Monday, September 7, 2015

Today's links

EM assets have entered a panic/liquidation phase that will end when EM corporate bonds will have priced in correctly the risks facing the asset class. We are still far away in terms of valuations." Rcube Global Asset Management 


No one has been held accountable for these crimes. Bush, Cheney, Rumsfeld, Rice, Powell and others in the previous administration who waged a war of aggression in Iraq based upon lies have enjoyed complete impunity. Those in the current administration, from Obama on down, have yet to be called to account for the catastrophes they have unleashed upon Libya and Syria. Their accomplices are many, from a US Congress that has acted as a rubber stamp for war policies to an embedded media that has helped foist wars based upon lies upon the American public, and the pseudo-lefts who have attributed a progressive role to US imperialism and its “humanitarian interventions.”
Together they are responsible for what is unfolding on Europe’s borders, which, more than a tragedy, is part of a protracted and continuing war crime.
https://www.wsws.org/en/articles/2015/09/04/pers-s04.html








1--Capital flight now the big concern for slowing China, Henny Sender


In the four quarters to the end of June, such outflows, (which do not include debt repayment) have totalled more than $500 billion according to data from Citigroup. China's mountain of foreign reserves, once around $4 trillion, are now down to less than $3.7 trillion and are expected to drop further to $3.3 trillion by the end of the year, Citi calculates...


It is neither the sell-off in Chinese stocks nor weakness in the currency that matters most," notes George Saravelos, a currency strategist in London with Deutsche Bank. "It is what is happening to China's FX reserves and what this means for global liquidity. The People's Bank of China's actions are equivalent to an unwind of QE or, in other words, Quantitative Tightening." ...


Some doomsayers now expect the 3 per cent move down to soon lead to a more dramatic fall as capital outflows pick up and Chinese companies continue to unwind their short-US dollar/long-renminbi carry trades. This would add to pressure on the PBoC to allow the currency to weaken, analysts at research boutique Gavekal say....


Such concerns are understandable. It is true that Chinese foreign exchange liabilities now amount to some $1 trillion, according to data from the Bank for International Settlements. Allowing for foreign currency borrowed by the subsidiaries of Chinese companies in Hong Kong, the actual amount is higher, as much a total of $1.5 trillion — 15 per cent of China's gross domestic product or 40 per cent of its foreign exchange, Gavekal calculates. Moreover, the combination of a depreciating currency and deepening deflation in the country means the real burden of servicing that debt has become ever more onerous...


The combination of future Fed tightening, less money in need of recycling in the hands of oil producers and the uncertain consequences of the swiftly changing circumstances in China is enough to turn most bulls into fearful bears


2--Forex reserves unwind could reverse bond supercycle


China's summer shock may mark the end of an era of globalization that helped define world markets for more than a decade.
Investor anxiety about the consequences is well-founded
...
According to the International Monetary Fund, the dollar value of foreign currency reserves held by all developing nations ballooned by almost $7 trillion in just one decade to a peak of some $8.05 trillion by the middle of last year.
While China was the main driver, accounting for about half of that increase, its economic boom created a commodity supercycle that flooded the coffers of resource-rich nations from across Asia to Russia, Brazil and the Gulf.
  
As the vast bulk of this hard cash was banked in U.S. Treasury and other low risk, rich-country bonds, they were at least one critical factor in the halving of U.S. Treasury and other Group of Seven government borrowing costs over the same period.


Alongside the disinflationary impact of China's low cost labor on western goods imports and wages, this reserve stash helped extend what has now been a 20-year bull market in bonds.
What's more, the drop in yields, by skewing relative returns between stocks and bonds and also the relative cost of capital for companies, also at least partly underwrote a post-credit crisis surge in equity prices to successive records.
Reverse that bond buying, even at the margin, and world asset markets may have a major problem. ...


Dutch bank Rabobank estimated China's central bank sold $200 billion of reserves in the last weeks of August alone.
Along with the pressure of looming Fed tightening and a higher dollar, the ebb of Chinese demand for commodities and slump in energy and metals prices has seen emerging market currencies plummet everywhere. And just steadying the capital exit is starting to strain their coffers.
Emerging market forex reserves fell by about half a trillion dollars between mid-2014 and the end of the first quarter of 2015, IMF data shows, and this is likely far from the end.


