Sunday, August 30, 2015

Today's Links

China appeals to IMF to declare Yuan-Renminbi a global reserve currency, followed by 2.8% drop by "market forces", Jack Rasmus


....the US can’t keep China at bay and its currency from achieving reserve trading status forever. To do so would encourage China to try to form yet another competitive global institution—next time as a direct alternative to the IMF itself. And it may come to that. That’s perhaps why the IMF has left the door still open to further negotiations.....


In the days immediately leading up to China’s decision to devaluate its currency last week, confidential negotiations were intensely underway between China and the IMF. The issue was China’s request that the IMF declare the Yuan-Renminbi as a global reserve and trading currency—like the US dollar, UK pound, Euro, and the Yen. After all, China is the second largest economy in the world; the first if one adjusts output to world price differences. Its manufacturing output is as large as the US. And it is the number one trading country in the world. It is therefore quite appropriate—and inevitable—that its currency becomes a reserve trading currency alongside the others.


The IMF refused China’s request in early August. But it left the door open for possible future granting of reserve currency status to the Yuan. The IMF used as its excuse that China needed to allow its currency to fluctuate more according to market forces. So China last week cleverly responded to the IMF’s rejection by adjusting its band to allow market forces to lower its currency’s value.


Technical means by which it did this aside, in simple terms it merely allowed the currency to fluctuate, as it always had, slightly differently within the ‘band’ or range it had always been allowed to change. So, it actually followed the ‘market forces’ to devalue by 2.8%. By adopting a method that relied on market forces, China in effect eliminated the charge by US politicians that it was not allowing market forces to determine its currency’s value, that it was therefore manipulating the market. It achieved a modest devaluation of 2.8% by also satisfying the IMF’s requirement that it let market forces determine its currency exchange rate as a precondition for IMF granting it reserve status. All of which proves, perhaps, that if one is sufficiently clever, even ideological manipulation at times may itself be manipulated.


China, IMF and Economic Power


Behind the IMF’s decision to refuse China’s currency reserve status is US commitment to protect its hegemonic role in the global economy. The US is opposed to allowing China’s currency reserve status and it is the US, with its allies, who control the majority votes in the IMF and determines what decisions it makes. That US control was ‘baked into’ the IMF at its creation in 1944. Together with its key allies in the IMF (UK, Japan, Germany, France, Canada) the US retains a very safe ‘control’ of the IMF’s majority voting rights and thus its decision making. The IMF’s director, Christina LaGarde, is employed at their pleasure. So the IMF does whatever the US voting bloc tells it to do. It’s not by accident the IMF was and remains located in Washington D.C


2---Largest gas field ever?


The Italian energy company Eni SpA announced today it has discovered a "supergiant" natural gas field off Egypt, describing it as the "largest-ever" found in the Mediterranean Sea. The news came a day after Eni CEO Claudio Descalzi met in Cairo with Egyptian President Abdel-Fattah el-Sissi, the Egyptian leader's office said. Eni said the discovery—made in its Zohr prospect "in the deep waters of Egypt"—could hold a potential 30 trillion cubic feet of gas over an area of 38.6 square miles. "Zohr is the largest gas discovery ever made in Egypt and in the Mediterranean Sea and could become one of the world's largest natural gas finds," Eni said in a statement. "The discovery, after its full development, will be able to ensure satisfying Egypt's natural gas demand for decades."
Descalzi was quoted by Eni as saying that the discovery reconfirms that "Egypt still has great potential" energy-wise."


3--HOW DOES WALL STREET MEASURE VOLATILITY?
There are a few measures, but the most quoted one is the Chicago Board Option Exchange's Volatility Index, most often called the VIX. The VIX essentially measures how volatile that investors expect the market to be in the next 30 days. The higher the reading, the more volatility expected, but a reading of above 30 points is generally considered a sign there's a lot of fear in the market.
The VIX hit a record of 80.86 at the height of the financial crisis. It has mostly remained below 20 for the last few years, with occasional but fleeting surges higher.
___
SO WHERE DOES THE VIX STAND NOW?
The recent shakeout of the financial markets has sent the VIX surging. It traded as high as 53.29 Monday, a level not seen since 2008-2009. The index has pulled back significantly from those levels, closing at 30.32 on Wednesday


4--As tragedies shock Europe, a bigger refugee crisis looms in the Middle East


5--Volatility, Henny Sender


6--Earnings Recession Continues


While the lack of inflation and economic growth remains the Fed's nemesis for monetary policy, earnings are no longer the investor's friend. Political Calculations posted a good analysis about the ongoing deterioration in earnings. To wit:
"Today, we'll confirm that the earnings recession that began in the fourth quarter of 2014 has continued to deepen."
forecasts-SP500-ttm-EPS-2010-2016-snapshot-2015-08-20
"In the chart above, we confirm that the trailing twelve month earnings per share for the S&P 500 throughout 2015 has continued to fall from the levels that Standard and Poor had projected they would be back in May 2015. And for that matter, what S&P forecast they would be back in February 2015 and in November 2014."


7---Stock market calls the Fed's bluff




The Fed normally raises rates when inflation is becoming intractable and robust growth is sending long-term rates spiking. However, this proposed rate-hike cycle is occurring within the context of anemic growth and deflationary forces that are causing long-term U.S. Treasury rates to fall.


The yield-curve spread, specifically the difference between the federal-funds rate and the 10-year note, is usually close to 4 percentage points at the start of major tightening cycles. This was the case at the start of the 1994 and 2004 campaigns to curb inflation. However, this go around, the spread is less than 2 percentage points and the benchmark 10-year note yield is falling. This means the yield curve will invert very quickly and cut off banks' profitability and incentives to lend — that will greatly exacerbate the deflationary impulses reverberating across the globe ...


the overvalued condition of stocks gets even worse when viewed in the context of anemic growth and the prospect of a hawkish Fed. Revenue growth has already been languishing: Revenue for the S&P 500 components was down 3.3 percent in the second quarter and earnings for those companies were down 1 percent during that period.
U.S. GDP has not been faring much better, averaging a lackluster 2 percent annual growth rate since 2010. The highly accurate Atlanta Fed GDP now has forecast GDP at just 1.3 percent for the third quarter, far short of what many perma-bulls on Wall Street are calling for.


For the first time in its history, the Fed would be raising rates into anemic and slowing GDP growth, negative earnings and revenue growth, and falling long-term interest rates. ...


This should cause the highly overcrowded long dollar trade to roll over sharply very soon and provide investors to profit in anti-dollar investments such as precious metals.
A prudent investor should hide out in cash and hedge their portfolios against more carnage to come in the near term. That is, at least until the Fed's fire brigade switches to a dovish monetary policy stance and comes running with another round of money printing. Maybe that will temporarily stop the bleeding in stock prices; but please don't believe it will save the economy.


8---Hussman talks


If you are familiar with mutual fund manager John Hussman, president of Hussman Investment Trust, you are probably aware that he is bearish on the U.S. economy and stocks.

In a recent market commentary, he explains why.
  • "The U.S. has become a nation preoccupied with consumption over investment; outsourcing its jobs, hollowing out its middle class and accumulating increasing debt burdens to do so," Hussman writes.
  • "U.S. wages and salaries have plunged to the lowest share of GDP in history, while the civilian labor force participation rate has dropped to levels not seen since the 1970s. Yet consumption as a share of GDP is near a record high."
  • As for stocks, "the most reliable stock market valuation measures . . . suggest that the S&P 500 index is likely to be lower a decade from now than it is today (though dividend income should bring the total return to about 1.5 percent annually)."
It's unclear which measures Hussman has in mind. But Robert Shiller's cyclically adjusted price-earnings ratio for the S&P 500, which includes 10 years of earnings, stands at 27.3, topped only by 1929, 2000 and 2007. Those, of course, were periods that preceded market crashes.

Read Latest Breaking News from Newsmax.com 




as for spurring inflation, reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are "at best best mixed." In addition to muted inflation, gross domestic product has yet to eclipse 2.5 percent for any calendar year during the recovery, while wage gains, and consequently living standards, have been mired around 2 percent or less.

