. Our economics team expects the core CPI inflation rate to reach +0.7% by year-end and then approach +1.2% level in 1Q 2016, reflecting both base-year effects and solid growth in household spending if wages do indeed keep rising. Macroeconomic conditions have actually been improving since last summer, with real exports and production rising since September while Cabinet Office Economy Watchers Survey results and other measures of sentiment have picked up sharply over the past few months. 

It goes without saying that we are skeptical of the degree to which Abenomics will be successful at either altering inflation expectations or creating anything that even approximates prosperity for Japan’s Middle Class (in fact, we recently outlined how Abe’s policies are destroying Middle Class Japanese citizens), what we can agree with MS on however, is the following assessment of JGB liquidity:

Market liquidity—or lack thereof as trading continues to thin out—is also likely to be a major theme.

BoJ operations have surpassed even the Fed's QE when measured relative to either GDP or total issuance, with secondary market availability—the total amount of JGBs held outside the BoJ's hands—dwindling since the April 2013 introduction of QQE and shrinking at an even faster pace under QQE2 (launched last October). The resultant decline in market liquidity means that price action is now being driven mostly by the supply/demand pressures associated with MoF auctions and BoJ purchases.

As discussed in our report Japan Interest Rate Strategist: Outlook for JGB Supply and Absorption (05 Mar 2015), if the BoJ persists with its current pace of JGB purchases, then the incentive for investors to reduce their holdings any further is likely to dwindle away within the next 18–24 months, at which point liquidity may evaporate altogether as a consequence of unprecedentedly tight supply/demand.

This loss of market functionality is liable to come just as a rising inflation rate starts to make BoJ tapering look like a real possibility. Upside to JGB yields should be limited to at least some degree by demand from banks (who are currently earning just 0.9% or thereabouts on their loans) and life insurers (who have been comparatively modest net buyers over the past couple of years), but it is nevertheless likely that JGB market participants will start to demand a risk premium when confronted with rising interest rates, high volatility, and the prospect of the BoJ winding back its monetary stimulus in foreseeable future. 

*  *  *

Perhaps Yoshiyuki Suzuki, the head of fixed income at Fukoku Mutual Life Insurance Co. said it best when he told Bloomberg the following: 

“If somebody sells, yields can jump.”

Caught On Tape: Cop Grabs, Smashes Phone Of Woman Recording Him

"He told me that I had to go. He said I was interfering with their investigation and I told [him] that I was on a public sidewalk and I had the right to film them.." And then this happened...



As MyFOXLA reports,

Beatriz Paez says she was doing nothing wrong taking video of U.S. Marshal executing warrants on San Juan Avenue Sunday. She saw people in handcuffs. “Around 8 people including women were held at gunpoint on their stomachs with their hands held behind their back,” says Paez.


But, when one marshal saw her recording, “He told me that I had to go. And, I told him I had the right to film and he said I was interfering with their investigation and I told them that I was on a public sidewalk and I had the right to film them.”

As The Washington Post notes,

...the courts have consistently held that the First Amendment protects citizens' right to record the police when they're on the job. The police can't stop you unless you're interfering with their work -- and they can't take away your smart phone or delete the recordings just because you took video.


Police need a warrant to mess with the content of your cell phone.

*  *  *

Apparently not...

But They Said "Go To College"

Submitted by Jim Quinn via The Burning Platform blog,



When I graduated from college in 1986 it was easy to get a job. The economy was booming and 82% of college graduates had a job. The other 18% were probably raising kids because their college educated spouse made enough to raise a family. The mantra for my entire life has been – go to college and you’ll get a good paying job. It seems something went wrong on the road to riches. The percentage of college graduates with jobs has been falling for the last 30 years and has been plummeting since 2008. It is now at an all-time low of 74.3%. Shouldn’t these people have obtained jobs since the government tells us the unemployment rate has dramatically dropped from 10% to 5.5% since 2009?



Not only is college graduate labor participation at record lows, but those getting jobs didn’t need a college degree in the first place to get that job, in the majority of cases. A new Careerbuilder survey indicates that though the majority of Class of 2014 college graduates are currently working, 51% of that group are in jobs that don’t require a degree. This is up dramatically from the 38% found in the 2010 US Census survey. The Careerbuilder survey also found that only 36% of 2014 college graduates had obtained full-time permanent jobs. The findings are as follows:

  • 65 percent of recent college grads are employed (of these, 36 percent are in full-time, permanent positions; 17 percent are in part-time, permanent positions; and 12 percent are in temporary/contract positions). Fifty-one percent are in jobs related to their college major.
  • 4 percent are in internships.
  • 31 percent are not working at all (although many in this group haven’t started their job search or are already back in school to pursue a higher degree). Of this group, not even half (43 percent) say they’re currently looking for a job.
  • Only 44 percent expect to make more than $30,000 their first year out of college.



So we have less and less college graduates being employed, a majority of college graduates ending up with jobs that don’t require a college degree, many getting part-time temp jobs, and even if they get a job their wages are low. What did Obama and his minions do in 2009? They take over the entire student loan program for the country and proceed to dole out $600 billion of new student loans to anyone who could fog a mirror, let alone add or subtract. Millions have been lured into irreversible chains of debt over the last six years in order for Obama to artificially lower the reported unemployment rate, while pumping billions into consumer spending through a devious backdoor method. Now the brilliant summa cum laude graduates of the University of Phoenix are pouring into the marketplace with $30,000 of student loan debt and interviews at Ruby Tuesday, Texas Roadhouse, and TGI Fridays.