Deutsche Bank estimated on Tuesday the high water-mark of almost two decades of reserve accumulation had now been reached and central banks will by the end of next year dump as much as $1.5 trillion to counter capital outflows....


We could be on the verge of a scenario that sees a reversal in the trend of declining global goods prices, a partial reversal in U.S. monetary policy and a reversal of the balance sheet expansion that allowed emerging market central banks to grow their foreign exchange reserves," he added. "The upshot? Significantly higher US Treasury yields."...


"The peak in bond demand is probably behind us," said Deutsche strategist George Saravelos.


3--Doug Noland firing on all cylinders: Credit Bubble bulletin


It’s my overarching thesis that the world is in the waning days of a historic multi-decade experiment in unfettered finance...The global policy response to the 2008 Bubble collapse unleashed Contemporary Finance’s Bubble Dynamics throughout the world - China and EM in particular.....In general, reckless “money” printing has over years produced a massive pool of destabilizing global speculative finance...


From individual trades, to themes to strategic asset-class and regional market allocations, speculative “hot money” flows have reversed course. Global deleveraging and de-risking have commenced. The fallacy of “liquid and continuous” markets is being exposed. Faith that global central bankers have things under control has begun to wane....Today, a Crowd of “money” is rushing to exit EM. The Crowd seeks to vacate a faltering Chinese Bubble. “Money” wants out of Crowded global leveraged “carry trades.” ....


Throughout it all, there’s been an overriding certitude that policymakers will retain control. Unwavering faith in concerted QE infinity, as necessary. The fallacy of liquid and continuous markets persisted so much longer than I ever imagined....


How long will Chinese officials tolerate bleeding the nation's international reserves to allow “money” to exit China at top dollar?
...
I wholeheartedly agree with the statement “technical factors can push the market away from fundamentals.” Indeed, that’s been the case now for going on seven years. A confluence of unprecedented monetary inflation, interest-rate manipulation, government deficits and leveraged speculation inflated a historic divergence between securities markets Bubbles and underlying fundamentals. The global Bubble is now faltering. Risk aversion is taking hold. De-leveraging is accelerating.


There still seems little recognition of the seriousness of the unfolding global market dislocation. It’s destined to be a wrenching bear market – at best.


4---The Numbers Are In: China Dumps A Record $94 Billion In US Treasurys In One Month


China isn't the only country liquidating its USD assets. When you consider that global EM FX reserves amount to more than $7 trillion, it seems reasonable to ask whether the flight to safety that would invariably accompany a worldwide selloff in risk assets would be sufficient to replace the lost bid from massive reserve draw downs. Or, as we put it on Saturday, "the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage."


And that consideration, in turn, puts the Fed in a very, very difficult spot. A rate hike cycle will put further pressure on already beleaguered EM currencies which raises the possibility that the FX reserve liquidation will be larger than the eventual safe haven flows and besides, there's bound to be a lag between the liquidation of USD assets and the flight to safety and given the potential for extraordinary bouts of volatility in UST, JGB, and German Bund markets, it's anyone's guess what happens in between.


Whatever the case, something will have to give here. That is, all of these dynamics (i.e. a Fed hike, China's massive UST dumping, an EM meltdown precipitating FX reserve drawdowns, illiquid markets for the same assets everyone is dumping, hemorrhaging petrostate budgets, etc.) simply cannot coexist for long without something snapping because, as we put it last week, in this very unstable arrangement, the smallest policy error will reverberate exponentially, and those reverberations can lead to only one thing: the Fed's admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque "helicopter money" episode


5--US-led strike kills 17 policemen in south Afghanistan


6--At last!


Russia has confirmed its arms deliveries to Syria, noting that the move aims to assist the Arab country in its fight against terrorism.
"The Russian side has never concealed the fact that it is sending military equipment to the Syrian authorities to help them fight terrorism," AFP quoted Russian foreign ministry spokeswoman Maria Zakharova as saying.
Zakharova said Russian Foreign Minister Sergei Lavrov told US Secretary of State John Kerry in a recent phone conversation that it is "premature" to speak about Moscow’s military participation in Syria.
The announcement comes as a Syrian military official has told Reuters that Russia’s military support for Syria, including new weapons and training, has recently seen a "big shift.”