"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation," Williamson wrote.
"For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2 percent inflation target," he added. "Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation."
The primary place where QE seems to have worked is in the stock market, where the S&P 500 has soared by 215 percent since the recession lows in March 2009. Elsewhere, though, deflation fears have permeated and interest rates have remained low...


one of the biggest fears Fed critics have espoused about its activities has been that the bloated balance sheet would drive inflation by releasing that "high-powered" money into the economy and driving up prices.
However, the inflation rate for the U.S., and for much of the other developed world where central bank activism is high, has remain muted, at least by conventional measures.


In Williamson's view, that's a product of policymakers wed to the Taylor rule, which dictates the level of interest rates in regard to economic conditions. The thinking essentially is that low rates beget low inflation, trapping central banks in zero interest rate policies (or ZIRP).
"With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely," Williamson said. "This idea seems to fit nicely with the recent observed behavior of the world's central banks...


The trap then manifests itself in a failed communication strategy.
In the third stage of QE, the Fed sought to establish specific targets for when it would raise rates, such as 6.5 percent unemployment rate and a 2.5 percent inflation target. However, as unemployment fell and inflation lagged, the Fed began moving the goalposts, to the point where the headline unemployment rate is now 5.3 percent and the central bank has yet to move on interest rates.




The Federal Reserve is the financial branch of the Pentagon

Saturday, August 29, 2015

Today's Links

Today's quote:  "
If you roll a wheelbarrow of dynamite into a crowd of fire jugglers, there’s not much chance things will end well. The cause of the inevitable wreckage is not the dynamite, but the trigger is the guy who drops his torch.


Likewise, once extreme valuations are established as a result of yield-seeking speculation that is enabled (1997-2000), encouraged (2004-2007), or actively promoted (2010-2014) by the Federal Reserve, an eventual collapse is inevitable.
By starving investors of safe return, activist Fed policy has promoted repeated valuation bubbles, and inevitable collapses, in risky assets.


On the basis of valuation measures having the strongest correlation with actual subsequent market returns, we fully expect the S&P 500 to decline by 40% to 55% over the completion of the current market cycle. The only uncertainty has been the triggers." John Hussman, Hussman Funds


Obama praises savage capitalist opportunists for looting New Orleans

“After the storm, this city became a laboratory for urban innovation,” Obama said, citing “cutting red tape” to ensure that “New Orleans is as entrepreneurial as any place in the country.”
New Orleans did indeed become a “laboratory,” but one in which the working people of New Orleans were the targets of free-market experiments of unprecedented savagery.


All 7,500 public school teachers, most of them city residents and victims of Katrina, were fired from their jobs as the public school system was dismantled and replaced entirely by charter schools. The residents of public housing were displaced, first by the hurricane, then by bulldozing most of the structures that remained. The city’s main health care facility for the poor, Charity Hospital, was shut down....


3---If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it." William Lazonick, Profits without Prosperity




1--Europe in Free Fall, saker


....the various states of the EU neither have the means to lock their borders, deport most refugees, nor control them. Sure, there will always be politicians who will make promises about how they are going to send all these refugees back home, but that is a crude and blatant lie. The vast majority of these refugees are fleeing war, famine and abject poverty and there is no way anybody is going to send them back home....


The level of aggravation suffered by many, if not most, Europeans directly resulting from this crisis in immigration is hard to describe to somebody who has not seen it. ...


The EU is ruled by a class of people who have completely sold themselves to the United States. The best examples of this sorry state of affairs is the Libyan debacle which saw the US and France completely destroy the most developed country in Africa only to now have hundreds of thousands of refugees cross the Mediterranean and seek refuge from war in the EU. This outcome could have been very easy to predict, and yet the European countries did nothing to prevent it. In fact, all these Obama Wars (Libya, Syria, Afghanistan, Iraq, Yemen, Somalia, Pakistan) have resulted in huge movements of refugees. Add to this the chaos in Egypt, Mali and the poverty all over Africa and you have a mass-exodus which no amount of wall-building, ditch-digging or refugee tear gassing will stop. .....


The sad reality is simple: the EU is a US colony, run by US puppets who are simply unable to stand up for basic and obvious European interests.....


Politics has turned into a make believe show where various actors pretend to deal with real issues when in reality all they talk about are invented, artificially created “problems” which they then “solve” (homosexual “marriage” being the perfect example). The only form of meaningful politics left in the EU is separatism (Scottish, Basque, Catalan, etc.) but so far, it has failed to produce any alternative.


2---Pentagon’s New “Law of War” Manual “Reduces Us to the Level of Nazis


3--Stock Buybacks Are Tied To Growing Income Inequality And Low Rates Of Innovation


Raising stock prices by reducing the number of shares outstanding also helps companies fend off hedge fund managers who threaten takeovers and the subsequent and highly profitable but destructive divestiture of a company's assets. "Without having contributed anything to a company's development or success, hedge funds seek to extract money from companies that other people have generated," writes Lazonick, the American economist who has done extensive analysis of stock buybacks. "In effect, tens of millions of Americans go to work every day to create value in the companies that employ them, only to have this value extracted by stock-market speculators and manipulators who have typically played little if any role in the value creation process." In 2014, the top 25 hedge fund managers "personally reaped a combined $11.2 billion, or an average of almost $450 million each, which was down almost 50 percent from $21.5 billion, or $860 million each in 2013," Lazonick notes.


By siphoning off so much net income into buybacks, companies have little left to invest in new technology, production improvements and their workers. Among the S&P 500 companies, buybacks exceeded the amount paid out in dividends starting in 1997. For 458 companies on the list, 52.5 percent of net income -- $3.7 trillion -- was expended on stock buybacks from 2005 to 2014, with another 35.7 percent of net income distributed as dividends.
...
From 2004 through 2015, the 458 of the 500 S&P companies' "total net equity issues -- their new share issues less shares taken off the market through buybacks and merger-and-acquisition deals -- averaged minus $399 billion per year," writes Lazonick in an August 6, 2015, paper titled "Buybacks: From Basics to Politics," published by the Academic-Industry Research Network. ...


It would not be hard to ban the practice. The Security and Exchange Commission can repeal the rule (10b-18) put in place in 1982 that allows them. Institutional investors would also benefit by a ban, since companies would use their income to reinvest in their companies, introduce new products and improve prospects for growth. Hiring employees rather than putting more money in the pockets of a few wealthy individuals could help spur an economic revival, boosting corporate growth.  "Any institutional investor that is looking to generate income over the long term should be dead set against buybacks because you want a reasonable level of dividends and you want reinvestment so if and when you sell those shares, the stock price will be higher not because it has been manipulated but because the company has competitive products," says Lazonick. "The buyback binge over the past three decades reflects a failure of corporate executives to develop strategies for the long-run competitiveness of the firms that they manage...


It would not be hard to ban the practice. The Security and Exchange Commission can repeal the rule (10b-18) put in place in 1982 that allows them. Institutional investors would also benefit by a ban, since companies would use their income to reinvest in their companies, introduce new products and improve prospects for growth. Hiring employees rather than putting more money in the pockets of a few wealthy individuals could help spur an economic revival, boosting corporate growth.  "Any institutional investor that is looking to generate income over the long term should be dead set against buybacks because you want a reasonable level of dividends and you want reinvestment so if and when you sell those shares, the stock price will be higher not because it has been manipulated but because the company has competitive products," says Lazonick. "The buyback binge over the past three decades reflects a failure of corporate executives to develop strategies for the long-run competitiveness of the firms that they manage


4--Pushback on Buybacks
A closer look at the numbers indicates buybacks aren’t as good for the companies, the market, or investors as previously thought.


