ZeroHedge RSS Feed

China Makes It Official, Launches The Bank That Humiliated Washington

In March, China was “handed a propaganda coup” (to use WSJ’s words), when the UK decided, in the face of loud protestations from Washington, to support Beijing’s efforts to launch a new development bank aimed at filling the gaps left by traditional post-war multilateral institutions such as the IMF and the ADB.

The US claims it has concerns about governance and adherence to international norms around corruption and environmental protocol, but as even the most casual observers are well aware, the real concern in Washington (and in Tokyo) is that China will use the bank as an instrument of foreign policy and as a means of embedding the yuan in global investment and trade.

Here's a helpful recap, excerpted from "China's Global Ambitions Take Shape As AIIB Structure Revealed":

The AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. This failure has been exemplified of late by Washington’s steadfast refusal to reform the IMF in order to ensure the Fund reflects the economic clout of its members. Although the failure falls largely at the feet of Congress — US lawmakers’ utter inability to legislate has left reform measures stalled — it recently manifested itself at the Presidential level when President Obama had an opportunity to change the structure of the IMF (for the better) without congressional approval but chose not to do so. Importantly, Obama’s decision not to act was not made out of reverence for Congress. Rather, The White House believed that supporting the reform agenda would have jeopardized the US veto, which US officials at all levels view as sacrosanct. 


As China builds its own multilateral institutions, Beijing has been keen to dispel the notion that it seeks to supplant the Bretton Woods order with its own brand of Eastern hegemony and although one can certainly question the degree to which China’s aims are rooted purely in an inclination to be benevolent towards nations in need of fixed asset investment, Beijing is making an effort to distance itself from the way the US governs the institutions under its control.


Despite the best efforts of The White House, US ally after US ally pledged their support for the China-led effort and four months after the UK opened the flood gates, the new bank has become a reality. WSJ has more:

On Monday, the Asian Infrastructure Investment Bank was launched with representatives from 57 countries gathered in Beijing. The bank came together in less than two years amid strong global interest. 


Lou Jiwei, China’s minister of finance, called the launch of the China-backed bank a “win-win for Asia” at the bank’s signing ceremony at Beijing’s Great Hall of the People. Mr. Lou said he thought the bank would start operating toward the end of the year. Of the 57 nations present, 50 signed the agreement

Monday with another seven holding out for potential signing later in the year.


Beijing has effective veto power over major decisions via a more than 25% voting share, and some are concerned about how the organization will be managed.


In the lead-up to the launch, China has pledged to operate a transparent, socially conscious development bank that helps meet the shortfall in Asian infrastructure funding and works with existing multilateral organizations.


China has vowed to bring to the bank some of the speed with which it has gotten work off the ground at home. It has also pledged to decrease the bureaucracy that slows projects at existing multilateral lenders such as the World Bank and the Asian Development Bank.


To cut costs and minimize political jockeying, the AIIB will have a nonresident board and focus on technical decision-making, according to founding documents and people close to the bank.

And here's a bit more color from The Washington Post on the signing ceremony:

Underscoring its growing global heft, China launched an infrastructure bank for Asia on Monday, receiving the backing of 50 countries for an initiative that seeks to boost the region’s economy but also put Beijing at the center of its development.


Representatives from Britain, Germany, South Korea and Australia were among those who took part in a ceremony to sign the articles of association in the Great Hall of the People, with the United States and Japan the most notable absentees.


Many U.S. allies joined the Asian Infrastructure Investment Bank (AIIB) on Monday — despite Washington’s initial objections — in what was seen as a major diplomatic victory for President Xi Jinping.


Finance Minister Lou Jiwei said Monday’s ceremony was a milestone and “a first step in an ‘epic journey,’ ” meant to deepen regional cooperation, boost Asia’s infrastructure and support the global economic recovery.


Among the other big investors are India, which has a 7.5 percent vote share, and Russia with 5.9 percent, followed by Germany and South Korea. Major decisions require 75 percent agreement, giving China veto power, but this may change if shares are diluted as more countries join.


(the Russian delegate signs on the dotted line)

And so, it is now official. China has created and launched a supranational lender aimed directly at supplanting the US-dominated institutions that have defined the global economic order for more than a half century. Despite criticism at home and abroad, the US has largely clung to a strategy that aims to undercut the bank by casting aspersions and claiming the institution has little relevance beyond what is says about Chinese ambition.

As we said earlier this month, "in the AIIB, the US faces a far greater threat to its position in the global economic order than anyone in Washington dares to admit. The smear campaign (that's really the only way to cast it) aimed at painting the new bank as relatively small and meaningful only to the degree that it symbolizes China's global and regional ambitions is profoundly misleading. This is not a pet project for Beijing and the founding members are not pledging hundreds of millions so they can play a part in petty Chinese theatrics. The bank is real. The sooner Washington recognizes and accepts this, the better off it will be in terms of helping to repair the reputational damage the IMF and ADB have suffered as a result of American and Japanese belligerence." 

Aii b Articles of Agreement

Greek Supermarkets Begin To Resemble Those Of Venezuela

For years we have mocked Venezuela's economy (if not its long-suffering population): it got so bad, we even did a visual summary of selected Venezuela headline posts we wrote over the years.

Most of these were expected, and in line with the transformation of any normal nation to a socialist utopia. None were more poignant than the images of supermarkets and grocery stores that have been ransacked empty as a result of the collapsing currency, devastated supply chains and soaring inflation (supermarkets which have since imposed fingerprint scanners in what is no longer capital but food controls).