7--Europe has to deal with refugee disaster caused by US – Nicolas Maduro to RT


8--Moscow: We don't do "social engineering"


"I would like to reiterate that Russia does not practice social engineering, we do not appoint or dismiss foreign presidents, being it on our own will or in agreement with somebody else. It concerns Syria and other states in the region, which are able to decide their future by themselves," Zakharova stressed.


9--The House of Lords - It's Time to Abolish


10--Turkish military says 16 killed, 6 wounded in PKK attack in Dağlıca


11--Revenue collapse signals trouble ahead


Now that 495 of the S&P 500 companies have reported second quarter earnings, something has become abundantly clear: 2015 is going to be a nasty year for corporate revenues.
Blended revenue for the S&P 500 companies dropped 3.4% in Q2, according to FactSet. “Blended” because it includes estimates for the five companies that have not yet reported. This follows the first quarter, during which reported revenues also declined. The last time year-over-year revenues declined two quarters in a row was in Q2 and Q3 2009 during the Financial Crisis.


Analysts liberally blame the strong dollar. It’s convenient. But numerous companies that mostly benefit from the strong dollar, such as GM (more on that in a second), still reported shrinking revenues in the quarter.
And analysts blamed energy companies whose revenues have totally collapsed. But company by company outside the energy sector reported declining, and in some cases plunging revenues, including in Big Tech and financial services ...


Four quarters in a row of declining year-over-year revenues! That sort of long-lasting revenue recession would take us back to the bowels of the Financial Crisis.


12---China will have to devalue


Since Q4 2014, we have been explaining why China had little option but to devalue its currency (Rcube Macro Portfolio 20/11/2014). Last week’s move is just the early step of a much more meaningful devaluation. Authorities always choose to devalue as opposed to reforms when a crisis hits. China is currently dealing with deflating housing and equity bubbles, but also debt and economic restructurings all at the same time. The odds that in such difficult environment they choose reform over devaluation are extremely low in our opinion.
On a trade weighted basis,August devaluation puts the yuan only back to where it was in May. Since mid‐2011, the real effective exchange trade weighted yuan has appreciated by 43%. It is no coincidence that it is precisely since then that economic conditions have started to worsen. The Yuan needs to weaken much more.
Chinese equities will keep plunging as long as the currency is not devalued more meaningfully...
Capital outflows are intensifying....
Authorities are tapping reserves which have fallen by $350bln to prevent the yuan from falling sharply, which de facto tightens financial conditions. FX reserves as % of M2 is crashing....


The China Momentum Indicator (CMI) weights together information on electricity consumption, rail freight volumes and credit growth. Based on those three 'easy to measure' indicators preferred by Premier Li, the indicator tells us where growth is heading over the next year or so. Based on the indicator, Chinese GDP is estimated to be below 3% and still falling....


The MSCI emerging market has finally broken below its key support (900). An acceleration is underway. 2008 low is our target....


EM financial conditions are tightening, EM corporations have borrowed almost 5trn of US dollars, and their currencies are plunging together with their cash flows (commodity crash). At the same time because the US twin deficits are shrinking, there are less dollars in circulation. This is a recipe for disaster. It is now unfolding...


EM corporate bonds have massively outperformed equities over the last 5 years, we think this is unsustainable given the EM credit channel tightening, weakening cash flows, capital outflows, and the substantial refinancing needs coming to maturity....


EM assets have entered a panic/liquidation phase that will end when EM corporate bonds will have priced in correctly the risks facing the asset class. We are still far away in terms of valuations.


13---The G20 summit: A spectacle of political bankruptcy


Another indication of the real state of the global economy is the data on world trade released last month, showing that trade contracted in the first half of 2015 more sharply than at any time since the height of the financial crisis in early 2009....