Now everyone’s doing it.”
They probably shouldn’t be. Nicholas Colas, chief market strategist at brokerage-firm Convergex, notes that the S&P 500 trades at 26 times its 10-year, cyclically adjusted earnings, a level that all but guarantees lower-than-average stock returns. That means companies won’t be getting the bang for the buck they’re expecting when they buy back their shares. It also means that the hurdles from capital projects probably aren’t as high as they think. The decision to spend on buybacks will look particularly bad if stocks return next to nothing over the next 10 years, Colas says. Buying back stock when share prices don’t rise “is essentially wasting capital that could be spent on growth initiatives,” he explains.....


What do I mean? Two weeks ago, the Standard & Poor’s 500 began to sell off as concerns about China, commodities, and emerging markets made headlines. But just as the popular benchmark looked like it was entering free fall, it suddenly reversed. Who was the mysterious savior rescuing the markets? Articles published soon after the remarkable rebound were quick to point out that trading desks at Goldman Sachs and Morgan Stanley had seen the most corporate buying on record, suggesting it was share buybacks that kept the market afloat.-...


Clinton has so far recommended only more disclosure, but there are others out there who would like to see buybacks gone for good.


5---Fischer Speaks At Jackson Hole: "Fed Should Not Wait Until 2% Inflation To Begin Tightening


New York Fed chief William Dudley said the argument for a rate increase in September was “less compelling.”"


6--Casualties of “Fortress Europe”: Refugees dead on land and sea
7--The refugee crisis and the inhuman face of European capitalism


8--Obama cynically mocks suffering claiming "entrepreneurial" New orleans


“After the storm, this city became a laboratory for urban innovation,” Obama said, citing “cutting red tape” to ensure that “New Orleans is as entrepreneurial as any place in the country.”
New Orleans did indeed become a “laboratory,” but one in which the working people of New Orleans were the targets of free-market experiments of unprecedented savagery.


All 7,500 public school teachers, most of them city residents and victims of Katrina, were fired from their jobs as the public school system was dismantled and replaced entirely by charter schools. The residents of public housing were displaced, first by the hurricane, then by bulldozing most of the structures that remained. The city’s main health care facility for the poor, Charity Hospital, was shut down....


  • In the Lower Ninth Ward, where he gave his speech, only 36 percent of the pre-Katrina population has returned.
  • An estimated 100,000 of the city’s poorest African-American working class residents have not returned, unable to find jobs or replacement housing.
  • Half of all working-age black men in New Orleans are unemployed, and a quarter of all working-age white men.
  • Half of all black children in New Orleans live in poverty.
  • Rents in New Orleans have doubled from an average of $488 a month before Katrina to $926 today, making the city increasingly unaffordable for working class families of all races.
  • 9---When elites get serious about economy, they always recommend fiscal stimulus: China drags world closer to recession


    “They will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2pc, which is in my definition a global recession,” he said.
    “The only thing likely to stop it going into recession is a large consumption-oriented fiscal stimulus funded through the central government, preferably monetized by the People’s Bank of China. Despite the economy crying out for it, the Chinese leadership is not ready for this,” he said.
    ..
    China’s chief lever at this point is fiscal policy. Interest rate cuts and monetary stimulus risk setting off further capital flight, tightening liquidity.

    Interactive: Ambrose2



    The 50 basis point cut in the reserve requirement ratio for banks this week added no net stimulus. It merely offset the damage already caused over the past two months by estimated outflows of $200bn, which reduces the multiplier effect of base money in China


    10--Investors Yank Cash From Almost Everything Just Like 2008


    Mom and pop are running for the hills.
    Since July, American households -- which account for almost all mutual fund investors -- have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse.
    Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.


    “Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. “It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.”
    Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form. While retail investor sentiment isn’t the best predictor of market moves, their reluctance could have significance, Saporta said.


    “It might suggest households are getting nervous about holding investments, and that could lead to some real economic implications including cutting back on spending,” she said. “Should the market turn lower again, it will be interesting to see if we have the traditional move back into bonds or if households move to cash.”
    After an 11 percent plunge in the Standard & Poor’s 500 in the past week, investors are searching for signs of strength in the U.S. economy in the face of slowing growth abroad. The S&P 500 gained 2.4 percent Thursday as data showed gross domestic product rose at a 3.7 percent annualized rate, exceeding all estimates of economists surveyed by Bloomberg.


    11--Profits without prosperity   Put an end to open-market buybacks.


    ... the amount of stock taken out of the market has exceeded the amount issued in almost every year; from 2004 through 2013 this net withdrawal averaged $316 billion a year. ...damage that open-market repurchases have done to capital formation


    Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.


    The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees...


    Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets...


    If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it....


    Given incentives to maximize shareholder value and meet Wall Street’s expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them “manage” stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation....


    Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b-18 of the Securities Exchange Act. Under the rule, a corporation’s board of directors can authorize senior executives to repurchase up to a certain dollar amount of stock over a specified or open-ended period of time, and the company must publicly announce the buyback program. After that, management can buy a large number of the company’s shares on any given business day without fear that the SEC will charge it with stock-price manipulation—provided, among other things, that the amount does not exceed a “safe harbor” of 25% of the previous four weeks’ average daily trading volume...


    Executives Are Serving Their Own Interests

    As I noted earlier, there is a simple, much more plausible explanation for the increase in open-market repurchases: the rise of stock-based pay. Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale.
    Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012. (See the exhibit “The Top 10 Stock Repurchasers.”) During the same decade, their CEOs received, on average, a total of $168 million each in compensation. On average, 34% of their compensation was in the form of stock options and 24% in stock awards. At these companies the next four highest-paid senior executives each received, on average, $77 million in compensation during the 10 years—27% of it in stock options and 29% in stock awards. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.
    ......


    12--Turkey on the brink of something very ugly indeed
    13--Iran in ‘serious’ gas talks with Arab states
    The last section of a pipeline to carry Iran’s gas to Iraq is being tested for the start of exports, officials have said. The pipeline will carry the gas to power plants in Najaf as well as Sadr City in Baghdad and al-Mansuriya south of the Iraqi capital.
    A separate pipeline is being laid for sending Iran’s gas to Basra in southern Iraq to a combined cycle power plant which the Islamic Republic is building at a cost of $2.5 billion


    Kameli said Iran’s neighbors are the top priority for gas exports. Sitting on 34 trillion cubic meters of natural gas reserves, or around 18% of the world's total, Iran is on course to become one of the world's top gas producers.


    14--Dollar slammed on global slowdown fears


    Speculators pared back bullish bets on
    the U.S. dollar in the latest week to their smallest in more
    than two months, according to Reuters calculations and data from
    the Commodity Futures Trading Commission released on Friday.
        The value of the dollar's net long position fell to $23.99
    billion in the week ended Aug. 25, from $32.26 billion the
    previous week. This was the first time in four weeks that net
    dollar longs came in below $30 billion.
        To be long a currency is to make a bet it will rise, while
    being short is a bet its value will decline.
        Concerns about global equity weakness and China's deepening
    slowdown convinced speculators that the Federal Reserve would
    delay raising interest rates. That prompted a sell-off in the
    dollar the last two weeks.


    15--US dollar up as Fed hints rate rise alive Fisher jawbones dollar higher


    16--It was a difficult week for traders as the initial US Dollar breakdown left many (including us) looking for further losses. The Euro/US Dollar first saw its largest three-day advance in six years, but instead of continuing higher it subsequently posted its largest three-day decline since 2011. Such choppy price action made it near impossible to keep any real conviction in market direction or a lasting trading bias. A big week of economic event risk and the new month may nonetheless add clarity for the US Dollar and broader financial markets

    Friday, August 28, 2015

    Today's Links

    1--Total Risk Surrender:’ Record $29.5 billion yanked from stock funds


    Investors pulled a record amount of money out of stock funds in the week ended Wednesday, signaling “Total Risk Surrender,” as a Bank of America Merrill Lynch note puts it.
    Equity funds saw $29.5 billion head for the exits, the largest weekly outflow on record, the note said, citing data going back to 2002.


    This massive exodus perhaps set the stage for the stock market’s big gains on Wednesday and Thursday. It was “capitulation,” the BofA note said, using a term that refers to so much selling that a bottom can be formed. The bank talked about capitulation last week for emerging markets, commodities and energy-related stocks.