We are sad to announce that what was once a Venezuela trademark has now transitioned to a country that until recently was among the most developed nations in the west: Greece.

As we noted yesterday, in clear rejection of Tsipras' plea for calm, the Greek population stormed (now empty) ATMs, grocery stores and gas stations as they scrambled to obtain, or convert, paper currency into tangible products.

This morning, the NYT picked up on the realization that for Greece ATM runs were last week's story. Now, it's all about the "Supermarket Sweep"... and hoarding. To wit:

Beside the lines at A.T.M.s, people were also lining up at gas stations and in grocery stories. In the small town of Spata, outside Athens, residents had stripped grocery shelves bare by Saturday night. The local Shell station had run out of regular unleaded and had only premium gasoline to sell. “Doom,” the gas attendant responded, when asked to describe the mood.


The frenzy at gas stations across the country prompted Greece’s largest refiner to issue a statement assuring that there would be enough supply...

And this is how Athens is slowly starting to look like Caracas.

On Monday supermarket shelves in #Athens emptying as Greeks stock up for coming days #Greece #Grexit #Greferendum

— Julia Damianova (@JuDamianova) June 29, 2015

1914 Deja Vu: Draghi's Cap On ELA Is Today's Czar Nicholas Troop Mobilization

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,


If you don't like how the table is set, turn over the table.

– Frank Underwood, “House of Cards” (2013)

 Nothing like a good Friday-after-the-close blockbuster to set the stage for an interesting week.

At 1am Saturday morning Athens time, the Greek government called for a nationwide referendum to vote the Eurogroup's reform + bailout proposal up or down. The vote will happen on Sunday, July 5th, but Greece will default on its IMF debt this Wednesday, and as a result the slow motion run on Greek banks is about to get a lot more fast motion unless capital controls are imposed. If you want to get into the weeds, Deutsche Bank put out a note, available here, that I think is both a well-written and comprehensive take on the facts at hand. As for the big picture, I've attached last week’s Epsilon Theory note ("Inherent Vice"), as this referendum is EXACTLY the sort of self-binding, "rip your brakes and steering wheel out of the car" strategy I wrote about as a highly effective way to play the game of Chicken.

Look, I have no idea whether or not Tsipras will be successful with this gambit. But I admire it. It’s a really smart move. It’s a wonderful display of what de Tocqueville praised as the “condition of semi-madness” that was so politically effective in 1848, and I suspect will be today. Plus, you can’t deny the sheer entertainment value of hearing Dijsselbloem splutter about how he was open to a revised, revised, Plan X from Greece all along, if only Tsipras would continue with this interminable charade. “The door was still open, in my mind.” Priceless.

So long as Tsipras can avoid market anarchy and TV coverage of violent ATM mobs this week, I think the NO vote is likely to win. The referendum is worded and timed in a way that allows very little room for Antonio Samaras and other Syriza opponents to turn the vote into a referendum on the Euro itself, which has proven to be a successful approach in the past. Particularly as the Eurogroup rather ham-handedly denied the request for a one-week extension in the default deadline, the referendum is being framed by Syriza as what Cormac McCarthy called a “condition of war”, an over-arching game where “that which is wagered swallows up game, player, all.” It may well be a close vote, but it’s hard to vote YES for a public humiliation of your own country under any circumstances, much less when that YES vote is being portrayed as giving aid and comfort to the enemy.

Here’s how I see the game playing out after the vote.

If Greece votes to accept the Eurogroup reform proposal after all, then the game of Chicken resolves itself within the stable Nash equilibrium of a shamed Greece and a triumphant Euro status quo. I would expect an enormous risk-on rally in equities and credit, particularly in Euro-area financials. Hard to say about rates ... peripheral Euro debt (Italy, Spain) should rally, and German Bunds might, too, as the Narrative will be that Germany "won". But reduction of systemic risk is a negative for any flight-to-safety trade, so this outcome is probably not good for Bunds in the long term, or US Treasuries over any term.

If Greece votes to reject the proposal, then either the game resolves itself within the stable Nash equilibrium of a shamed Euro status quo and a triumphant Greece (if the ECB and EU decide to cave to some form of the original Greek proposal), or we enter the death spiral phase of a game of Chicken, as all parties start to talk about how they “have no choice” but to crash their cars. That latter course is the far more likely path, I think, given how the various Euro Powers That Be are already positioning themselves. It’s all so very 1914-ish. Draghi’s cap on bank-supporting Emergency Liquidity Assistance (ELA) is the modern day equivalent of Czar Nicholas II’s troop mobilization. Good luck walking that back.

If we go down the death spiral path and some form of Greek exit from the Euro-system, I expect the dominant market Narrative to be that Greece committed economic suicide and that the rest of Europe will be just fine, thank you very much. That should prevent a big risk-off market move down, or at least keep it short-lived (although you should expect Bunds and USTs to do their risk-off thing here). Unless you’re a hedge fund trying to make a killing on those really cheap Greek bonds you bought two years ago, there’s no reason to panic even if we’re on the death spiral.

Over time, however, I expect that dominant Narrative to be flipped on its head. Greece will quickly do some sort of deal with Russia (hard currency for port access?), and then the IMF will strike a deal because that's what the IMF does. More and more people will start to say, "Hey, this isn't so bad", which is actually the worst possible outcome for Draghi and Merkel. At that point, you’ll start to see the Narrative focus on the ECB balance sheet and credibility, and as Italian and Spanish rates start to creep up and as the spread to Bunds starts to widen, people will recall that ECB QE only has national banks buying their own debt ... the Bundesbank ain't propping up Italian sovereign debt. I suspect it will be a slow motion contagion, all taking place in the Narrative and expressed in Italian, Spanish, and French politics over the next 12 months or so. The Red King will start to wake.