Student loan debt has surpassed $1.3 trillion and the American taxpayer is now on the hook. At least 30% of the outstanding debt is already in default or deferral. The students are left with a debt burden that can’t be written off by declaring bankruptcy, very few jobs in their fields of study, wages that can barely cover the debt payments, and no chance of ever owning a home. They were told by their parents, politicians, and the mainstream media that college was the path to prosperity. They were lied to.

The Federal Reserve and the politicians in Washington D.C. have destroyed our economy with their debt based solutions and vast array of laws, regulations, and taxes, which have drained the life out of our financial system. The number of good paying new jobs for college graduates will continue to decline, but the amount of government backed student loans continues to go up by $5 billion per month. Those who have been unwittingly convinced college was a great idea, will pay for the rest of their lives. Or at least until the $500 billion taxpayer bailout when future president Clinton or Bush decides to relieve the burden of potential voters in a future election. Our hole is deep, but we just keep digging deeper. And the vested interests get richer as students and taxpayers go deeper into debt. They like the system just as it is.


"Above The Law" Fed Ignores Congressional Deadline On FOMC Minutes Leak Probe

In a stunning shun to Congressional lawmakers, WSJ reports that The Fed has failed to comply with a request that the bank-owned entity identify the individuals who leaked The FOMC Minutes to Medley Global Advisors a day before the official release in October 2012. Rep. Jeb Hensarling sent a letter to Fed Chairwoman Janet Yellen on April 15 asking the Fed to name them by 5 p.m. EDT April 22. The deadline passed without any response by the Fed...

As a reminder, ProPublica explains the leak...

The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst's private newsletter.


The leak occurred the day before the scheduled public release of meeting minutes that shed new light on the Fed's decision to embark on a third round of bond buying to boost the economy, ProPublica has learned.




The newsletter containing the leaked material came from an economic policy intelligence firm called Medley Global Advisors whose clients include hedge funds, institutional investors and asset managers. On Oct. 3, 2012, Regina Schleiger, an analyst with the firm, sent clients a "special report" titled "Fed: December Bound."


The report focused on the Sept. 12-13 open market committee meeting, where the panel had approved what's called "QE3," a new program of large-scale purchases of mortgage-backed and Treasury securities.


Typically, the Fed chairman holds a news conference following the meetings to help explain the committee's actions. But when Bernanke did this on Sept. 13, he did not reveal the depth of disagreement within the committee about how effective the bond-buying program would be and whether it was worth the cost.


Schleiger wrote, however, that the minutes due out the next day would reveal "intense debate between Federal Open Market Committee participants."


Schleiger also revealed that the Fed would likely continue buying longer-term Treasury bonds beyond December. As part of a program dubbed Operation Twist, the Fed had been selling short-term Treasuries to buy longer-term ones.


Schleiger wrote that the committee would likely continue buying long-term bonds even after it sold all the shorter-term Treasuries. This information was not contained in the minutes and proved to be accurate.


Her newsletter also explained in uncommon detail both how Fed staff constructed the minutes and various policy options that were recommended and the thinking of the leadership – Bernanke and vice chairs Janet Yellen and Bill Dudley.


"It's not unusual for board staff to pull all-nighters working on the final draft of the policy recommendations, once these has [sic] been commented on," Schleiger wrote. "This one took until after midnight."

Which resulted in an internal probe ordered by Bernanke that inevitably found no wrongdoing.. and so Congress took up the matter.

But now, as The Wall Street Journal reports, The Fed has ignored that request...

The Federal Reserve has not replied to a lawmakers’ request that it identify the individuals who had contact with a private consulting firm that published a report on the central bank’s market-sensitive internal policy deliberations.


In October 2012, the day before the Fed released its minutes of its September 2012 policy meeting, Medley Global Advisors, sent a report to its clients with several sensitive details that subsequently appeared in the minutes. A central bank probe found  a “few” Fed staffers had contact with Medley before the report, but did not identify them.


Rep. Jeb Hensarling (R., Texas), Chairman of the House Financial Services Committee, sent a letter to Fed Chairwoman Janet Yellen on April 15 asking the Fed to name them by 5 p.m. EDT April 22.


The deadline passed without any response by the Fed, a committee spokesman said Wednesday.


The Fed declined to comment. Medley did not respond to a request for comment.

*  *  *

By way of conclusion, it appears  James Miller (of summed it up best, Fed Independence Is A Joke, So Why Not Audit?

A whistleblower-hating president, a bureaucrat who illegally targeted conservatives, and the former national intelligence director who lied before Congress walk into a bar.

The bartender says: what can I get “the most transparent administration in history”?

If Janet Yellen didn’t resemble a bookwormish teetotaler, perhaps she’d join her colleagues in a toast to suppressing democratic accountability. For now, she’ll order a club soda while working vigorously to keep Congress, and thus the people, out of her business of running the country’s central bank.

Yellen has only been Chair of the Federal Reserve for one year, but she’s already facing pressure to open the books from the new Congress. Leading the charge are two statesmen from Kentucky: Representative Thomas Massie and Senator Rand Paul. Both have introduced audit the Fed legislation in their respective chambers.

Wall Street’s cadre of financial oligarchs are predictably up in arms over an audit of their free money machine. Think tankers are antagonizing the campaign, with Jim Pethokoukis of the American Enterprise Institute asserting that Sen. Paul has “a poor understanding of what’s actually on the Fed balance sheet and how the bank operates.” It’s expected President Obama would veto an audit the Fed bill. Even local bankers are scaremongering over the prospect of the Fed losing autonomy.