The IMF has urged the US Federal Reserve not to begin interest rate increases until well into next year, a position that was repeated by Managing Director Lagarde. The Fed had not raised interest rates for such a long time (nine years), that it should make a move only when there was no uncertainty and should not give it a try and then have to reverse its decision, she said.
Lagarde and others fear that any interest rate increase in the US will impact heavily on the financial position of emerging markets and spark a major outflow of capital, exceeding that which took place during the so-called “taper tantrum” of 2013, when the Fed first indicated it would wind back its asset-purchasing program.
Emerging markets are already feeling the effects of the slowdown in China, their major export market, with currency values in some South East Asian countries down to levels not seen since the Asian financial crisis of 1997–98. If a rise in US interest rates sparks a rush for the exit by major investors, it could set off a major financial crisis.
...
In all of the reports by economic authorities on the state of the world economy, including the IMF and the Organisation for Economic Cooperation and Development (OECD), the lack of investment, now 25 percent below where it was in 2007 in some cases, is cited as the major cause of economic stagnation. There was an attempt to address this issue at the G20 heads of government meeting in Brisbane, Australia last November, at which participants committed themselves to the target of a two percent increase in growth over the next five years, much of it to be achieved through infrastructure projects. Less than a year on, the goals of the Brisbane meeting are regarded as a dead letter.


This decline in productive investment is a product of the colossal growth of financial speculation and parasitism in the world capitalist economy, with resources increasingly diverted away from investment in the material productive forces and into financial manipulations and swindles that account for an ever greater share of the income of the world’s billionaires. The policy of central banks and capitalist governments of continuing to pump vast sums into the financial markets only fuels the growth of financial parasitism


14--US responsible for refugee crisis


Any serious consideration of what lies behind the surge of refugees into Europe leads to the inescapable conclusion that it constitutes not only a tragedy but a crime. More precisely, it is the tragic byproduct of a criminal policy of aggressive wars and regime change interventions pursued uninterruptedly by US imperialism, with the aid and complicity of its Western European allies, over the course of nearly a quarter century...


Decade-long wars in Afghanistan and Iraq, waged under the pretext of a “war on terrorism” and justified with the infamous lies about Iraqi “weapons of mass destruction,” succeeded only in devastating entire societies and killing hundreds of thousands of men, women and children.
They were followed by the US-NATO war for regime change that toppled the government of Muammar Gaddafi and turned Libya into a so-called failed state, wracked by continuous fighting between rival militias. Then came the Syrian civil war—stoked, armed and funded by US imperialism and its allies, with the aim of toppling Bashar al-Assad and imposing a more pliant Western puppet in Damascus.
The predatory interventions in Libya and Syria were justified in the name of “human rights” and “democracy,” receiving on this basis the support of a whole range of pseudo-left organizations representing privileged layers of the middle class—the Left Party in Germany, the New Anti-Capitalist Party in France, the International Socialist Organization in the US and others. Some of them went so far as to hail the actions of Islamist militias armed and funded by the CIA as “revolutions.”...


No one has been held accountable for these crimes. Bush, Cheney, Rumsfeld, Rice, Powell and others in the previous administration who waged a war of aggression in Iraq based upon lies have enjoyed complete impunity. Those in the current administration, from Obama on down, have yet to be called to account for the catastrophes they have unleashed upon Libya and Syria. Their accomplices are many, from a US Congress that has acted as a rubber stamp for war policies to an embedded media that has helped foist wars based upon lies upon the American public, and the pseudo-lefts who have attributed a progressive role to US imperialism and its “humanitarian interventions.”
Together they are responsible for what is unfolding on Europe’s borders, which, more than a tragedy, is part of a protracted and continuing war crime


15--NATO powers move to exploit refugee crisis to intensify bombing of Syria


17--U.S. Drops Bombs; EU Gets Refugees and Blame. This is insane.


much like another great investigative journalist Seymour Hersh subsequently reported (using different sources) in the London Review of Books on 17 April 2014, Lehmann’s even-earlier investigation found that the U.S. had set up the chemical attack, and that it was actually carried out by Islamic jihadists that the U.S. itself was supplying in Syria, through Turkey. Lehmann reported: ...


some EU leader will be able to explain why all EU nations don’t just kick out NATO and ally with Russia, so as to put a stop to Islamic jihad, which is funded by the royal families of the Arabic oil states, and also so as to put an end to the sources of these flows of refugees, and also to put a start to, and become a part of, the emerging Eur-Asian economic giant which will finally eclipse the corrupt declining American empire, and perhaps bring it to an end — bring to an end the world’s biggest single threat to peace, and the world’s biggest single sponsor of endless wars

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