    Huge one-day outflow: Beyond the weekly data, there’s this stunning point: Investors pulled more money out of stocks funds in one day during the past week — Tuesday — than they did in any day in roughly the last eight years, as the chart below shows.
    Tuesday’s outflow was $19 billion, according to the latest “Flow Show” note dated Thursday from the Bank of America Merrill Lynch investment strategy team led by Michael Hartnett.


    2--Investors dash to cash


    3--America’s Dangerous Bargain With Turkey


    Washington’s policy has been inconsistent and vague, but it always envisioned a post-Assad Syria that would be pluralistic and guarantee minority rights. Turkey recognized early on that Mr. Assad’s brutal policies would lead to radicalization, but the Turkish policy of seeking a Sunni-dominated Syria, governed by forces rooted in the Muslim Brotherhood, has not helped matters.


    4---Money Pours Out of Emerging Markets at Rate Unseen Since Lehman


    This week, investors relived a nightmare.
    As markets from China to South Africa tumbled, they pulled $2.7 billion out of developing economies on Aug. 24. That matches a Sept. 17, 2008 exodus during the week Lehman Brothers went under. The collapse of the U.S. investment bank was a seminal moment in the timeline of the global financial crisis.


    5--Global equity funds witness biggest-ever exodus
    6--The Investor Revolt Arrives: This Hasn't Happened Since Q4 2008
    7---Share buybacks: Symptom of a decaying economic order


    8---Fed acts to push US stocks higher
    9--China's 'QT' is the real global economic threat


    10---Summer 1929
    11---What china's liquidating UST means


    12---Poor U.S. bond sales raise concerns about foreign demand


    Treasury auctions on Tuesday and Wednesday featured worrisome signs that foreign central banks were not the big buyers they had been up to now. Foreign central banks typically purchase new Treasuries through bond dealers who bid on their behalf, a category of buyers identified as "indirect bidders."




    13---Central banks inflating 'elevated' asset prices - BIS
    14--Disaster Is Inevitable When The Two Decade-Old Stock Bubble Bursts
    15---Three signs the equity-bubble grenade will pop
    16--Are We in a Stock Market Bubble?
    17--Bubble warning grows louder








    14--Global Public Investors - the new force in markets CBs buy assets?





















    Wednesday, August 26, 2015

    Today's Links

     


      "Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small.... But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vunerable to the kind of blow it received from Wall Street. Those who have emphasized this vulnerability are obviously on strong ground. Yet when a greenhouse succumbs to a hailstorm something more than a purely passive role is normally attributed to the storm. One must accord similar significance to the typhoon which blew out of lower Manhattan in October 1929."      Extracts from "The Great Crash: 1929", John Kenneth Galbraith, First Published 1955, Chapter 10: "Cause and Consequence", Page 204.





    "Whereas in 2007 we had a stock bubble driven at least somewhat by market fundamentals, in 2015 it’s just the long, drawn-out drama of a drug addict pumping too much heroine for too long. Now, detox is ahead!"  Harry Dent
    http://economyandmarkets.com/markets/stocks/get-with-the-program-bubbles-dont-correct-they-burst/


    Russell Napier: "Another asset purchase program by the Fed will not help this time. It’s like if you are lying in the hospital and the doctor says "The good news is you are getting more medicine. The bad news is it does not work."




    1--The party is over for junk bond investors
    More than $8 billion has poured out of high-yield bonds and the carnage is expected to continue


    More than $8 billion has poured out of the nearly 200 high-yield mutual and exchange-traded funds tracked by Lipper over for the last three months. While high-yield bond ETFs actually took in money last week despite poor performance, outflows are likely to continue. "...There have been outflows from the sector in nine of the last 10 weeks. Investors have been shying away from high yield bonds for much of this year...
    Moody's is expecting the default rate to rise from here—predominantly due to distressed energy and commodity-related issuers. The general increase in market volatility will also hurt every other non-investment grade company....


    In the ultra-low interest rate environment since the financial crisis, junk bonds have been a favorite place to find more yield. Not anymore.
    Investors are bailing out of high-yield bond funds as the global economic picture deteriorates. Prices of speculative grade debt—bonds rated BB/Ba or less—have fallen along with stocks as worries about China, the Eurozone and global economic growth intensify.
    "Spreads are widening across all sectors of the market in response to the heightened uncertainty of the economic outlook," said Jon Lonski, chief markets economist at Moody's Analytics. "There's a reduced expectation for business activity."


    2-- China’s Stocks Slump as Rate Cut Fails to Stop $5 Trillion Rout


    3--Get With the Program: Bubbles Don’t Correct, They BURST!
    http://economyandmarkets.com/markets/stocks/get-with-the-program-bubbles-dont-correct-they-burst/
    We had the stock bubble in 1987, the tech bubble of early 2000, the real estate bubble in early 2006, another stock bubble into 2007, oil in mid-2008, gold in mid-2011 – and now, a final stock bubble into 2015.
    They’ve all burst, or are still bursting!
    Oil’s down more than 65% from its secondary peak in 2011 and was down 80% from its all-time high in 2008. Gold’s down 40% from its 2011 high....


    Bubbles typically crash 70% to 80% before they fully deleverage. But when they burst, they usually kick off with a 20% to 50% slide right out the gate – most often within a matter of months


    4---/http://wallstreetonparade.com/2015/08/forget-china-heres-whats-really-frightening-u-s-stock-investors/


    5---Current Low Oil Price Has Nothing to Do With Supply and Demand
    http://russia-insider.com/en/business/ri


    All these things still don’t explain the panic in oil markets other than financially driven events that aren’t directly tied to the supply and demand of oil ...


    In addition to the precipitous drop in oil is the mystery of oil imports which, over the last three months, have risen dramatically while U.S. production has fallen. Why would this occur as the media continues its portrayals of a supply glut in the U.S.?


    Last week, and almost every week in which oil inventories have risen, it has come as a result of surging imports at a time that U.S. refineries have promised 700,000 barrels per day in additional light sweet oil capacity dedicated to shale production.
    Suffice it to say, something smells rotten. Since June, U.S. imports have risen by over 1 mb/d to near record levels achieved back in April of this year. How can we be awash in domestic production yet be importing record amounts of foreign oil...


    If the chart below is correct and gasoline supplied to the U.S. domestic market rose 500,000 barrels per day while U.S. production held nearly flat since the start of 2015, how in the world are inventories in the U.S. so high according to the EIA? ...


    As I stated in previous articles, until the Fed admits the strong dollar and rate hike threats are off the table signaling a policy change, efforts on depressing oil prices won’t subside. The U.S. economy is weakening not strengthening and has been for some time. Historical QE initiations have started at just about these times, as markets begin to crash, yet we still hear about higher rates. Has the FED changed course on stimulus instead, using falling commodities vs. QE? Maybe for a time, but recent data indicates that isn’t working either.
    Look for a significant U.S. dollar correction in the coming months, marking a turn in commodities in general. Until then, we are in a perfect storm where forces are driving prices lower with little regard for the fundamentals, due to Fed policy and just the pure greed of funds who can push oil futures lower, so as to maximize short equity returns or to buy assets on the cheap.:


    It is clear that it is no longer supply and demand for oil that is dictating the price but is instead the financial markets and more importantly money flows tied to central bank policy.
    Bearish sentiment in the oil markets is taking over as net short positions near record highs. According to Reuters, 50 to 60 hedge funds have taken short positions that account for around 160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil options and futures now exceeds levels in the great financial meltdown of 2008, believe it or not, despite talk of a good economy and the Fed needing to raise interest rates. Madness, right
    ...
    Fundamentally, almost every bear case presented by the media in 2015 has been proven false. Doomsday events such as rig count (vertical rigs being dropped vs. horizontal), Cushing overflowing, China demand slowing, to Iran floating storage of 50 million barrels being unleashed, U.S. production rising, have all been dispelled.
    In fact, as I said, the fundamentals have even improved as U.S. production has entered into decline, crude stocks have been drawing down since the spring, and demand for gasoline is at record highs (much higher vs. expectations going into 2015).....


