Tuesday, September 1, 2015

Today's links

1--'No Russian jets sent to Syria' - military source on 'expeditionary force' report

2--The China Syndrome: Bubble Trouble

we do still possess the keys for more rapid growth. After all, the problem is simply a lack of demand in the U.S. and world economy. We can create more demand by having the government spend money or give out tax cuts. Larger deficits will boost the economy.

If the private sector isn't prepared to spend, the government can increase demand by repairing and improving the infrastructure, increased funding for health care, child care, and education, or subsidizing wind, solar, and other forms of clean energy. With interest rates at extraordinarily low levels and no signs of inflation anywhere in sight, there is no economic barrier to spending in these and other areas. Such spending would both help to make up the demand gap resulting from our trade deficit, thereby creating jobs, and also increase our economy's longer-term potential and the country's well-being.

The only obstacle to such spending is political. This spending would mean larger budget deficits and our politicians are scared of talking about budget deficits

3--To Restore Trust in Government, Slow Wall Street's Revolving Door, Elizabeth Warren

4-- Clerk called to hearing over gay marriage licences

5--10 Years After Katrina, New Orleans’ All-Charter School System Has Proven a Failure
Test scores tell one story, and residents tell another. A three-month investigation by In These Times reveals the cracks in the education reform narrative.

Carver is part of New Orleans’ Recovery School District (RSD), the first all-charter school district in the nation. In the chaos after Hurricane Katrina, Louisiana opted to completely overhaul the city’s failing public schools by putting them on the open market. Ten years later, cities and states around the country have embarked on their own charter-school experiments and are watching New Orleans closely, laser-focused on outcomes.
Test scores have improved, according to two major reports that examine academic achievement over the past nine years. On Katrina’s 10th anniversary, RSD is being held up as a national model. The graduation rate has risen from 56 percent to 73 percent. Last year, 63 percent of students in grades 3-8 scored basic or above on state standardized tests, up from 33 percent.

But by other measures, the RSD suffers. In These Times received an advance copy of research conducted for the Network for Public Education (NPE) by University of Arizona researchers Francesca López and Amy Olson. The study compared charters in Louisiana, the majority of which are in New Orleans, to Louisiana public schools, controlling for factors like race, ethnicity, poverty and whether students qualified for special education. On eighth-grade reading and math tests, charter-school students performed worse than their public-school counterparts by enormous margins—2 to 3 standard deviations.
The researchers found that the gap between charter and public school performance in Louisiana was the largest of any state in the country. And Louisiana’s overall scores were the fourth-lowest in the nation.

“You can say until you’re blue in the face that this should be a national model, but this is one of the worst-performing districts in one of the worst-performing states,” says NPE board member Julian Vasquez Heilig, an education professor at California State Sacramento.
However, test scores, high or low, are only a piece of the story. In a three-month investigation, In These Times interviewed teachers, parents and students to find out how they feel about the charterization of public education in New Orleans.
Community members mourned the closures of public schools that had served as neighborhood hubs. Students at no-excuses charters described feeling like they were in prison, or bootcamp. Teachers felt demoralized, like they didn’t have a voice in the classroom. Parents complained about a lack of black teachers. In interview after interview, people said the same thing: The system doesn’t put children’s needs first

6--Bernie Sanders Says He Will Not End Drone Program If Elected President

7--Quantitative Tightening?

The so-called "Great Accumulation" is over.

"Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years," DB begins, before noting what we outlined above, namely that the "three cyclical drivers point[ing] to further reserve draw-downs in the short term [are] China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price."
In an

attempt to quantify the effect of China’s reserve liquidation, we’ve quoted Citi, who, after reviewing the extant literature noted that for every $500 billion in EM FX reserve draw downs, the effect is to put around 108 bps of upward pressure on 10Y UST yields. Applying that to the possibility that China will have to sell up to $1.1 trillion in assets to offset the unwind of the great RMB carry and you end up, theoretically, with over 200 bps of upward pressure on yields, which would of course pressure the US economy and force the Fed, to whatever degree they might have tightened by the time China’s 365-day liquidation sale ends, to reverse course quickly.
Deutsche Bank comes to similar conclusions. To wit:
The implications of our conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. For every $100bn (exogenous) reduction in global reserves, we estimate EUR/USD will weaken by ~3 big figures.


Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income. A recent working paper by ECB staff shows that the increase in foreign holdings of euro area bonds from 2000 to mid-2006... is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, in line with the estimated impact on US Treasury yields by other studies. On the short-term impact, one recent paper estimates that “if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5- year Treasury rates would rise by about 40–60 basis points in the short run”, consistent with our estimates above. China and oil exporting countries played an important role in these flows.

which of course means the Fed is stuck:
The current secular shift in reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty.

8--So how far could stocks eventually fall?
Hussman is projecting that we could ultimately see the market decline by more than 50 percent
We fully expect a 40-55% market loss over the completion of the present market cycle. Such a loss would only bring valuations to levels that have been historically run-of-the-mill. 

9--Chicago PMI weakens

 The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction. 

Real gross domestic income (GDI) was up at only a .6% annual rate, only a bit higher than Q1, and in contrast to GDP being up 3.7% for the same quarter. This time looks to me like it’s GDP that’s out of line, as per my narrative where I don’t see any signs of any other sector stepping up and replacing the GDP supported by the now lost oil capital expendit

10--Oil prices fell sharply on Tuesday after official data showed China's manufacturing sector, one of the main engines powering the world's biggest energy consumer, contracted at its fastest pace in three years.
China's official Purchasing Managers' Index (PMI) dropped to 49.7 in August from 50.0 in July, reinforcing concerns over the world's second-largest economy.
The figures helped spur a retreat in oil prices after three days of hefty gains. Investors took profits after Brent and U.S. crude both soared more than 8 percent on Monday, traders said.
Read MoreOil may test $30 again this year: Trader
"It was primarily the China fear factor," Carsten Fritsch at Commerzbank in Frankfurt told the Reuters Global Oil
Brent crude for October delivery fell $4.03, or 7.4 percent, to $50.12 a barrel by 1 p.m. EDT (1700 GMT). On Monday, Brent climbed $4.10, or 8.2 percent, extending a rally from a 6½-year low at just above $42 on Aug. 26.

11--Both pieces made the same claim: President Tayyip Erdoğan has used the recent cooperation against ISIL as a cover for Turkey’s massive operations against the outlawed Kurdistan Workers’ Party (PKK). The latter has been a key fighting force on the ground against ISIL via its sister organization in Syria, the Democratic Union Party (PYD), so Ankara’s attacks on the PKK actually weaken the fight against the notorious jihadist organization.

In another recent article, “Repeat Elections, Repeat Results?” Bülent Alirıza, the head of the Turkey program of the Center for International and Strategic Studies (CSIS), questioned whether the move against the PKK was related to Erdoğan’s dissatisfaction with the June 7 election results, ahead of the government trying its chances once again in the re-election scheduled for Nov. 1

12--Biderman-Santelli. Investors still bullish, Investors betting we've hit the bottom, which doesn't happen when you've reached the bottom. More to go on the downside.

13--Here’s why it can get much worse: Technician

According to Worth, the divergence of ETFs from the indices they follow is a major red flag for the market.
"This is not a good situation. Indeed, it's a precarious one," said Worth. "Things were out of control in many ETFs last Monday and the market to some extent also was out of control."

By Worth's estimation, many of the extreme moves in individual equities was driven by forced selling in ETFs. For example, Worth noted that both Dow Components Home Depot and JP Morgan lost 20 percent of their value on an intraday basis last Monday. But total volume in those names was only slightly above average.
"Why couldn't the moves have been twice as big as they were?" Worth wrote in a note Monday. "The answer is—they could have been."

14--The West Point Professor Who Contemplated a Coup
After calling his intellectual opponents treasonous, and allegedly exaggerating his credentials, a controversial law professor resigns from the United States Military Academy


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