Yellen, for her part, isn’t about to let the nosy wolves in her henhouse. In a recent interview, she said she would stand “forcefully” against any audit measures. She justified her intransigence by citing the importance of “central bank independence” and being able to act without interference.

Nothing says limited government and separation of powers like a bureaucracy unaccountable to the voice of the people! Then again, Yellen doesn’t care much for democratic oversight. She’s a caricature of Randian libertarianism: someone who wants to do whatever, whenever, without rulers. The problem is Yellen isn’t operating a private railroad company. She’s the figurehead for a government institution created by Congress. If democracy means anything, it’s that voters have some measure of control over political bureaucracies.

So apologies Janet, you don’t operate in a bubble (insert Fed pun here). The people - those plain people who think economics is about supply and demand rather than complicated math formulas - deserve some level of sway over the Fed’s operations. So why not an audit by the Government Accountability Office? Last I heard, President Obama was all about accountability.

Yellen and company aren’t buying it. They don’t want anyone butting in on their micromanagement of the money supply. Outside observers would interfere with the Fed’s independence, which is a sacrament of the central bank.

In an illuminating interview with the Wall Street Journal, David Wessel does his best to explain the history of the Federal Reserve and Congress’s long trek to make its internal deliberations more public. For over four decades, the GAO (then called the General Accountability Office) was barred from investigating the Fed. That changed in 1978, when Congress passed a law allowing the GAO to look at the central bank’s “regulatory duties.”

Then the financial crisis of 2008 hit, and the Fed intervened in the financial markets at an unprecedented scale. Banks and Wall Street firms were bailed out to the tune of tens of trillions of dollars. Main Street was left high and dry. Voters were livid and rightfully so.

Congress - after ignominiously bailing out the banks further - expanded the GAO’s authority to examine Fed loans to private companies. With the passage of the Dodd-Frank bill in 2010, the Fed was further opened up, and had to disclose “internal controls, policies on collateral, use of contractors and other activities.” Currently, the GAO is not allowed to review the Fed’s discussions on monetary-policy decisions.

Rand Paul’s audit the Federal Reserve bill eliminates that barrier. And therein lies to the problem according to Fed apologists. As Mr. Wessel tells us, the central bank should be protected from the influence of short-sighted politicians. “[G]iving politicians power over interest rates and the supply of credit hurts an economy over time,” he explains. “Prohibiting the GAO—an arm of Congress–from second-guessing the Fed’s monetary policy decisions is part of that insulation.”

Now, it is indeed true that politicians tend to be myopic in their actions. An $18 trillion debt created by the refusal to don big boy pants and cut spending is indicative of Congress’s systematic immaturity. Having the likes of Nancy Pelosi and John Boehner in charge of the Fed’s printing presses is a startling notion. But that’s not what auditing the Fed accomplishes. There is no language in either the House bill or Senate bill that puts Congress in charge of monetary operations. Fed proponents like Pethokoukis are demagoguing when they say otherwise.

It’s true the Fed’s financial statements are audited every year by the firm Deloitte & Touche. That perfunctory measure didn’t reveal the fact that the Fed took advantage of the financial crisis to bail out foreign companies and central banks. Over $16 trillion was doled out to foreign institutions like Barclays and UBS. The American public only became aware of the monetary shenanigans because Dodd-Frank contained a partial audit of the Fed’s activities. Had that not happened, we would still be in the dark.

Central bank defenders who scream “independence” over the prospect of an audit are misguided. The idea that political institutions operate in a vacuum and are isolated from outside interests is college-level idealism. It doesn’t pass the smell test. Government officials are primarily interested in perpetuating their power - public good be damned.

Janet Yellen is just as beholden to everyday politics as President Obama. She’s not independent; her job depends on the president’s approval. In a recent testimony before Congress, Yellen wondered aloud, “I really wonder whether or not the Volcker-led Fed would have had the courage to take the hard decisions necessary to bring down inflation and get that finally under control.” What she referred to was the economic calamity that preceded the inauguration of President Ronald Reagan. When the Gipper took office, inflation was raging. Volcker was appointed to the Fed to clamp down on rising prices. This wasn’t popular at first; hiking interest rates tanked the economy. But Reagan stood by Volker, giving him the political cover to follow through. As Washington Post columnist Robert Samuelson writes,

“[D]uring Volcker’s monetary onslaught, there were many congressional proposals, backed by members of both parties, to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat.”

Volcker didn’t operate independently. He had the support of the Reagan White House. Just the same, Yellen isn’t free from democratic pressure. She has to obey political headwinds.

If the Fed is not immune from politics, then why keep up the facade of independence? Let’s acknowledge the central bank must answer to the political class. And then let’s look at the past: the Fed’s history is full of backroom deals for elite special interests. That’s not an accident. Darkness gives cover to all sorts of sleazy deeds. An audit would begin the process of weeding out this secrecy.

If the Federal Reserve has nothing to hide, it has nothing to fear, right?