    6--Deflation is baaack
    http://www.econotimes.com/Deflation-fear-is-back-80797#HgIa2MP2r7E0EsAx.99
    Investors and policymakers are back again weighing the possibilities of deflation if China slows down further and commodity rout continues. China is extremely prominent in global trade, especially in commodity space, which makes the developments in the country extremely vital for global inflation, which continues to lag all the growth.
    • US inflation expectations as measured by 5 year- 5 year (5y/5y) inflation expectation using swap dropped to lowest level in 5 years. It is even worse for one year break even inflation, which since July has been declining steadily beyond negative and now hovering below 1.5%.
    • http://www.econotimes.com/Deflation-fear-is-back-80797#HgIa2MP2r7E0EsAx.99


    .
      have nothing to base this on, but those are my exact feelings which is why I looked at the trouble in the credit markets for answers. But here's what's interesting: The Dow dropped nearly 600 pts on the day, but  10-year and the 30-year Treasuries hardly budged. (just 2 basis points each) which means that the optimistic view of the stock market capitulated to the pessimistic view of the bond market which sees slow growth and zero inflation for as far as the eye can see. There seems to be a realization that sky-high valuations are not sustainable when the economy is stuck in the mud and growing under 2% per year


    http://www.zerohedge.com/news/2015-08-21/russell-napier-lays-out-trigger-next-emerging-market-crisis
    How do emerging markets cause a global problem?
    Some of the emerging markets borrowed massively in foreign currency in the past. The rapid depreciation of their currency creates solvency issues. If there is a significant default in the emerging markets, we are a facing a global crisis. The last thing the world needs in times of slow global growth is a credit crunch. But such a credit crunch somewhere in the emerging markets is very likely





    Here's more from Andrew Ross Sorkin at the New York Times:

    Since 2004, companies have spent nearly $7 trillion purchasing their own stock — often at inflated prices, according to data from Mustafa Erdem Sakinc of the Academic-Industry Research Network. That amounts to about 54 percent of all profits from Standard & Poor’s 500-stock index companies between 2003 and 2012, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell."



    Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.







    Today's Links

    I'm expecting a reboundbut the key for me is volatility.
    Here's a thought: "...the end of the low volatility period leads to a strong and sudden crash in prices."  Constantin Gurdgiev

    I don't see why they want to keep stocks high
    Bond yields are saying that we're headed for a long period of slow growth and no inflation.
    Stocks are saying everything is hunky dory.
    who's right?




    1--Wall Street terrorists steal money from pensioners to line their pockets: How a Public Pension Crisis Is Driving an Epic Credit Boom


    Massively underfunded public pensions are driving an epic credit boom in the corporate bond market that will likely accelerate in the coming years.
    Lawrence McQuillan of the Independent Institute explained on Financial Sense Newshour this week how public pensions are being operated under rules and assumptions that would be considered criminal under Federal law if operated similarly in the private sector.


    We spoke with him about his very important book (see here), California Dreaming: Lessons on How to Resolve America's Public Pension Crisis, where he said that in order to meet their funding requirements the Big Three pension funds in California (CalPERS, CalSTRS, and UCRP) assume that "they will outperform the average portfolio return...by 21 percent every year for decades."
    Given their massively growing liabilities, which collectively dwarf the size of the Fed's own balance sheet, and high return requirements, our other guest this week, Brian Reynolds, Chief Market Strategist at New Albion Partners, said pension funds across the nationa are pouring money into the corporate bond market leading to a "daisy chain of financial engineering."


    "Pension funds," he said, "have to make 7.5%," so they are putting their money "in these levered credit funds that mimic Long-Term Capital Management in the 1990s." Those funds, in turn, "buy enormous amounts of corporate bonds from companies which puts cash onto company balance sheets...and they use it to jack their stock price up, either through buybacks or mergers and acquisitions."


    "It's just a daisy chain of financial engineering and it's probably going to intensify in coming years," Brian said.
    When we asked him why he thought this, New Albion's Chief Market Strategist cited two important factors: what came out of the Detroit bankruptcy and the eventual move toward Fed rate hikes.
    With regards to the latter, he explained that private equity firms and hedge funds actually begin to buy corporate bonds more aggressively to paper over the losses from rising yields/lower bond prices. So, although most investors think a move towards higher rates will cause panic, Brian said, ironically, that's when you see things really start to accelerate.


    2--Why do markets fall late in the day? A. Buybacks, perhaps, Kelly Evans


    That said, corporate America has been pretty much the only buyer of this rally that most everyone else—individual investors, pension funds, macro hedge funds—has sold.
    There were $141 billion of stock buybacks authorized in April alone--a new record, according to Birinyi Associates. If the year-to-date pace keeps up, 2015 will record $1.2 trillion in total buybacks, handily outpacing the previous annual high of $863 billion set in 2007.


    3---Michael Hudson: Smoke and Mirrors of Corporate Buybacks Behind the Market Crash


    what most of the commentators don’t get, that all this market runoff we’ve seen in the last year or two has been by the Federal Reserve making credit available to banks at about one-tenth of 1 percent. The banks have lent out to brokers who have lent out to big institutional traders and speculators thinking, well gee, if we can borrow at 1 percent and buy stocks that yield maybe 5 or 6 percent, then we can make the arbitrage. So they’ve made a 5 percent arbitrage by buying, but they’ve also now lost 10 percent, maybe 20 percent on the capital....


     companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple, especially, have been borrowing money to buy their own stock. And corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. You’ll get rich in no time. So all of these stock buybacks by Apple and by other companies at high prices, all of a sudden yes, they can make that money in the short term. But their net worth is all of a sudden plunging. And so we’re in a classic debt deflation.....


    You’ve had stock prices going up without really corporate earnings going up. Although if you buy back your stock and you retire the shares, then earning the shares go up. And all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it’s not real. There’s been no real gain in industrial profitability. There’s just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring....


    The real problem is that low interest rates provide money to short-term speculators. And all of this credit has been used not for the long term, not for investment at all, but just speculation. And when you have speculation, a little bit of a drop in the market can wipe out all of the capital that’s invested.


    4--fewer people are invested in the stock market today than at any time in nearly the last two decades (because they think) the rules of the game are rigged  Duh?


    fewer people are invested in the stock market today than at any time in nearly the last two decades -- the product of dogged wage stagnation and a dramatic loss of faith in markets.
    Data varies by source. But according to the U.S. Federal Reserve's most recent survey, only about 48 percent of Americans reported owning stocks or stock-based investments, down from a 2007 peak of 65 percent, according to Gallup. A more recent study released in April by consumer finance firm Bankrate.comfound the same proportion as the Fed, which marks the lowest participation rate since 1995, when about 41 percent held some form of stock.
    One is more likely to encounter a One is more likely to encounter a daily tea drinker in the United States than someone with money invested in the stock market -- and that includes so-called nondirect investments like mutual funds held in 401(k) accounts. Even fewer Americans, about 14 percent, own individual stocks like Apple or Microsoft....


    But that doesn’t account for the full picture. Even people with the means to invest are steering clear of Wall Street. When asked what kind of investments “made the most sense,” more people said real estate or cash--savings accounts or certificates of deposit--than stocks, according to a separate Bankrate.com survey released last month....


    Many share a feeling that the rules of the game are rigged or that it’s too risky to invest savings in a system they cannot possibly understand
    5--Michael Hudson on What's Behind the Stock Market's Roller-Coaster Ride


    6--Turkey refutes tipping al-Qaeda group to US-trained fighters


    Turkey has strongly denied a news report suggesting that Turkish authorities orchestrated the kidnapping of a group of U.S.-trained moderate Syrian fighters after they entered Syria last month to confront fighters of the Islamic State of Iraq and the Levant (ISIL), arguing that the report was “intentional.”...

