Saturday, February 27, 2016

Today's Links

1---This is why you can expect another global stock market meltdown, MW

The mispricing of assets across world markets has reached epidemic proportions.

Stock prices have made strong advances over the past several years, yet ... this rise in stock values has been underpinned by financial engineering and liquidity — setting the stage for a global financial crisis rivaling 2008 and early 2009.

The conditions for a crisis are now firmly established: overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility...

For example, U.S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings.....

To be sure, stronger earnings have supported stocks. But on average, 70% to 80% of the improvement has come from cost-cutting, not revenue growth. Since mid-2014, corporate profit margins have stagnated and may even be declining....

The S&P 500 SPX, -0.19%  now trades at around 17-18 times forward earnings, a level that is historically expensive and only exceeded during the 1999-2000 tech-stock bubble.

2---Distress” in Bonds Spirals into Financial Crisis Conditions

3--Subprime Auto Loans Implode (in Your Bond Fund)

Auto loan ABS delinquencies reached 4.7% in January, the highest since February 2010, according to data from Wells Fargo, cited by Bloomberg. During the Financial Crisis, delinquencies topped out at 5.4%. During normal times, they range from 2% to 3%.

John McElravey, head of Consumer ABS Research at Wells Fargo Securities, warned that these delinquencies would entail a wave of defaults. The default rate is already skyrocketing. It hit 12.3% in January, up from 11.3% in December, the highest since 2010.

4--Recession time?

...a few days ago, Evan Koenig, Senior Vice President at the Dallas Fed, gave a presentation that showed that manufacturing contractions preceded service contractions in the run-up of the past two recessions. When service sector growth begins to dwindle – so still growth, but slower growth – after the manufacturing sector has already begun to shrink, that’s the point he called “prelude to recession.” And when the service sector begins to actually shrink, that event marks what officials will later call the beginning of the recession [read…  “Prelude to Recession”: the Dallas Fed’s Unsettling Charts].

That “prelude to a recession” happened a few months ago. At the time, manufacturing was already shrinking; and the services index had just started heading south. But now the services index entered a contraction as well. So this could mark the beginning of what will much later be officially called a recession

5--Another G-20 fiasco

"Investor hopes of coordinated policy actions proved to be pure fantasy," said TCW's David Loevinger, a former China specialist at the U.S. Treasury. "It’s every country for themselves."

“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth," the statment continues, in a rather dour assessment of the economic landscape. "While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy," officials added. 

Right. If markets were "reflecting the underlying fundamentals" of this global deflationary trainwreck, things would probably be even more volatile. 

Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. "Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path," the statement reads.

6--Bank of America is preparing big layoffs in investment banking and trading

7--G-20 finance chiefs eye market stability at two-day meeting in Shanghai

Finance leaders from the world’s 20 major economies on Saturday called for using every possible measure to improve market stability and prop up sagging growth, according to a statement that was to be issued upon conclusion of their two-day meeting in Shanghai.

“We will use all policy tools — monetary, fiscal and structural — individually and collectively” to enhance “growth, investment and financial stability,” according to a final communique released in Shanghai despite German disquiet over fiscal and monetary stimulus

“Investor hopes of coordinated policy actions proved to be pure fantasy,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “It’s every country for themselves.”

On the first day of the meeting, disagreements about the right remedy to counter the slowdown in global expansion emerged after German Finance Minister Wolfgang Schaeuble said attempts to boost economies with monetary loosening could be counterproductive and fiscal stimulus — governments spending more or cutting taxes — had run its course.

“Fiscal as well as monetary policies have reached their limits,” he said. “If you want the real economy to grow there are no shortcuts without reforms.”

8--G20 to say world needs to look beyond ultra-easy policy for growth

"The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth," said the communique, issued at the end of a two-day meeting in Shanghai.

"Monetary policies will continue to support economic activity and ensure price stability ... but monetary policy alone cannot lead to balanced growth."

The G20 ministers agreed to use "all policy tools – monetary, fiscal and structural – individually and collectively" to reach the group's economic goals.

A communique from the Group of 20 (G20) finance ministers and central bankers flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential "shock" of a British exit from the EU.....

But there was no plan for specific coordinated stimulus spending to spark activity, as some investors had been hoping after markets nosedived at the start of 2016. Over the course of the two-day meeting in Shanghai comments by policymakers made clear the divergence of views on the way forward.