One last point on how the market Narrative will shift if we go down the death spiral path, and that’s the dog that will stop barking. The incessant and often silly focus on Fed “lift-off” is about to go on summer hiatus, which can’t happen soon enough for me.

Puerto Rico Announces Bond Payment "Moratorium"

Having concluded last night that Puerto Rico debt is "unpayable," and that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts, Padilla confirmed tonight that (from Bloomberg):


Likening his state's situation to that of Detroit and New York City (though not Greece), Padilla concluded, the economic situation is "extremely difficult," which is odd because just a few years ago when they issued that bond - everything was awesome?

When will PR overtake Greece again?


Puerto Rico's Governor is speaking on national TV:


And the punchline:


We suspect the 70 handle will quickly become a 50 handle or less...

As AP reports,

Puerto Rico's governor says he will create a financial team that will meet with bondholders and seek a moratorium on debt payments.


Gov. Alejandro Garcia Padilla made the announcement Monday night after saying that the U.S. territory's $72 billion public debt is unpayable. He said he would seek a moratorium of several years but did not provide specifics.


Garcia's comments come just hours after international economists released a gloomy report on Puerto Rico's economy.


Legislators are still debating a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

As we explained previously,

What happens next is unclear: "Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out."

So without the "luxury" of default, what is PR to do? Why petition to be allowed to file Chapter 9 naturally: after all everyone is doing it.

In Washington, the García Padilla administration has been pushing for a bill that would allow the island’s public corporations, like its electrical power authority and water agency, to declare bankruptcy. Of Puerto Rico’s $72 billion in bonds, roughly $25 billion were issued by the public corporations.


Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos.


“There are way too many creditors and way too many kinds of debt,” Mr. Rhodes said in an interview. “They need Chapter 9 for the whole commonwealth.”

García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts. Where have we heard that before...

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.


“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

And the punchline:

“My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”

And this one: any deal with hedge funds, who are desperate to inject more capital in PR so they can avoid writing down their bond exposure in case of a default, "would only postpone Puerto Rico’s inevitable reckoning. “It will kick the can,” Mr. García Padilla said. “I am not kicking the can.”

We wonder how long before Tsipras, who earlier was quoting FDR, steals this line too.

And speaking of Prexit, how long before Puerto Rico exits the Dollarzone... and will there be a Preferendum first or will the governor, in his can kick-less stampede, just make a unilateral decision to join Greece, Ukraine, Venezuela and countless other soon to be broke countries in the twilight zone of Keynesian sovereign failures?

*  *  *

But Puerto Rico is not Detroit... well actually it is... worse:


Puerto Rico's debt is nearly half that of California for a population one-tenth the size... (via WSJ)


Greece Threatens 'Unprecedented' Injunction Against EU To Block Grexit

Having told the citizens of Greece that the European leaders will not kick them out of Europe because "the cost of throwing them out is too high, enormous," it appears Greek PM Tspiras has another plan to ensure - no matter what the outcome of the forthcoming referendum - that there is no actual Grexit. As The Telegraph reports, Greece has threatened to seek a court injunction against the EU institutions, saying "we are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable."


Speaking earlier Tsipras stated:


And now, as The Telegraph reports, Plan B is in place...

Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.


“The Greek government will make use of all our legal rights,” said the finance minister, Yanis Varoufakis.


“We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable,“ he told the Telegraph.


The defiant stand came as Europe’s major powers warned in the bluntest terms that Greece will be forced out of monetary union if voters reject austerity demands in a shock referendum on Sunday.


Any request for an injunction against EU bodies at the European Court would be an unprecedented development, further complicating the crisis.

*  *  *

With JC Juncker lies and propaganda this morning, Tsipras main goal now is to keep anarchy from breaking out before the potential vote on Sunday.

A Wall Street Crash Course: How To Sell $1 For $100

Submitted by Daniel Drew via,

On Wall Street, a vital skill is the ability to sell something that you know is completely worthless. Goldman Sachs did it when it sold ABACUS 2007-AC1 to investors while hedge fund manager John Paulson was betting against it. Paulson paid Goldman $15 million to peddle this junk, which was a collateralized debt obligation that would make money when millions of people lost their homes. The SEC charged Goldman with fraud, and they eventually settled for $550 million. If you're an enterprising Wall Streeter who wants to make a name for himself without breaking the rules, you can operate a tantalizing scheme that investors can't resist. It's called Shubik's Dollar Auction.

The Dollar Auction was created in 1971 by Martin Shubik, a professor at Yale. Shubik was friends with the late game theorist John Nash, and in their spare time, they amused themselves by creating parlor games that were nothing less than diabolical. Wall Streeters are usually familiar with traditional risky games like No Limit Texas Hold'em and Liar's Poker. However, the Dollar Auction trumps all of those games by taking loss aversion to the next level.

The Dollar Auction works like any other auction except for one key rule: the second-highest bidder has to pay his bid in full and gets nothing in return. Experienced traders will immediately foresee how this will play out. Gather a large group of people in a room and start the bidding. Initially excited by the prospect of getting a dollar for pennies, people will start bidding. Even at 50 cents, they are still getting a bargain. No one worries about being the second-highest bidder because there are so many other people in the room.

