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

1 comment:

  1. eToro is the most recommended forex broker for newbie and pro traders.

    ReplyDelete