Sunday, September 6, 2015

Today's Links

1--Negative real interest rates are correlated both with a rise in stock valuations (because dividend yields decline) and with a rise in earnings themselves, as the corporate cost of capital declines. Earnings are now at record levels in relation to US GDP, two or three times the deflated level that would be suggested by the current anemic rate of growth. However valuations continue to increase in relation to these inflated earnings, driving stock prices into the stratosphere. Since central banks worldwide are now pursuing the same easy-money policies as the Bernanke Fed, the same correlations are appearing elsewhere, with the exception of the majority of emerging markets, where economic reality remains in play." - source Asia Times, Martin Hutchinson

Dr. Constantin Gurdgiev, from his post entitled "Great Moderation or Great Delusion":
"when investors "infer the persistence of low volatility from empirical evidence" (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then "Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices." 

Welcome to Quantitative Tightening as $12 Trillion Reserves Fall
The great global monetary tightening of 2015 is under way, but it’s not being led by the Federal Reserve.
Even as U.S. policy makers ponder whether to raise interest rates this month, one recent source of central bank liquidity in financial markets is drying up and the loss of it partly explains August’s trading volatility.

Behind the drawdown are the foreign exchange reserves run by the central banks. Bolstered following financial crises in the late 1990s as a buffer against capital outflows and falling currencies, such hoards fell to $11.43 trillion in the first quarter from a peak of $11.98 trillion in the middle of last year, according to the International Monetary Fund....

Each means central banks are either paring their reserves to offset an exit of capital or manage currencies, have less money flowing into their economies to salt away or no longer need to sit on as much. Whichever it is, the shrinking of reserves means much less money flowing into the financial system given authorities tended to recycle their cash piles into local currency or liquid assets such as bonds.
In the words of Deutsche Bank AG strategist George Saravelos and colleagues, welcome to the world of “quantitative tightening

3--Sizeable capital outflow from China adds another layer of worry

“Net capital outflows could be around $224 billion in the [second] quarter, meaningfully up from the first quarter,” they said. “Capital outflows have become very sizeable and now eclipse anything seen in the recent past.”...

“China cannot lower interest rates and defend the Chinese yuan at the same time,” he said. And once the Federal Reserve hikes interest rates, which BAML still expects this month, the interest rate differential between China and the U.S. will further narrow, leading to more capital leaving the country, he said.

As a result, Beijing is expected to curtail foreign-exchange interventions and allow the yuan to fall further in an effort to keep its monetary policy options open. This could lead to a fresh currency war, particularly among emerging-market countries, but it could also pave the way for additional monetary easing and attract investors seeking value back to China.

4--Europe's Biggest Bank Dares To Ask: Is The Fed Preparing For A "Controlled Demolition" Of The Market

5---Preventing a another Libya

... if the Syrian air force was unable to support its ground troops not just in the North, but anywhere in Syria, the balance of power would inexorably shift towards the opposition groups and a de facto partition of Syria would be unavoidable. To the Russians, this is unacceptable. They may be willing to let Assad go, but not to abandon Syria as an ally and a Russian asset in the "grand game"....

Before getting to the core of the scenario that could explain events on the ground, it may be useful to recall the Libyan precedent: a "no fly zone" implemented by NATO under a UN-resolution was hijacked – in the Russians' view – to support the anti-Gaddafi insurgents and give them close air support for several months, until the Libyan dictator was finally ousted from power.

Ever since the start of the civil war in Syria, the Russians have always made it clear that they would not tolerate another version of the Libyan precedent. In 2013 already, Russian officials made numerous statements formally objecting to a "no fly zone". A few very strongly worded declarations by President Putin himself didn't leave any doubt as to the Russians' willingness to actively oppose such a development....

The biggest downside to such a negotiated solution though would be, that fighting the Islamic State could not be used anymore as a pretence for supporting the actions of the anti-Assad rebels.
The Syrians - and the Russians - certainly realize that contingency plans are also a necessity for them, whether the alleged settlement initiative succeeds or fails. The recent announcement of a second and larger Russian base on the Syrian coast is certainly part of such contingency plans. Both a naval base and a logistics base, it could help stabilize the heartland of the Al-Assad clan and bolster the Alawi minority's claim and dominance over these lands, cutting of any sea access to whatever Sunni/Jihadi political construct could be established further inland. 

Putting a serious dent into Coalition plans
This is why the establishment of a "no fly zone" and increased operational tempo is so crucial to its most vocal proponents. Short of destroying the regime before any settlement is announced, Bashar al-Assad has to be weakened and his power base eroded to the point where even opposition groups currently willing to sign off on a negotiated peace might possibly change their mind....

Targeting the key component
That is where the MIG-31s come in. Sending in these planes, their crews, as well as all the necessary logistics into Syria, could be a clear message intended at disrupting any idea the Coalition might have of establishing "safe zones", "security perimeters" or "no fly zones", whatever you want to call them, without actual backing from international law.
Based on current Syrian-Russian defence agreements, Russian – or Syrian – MIG31s would be fully justified in shooting down any aircraft deemed hostile over Syrian territory. The MIG-31s are well equipped for that kind of mission: they can take off and reach a flight altitude of over 30 000 feet in under three minutes, making them immune from any MANPADs the rebels might be armed with
once they are in the air, the MIG-31s could fire their missiles and, at that point, nothing could stop them from reaching their target, whether that is an AWACS or possibly even a fighter jet preparing for close support mission of anti-government forces.
Now, of course, if an AWACS was shut down by a Russian jet, that could be the starting point to something like WW3. The Russians don't want that, and neither do we. So what this means, is that their troop deployment is signalling us something: they know what we are up to and they are not willing to let go of it.