As the bidding gets closer to $1, bids will start dying out. Eventually, someone will bid $1. At that point, there will be no new bidders, but someone is still stuck at 99 cents. That person is facing a guaranteed loss of 99 cents. If they bid $1.01 and win, they can get the dollar and only take a 1 cent loss. So they figure a 1 cent potential loss is better than a 99 cent guaranteed loss. However, the other remaining bidder is thinking the same thing. These two bidders will run up the price as high as necessary until one of them eventually decides he can't take it any longer. There is no limit to how high the insanity can go. Meanwhile, the auctioneer keeps both bids and only gives up one dollar. The Dollar Auction is the perfect metaphor for Wall Street. Both involve setting the clients against each other and taking fees for yourself.

The Dollar Auction mindset can also be seen in the post-crash bizarro bond markets. As a response to what seems like unlimited quantitative easing, bond investors have bid up the price of bonds to the point where they are actually locking in a loss on their investment right from the beginning. As Zero Hedge reported earlier this year, 16% of global government bonds have a negative yield; that's $3.6 trillion.

The logic behind this behavior is that yields will become even more negative or deflation will occur. Bond investors are scrambling to avoid becoming the second-highest bidder in the global bond market frenzy. However, with QE failing in Sweden, and with the CDS market collapsing, this will not end well.

When Shubik created the Dollar Auction over 40 years ago, I doubt he could have imagined that the madness of his diabolical parlor game would be playing out in the global bond markets.

"Retired" Dallas Fed Chief Joins Barclays As "Senior Advisor"

Spin revolving door, spin. 

Recently “retired” Dallas Fed chief Richard Fisher — who really, really believed that talk of falling oil prices negatively affecting the Texas economy amounted to “bull droppings” until a JP Morgan analyst reminded him that the “only thing dropping in the Texas economy [was] jobs” — is following proudly in the footsteps of Ben Bernanke, Jeremy Stein, and Janet Yellen (if you count unofficial, off-the-record ‘consultations’) by becoming the latest Fed policymaker to ink a lucrative deal ‘advising’ the private sector.

As WSJ reports, Fisher will become a “senior advisor” to Barclays starting on July 1:

Barclays PLC on Monday named Richard Fisher, who recently retired from his post as head of the Federal Reserve Bank of Dallas, as senior adviser at the bank.



“His exceptional knowledge and extensive experience in monetary policy, financial markets and services, global trade negotiations and regulatory matters will be of tremendous value to Barclays and to our clients,” said Tom King, who is chief executive of the investment bank at Barclays.

Yes, we imagine it will.

Also of “tremendous value” to the bank (which, you’re reminded, somehow managed to get itself involved in each and every financial scandal that’s come to light over the past half decade or so) will be Fisher’s connections and pull, because as we’ve seen time and again with Deutsche Bank and the SEC, the next best thing to installing former employees in key regulatory and policymaking roles is having former regulators and policymakers on the payroll. And he'll be a particularly handy guy to bounce ideas off of for anyone at the bank who covers AT&T or Pepsi. 

This would be appalling if it weren't so commonplace.

About the only thing worse would be if a former Fed Chair joined the world's most influential, highly leveraged HFT hedge fund. Oh, wait...

Technically Speaking - Bears Are Winning

Submitted by Lance Roberts via STA Wealth Management,

Over the last several months, I have been discussing the "consolidation" of the markets and the various support and resistance levels that have contained generally contained the markets since the beginning of this year. To wit:

"While the rally this week was nice, it failed to break back above resistance which it needs to do to reestablish the bullish trend. Currently, the markets have held the long-term bullish trend line that has remained intact since December of 2012 with two successful tests over the past month. That is bullish for now and indicates buyers are still in the market. However, there is a BATTLE being waged between the bulls and the bears as prices have continued to deteriorate from early-year highs. That battle should be resolved soon, and for now the bears have the advantage."

"Importantly, notice that the previous OVERSOLD condition in the lower panel is now back to OVERBOUGHT. This suggests that the current rally is likely near completion. This does not mean that the markets can't rally to new highs, they certainly could. However, the risk, for the moment is to the downside. As stated above, the BULLISH TREND remains intact which keeps portfolios allocated towards equities."

With that analysis, we can now update that chart to see how things have developed over the last week.

As you can see, the market is once again retesting that long-running 150-day moving average that has defined the "bullish trend" of the market since December of 2012. Of course, that month marked then Fed Chairman Ben Bernanke's announcement of the launch of QE3.

The Current Scorecard

This brings me to the ongoing conversation that I have been having with one of my favorite reporters over the last several weeks.

Q: Have we reached the trigger for a pullback here in the US? How concerned should investors be about the fallout from Greece?

The following answer refers to the updated chart above.

  • The market held its primary bullish support trend line after breaking below the price consolidation that we have been discussing over the last several weeks. Bears score +1
  • However, the market did hold its long-term uptrend at the 150-dma which has acted as important support for the market since late 2012. Bulls score +1
  • The market then rallied and failed at the previous bullish consolidation support trend and turned lower last week. Bears score +1
  • As shown in the lower part of the chart – the rally from the OVERSOLD condition at the 150-dma moved back into an OVER BOUGHT condition WITHOUT the market making a new high. Bears score +1
  • Relative Strength (RSI) has been on the decline since last year as momentum has turned decidedly negative. This has been a non-confirmation of the bullish advance that historically has not ended positively. Bears score +1

At the open this morning, the market has once again test the 150-dma. If the market fails to hold that level by the end of the day, it is quite possible, given that the market is not OVERSOLD as of yet, that there could be further deterioration this week.