*  *  *

Or perhaps this sums it up best... (when it comes to the untouchables)

Stolen Horse Chase Nets Suspect $650,000 Pay Day

Earlier this month we brought you the story of Jared Pusok who San Bernardino Sheriff’s Deputies thought they were going to arrest April 9 on identity theft charges. Pusok had other ideas. After first fleeing by car, Pusok allegedly stole a horse (and we say “allegedly” only in terms of whether the horse was in fact stolen because as you can see from the video below, there is no doubt as to whether there was a horse involved) and led deputies on a two hour, wild west-style high speed horse chase through the desert. In the end, Pusok was removed from the saddle via taser and once on the ground, appeared to suffer a brutal beating by authorities. Here is the scene:

Pusok faced several charges including resisting arrest, attempted robbery, using fighting or offensive words, and animal cruelty (although it doesn’t appear the horse was harmed), but in the end, it looks as though the two-minute police beating took precedence because as AP reports, Pusok came out of the whole ordeal $650,000 richer.

Via AP:

A California county on Tuesday approved paying a $650,000 settlement to avoid a lawsuit by a man whose beating by deputies after a horse chase was captured on video and led to a federal civil rights investigation.


San Bernardino County supervisors approved the settlement with Francis Pusok, 30, in a closed meeting, said David Wert, a county spokesman.


Attorneys Sharon Brunner and Jim Terrell, who represent Pusok, said in a statement that county officials initiated the settlement negotiations. The lawyers noted that it was "remarkable as there was essentially no investigation nor any indictments," and it was based on video...


Pusok fled by car and then on the horse in the desert on April 9 while deputies chased him on foot after trying to serve a search warrant in an identity-theft investigation.

But before you say it was all about the money, note that the Pusok family was more concerned about ending what they call “police harassment” than they were about the nearly three quarters of a million dollars they stood to gain:

Pusok's attorneys say he didn't settle for the money. They say he would have probably made more through litigation, but he wanted to end police harassment and abuse.

Meanwhile, the sheriff's department is pleased that its deputies can now get back to doing the kind of serving and protecting that is on full display in the Pusok video:

"With this situation behind us, we can move forward with protecting our residents and ensuring that local enforcement is responsive, effective and restrained.”

*  *  *

It looks like this proves yet again that all’s well that ends well after a good old fashioned horse chase.

Dear CFTC: This Is The Market Manipulating "Spoofing" Taking Place In The E-Mini Just Today

Dear CFTC:

Thank you!

Thank you, because 6 years after we warned about the dangers from predatory HFT including such parasitic "strategies" as spoofing (or layering, which together with the DOJ you have now confirmed is illegal), quote stuffing, flash trades, momentum ignition, sub-pennying, ISOs, and countless others, you have confirmed everything we have said.

So we have decided to return the favor.

Just because we know how serious you are in your quest to root out all market rigging, or as you put it in your charge against Navinder Sarao "manipulation or attempt to manipulate the price of the intra-day contract price for the near month of the E-mini S&P," we have decided together with Nanex to once again give you a helping hand, and point out all the spoofing that has taken place in the E-mini or ES.

Just today.

The chart below shows a contract count of just the buy orders added/canceled/executed in the 1 hour interval between 11 and 12pm in the ES:


And here are the "sales":

To remind you, this is what irritated you in the Sarao document:

... Defendants used the Layering Algorithm to place hundreds of orders for tens of thousands of contracts that were modified thousands of times and eventually canceled over 99% without ever resulting in a trade.

As you can see the vast, vast majority of ES contracts just before lunch today was cancelled without ever resulting in a single trade.

And, we are confident, since Mr. Sarao is currently either in custody or on bail, without access to the internet, one can't blame today's massive E-mini spoofing on the flash crashing mastermind.

Since we are confident you intend to root out this evil market scourge at the root, we are also providing you with examples of spoofing in oil, in US Treasurys, and in gold.

Finally, since like you we are confident the investing public's faith in the broken market must be restored at all costs, we will make this article into a daily feature showing every single day the hundreds of thousands of spoofed ES contracts, openly "manipulating" (in your own words), the so-called market.

We will stop once you, dear CFTC, have rooted out all the spoofing, all the momentum ignition, all the sub-pennying, all the quote stuffing. In short - the endless manipulation.

Now, go get 'em!

P.S. if you are unsure who the spoofer is, call us - we will be delighted to tell you: we don't even want the whistleblower award.

Spot The Hockey-Stick

Do you believe in miracles? Sell-side economists do... (again)


The "Faith Gap" between Q1 '15 growth and Q2 '15 growth has never been higher...


and as a reminder, this consensus is still massivekly above The Atlanta Fed's forecast...


Charts: Bloomberg

"China Has A Massive Debt Problem", And Why It Is About Get Much Massiver

We’ve spent quite a bit of time recently discussing the fact that China faces tough choices as Beijing attempts to counter decelerating economic growth while maintaining a peg to what has lately been one of the world’s strongest currencies. With pressure coming from four consecutive quarters of capital outflows totaling some $300 billion, devaluation is a somewhat risky (if inevitable) proposition and so the PBoC has opted for interest rate and RRR cuts to keep liquidity flowing into the economy.

But even as the reserve requirement cut freed up more than a trillion yuan, policymakers must also grapple with competing agendas such as deleveraging a system that, as we exposed more than two years ago, and as Bloomberg now reports, is weighed down by a veritable mountain of debt. 

China has a $28 trillion problem. That’s the country’s total government, corporate and household debt load as of mid-2014, according to McKinsey & Co. It’s equal to 282 percent of the country’s total annual economic output.