    “The rebels say that the tipoff to al-Qaeda’s Nusra Front enabled Nusra to snatch many of the 54 graduates of the $500 million program on July 29 as soon as they entered Syria, dealing a humiliating blow to the Obama administration’s plans for confronting [ISIL],” the report said.


    7---Two arrested for insulting President Erdoğan during captain’s funeral


    8--Erdoğan no longer credible


     Erdoğan is the actor of the Sept. 12 regime. He is not hope but rather the source of the crisis. He has lost all credibility in the claim to promote democracy and peace.


    9--US stock rally collapses amid fears of global slump


    The failure to stage a reversal of Monday’s selloff underscored the disarray and perplexity of capitalist governments and central banks. There is virtually no confidence that any of the major imperialist powers—the United States, Europe or Japan—acting either separately or in concert, can lead the way out of the crisis. Instead, all hopes are pinned on crisis-ridden China.
    This sentiment was expressed by Mohamed A. El-Erian, the former head of the world’s largest bond trading firm Pimco, who wrote that the only longer-term solution to the crisis gripping the world economy was an economic normalization in emerging markets, most notably China.


    El-Erian declared that a significant portion of the selloff “arose from the correct realization that the primary response would have to come from the emerging economies that are the source of the growth and financial concerns.”
    The prospects of China or another emerging market country (India, Brazil, etc.) even temporarily rescuing the world capitalist system are remote. In a statement announcing Tuesday’s rate cut, the Chinese central bank declared: “China’s economic growth is still facing downward pressure, and the task of stabilising growth, adjusting institutions, advancing reform, benefiting people’s lives and preventing risks is still extremely arduous.”


    El-Erian admitted that “the best that can be hoped for right now is short-term market stabilization through another series of liquidity-driven Band-Aids.” He added, “This approach would provide much-appreciated immediate relief, but it wouldn’t be sufficient to deliver the longer-term anchor of stability that the global financial system is searching for.”...


    Over the weekend, former US Treasury Secretary Lawrence Summers called for the Federal Reserve to abandon its plans to raise the federal funds rate for the first time in nearly nine years and instead extend its current policy of zero interest rates into the indefinite future.
    Summers went further on Tuesday, tweeting that the Federal Reserve should consider further monetary expansion in response to the selloff. As the Financial Times put it, Summers “suggested… that the Fed should even consider another [quantitative easing] bond-buying programme


    10--The atrocities of ISIS and the US wars of sociocide


    The similarities between ISIS and the Khmer Rouge do not end with their barbaric assaults on culture and human life. In both cases, the preconditions for these atrocities had been created through the destruction of entire societies by US imperialism.
    In Cambodia, a US bombing campaign dropped some 532,000 tons of explosives on the country in four yearsmore than three times the tonnage dropped on Japan during all of World War II. The resulting death toll is estimated as high as 600,000, while 2 million people out of a population of 7 million were made homeless and economic life was shattered.


    ISIS and the current bloodshed across Syria and Iraq are the direct products of similar acts of sociocide on the part of US imperialism. In Iraq, the illegal US invasion of 2003, the subsequent occupation and the systematic destruction of what had been one of the most advanced health and social infrastructures in the Arab world claimed the lives of over 1 million Iraqis, while turning another 5 million into refugees. The divide-and-rule strategy pursued by the Pentagon stoked a sectarian civil war by deliberately manipulating tensions between Iraq’s Shia and Sunni populations.


    The ramifications of this policy have long since spilled across national borders, with increasingly catastrophic consequences, all driven by Washington’s resort to militarism to advance its aim of hegemony over the energy-rich regions of the Middle East and Central Asia....


    Nine months before the last US troops withdrew from Iraq in December 2011, Washington and its NATO allies launched another unprovoked war of aggression to topple the government of Muammar Gaddafi in Libya and impose their own puppet regime over the oil-rich North African country. The destruction of the Libyan state and the murder of Gaddafi plunged the country into chaos and bloodshed that continues to this day. Islamist militias used as US proxies in the Libyan war, along with tons of captured Libyan weapons, were subsequently funneledwith the aid of the CIAinto the civil war in Syria, strengthening ISIS and helping create the conditions for it to overrun more than a third of Iraq.


    In the name of the never-ending “war on terrorism,” Washington is prosecuting another military campaign in alliance with the Shia-based government in Baghdad against ISIS in the predominately Sunni regions of Iraq, while in Syria it is stepping up military operations in alliance with Turkey, Saudi Arabia and the other Sunni Gulf monarchies, while attempting to find “moderate” Sunni Islamists it can utilize as proxies in the war to topple the government of President Bashar al-Assad.


    11--As World Markets Drop, U.S. Economic Confidence Index at -14 Gallup
    12--quick macro update, Mosler "must read"


    13---Forget China, Here’s What’s Really Frightening U.S. Stock Investors


    As earnings and revenues slide, the corporate balance sheets bloated with debt taken on to buy back the company’s own shares will provide an unwelcome headwind to grow earnings. Since 2009, S&P 500 corporations have spent over $2 trillion buying back their own stock.


    According to the U.S. Treasury’s Office of Financial Research in a report released in March, “corporate debt outstanding has risen to $7.4 trillion, up from $5.7 trillion in 2006,” noting that a significant portion of that was spent on share buybacks. The report goes on to note that “Although this financial engineering has contributed to higher stock prices in the short run, it detracts from opportunities to invest capital to support longer-term organic growth. Credit conditions remain favorable today because of the positive trend in earnings, but once the cycle turns from expansion to downturn, the buildup of past excesses will eventually lead to future defaults and losses.”


    Further angst on Wall Street stems from worries about just how the U.S. mega banks might fare in a market meltdown. As we reported in June, some of the largest banks are back to their dodgy practices, this time entering into “capital relief trades” with questionable counter parties like hedge funds and private equity firms. The capital relief trades allow the banks to enter into derivative trades that dress up the appearance of stronger capital while keeping the deteriorating assets on their books.


    The Office of Financial Research (OFR) released a report on the practice in June and suggested these derivatives deals may present systemic risk to the financial system. What was particularly stunning about the report is that it directly linked the current behavior to the same type of behavior as that which collapsed the economy in 2008.


    The OFR report referenced a memo that was disclosed by the Financial Crisis Inquiry Commission, charged with investigating and reporting on the underlying causes of the 2008 Wall Street collapse.
    That memo was transmitted on September 16, 2008 – a day after Lehman Brothers had filed for bankruptcy. The memo was attached to an email to Tim Geithner, then President of the New York Fed. One section of the memo detailed what AIG, the giant international insurance company headquartered in the U.S., had been doing with European banks to dress up their capital. The memo said AIG had engaged in swaps that allowed European banks to hold “1.6% in regulatory capital as opposed to 8%.”


    AIG was also on the hook for Credit Default Swaps purchased by Wall Street banks like Goldman Sachs and required a $185 billion taxpayer bailout to remain afloat.
    One of the mega banks that is currently engaging in these capital relief trades is Citigroup, the recipient of the largest bank bailout in U.S. history during the 2008 crash. According to a February 2013 report at Bloomberg Business, Citigroup entered into a deal with private-equity firm, Blackstone Group. Citigroup obtained from Blackstone protection against initial losses on $1.2 billion of shipping loans, which allowed Citigroup to lower the amount of capital it had to set aside by 96 percent. According to Bloomberg, the loans remained on Citigroup’s balance sheet.



    Tuesday, August 25, 2015

    Today's Links

    Monday: Dow closes down 588
    "...the end of the low volatility period leads to a strong and sudden crash in prices."  Constantin Gurdgiev,  "Great Moderation or Great Delusion


    1--Commodity Meltdown to 16-Year Low Pauses as Bears Take Breather


    Flush from a collapse in everything from oil to aluminum to cotton, commodity bears are taking a break.
    A measure of returns from 22 raw materials edged higher after tumbling to the lowest level since 1999 on Monday on concern a slowing Chinese economy will exacerbate supply gluts. Shares in miners and explorers outside China including Glencore Plc, Fortescue Metals Group Ltd. and BP Plc recouped some losses after a selloff that wiped $2.7 trillion from global equity markets.