HOWEVER, as I have discussed many times in the past, for INVESTORS it is really only important where the markets close at the END OF THE WEEK. This is because for longer term investors it is the overall TREND of the market that we are ultimately concerned with.

Despite short-term volatility, which can be quite unnerving at times, portfolios must be allocated towards equity risk exposure as long as the overall market is still trending positively. When that positively biased trend changes to the negative, it is then that investors will want to become much more conservatively allocated. This is NOT MARKET TIMING. This is portfolio RISK MANAGEMENT. There is a massive difference between the two.

Therefore, even if the market breaks below 2080 today, as long as it closes above that level by the end of the week, then nothing has changed. A close BELOW that level will suggest that we are beginning a more significant correction toward the January lows of 2000. 

Q. According to the "score card," the bears are winning. So, shouldn't investors be doing something now?


If this were a soccer game, we could most likely predict the winner. So, technically, yes, I could make the case for gathering up your belongings and leaving the stadium early to beat the traffic.

However, if you do leave the game early, i.e. SELL, you might be disappointed to find out on your ride home that the Bulls rallied back and scored 5 points in the last few minutes. It is not likely, but it is possible.

This is why we wait for the evidence to be presented before acting. The job of any investor is to make investment into one or more assets, and then manage the "risk" of owning that asset to create either:

  • a "positive outcome" by garnering a "realized gain," or;
  • to minimize the impact of a "negative outcome" by limiting "realized losses."

Currently, the technical deterioration in momentum and relative strength are suggesting that the market dynamics are far weaker than what the current price of the index suggests. As noted by GaveKal Research today:

"A correction is generally defined as any stock that is at least 10% off a recent high. If we look at a price performance over the past 200-days, 42% of all the stocks in the MSCI World Index are in a correction. Higher than you might have thought, right?"

There is sufficient cause for concern currently as the underlying weakness in the overall market is becoming much more pervasive. However, "guessing" at the outcome may leave you wishing you had stayed to see the "end of the game."

Is Greece The Thing?

Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning:

"I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble."

That is exactly the right advice for both traders and longer term investors. For longer term investors, I have always suggested using weekly and monthly charts to more clearly define the current trend of the market. However, this also means these charts are only updated at the end of each week or month, so what happens TODAY is far less important that where the market closes at the end of the relevant period. The final chart below is the weekly chart of the market.

There are several important points in the chart above. First, since the implementation of QE3 the bulls have clearly been in charge maintaining the bullish trend line since the June, 2012 lows. Secondly, there have been numerous sell-offs along the way, none of which have resulted in the need to grossly reduce equity exposure from fully allocated levels as of yet. "Yet" being the "key word."

Finally, the bullish moving averages, which have acted as primary support along this entire advance currently remain intact. This suggests that currently, outside of normal portfolio management processes, portfolios should be maintained near target equity allocation levels.

However, it is worth noting that the longer term MACD sell signal is becoming more pronounced which suggests that the "bull case" is weakening markedly. Where this chart finishes the week will provide a clearer picture of whether it is time to "leave the stadium" or "hang around for a terrific comeback."

One thing is for sure...things are about to become much more interesting.

ECB Says "Grexit Can No Longer Be Excluded", Hints At More QE

It seems Goldman Sachs' conspiracy theory was right all along...


This is exactly what The ECB wanted all along (and their leaders overlords) - all they needed was an 'excuse'.

*  *  *

As we noted previously, from Goldman:

As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.

Here is Goldman's full take:

From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.


Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.

But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default - and with limited contagion at that - one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14.  Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.

A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."

Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."

Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking - it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."

Bingo - because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts...

... simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.

Incidentally, all of this was previewed long ago in, in December 2012 when we wrote "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And... France." To Greece's great chagrin, all of this internal devaluation has mostly impacted the impoverished country, which continues to be a shock absorber to broader internal devaluation across the entire Eurozone.

Which brings us back to Goldman's assessment of the current Greek state, and the suggestion that all the smoke and mirrors flooding the headline-scanning algos is nothing but noise, and that in reality the forces are alligned to "push the EUR near parity in fairly short order."


Paradoxically, Goldman keeps pushing for a worst-case outcome, and one where the market finally reprices all the risk it has ignored for months:

Even if Greece ultimately stays in the Euro (our base case), the immediate aftermath of such a non-payment will be to push bond yields up across the periphery. This rise in the fiscal risk premium (Exhibit 3) will of course be limited, because the ECB will likely accelerate QE, including via the Bundesbank. That will push rate differentials, especially longer-dated ones (Exhibit 4), against EUR/$. We estimate that the initial fiscal risk premium effect could be three big figures, while the subsequent QE effect could be worth around seven big figures.

The conclusion:

In short, we see mounting tensions over Greece as a catalyst for EUR/$ to move near parity in fairly short order, with much of that move driven by rate differentials. If, instead, a compromise solution is found (including possible debt haircuts), we see the upside to EUR/$ as very limited, i.e. on the order of one big figure at most. The reason for this is that the market is broadly expecting an agreement to be found, even with the possibility of a default in the near term on debt repayments coming due.

And of course, going back to the start of the note, a "favorable" outcome pushing EUR higher will be one that "will do little to return Greece to growth" and as a result will force the insolvent nation back to the negotiating table until such time as the Eurozone finally realizes that it desperately needs EUR much lower, not higher, and will do everything it can to achieve that, even if it means "siloing" Greece in a state of suspended default indefinitely if only to eliminate the "risk on" euphoria in the currency pair.