President Xi Jinping’s government aims to wind down that burden to more manageable levels by recapitalizing banks, overhauling local finances and removing implicit guarantees for corporate borrowing that once helped struggling companies. Those like Baoding Tianwei Group Co., a power-equipment maker that Tuesday became China’s first state-owned enterprise to default on domestic debt.


Now hold that thought, and consider this: China’s also trying to prop up a $10.4 trillion economy that’s decelerating and probably will continue to do so through 2016, or so says the International Monetary Fund. The economy expanded 7 percent -- the leadership’s growth target for this year -- in the first quarter, the weakest since 2009 and a far cry from the 10 percent average China managed from 1980 through 2012.


Against this backdrop, a barrage of recent policy moves out of China in recent days comes into sharper focus. It also helps explain why various parts of the government don’t always seem to be working from the same playbook.


“There’s obviously a contradiction between attempts to deleverage the economy and attempts to boost growth,” said Dariusz Kowalczyk, a senior economist at Credit Agricole SA in Hong Kong.

As a reminder, Baoding Tianwei Group Co (mentioned by Bloomberg above) is a subsidiary of state-owned China South Industries Group, and so when Baoding Tianwei indicated it would likely come up short on $14 million in interest payments due Tuesday, many speculated the parent company would step in to support it rather than risk a panic triggered by the first bankruptcy from a state-backed borrower. Instead, China South Industries called the issue none of their concern, suggesting that going forward, Beijing will allow the market to play a greater role in shaking out excessive debt burdens. 

The country is also moving to curb the excessive margin debt that has helped fuel the country’s world-beating equity rally and is set to kick off a pilot program that will allow heavily indebted local governments to refinance their high interest loans (which total 35% of GDP) and save billions in interest expenses in the process (and which incidentally may eventually be part of the Chinese version of ECB LTROs). And that’s not all: 

Among regulatory overhauls in train is a deposit-insurance program and ending a cap on deposit rates that effectively subsidized credit and punished savers. The deposit-rate ceiling may be abandoned this year and deposit insurance, a vital prerequisite, is scheduled to start May 1.


Putting depositor safeguards in place would allow for bank failures without stoking the kind of panic that spurred almost 1,000 customers to rush to outlets of Jiangsu Sheyang Rural Commercial Bank last year amid rumors the lender might go bust.


Moving toward a financial system where risk is more accurately priced and defaults tolerated is also crucial to the government’s fiscal overhaul of debt-besotted local governments...


All this explains why cleaning up the debt mess matters. With $3.73 trillion in foreign currency reserves, China has the financial resources to handle any future bank bailout or economic stimulus if need be.


Even so, if borrowing levels keep rising, at some point the country’s ability to both roll over existing credit and fund new projects will get tapped out. That’s not a good place to be for a one-party state with huge inequality and still-considerable development needs.

So in summary, China’s deleveraging efforts have the potential to work at cross purposes with Beijing’s desire to keep liquidity flowing and keep the economic machine from shifting further into low gear, but as Reuters notes, the PBoC is set to remove a bureaucratic hurdle from the ABS issuance process, which means that suddenly, trillions in loans which had previously sat idle on banks’ books, will now be sliced, packaged, and sold. This, in turn, will put in motion the classic securitization (non)virtuous circle in which banks offload credit risk to investors via ABS and, encouraged by the generation of securitization fees along the way, use their newly unencumbered balance sheet to make more loans to feed the securitization machine. This results, invariably, in shoddy underwriting as banks compete for business, and the amount of risk embedded in the financial system rises in lockstep with the percentage of securitizations backed by new loans to underqualified borrowers. 

Here’s more from Reuters on the PBoC’s new rules for ABS issuance:

Issuance of Chinese asset-backed securities (ABS) could triple to more than $160 billion this year, reactivating huge assets now mouldering on bank books, as Beijing streamlines procedures for firms to securitise receivables.


By making it easier for banks to repackage and resell receivables - such as loan repayments on mortgages, car loans and credit cards - the government hopes to free up banks' balance sheets so they can lend more to the real economy.


The People's Bank of China (PBOC) announced this month that regulatory approval will no longer be required to issue ABS, and issuers will now only need to register to do so.


Getting banks to lend more is a major policy goal, given banks have so far been reluctant to lend despite repeated exhortations from top officials. Even Premier Li Keqiang has called for banks to "activate existing assets," - which is where this securitisation push comes in…


Market players now expect ABS issuance to more than triple to 1 trillion yuan ($161 billion) this year, up from 300 billion yuan in 2014, which was in turn twice the total issued since 2005.


"There is a huge demand from banks alone to securitise assets," said Zhao Hao, economist at ANZ in Shanghai.


"General demand can easily push issuance value exceeding 1 trillion yuan ($161 billion) this year."

What this means is that China’s massive debt burden is about to get massiv-er, as banks use ABS issuance as a pressure valve to free up lending capacity. And as a reminder, here’s what will be going into the ABS collateral pools:

Political Partisanship Has Never Been Higher (Why It's Getting Worse)

While it has been widely reported that partisanship in the United States Congress is at an historic high, a new study finds that despite short-term fluctuations, partisanship or non-cooperation in the U.S. Congress has been increasing exponentially for over 60 years with no sign of abating or reversing.

As The Study notes, Americans today are represented by political figures who struggle to cooperate across party lines at an unprecedented rate, resulting in high profile fiscal and policy battles, government shutdowns, and an inability to resolve problems or enact legislation that guides the nation’s domestic and foreign policy.