Finance chiefs had agreed that "the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy", the communique draft said.

To pep up the global economy, faster progress on structural reforms "should bolster potential growth in the medium term and make our economies more innovative, flexible and resilient", it said.

"We are committed to further enhancing the structural reform agenda," it added

9--G-20 needs to 'man up' to avert more market turmoil, says Citigroup's Englander

there appears to be little prospect of a deal along the lines of the 1985 Plaza Accord, where the governments of the US, UK France, West Germany and Japan agreed to weaken the greenback...

Investors burned by turmoil in global markets are looking for signs the world's top finance officials are ready to take action to bolster growth and calm currency moves.

As finance chiefs and central bankers from Group of 20 nations gather in Shanghai, Citigroup's Steven Englander said a failure to include more explicit support for fiscal stimulus in the closing statement from policy makers would be taken badly by investors. ...

"Keeping the previous language would be very disappointing and would be viewed as either complacent or reflecting policy paralysis," Englander, Citigroup's head of currency strategy for major developed economies, said in a February 25 report. He urged the G-20 to "man up and tell member countries that monetary policy should be accompanied by fiscal expansion"....

As crude oil's drop to a more than 12-year low led a slump in commodities, more than $US6 trillion has been wiped off the value of global equities this year. Share gauges in Europe, Japan and China have lost more than 9 per cent since December 31 and US indexes retreated at least 4 per cent.

10---G-20 Wants Governments Doing More, and Central Banks Less; Cheap money is not doing the trick

Reaching Limit

An increasing sense monetary policy is reaching its limit permeated officials’ briefings during the meetings that ended Saturday. While central banks proved critical in avoiding a global slide into depression last decade, there is now no consensus among the world’s top economic guardians backing stepped-up monetary stimulus. That leaves focus on fiscal polices that are subject to domestic political constraints, and a structural-reform agenda the G-20 said will be gauged through a new indicator system.

"Central bankers have done their bit in recent years to stabilize the world economy," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "But as their tools are losing their effectiveness, only more aggressive fiscal policy and structural reforms will help to lift growth."

Among those publicly indicating a potentially reduced role for central banks was Lagarde, who said Friday the effects of monetary policies, even innovative ones, are diminishing. Bank of England Governor Mark Carney used a Shanghai speech ahead of the G-20 to voice skepticism over negative interest rates -- now in place in continental Europe and Japan -- and their ability to boost domestic demand.

Bare Minimum’

"There is no positive surprise" from the G-20 commitments, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo. "There are no detailed plans in this agreement, so generally you can say they just achieved the bare minimum," he said. "Stocks may sell off a bit."

11--Negative rates: The results are in


This survey makes sobering reading for both banks and central banks. For the banks, the results suggest that they might be right to be reluctant to cut rates below zero. Only 23% of savers would not react, and a smaller proportion still would save more. Four-fifths would move at least some of their money out of their savings accounts. Some of this might find its way into other bank products, but more than a third say that they would take some of their money out and hoard it.

Banks would be faced with an uncomfortable choice between not cutting retail rates below zero, and so seeing their profit margins squeezed, and doing so and risking a substantial deposit outflow.1 They might perhaps mitigate a profit squeeze by raising fees, or increasing the cost of mortgages, as some banks in Switzerland have done. However, these would undoubtedly also meet with customer resistance and official consternation.

Moreover, even if the banks dare to pass on negative rates to retail savers, the stimulus to spending would be far less than the rate cuts so far. Indeed, in the total sample, marginally more (11% versus 10%) of respondents said that they would save more, not less, in the event of negative rates....

the results strongly suggest that the cuts in interest rates below zero are likely to give a smaller boost to consumer spending than cuts in rates above it. Moreover, they also highlight the unpredictability of pursuing NIRP. With the credit channel weak or blocked, central banks have been relying largely on rising asset values and weaker exchange rates to provide the needed stimulus. But the BOJ’s recent adoption of NIRP has had the opposite effect. Evidently, the initial market reaction has been to see it as an act of desperation. The risk is that this negative sentiment will infect the real economy, serving to depress spending. If so, the danger is that NIRP will have an impact on economic growth that is not merely non-linear, but perversely negative.

12--The "Deep State" - How Much Does It Explain?

13--Is The U.S. Preparing A "Color Revolution" In Russia?, MoA

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