Indeed, as we said last year, the entire escalation over the Ukraine conflict was merely to push Europe to the verge of a triple-dip recession, which in turn was the catalyst that finally greenlighted the ECB's first episode of QE with Buba's blessing (after all Germany's economy was finally on the brink as well and it had little to lose). Well, the next such "catalyst" will come from none other than Greece as per Goldman's punchline:

We encounter many who argue that mounting tensions over Greece could be Euro positive. The short term angle is that risk reduction will lead to a squeeze of Euro shorts, so that EUR/$ could squeeze higher. The reason we don’t believe this is because we think stepped up ECB QE will dominate any risk-off response. Or, to put this in another way, the ECB will not allow the fiscal risk premium to go all that much higher. The medium-term angle is that the Euro zone might be more cohesive without Greece. That rationale assumes that Greece is a case apart, when of course it isn’t. After all, the Spanish unemployment rate is not far behind that of Greece and populist political pressure is also building. The underlying commonality, in our minds, is that “internal devaluation” is very difficult. As a result, we think mounting tensions around Greece could just as well focus market attention on the sustainability of the adjustment program on the Euro periphery.

Whoever would have thought that none other than Goldman would serve as the source of what may be the biggest "conspiracy theory" gambit of 2015...

One final thought: what Goldman wants, its former employee at the ECB tends to deliver.

Greece... Mattered: Surveying The Carnage

Greece... mattered!!


The market be like...

*  *  *

It began as FX markets opened ugly in early Asian trading, but once stock markets started to open, the focus shifted there...

Japan spanked... Nikkei 225 down 730 points from Friday's close...


China collapsed...


When Europe opened it was ugly in stocks...


And bonds... European spreads exploded - biggest risk increase in 7 years...


But The Swiss National Bank did its best to sell Francs and buy EURs to make it all appear "contained"... Which squeezed EURUSD all the way into the green... a 325 pip ramp!!!


And the Sudden "hand of God" move in EUR around 1340ET

Chart showing sudden jolt in currency futures

— Eric Scott Hunsader (@nanexllc) June 29, 2015


While Greek stock markets were closed, their bonds were not.. .and carnaged 420bps higher to 15.10%...


And stock ADRs and ETFs traded in the US:

  • EUFN - European Financials, down 4% - broke below its 200DMA
  • NBG - Nation Bank of Greece, down 26% on record volume
  • GREK - Greek Stocks, down 18% on record volume


*  *  *

In The US, the initial carnage dip was bought with gusto but that ramp failed and by the close we were testing new lows...


Trannies managed to get back to unchanged before plunging...


Cash markets were a one-way street from just after the open...


Financials hammered!!


Post-FOMC: Bonds best, Gold glitters, but Stocks stink...


Leaving The Dow red and S&P unch for the year...


All major indices broke significant technical levels today...


VIX surged to 19.00... (from 11 handle last Tuesday)


As the 50.98 million share short of the 63.9 million outstanding in VXX suffered greatly... above 20 to 7-week highs on massive volume


The last time VXX rose more than 14% in a day was 913 trading days ago (more than 3 years ago on November 9, 2011) and Bernanke bailed out Europe


VIX term structure inverted once again...


Treasury yields plunged as a near-record short position felt the squeeze... this was the best day for 10Y yields since January


The dollar tumbled as the manipulated EUR surge "proved" there was nothing to fear... USDJPY did not play along wioth the manipulation.


Gold held onto gains but copper, silver and worse Crude (down 2.4%) all slide despite the USD weakness...


*  *  *

Oh and then there is Puerto Rico collapsing...


And Bitcoin is surging...

*  *  *

Amid all this with stocks down just 3% from their highs... The Fear & Greed Index collapsed to just 12!!!!



But apart from that...

Charts: Bloomberg

The More They Stay The Same

From the Slope of Hope: I wanted to do a post that had nothing to do with Greece or charts, just for a change of pace. Because I don't know about you, but after the past 72 hours, I'm exhausted!

One of my favorite "fun" books is a 1995 offering called Hey Skinny!which is a collection of full-page color ads that were published in comic books in the 1940s and 1950s. I've thumbed through the book many times, but it dawned on me that even though we live in an age where a product released a month ago is "ancient history", these artifacts from six decades ago still speak to the same immutable human desires (which are basically to acquire resources and protect them). There are analogs for just about every product in this thin volume.

Take this little gem, for example:

Boys like so shoot stuff. They always have. Back in those days, blasting your friends with a machine gun assured you "sure 'nuff action". In the modern era, we have offerings like Call of Duty (and dozens of imitators).

Well, how about uber-modern stuff, like 3-D Printing? Being able to create your own plastic products at home is something unique to our time, right? Those primitive kids back in the 50s weren't so lucky, right? Well, not so fast........

So being able to crank out worthless little knick-knacks could be done during the Obama administration or the Harry Truman one. (And be sure to check out the chart of DDD to see how well the 3d printing fad is doing).

Chief among all desires among adults, however, is to be able to earn money and then keep it away from the tyranny of that sumbitch boss of yours, right? These days, you can find dozens of books about making money with Etsy or YouTube or any other creative outlet. The cold reality is that, as with musicians, authors, or any other creative folk, a tiny handful of them make really good money while the overwhelming majority scrape by on next to nothing (or less).

So what was the "Make Your Fortune on YouTube" sixty years ago? I'm glad you asked:

I suppose if we have to point to any progress we've made, one can at least take comfort that I won't be knocking on your door any time in the near future, trying to sell you a cheap pair of shoes from a catalog. You're welcome.