Partisanship has been attributed to a number of causes, including the stratifying wealth distribution of Americans; boundary redistricting; activist activity at primary elections; changes in Congressional procedural rules; political realignment in the American South ; the shift from electing moderate members to electing partisan members movement by existing members towards ideological poles; and an increasing political, pervasive media.


The individual representative’s role in facilitating partisanship is less clear. Party affiliation significantly shapes a legislator’s voting record, so much that in some cases, a change in a legislator’s party affiliation results in an immediate and significant realignment of voting behavior towards the new party agenda. This change is too rapid to be attributable to contemporaneous changes in constituent ideology, indicating a disconnection between the representative and his or her constituency. Party leaders also ensure obedience by offering incentives such as the prospect of assigning a member to a favored committee or promoting legislation crafted by the member to reach final voting stages, i.e. bringing legislation ‘to the floor’. As many have concluded, much is at stake with this type of party-driven arrangement.


Despite party-level pressures, there are incentives for individual representatives to vote with members of the opposite party on issues that are specific to a district’s geography, such as aging populations, natural resource management, veterans’ affairs, or regional concerns. Moreover, regardless of party affiliation, pairwise relationships may form as a result of social interactions such as sponsoring bills, interacting with lobbyists, creating trust networks for communication, sharing ideas, garnering support for initiatives, negotiating provisions and sharing one’s own sense of ethics and orthopraxy. Vote trading, also known as logrolling, is another incentive for cross-party cooperation. Though difficult to quantify because vote trading discussions are not public information, these would result in increased inter-party cooperation on ideological votes.

But the division of Democrat and Republican Party members over time shows things are getting worse...

As co-operation collapses and disagreements soar...

As the study concludes:

Our analysis shows that Congressional partisanship has been increasing exponentially for over 60 years, and has had negative effects on Congressional productivity. This is particularly apparent in the steady reduction of the number of bills introduced onto the floor, suggesting that the primary negative effect of increasing partisanship is a loss of Congressional innovation.


This increase in non-cooperation leads to an interesting electoral paradox. While U.S. voters have been selecting increasingly partisan representatives for 40 years, public opinion of the U.S. Congress has been steadily declining. This decline [30] suggests that voters cast their ballots on a local basis for increasingly partisan representatives whom they view as best representing their increasingly partisan concerns, leaving few if any moderate legislators to connect parties for a more cohesive Congress. Elected representatives are increasingly unable to cooperate at a national Congressional level but are re-elected at least 90% of the time, reflecting an evasion of collective responsibility.


Voters might believe that highly partisan candidates will ‘tip the scale’ in one party’s favor. However, based on correlations shown here, a partisan candidate may lack cooperation needed to pass legislation. More moderate legislators may have a competitive advantage in negotiating for their party’s legislation.

A fundamental reversal of increasing non-cooperation, over time, might require either a change in local ideological perspectives (resulting in a selective shift to fewer partisan representatives), or a fundamental change in how the electorate votes (from concerns focused on party issues to concerns focused on global effectiveness).

"Plan B"

Submitted by Simon Black via Sovereign Man blog,

In May 1788, Thomas Jefferson wrote one of the most prescient statements of his career:

“The natural progress of things is for liberty to yield, and government to gain ground.”

Jefferson was living in Paris at the time serving as the Minister to France at a time when the United States was still in its infancy.

It was during this period that France descended into violent revolution. And Jefferson had a front row seat to witness it.

France’s reversal of fortune was legendary; only a few years before they were the largest superpower in the world and had helped the US gain independence.

Yet not even a decade later, Jefferson watched as French peasants stormed the Bastille in 1789 and entered a 26-year period of chaos.

He wrote extensively on the subject, and it clearly influenced his thinking on politics.

For example, one of Jefferson’s chief concerns was that the US Constitution did not limit the number of terms someone could serve as US president.

To Jefferson, a president serving for multiple terms was tantamount to a monarchy.

It has certainly turned out that way. Particularly as the next US election may shape up to be a contest between the House of Bush and the House of Clinton.

True to Jefferson’s words, liberty has yielded in the Land of the Free… and most of the West for that matter.

Governments regulate what we can and cannot put in our bodies, and how we are allowed to raise our own children.


They have awarded totalitarian control of the economy and money supply to an unelected central banking elite, which have in turn created epic bubbles in nearly every major financial market on the planet.


Interest rates are negative. Bank balance sheets are in pitiful condition. Capital controls are being rolled out. Debt levels are exploding. Pension funds are insolvent.

Ask yourself– where do you think this is going? Do you really think your home country will be more free and more prosperous in five years?

If not, it’s time to come up with a Plan B:

1) Don’t Panic. This is good news.

The world isn’t coming to an end. It’s changing. And this will unlock some of the most exciting opportunities we’ve ever seen.

Remember, some of the wealthiest families in Europe were wiped out in the 1920s because they were living in Germany and didn’t see hyperinflation coming.

Others who saw the writing on the wall built generational wealth in just a few years.

That’s the same opportunity we have now.

2) If your banking system is highly illiquid, switch banking systems.

Today, most banks in the West hold as little as 3% of their customers’ deposits; the rest is gambled away in the markets or loaned to bankrupt governments at negative interest.

There’s absolutely no sense in keeping your money trapped in a banking system that treats you like a milk cow.

It’s 2015. Technology makes it possible to transfer money across the world with just a mouse click.

So there’s no reason to choose a bank simply because it’s a short drive from your house. Geography is irrelevant.

Instead, choose a bank because it has strong financial fundamentals and plentiful liquidity reserves.