6---Refugee crisis used to drive to war

I asked what purpose this media campaign may have. It now seems clear that it is part of preparing the European public for all-out war on Syria, its government and its people.
The Guardian editors use the created migrant crisis to demand that "something" be done. They ridiculously first remind us that the false "no-fly-zone" campaign against Libya ended in a country ripped apart and more refugees only to then demand a similar campaign in Syria. Saner British voices remind us that "western" meddling in the Middle East is the source, not the solution for the current catastrophes.

The State Department just released this Readout of Secretary Kerry's Call With Foreign Minister Lavrov:
The Secretary called Russian Foreign Minister Lavrov this morning to discuss Syria, including U.S. concerns about reports suggesting an imminent enhanced Russian military build-up there. The Secretary made clear that if such reports were accurate, these actions could further escalate the conflict, lead to greater loss of innocent life, increase refugee flows and risk confrontation with the anti-ISIL Coalition operating in Syria. The two agreed that discussions on the Syrian conflict would continue in New York later this month.

7--‘West creates refugees by destroying Islamic nations’ – Chechen leader

8--While payroll figures were worse than expected, the official jobless rate fell to 5.1 percent, the lowest since April 2008

The official jobless rate, however, ignores an estimated 3.47 million potential workers who, “because of weak job opportunities, are neither employed nor actively seeking a job,” according to the Economic Policy Institute (EPI). Were these workers counted, the unemployment rate would be 7.2 percent.
The EPI also noted Friday that the growth in US jobs is only just enough to keep up with population growth. It wrote, “A great example of just how slow this job recovery is going is the flat prime-age employment-to-population ratio. This means the economy is only adding enough jobs to keep up with prime-age population growth—nothing more, nothing less.”

The Labor Department’s report states that there are 6.5 million part-time workers who wish they could be working more, but due to economic reasons are unable to acquire a full-time job. A total of 10.3 percent of the workforce are either unemployed, marginally attached to the workforce, or are underemployed, according to Friday’s report. ...

Job growth was focused in the lower-paid sectors of health care and social assistance, which added 56,000 jobs in August. Additionally, the number of jobs in restaurants and bars increased by 26,000, business and professional services by 33,000 and financial services by 19,000.
These figures, showing declines in the relatively higher-paying manufacturing sector and increases in lower-paid sectors, conform to the general trend of a “low-wage recovery” over the past six years.

9--Zero rates involve risks

Back on May 22, 2013, in remarks to the Joint Economic Committee of Congress, then Fed Chairman Ben Bernanke referred to the risks building up in higher risk bond markets. Bernanke explained:
“…the Committee is aware that a long period of low interest rates has costs and risks. For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may ‘reach for yield’ by taking on more credit risk, duration risk, or leverage. The Federal Reserve is working to address financial stability concerns through increased monitoring, a more systemic approach to supervising financial firms, and the ongoing implementation of reforms to make the financial system more resilient

Last week’s histrionics in U.S. equities occurred as one thing remained constant: plentiful share buybacks. For bulls, that’s good and bad news.
Evidence that buybacks held up comes from Goldman Sachs Group Inc.’s corporate agency desk, which received record orders from clients for repurchases in the five days ended Friday, according to a note obtained by Bloomberg. The stretch includes two days in which the Standard & Poor’s 500 Index slid more than 1 percent and two in which it climbed more than 2 percent.

While the repurchases may have helped limit losses, they also show that companies alone don’t represent sufficient buying power to prevent every selloff in equities. At the lowest levels a week ago, the S&P 500 was down more than 12 percent from its May high, recording its first correction in almost four years.
“Corporate buybacks may not stop a severe decline, but they may mitigate it,” said Peter Tuz, who helps manage more than $430 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia. “So many companies have these giant plans authorized, have lots of cash left. After a horrible couple of days it’s no surprise they put it to work.”

As stock prices have fallen, U.S. companies have stayed aggressive in buying their own shares. The same group at Goldman had its busiest day since 2011 on Aug. 12, when the value of equities repurchased set a record as the S&P 500 staged its biggest single-day turnaround in three years, according to an earlier note....

“Buybacks were the bungee cord that kept a declining market from crashing on the rocks below,” Sam Stovall, a strategist at S&P Capital IQ, said in a phone interview. “Maybe it has to do with timing, as we crossed the 10 percent threshold and company managements started scooping this up. A cynic would say it’s because without aggressive share repurchases, their numbers would be crap.”
Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. In the second quarter of 2015, S&P 500 companies listed buybacks or dividends among the proceeds in $58 billion of bond deals, the most on record.

In all, U.S. companies have bought back about $260 billion in stock in 2015, bringing the overall total since the bull market began to more than $2 trillion, according to S&P Dow Jones. Even so, companies have gotten less bang for the buck this summer. The S&P 500 Buyback Index, which compiles companies doing the most repurchases, is down about 9 percent since May, trailing the equal-weighted S&P 500 by more than a percentage point.
“You wonder what the market would have been like without that kind of activity and that’s a valid question,” Tuz said. “You have to assume they lent some support to the overall market.”


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