Dow Tumbles 200 Points - Gives Up 2015 Gains

Trannies touched unchanged and instantly reversed but Dow Industrials only managed a modest bounce of opening lows.


However, the momo did not last and there's no Nike to save the day today - The Dow is now down over 200 points and has tumbled back into the red for 2015.



Unleash The Bullard!!

Greek 10Y Bonds Collapse - Yield Tops 15%

Greek stocks may be closed and the bond market super-illiquid but traders are willing to dump GGBs at almost any price for now. 10Y Greek government bonds are spiking over 400bps and have topped 15% for the first time since December 2012.



Charts: Bloomberg

An Inadvertent Warning From BlackRock - Get Your Money Out Of Mutual Funds ASAP

Via Investment Research Dynamics,

BlackRock Inc. is seeking government clearance to set up an internal program in which mutual funds that get hit with client redemptions could temporarily borrow money from sister funds that are flush with cash.  – Bloomberg News

We may have been early on warning about leaving your savings in the financial system. It’s okay to be too early getting your money out of the system but it’s fatal to be just one second too late.  The gates are already in place in money market funds just waiting for the signal to be lowered

BlackRock’s filing with the SEC to enable “have cash” funds to lend to “heavy redemption” funds should send shivers down the spine of anyone with funds invested in any BlackRock fund.  In fact, it should horrify anyone invested in any mutual fund.

Larry Fink, BlackRock’s chief executive officer, said in December that U.S. bond funds face increased volatility, adding that he expected a “dysfunctional market” lasting days or even weeks within the next two years.   – Bloomberg

I warned last summer when the money market funds received authorization to put redemption gates in place that it was time to remove your money from these instruments.  The only reason a gate would be needed is if the people running the funds believed that there were risk events coming that would necessitate the gates.

BlackRock has already arranged credit lines from banks to cover the possibility of a redemption stampede from its riskier funds.  It’s clear the elitists running BlackRock now foresee events coming that will trigger a redemption run because the fund company is seeking SEC approval for the ability to take cash from funds with cash and lend that cash to funds that will need cash when the redemption rush begins.

Rather than let the market decide the value of the investments in BlackRock’s riskier funds, Larry Fink is going add even more leverage to the equation by enabling riskier funds to take on debt in order to avoid having to sell positions into a market that won’t be able to handle the selling.   This adds yet another layer of fraudulent intervention to a system that is ready to blow up from what’s already been done to it.

And let’s not forget, as I pointed out last summer, that BlackRock funds are already riddled with OTC derivatives, which is why Vice Chairman Barbara Novick has been running around Capitol Hill working to get a bailout mechanism in place for the Depository Trust Company’s derivatives clearing unit.

BlackRock Changes The Rules Of The Game Because Of An Outcome It Fears

This move will, in effect, transfer a portion of the risk of BlackRock’s riskier mutual funds – derivative-laced high yield and equity funds – to its more “conservative” funds, like high grade, short duration fixed income funds.

Anyone who invested in less-risky funds did so with an understanding of the definition and risk parameters of the funds at the time of investment.  But now BlackRock is changing the rules and risk parameters of those funds by exposing them to the counterparty risk of the riskier funds in the BlackRock fund complex which will be able to borrow money from the less risky funds.

This means that the Treasury fund in which your IRA or 401k is invested will now be “invested” in any fund that borrows money from the fund with your money.  The risk profile of your “conservative” fund assumes the risk profile of the riskier fund. Because of this, there is absolutely no reason for anyone to leave any of their money in any of BlackRock’s funds.

The SEC should deny BlackRock’s filing.  But it won’t because Wall Street is the SEC.

This move by BlackRock also signals that the elitists at BlackRock foresee an event that will disrupt the markets and trigger “bank” run on mutual funds.  What or when is anyone’s best guess.  But the fact that Larry Fink has decided to implement internal lending among funds indicates that he and his band of merry criminals believe an event will happen sooner rather than later.

To me, this is the signal that everyone should call up their mutual fund company, financial adviser or 401k administrator and get all of their the money out of any mutual fund.  Larry Fink has done everyone invested in any mutual fund a favor:  he’s unwittingly signaled that it’s time to get out – now.   Anyone who is aware of this and does not take action immediately is either a complete idiot or simply does not care about having their money taken from them by the criminal elite.

Dallas Fed Surges Back, Beats By Most Since Jan 2012 But Hope Tumbles

After breaking to 6 year lows in May, expectations were for a bounce in Dallas Fed's Manufacturing Outlook from -20.8 to -16. After missing expectations for six straight months, June's bounce to a -7.0 print is the biggest best since January 2012. This surge was all due to the current conditions shift as future hope for new orders and production tumbled. While most subindices rose, we note that CapEx fall once again to 3-month lows. This is the 6th consecutive negative (contractionary) print in a row for Dallas Fed - something not seen outside of a recession.

Bounce... or Trend?


The imrpovement was all current conditions as future hope tumbled...


Why is it still not growing again? Simple - rain!

Fabricated Metal Manufacturing


We currently believe we are seeing the bottom of the downturn in oil and gas. So far, it appears it is holding true as new orders received in June are equal to the prior month for the first time in 2015. Sales and orders are increasing, but costs are increasing at a greater rate.


First we faced strikes, now storms. It is tough out there. Signs of some stability in oil and gas exploration and production are emerging. If that continues, then our business conditions will benefit in the coming months.


Weather in the Texas region continues to slow home building and renovation. Due to the wet conditions, most of my customers are unable to work on projects and their backlog continues to grow.