This tends to be the case in Asia (places like Hong Kong and Singapore) where in some cases you can open a bank account and move a portion of your savings overseas without leaving the house.

3) If your currency has pitiful fundamentals, switch currencies.

It’s not exactly a profound assertion these days to point out that the US dollar is a disaster.

Its issuing authority, the Federal Reserve, is nearly insolvent. And the government backing it up is totally insolvent.

One option I’d recommend is to consider holding the Hong Kong dollar instead.

The Hong Kong dollar is pegged to the US dollar at a rate of 7.80 per USD +/- a very narrow band.

This means that the value of your savings won’t fluctuate very much in USD terms. If the dollar remains strong, the HKD will remain strong.

But if the US dollar experiences a painful collapse, the Hong Kong Monetary Authority could simply revalue the exchange rate. This gives you quite a bit of downside protection.

4) If your home government is totally bankrupt, don’t keep all of your assets there.

Consider owning real assets that are not located in your home country. You can store gold and silver in Singapore at a place like Silver Bullion.

Or own cash-producing real estate in a rising South American nation like Panama, Colombia, or Chile.

5) If you find that your home country is less free, find freedom somewhere else.

Again, geography is totally irrelevant in 2015. You no longer have to live in a place simply because your boss or customers live there too.

It’s still possible to find freedom in the world. There’s no one-size-fits-all solution, but your slice is out there somewhere.

At a minimum, apply for a passport and travel a bit. You’ll find that the rest of the world actually does have running water and doesn’t look like a Feed the Children commercial.

Find a place that you would be happy spending more time, and even better, obtain residency there.

You won’t be worse off for doing this. But if things ever get so bad that you decide it’s time to get out of Dodge, you’ll already know exactly where to go.

Why Are Oil & Gas Workers Mysteriously Dying Across America?

In July of 2012, the mother of 21-year old Dustin Bergsing filed a wrongful-death suit in Yellowstone County District Court. Bergsing died on January 7 of that year — his first child was born just six weeks prior. The cause of death was hydrocarbon poisoning. More specifically, Bergsing died from inhaling fatal amounts of petroleum vapors after gauging a crude oil tank on a Marathon Oil site in Mandaree, North Dakota. Here is what happened (from a North Dakota Supreme Court apellee brief):

Dustin Bergsing was working for Across Big Sky when he was found dead at a Marathon well-site near Mandaree, North Dakota, in the early morning hours of January 7, 2012. Across Big Sky also submitted a report of death, describing the accident happened when Bergsing was "on the catwalk and was going to gauge the oil level in the production tank." 


On January 6, 2012, Bergsing left the home he shared with Lacey Breding in Montana to start his shift in North Dakota. The week before, Breding and Bergsing began making plans for their wedding, which was scheduled for June 30, 2012. The night of January 6, Breding and Bergsing were messaging each other, and Bergsing stopped responding around 9:30 p.m. The next contact Breding had was from the Dunn County Sheriff's Department at approximately 4:15 a.m. informing her Bergsing had died…


The bloodwork showed Bergsing had ethane, propane, butane, isobutene, pentane, hexane, and cyclohexane in his blood.

The concept of tank gauging is simple: workers check the level of oil in storage tanks at tank batteries by opening a hatch and putting a gauge inside. Here’s how it works:

One of the problems with manual tank gauging is that, as one might imagine, noxious vapors have a tendency to build up inside the tanks and so, when the hatches on top are opened, those vapors are suddenly released into the previously breathable air around the workers. Breathing these hydrocarbon “plumes” can lead to sudden death by asphyxiation and/or cardiac arrest. In some cases, tank gauging is done alone, increasing the risk of fatal accidents. 

Nine workers have been killed over the past four years in circumstances that strongly suggest hydrocarbon poisoning as the likely cause of death, and yet so far, only one of the fatalities has been solely attributed to hydrocarbon vapor inhalation.

As far as the oil & gas industry’s position on the dangers of manual tank gauging is concerned, there appear to be two possibilities: either they did not realize that opening a hatch on top of an oil tank and looking inside might expose workers to dangerous fumes, or they did realize this and chose not to do anything about it. Here’s WSJ:

The deaths of Trent Vigus and at least nine other oil-field workers over the past five years had haunting similarities. Each worker was doing a job that involved climbing on top of a catwalk strung between rows of storage tanks and opening a hatch.


There were no known witnesses to any of the men’s deaths. Their bodies were all found lying on top of or near the tanks. Medical examiners generally attributed the workers’ deaths primarily or entirely to natural causes, often heart failure…


According to some industry-safety and government officials. The industry has been ignoring warning signs for years and has been resistant to implementing some steps that would reduce or eliminate the risk to workers.


“I was trying to get workers into respirators and all kinds of things and running an uphill battle,” said a former industrial hygienist for a large oil company who said he had noticed dangerously high hydrocarbon levels in some of his testing as far back as 2009. “They say, ‘Everyone does it this way.’ But that doesn’t make it any less right or wrong.”


Some industry officials said that companies hadn’t realized there might be a problem until the pattern of deaths began to emerge, but they now acknowledge the situation needs to be studied further.

One company that surely did “realize there might be a problem” was Marathon because, as the following excerpt from the Billings Montana Gazette details, both sides in the wrongful death suit of Dustin Bergsing agreed that hydrocarbon poisoning was indeed the cause of death and although the exact amount of the settlement wasn’t revealed, someone apparently made a payment to the family “in the seven-figure range”:

A confidential settlement has been reached in a lawsuit involving a Montana man who died working at a Marathon Oil well in North Dakota.