    Raw materials have plunged as supplies outstrip demand amid forecasts for the slowest Chinese growth since 1990. The largest user of energy, grains and metals was much weaker than anyone expected in the first half of the year, according to Ivan Glasenberg, head of Glencore, the world’s leading commodity trader.
    Oil futures gained as much as 2.4 percent in New York, paring losses after a 5.5 percent drop on Monday. Brent, which tumbled below $45 a barrel for the first time in six years, was 2.1 percent higher. Copper rose as much as 1 percent and aluminum increased 1.6 percent, both advancing from the lowest close since 2009 on Monday.


    2--Larry  Summers: See substantial risks of significant instability


    3-Adult in the room---Biggest trading day ever and 10-year only dips 2 basis points while 30-year gains two basis points


    Market volatility leaves bonds twisting in the wind
    Ten-year Treasury note yields touched a session low of 1.90 percent, breaching the 2 percent level for the first time since April, but the security recouped most of those losses. It was last down about 2 basis points at 2.02 percent
     
    0.0630%
    US 10-YR2.0644
     
    0.0660%
    US 30-YR2.7884
     
    0.0690%
     


    The yield on 30-year Treasury bonds erased earlier losses to trade up slightly at 2.735 percent, while the yields of all other the maturities were in the red. (yield on 30 year only moved 3 basis pts
    http://www.cnbc.com/2015/08/24/d-yields-break-below-2.html


    4--QE 4?  "Yeah, we could try that again, so we can go thru withdrawal again. Doesn't make much sense?" Santelli rant
    QE creates mismatch between fundamentals of the economy and the price levels in the equities markets.
    We will be able to calibrate the true value of stocks when the Fed comes up with the true value of interest rates and we'll get the true value of stocks.


    10- year and 30 year only moved 2 basis points each..."even though the debate has been raging for years about which market is right (stocks or bond markets). Well, we know what market is right now.
    Treasuries have handicapped the long-end to global growth, and the reason the moves aren't bigger is because everyone else is catching up to the reality Treasuries have been pricing all along."
    What about "Can't raise rates now."
    Of course they can. Does anyone want to go through this drip-drip-drip  again?
    The markets are making an adjustment. Janet Yellen, let the markets do it. Don't put the markets thru it again."


    5--Banks take a drubbing


    What no one seems to be talking about is the serious drubbing the shares of the too-big-to-fail Wall Street banks took on Thursday and Friday of last week. That’s not something that should be swept under the rug when markets are behaving like the early days of the last financial crisis in 2008 — which saw the largest Wall Street bank bailouts in history.
    While the stock losses of the largest Wall Street banks were manageable last Thursday, they picked up steam on Friday. What was particularly surprising was that JPMorgan’s losses were on a par with those of Citigroup, with Citigroup shares losing 6.06 percent in the two day period while JPMorgan was off by 6.01 percent. Bank of America, which owns the giant Wall Street stock brokerage firm, Merrill Lynch, lost 7.95 percent in the two-day span.


    6--U.S. stocks end harrowing session with biggest drop in 4 years


    7--JPMorgan Sheds $27.18 Billion in Market Cap in Three Trading Sessions


    8--Home prices rose 4.97% YoY in June, according to Case-Shiller's 20-City index, missing expectations for the 3rd month in a row. Price appreciation has now been flat for 5 months - despite surging home sales - as bubblicious San Francisco saw price depreciation once again. Portland amd Denver saw the most appreciation in June. This is the second month in a row of sequential seasonally-adjusted declines in home prices, and along with TOL's dismal report this morning, suggests maybe another pillar of the 'strong' US economy meme is being kicked out... and Case-Shiller warn more than one rate hike by The Fed (or a stock market plunge) will stymie housing considerably.


    9--U.S. Credit Traders Send Warning Signal to Rest of World Markets


    10--Stock are so volatile that they’ve short-circuited the CBOE Volatility Index.

     A CBOE spokesman said VIX, commonly known as the stock market’s fear gauge, experienced quoting problems because of the whippiness of Standard & Poor’s 500 Index prices.
    The VIX is derived from the midpoint of various S&P 500 options, and the exchange claims those midpoints were tough to determine at the open.
    VIX initially spiked above 50, and is now around 46.76. At these levels, VIX is pricing a global economic depression
    Volatility Short-Circuits VIX


    11--Dick Bove "Liquid markets, no more!"


    At its base, the key problem is that the historic protections that once existed in the markets to prevent massive downslides have been removed," he said. "This country's claim that it has deep and liquid markets is being put to the test."


    12---Printing money creates inflation. Asset inflation.
    "It seems to me the really pernicious inflation of this cycle has been the systematic comprehensive mispricing of asset prices," Grant said



    13--Fed looks ready to make mistake

    Tightening policy will adversely affect employment levels because higher interest rates make holding on to cash more attractive than investing it. Higher interest rates will also increase the value of the dollar, making US producers less competitive and pressuring the economies of our trading partners.
    This is especially troubling at a time of rising inequality. Studies of periods of tight labour markets like the late 1990s and 1960s make it clear that the best social programme for disadvantaged workers is an economy where employers are struggling to fill vacancies.


    Summers peddles bullshit secular stagnation theory to perpetuate cash giveaway to billionaires
    Much more plausible is the view that, for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the “secular stagnation” diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a “savings glut”. Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade.


    14---More warmongering: New U.S. Security Strategy Doesn’t Go Far Enough on South China Sea


    The publication documents that Chinese island building in the SCS has added 2,900 acres of artificial land, dwarfing Vietnam’s 80, Malaysia’s 70, the Philippines’ 14, and Taiwan’s 8. China has built 17 times more artificial island area in 20 months than rival claimants combined over the past 40 years. It has generated 95% of all artificial land in the Spratlys. The Pentagon rightly emphasizes that all sovereignty claims must be based on natural land features, and calls out all parties making excessive claims.
    Reassuringly, the report documents tangible American commitment to the region. As part of home-porting 60% of its naval and overseas air assets to the Pacific by 2020, the U.S. is upgrading its forward-deployed carrier; home-porting its three newest stealth destroyers; and deploying its newest air operations-oriented amphibious assault ship, two additional Aegis-capable destroyers, an additional attack submarine, and manifold advanced aircraft. It is funding wide-ranging weapons modernization, with—at long last—increased focus on missile

    -15---Investors have pulled near $1 trillion from emerging markets


    "The collapse in emerging market imports reflects a more fundamental drop in demand as capital outflows have forced domestic demand to shrink and lower commodity prices have eroded incomes in commodity-producing countries," said Neil Shearing of Capital Economics. "So far, there is little sign that we have reached the bottom."
    Emerging market currencies again came under strain on Tuesday as traders judged that China's devaluation of the renminbi this month had removed a rare anchor of currency market stability. In addition, 6.1 percent and 6.6 percent falls in the main indices of the Shanghai and Shenzhen stock markets respectively undermined confidence in Beijing's ability to reinvigorate economic growth.


    16--China stock market panic shows what happens when stimulants wear off


    On the day that QE was launched in the UK, 9 March 2009, the FTSE 100 stood at 3542 points. Its recent peak on 27 April this year was 7103 points, a gain of 100.5%. There is a similar correlation between the three rounds of QE in the US and the performance of the S&P 500, which was up more than 200% during the same period.


    17--China: This was the fastest growth in credit in any country, EVER,  Steven Keen


    18--Pritchard, China


    As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place.
    China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse. As Figure 3 in last week’s post showed (reproduced below as Figure 3 below), the growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years.


    This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010


    18--It turned into a global rout after the Shanghai composite index crashed 8.5pc on China’s “Black Monday”, pulverizing its July lows after the central bank (PBOC) - oddly passive - refused to come to the rescue as expected with a cut in the reserve requirement ratio for banks.
    Beijing’s botched efforts to prop up the country’s stock markets have collapsed. An estimated $300bn of state-orchestrated buying achieved nothing, overwhelmed by an avalanche of selling by investors forced to cover margin debt. ...