May's rains will impact construction activity over the next couple of months.

Charts: Bloomberg

Greece May Not Even Have The Funds To Conduct A Referendum

With Europe making it very clear that unless Greece folds in the next 48 hours, there will be no deal on which the Greeks will be conducting their "Greferendum" as Greece will be programless after June 30, there has been ample confusion about just what the wording of the ballot will be to which the Greek population will say Nai or Oxi. As the following latest snapshot confirms, even the Greek side is rather confused and is now essentially telling people to vote on a deal that was proposed once (on June 25) and may or may no longer be relevant.

This takes place even as moments ago Germany's minister for economic affairs Sigmar Gabriel explained just what a No vote would entail:


Even though there was clearly some confusion as the push to set the narrative begins:


A clear lie as just moment prior we got this:


Of course, Greece is quite aware of this, and it doing all it can to push voters in the desired direction as the front page of Syriza's newspaper today reveals...

... but at this point there is no alternative: since the bluffing game had to be taken beyond the point of no return and both Greece and the Troika have to last it out until the weekend.

However, the problem for Greece may not be one of wording or even maintaining the "game theory" bluff until the very end, but a far simpler one: not having the funds to actually conduct it!

According to Germany's FAZ, "the Greek Court also estimates that the referendum will cost around 110 million euros, according to a well-informed policy analyst. Money that in view of the strapped Greek Checkout simply will not be there, even if the country saves a EUR 1.6 billion full-scale default to the International Monetary Fund this Tuesday."

Furthermore, the Athens Chamber of Commerce added there is no paper to print some 20 million requred ballots!

So a question emerges: if indeed Greece is unable to fund a referendum will it be stuck with mailed-in responses? And how long would it take to tabulate those votes: 3 weeks, 3 months? Needless to say, the cash-based Greek economy, with its €60/day daily allowance of ATM will not survive nearly that long, something the government hopefully realizes as the next wave of anger will promptly turn away from the Troika once the natitonalistic passion has died down and refocuses on the local government itself...

Pending Home Sales Rise At Slowest Pace Since 2014, April Revised Lower

While May Pending Home Sales are the highest in 9 years, the pace of growth is slowing as April's rise was revised lower to +2.7% (from 3.4%) and May prints +0.9% (slightly less than the 1.0% jump expected). The 0.9% rise is the slowest MoM rise since Dec 2014.



Charts: bloomberg

National Bank Of Greece Crashes To Record Low

While the Greek Stock Market remains closed, ADRs trade around the world and National Bank of Greece - theoretically the strongest and least ELA-exposed (although still a disaster) - is trading down 24% in US markets on extremely heavy volume...

This is a new record low...

The Next Round of the Great Crisis Has Just Begun

As we have been noting throughout 2015 thus far:


There is no recovery. There is only the bond bubble. And everything has been done to prop it up because when it bursts (as all bubbles do), entire countries (including the US) will go bust.


Greece is just the first domino to fall.


Indeed the front pages of the financial media today show an interesting tale: both China and Greece are experiencing debt implosions, the former being a margin debt fueled stock market bubble crashing while the latter is on the verge of defaulting on its sovereign debt.


China is long held to be the engine


As we wrote in April:


China is thought to be the great growth story of the post-2008 era. China’s economy not only bottomed before the developed world, but by most accounts, China was thought to be the engine that pulled the world out of recession, thanks to its near-clocklike hitting of 7%+ in GDP growth per year.


Today, China remains central to the notion that the world is in recovery. As Japan’s Abenomics gamble sputters out economically while Europe continues to deteriorate and seems at risk of even breaking apart, it is China and the US that are held up to be the last remaining sources of economic growth for global economy.


At that we noted that China’s “real” economy was imploding with rail traffic and electricity consumption suggesting real GDP growth of 3.5% at best and negative at worst.


Today, we find that all China really did was engage in arguably the single largest credit expansion in monetary history. The China credit bubble dwarfs even Japan’s bubble of the 1980s (a period of such excess that the land under the Japanese Imperial Palace was valued greater than the entire State of Caifornia!).



When the Real Estate bubble burst, China pushed for a stock market bubble. Now that bubble is bursting. The implications will be significant throughout the globe.


As for Greece… the EU has been desperately trying to prop up this house of cards since 2012. AS we noted in February 2015:


The European banking system as a whole is leveraged at over 26 to 1. That’s the ENTIRE European Banking system leveraged at near Lehman levels (Lehman was 30 to 1 when it collapsed).


To put this into perspective, with a leverage level of 26 to 1, you only need a 4% drop in asset prices to wipe out ALL capital. What are the odds that European bank assets have fallen 4% in value in the last two years?


The European crisis is not over. And when the next round really hits, whether it be from Greece leaving the Euro or some other issue, both capital and border controls will be implemented.


Fast forward to today and the EU banking system is indeed imploding and capital controls are already underway with border controls to follow (once people start trying to smuggle physical cash across the border).


The real issue is just how much collateral will disappear when Greece goes bust. Because whatever happens in Greece will be used as a template for much larger problems AKA Spain and Italy.

Spain and Italy, by comparison, have €1.78 trillion and €1.87 trillion in external debt respectively.

That is a heck of a lot of collateral that would be in BIG trouble in the event of a bond crash for either country.

The next round of the great crisis is approaching. 2008 was A Crisis… what’s begun is THE Crisis.

If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.


We made 1,000 copies available for FREE the general public.


As we write this, there are less than 50 left.


To pick up yours, swing by….


Best Regards


Phoenix Capital Research