An attorney representing the family of Dustin Bergsing said Friday that he could not reveal any details of the settlement.


Fredric Bremseth, of the Bremseth Law Firm in Minnetonka, Minn., said only that "the case was resolved for a confidential amount”...


In pretrial statements filed by attorneys for the family and Marathon Oil, both sides agreed that Bergsing died of hydrocarbon poisoning…


The statement said Marathon Oil "knew or should have known that the oil well and tank facility where Dustin Bergsing worked was unreasonably dangerous due to the presence of a large amount of toxic hydrocarbon gases under pressure in the oil."


The statement further said that Marathon "was actually warned by an employee that the accumulation of gases at these wells was ultrahazardous, and could result in a death."


A computation of damages hadn't yet been done, the statement continued, "other than to value the case in the seven-figure range."

Fortunately for everyone in the oil & gas industry who may have been hitherto unaware that breathing hydrocarbon vapors emitted out of giant oil tanks might be dangerous, both the CDC and OSHA have put together some helpful information on the subject. 

From the CDC:

NIOSH researchers, along with officials from the Occupational Safety and Health Administration (OSHA) and members of the academic community, have continued to investigate these and other reports of worker deaths associated with manual tank gauging and sampling operations in the oil and gas extraction industry. Through this investigation, NIOSH researchers have now identified nine fatalities of oil and gas extraction workers from January 2010 to December 2014 associated with tank gauging or sampling. The degree of detailed information about each case varies but all have in common manually gauging or sampling production tanks at oil and gas well sites…


When hatches on production tanks are opened by a worker, a plume of hydrocarbon gases and vapors can be rapidly released due to the internal pressure present in the tank. These gases and vapors can include benzene, a carcinogen, as well as low molecular weight hydrocarbons such as ethane, propane, and butane. In addition to asphyxiation and explosive hazards, exposure to high concentrations of these low molecular weight hydrocarbons can have narcotic effects, resulting in disorientation, dizziness, light-headedness and other effects.

For those wondering what a deadly hydrocarbon plume looks like, here’s an infrared image which shows you just what it is that these workers are breathing when they open the hatches atop the oil tanks...

...and here is OSHA to explain exactly how the buildup occurs and what happens when the vapor is released…

Hatch is closed. No visible emissions, greater than 95% VOCs produced are controlled. Gases and vapors in tank are in equilibrium with gas and vapors in the liquid hydrocarbon. The different gases and vapors are exerting pressure on the container.

Hatch is opened. A large volume of gases (mostly propane and butane) rush out of the hatch very quickly. The “cloud” can displace oxygen in the immediate work area and presents an immediate asphyxiation hazard. 

Below, courtesy of the CDC, is a list of the circumstances surrounding each of the nine workers’ deaths. Note that the fatalities are variously attributed to things like atherosclerosis, diabetes, and tobacco use. Particularly absurd is the fact that the following series of events was attributed to ischemic heart disease ("natural causes") with no mention of hydrocarbon vapors: 

The employee (52 years old) lost consciousness while pulling an oil sample out of a thief hatch on a tank. The employee fell backwards on the 90 degree corner of the catwalk guardrail. The employee's clothing became hooked to the guardrail. The employee was hanged by his sweatshirt hood. From the toxicology report, autopsy, and extensive air monitoring conducted by the employer and emergency personnel it was determined this individual died from natural causes. The cause of death was sudden cardiac death due to ischemic heart disease. Contributing factors include atherosclerosis and cardiomegaly.

While "natural causes" are blamed in most of these cases, it seems to us that there is a very real possibility that most (or all) of these fatalities were the result of hydrocarbon poisoning and thus could have been entirely avoidable. Of course the likely reason why the proper solutions have not been implemented is that fixing the problem would cost money. Here's WSJ again:

Some industry experts say the industry knew the plumes could unleash potentially dangerous vapors and should have been monitoring the chemical levels all along. And, they say, companies could implement safety fixes that would reduce or remove hazards. One option is to use automated or remote methods to read tank levels. That is done regularly elsewhere, including in Canada.


“There’s no question in my mind it was absolutely known” that there were dangerously noxious fumes coming from the tanks, said Dennis Schmitz, a safety consultant for oil companies in North Dakota. “You are absolutely required to evaluate that hazard before you put that employee up there.”


“Every hazard should be engineered out,” added Mr. Schmitz, who acknowledged that fixes would add some cost.

We'll leave you with the following quote from Dr. William Massello, a North Dakota state forensic examiner, and a forensic pathologist — these are some of the things that can happen should you inhale toxic hydrocarbon vapors right before you coincidentally die of "natural causes": 

Well, as I mentioned, number one is you can have a seizure. You could have respiratory ­what we call respiratory arrest or respiratory paralysis, it can put you in a coma, or you can have what we call a fatal arrhythmia of the heart, the heart can quit beating normally and actually sort of fibrillate or jiggle in such a fashion that it doesn't produce any flow of blood and you die from that. And then, of course, you know, when you have fluid in your lung, this can impair the exchange of oxygen that you are going to you're not going to get enough oxygen when you breathe. And then also these components will displace oxygen from your lungs so that in and of themselves they're displacing oxygen from the lung and, as a consequence, you just don't have enough oxygen in your system. So it can be any one of these or all of these things and these can end up killing you.