    Spending contracted 19.9pc in January as local government reform went horribly wrong. It did not recover fully until May and June, when the new bond market took off. The fiscal stimulus will feed through over the next six months. ...


    China is burning through foreign reserves at a blistering pace to stabilize the yuan and offset capital flight estimated at $35bn a week. This is automatically tightening monetary policy, squeezing liquidity, and risks holding back the very recovery in China needed to quell doubts.


    19--PPT at large?? Forbes


    It sure looks like the U.S. plunge protection team is out in full force this morning.
    Our indices are off the lows made from the open and a lot of stocks that were down to absolutely ridiculous levels have also bounced back and some are even trying to go green amidst the carnage.
    U.S. Plunge Protection Team Out In Force This Morning, Forbes
    http://www.forbes.com/sites/jaysomaney/2015/08/24/u-s-plunge-protection-team-out-in-force-this-morning/


    20--Paul Craig Roberts




    "....we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying. It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.


    Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off." ("Central Banks Have Become a Corrupting Force" Counterpunch
    http://www.counterpunch.org/2015/08/24/central-banks-have-become-a-corrupting-force/


     21--Foreign central banks are being used to conceal flagging sales of US Treasuries which prop up the critically-ill US dollar. Check it out:




    From November 2013 through January 2014 Belgium with a GDP of $480 billion purchased $141.2 billion of US Treasury bonds. Somehow Belgium came up with enough money to allocate during a 3-month period 29 percent of its annual GDP to the purchase of US Treasury bonds.
    Certainly Belgium did not have a budget surplus of $141.2 billion. Was Belgium running a trade surplus during a 3-month period equal to 29 percent of Belgium GDP?
    No, Belgium’s trade and current accounts are in deficit.


    Did Belgium’s central bank print $141.2 billion worth of euros in order to make the purchase?
    No, Belgium is a member of the euro system, and its central bank cannot increase the money supply.
    So where did the $141.2 billion come from?


    There is only one source. The money came from the US Federal Reserve, and the purchase was laundered through Belgium in order to hide the fact that actual Federal Reserve bond purchases during November 2013 through January 2014 were $112 billion per month."
    ("The Fed Is The Great Deceiver", Paul Craig Roberts and Dave Kranzler
    http://www.paulcraigroberts.org/2014/05/12/fed-great-deceiver-paul-craig-roberts/


    22--Petrodollars leave world markets for first time in 18 years - BNP
    Petrodollar recycling peaked at $511 billion in 2006, BNP said.
    "At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out," said David Spegel, global head of emerging market sovereign and corporate Research at BNP.
    In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.


    23---China dumping Treasuries? Russell Napier titled "The Great Reset - Act II", in which the former CLSA strategist, asks a simple question:
    "how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM."
    24---China's Record Dumping Of US Treasuries Leaves Goldman Speechless
    http://www.zerohedge.com/news/2015-07-21/chinas-record-dumping-us-treasuries-leaves-goldman-speechless
    We then put China's change in FX reserves alongside the total Treasury holdings of China and its "anonymous" offshore Treasury dealer Euroclear (aka "Belgium") as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted - namely virtually the entire delta in Chinese FX reserves come via China's US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.


    We explained all of his on Friday in "China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium", and frankly we have been surprised that this extremely important topic has not gotten broader attention.


    25--China dumping Treasuries FX


    21--China Slashes U.S. Debt Stake by $180 Billion, Bonds Shrug


    22--Slower US bond demand may urge Fed rethink


    China’s Treasury buying is likely to ease, forcing rates higher 


    23--China's holdings of US Treasuries continues to rise
    Updated:2015-08-18 10:10
    (Xinhua)
    WASHINGTON -- China's holdings of US Treasury securities rose for the fourth month in June, while Japan had kept cutting its holdings to the lowest level since 2013. China's holdings of the treasuries rose about $900 million to $1.271 trillion in June, the latest data from the Treasury Department showed Monday. China has increased its US treasuries holdings for four months in a row and remained the largest holder of US government debt. Japan, which overtook China as the biggest foreign holder in February but fell back to the second place in March, cut its holdings by $17.8 billion to $1.197 trillion in June, the lowest since 2013. Japan's holdings have been falling for three consecutive months. In June, overall foreign holdings of US Treasury securities rebounded to $6.175 trillion after falling for two months. ...


    24--China selling treasury bonds for 40 bln yuan
    Updated:2015-08-06 14:05
    (china.org.cn)
    The Chinese Ministry of Financewill sell two batches of treasury bonds for a total of 40 billionyuan (about 6.5 billion U.S. dollars) in August, it announcedWednesday.One batch is worth 20 billion yuanat an annual coupon rate of 4.5 percent with a maturity of threeyears, while the other is worth 20 billion yuan at an annual couponrate of 4.87 percent with a maturity of five years.These bonds will be sold from Aug.10 to 19 to individuals only.


    25--Mike Norman on USTs


    Bloomberg and other financial media outlets are running a story about how China sold $180 billion in Treasuries and the market did nothing.

    Why are we not surprised?

    It seems that Bloomberg and the rest of the financial media mental midgets are still clueless. They still believe, I guess, that China sets rates in the U.S. or, that dollars come from anywhere else, but the U.S. government.

    We have long said here in Mike Norman Economics that the worries over China selling our Treasuries or, any other entity selling Treasuries is meaningless because, a) there will always be demand for Treasuries when the Federal Gov't is spending $11 trillion per year (Gross "withdrawals" as per the Treasury's end of the Fiscal Year statement), which equates to vast amounts of resrves piling up in the bankiing system. And, b) when reserves pay nothing and Treasuries pay something.


    26--As global selloff deepens, US stock market teeters on edge of collapse


    There can be little doubt that the Federal Reserve Board and related government agencies intervened behind the scenes to organize the massive buying spree that halted the opening market plunge. Reports emerged later that the New York Stock Exchange had invoked an obscure and rarely used rule to preempt panic selling. Rule 48 speeds up the opening of trading by suspending a requirement that stock prices be announced at the beginning of the session. This may have been used to facilitate an intervention by the Fed.


    Given the role of the Fed in financing the tripling of stock prices since the 2008-2009 crash by holding interest rates at near-zero and pumping trillions of dollars into the financial markets, such an intervention to once again rescue the financial elite would not be an aberration. The entire policy of the Fed and other major central banks and governments since the eruption of the crisis seven years ago has been focused on engineering a vast redistribution of wealth from the working class to the corporate-financial elite through a combination of austerity and record high stock prices.


    The unprecedented bull market has been the main mechanism for further enriching the world’s multimillionaires and billionaires, even as the real economy was starved of productive investment and remained mired in stagnation. The current stock market panic reflects the growth of deflationary pressures in the global economy that are overpowering the efforts to inflate and maintain financial bubbles for the benefit of the rich and the super-rich....


    A former adviser to ex-British Prime Minister Gordon Brown was more apocalyptic. Damian McBride tweeted advice on “the looming crash,” stressing the need to put “hard cash in a safe place” and not assume that banks will be open. Suggesting the eruption of civil strife and state repression, he counseled the need to stock up on “bottled water, tinned goods & other essentials at home to live a month indoors.”


    27--Turkey on the brink of something very ugly indeed, Amanda paul




    http://www.businessinsider.com/china-is-going-through-a-deflation-2015-8?r=UK&IR=T
    http://macronomy.blogspot.com/
    http://www.wsws.org/en/articles/2015/08/22/pers-a22.html
    http://www.nytimes.com/2015/08/22/business/dealbook/global-markets-fall-for-second-day.html?_r=0
    http://www.zerohedge.com/news/2015-08-22/making-sense-sudden-market-plunge
     http://www.nytimes.com/2015/02/06/upshot/global-debt-has-risen-by-57-trillion-since-the-financial-crisis-heres-why-that-is-scary.html?_r=0&abt=0002&abg=1
    http://www.reuters.com/article/2014/11/03/emerging-oil-petrodollars-idUSL6N0ST2YZ20141103