Friday, February 5, 2016

Today's Links

1---Negative rates in US? Here's why it could happen, cnbc

...Instituting negative rates has a goal of shocking banks into lending and stimulating inflation...While negative rates would deliver the sharpest blow to banks, which have been at the forefront of the recent market volatility, the move would become an increasing possibility for the Fed if officials remain dissatisfied with growth

Following the December rate hike, Fed members' projections indicated there would be four more hikes in 2016. However, in the tumult following the increase, market expectations have differed sharply with those projections. ...

2---Bond Market Suffocation: Beneath that calm surface, over-indebted, junk-rated companies are running out of oxygen.

Late yesterday was a propitious moment. And today, when the index was updated, it became official: The average yield of junk bonds rated CCC or below, the bottom tier of the rating scale, hit 20%.

Yields soar when bonds get crushed. The last time the average yield of those bonds jumped to 20%, on September 30, 2008, all heck had already broken loose. Lehman Brothers had gone bankrupt 15 days earlier. Liquidity had dried up. Banks were lining up to be toppled. Panic was breaking out.

Today, there’s no panic.


The companies in the index, which also often have a CCC or below credit rating, are facing one heck of a time borrowing new money, or even rolling over existing debt, given that for them, the cost of borrowing may approach or even exceed 20%.

These companies are essentially locked out from the capital markets. Their bonds trade at a fraction of face value. Their banks are getting nervous. They will have difficulties refinancing their maturing debts. Some of them – as is currently happening – might not even be able to make their interest payments. The increasing difficulties and costs in raising new cash will lead to many more defaults.

Moody’s warned late Monday that its “Liquidity Stress Index,” which tracks the number of companies downgraded to the lowest liquidity rating (SGL-4), had jumped from 6.8% in December to 7.9% in January, the largest one-month jump since March 2009, and the highest level since December 2009.

Moody’s wasn’t kidding. Beneath that calm surface, over-indebted, junk-rated companies are running out of oxygen

3---Dollar tumbles as Fed rescues China in the nick of time, AEP

The central banks of Europe and Japan discover that it is impossible to stave off deflation by debasing their currencies when everybody is playing the same game

In trade-weighted terms the euro is 5pc higher than it was in March, when the ECB began quantitative easing, showing just how difficult it has become for authorities to drive down their exchange rates. Everybody is playing the same game.

Yet a halt to the dollar rally is a huge relief for companies and banks around the world that have borrowed a record $9.8 trillion in US currency outside the US, up from $2 trillion barely more than a decade ago.


Markets are currently in a well-oiled "death spiral," according to Citigroup Inc. analysts led by Jonathan Stubbs.

"It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets," the analysts write, citing the resilient U.S. dollar, lower commodities prices, weaker trade and capital flows, and declining emerging market growth. 

"It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks," the analysts add. "Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon

5---Oil price fall brings significant losses for big producers

The “conventional wisdom” ignored two major changes in the structure of the global economy over the past decade. First, that so-called emerging markets, many of which depend on the export of oil and other industrial commodities, now comprise about 40 percent of global gross domestic product, double their share in 1990, and so any decline in their revenues has a much bigger impact than previously. And, second, that the financial crisis of 2008–2009 was not merely a conjunctural downturn in the business cycle but signified a breakdown in the functioning of the global economy.....

Overall, the energy sector is expected to cut spending to $522 billion this year, following a 22 percent reduction to $595 billion in 2015. This will be the first time since 1986 that the industry has reduced spending two years in a row....

Apart from lowered credit ratings, the fall in the oil price is impacting on the financial system, especially via US banks, notably smaller regional banks, which have funded shale oil operations. Figures for January reveal that the main contributor to the 5 percent drop in Wall Street’s S&P 500 share index was the fall in bank stocks.

The impact of lower prices has yet to be fully felt because oil producers have been able to cover their position by taking out future selling contracts at higher than current market prices. As those contracts expire, however, some shale producers will become unprofitable unless there is a significant upturn in oil prices.

6---Deficits=Good. Surpluses=Bad. Surpluses lead to Depression


Federal deficits are necessary and the government normally runs them.  It ran them during 129 of the past 200 years or nearly two thirds of the time.  During the other third, it ran surpluses to reduce its debt during five periods of six or more years.  Each period led to a major depression.

1823-1836: Federal debt reduced 99%  – depression began 1837.
1852-1857:        ”         ”         ”       59%  –        ”              ”      1857.
1867-1873:        ”         ”         ”       27%  –        ”              ”      1873.
1880-1893:        ”         ”         ”       57%  –        ”              ”      1893.
1920-1930:        ”         ”         ”       36%  –        ”              ”      1929.

The government had to run deficits to recover from each depression...

The economy needs a continuing influx of new dollars to grow.  The government creates new dollars when it runs deficits by spending more than it receives from taxes.

When the government collects taxes it takes dollars out of the economy.

Drive the Economy

The economy is like a car.  Government spending is the accelerator.  Taxes are the brakes.  To keep going or speed up, press the accelerator.  To slow down, ease off the accelerator or press the brakes.  Driving too fast could lead to hyper-inflation, but that never happened here because the country always slowed down in time

7--"Damn the torpedoes" Draghi says side effects from policy don't matter

“There can be no doubt that if we needed to adopt a more expansionary policy, the risk of side effects would not stand in our way,” Draghi said. “We always aim to limit the distortions caused by our policy, but what comes first is the price-stability objective.”...

The ECB is currently reviewing its monetary stance and policy makers will decide on March 10 whether the current program of negative interest rates and a 1.5 trillion-euro ($1.6 trillion) bond-buying plan goes far enough. Euro-area consumer prices rose an annual 0.4 percent in January and the rate is likely to turn negative in coming months...

“If we do not ‘surrender’ to low inflation -- and we certainly do not -- in the steady state, it will return to levels consistent with our objective,” Draghi said at the event hosted by Germany’s Bundesbank. “If on the other hand we capitulate to ‘inexorable disinflationary forces’ or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation.”...

8---Surprising way rising mortgage rates harm existing homeowners, oc housing news

First, in early 2009, regulators relaxed mark-to-market accounting rules allowing banks to hold bad loans on their books at a fantasy value to avoid loss recognition, buying the banks time. Further, in order to placate pressure from homeowners to “do something” and to provide lenders with a few additional debt service payments on these bad loans, the government embarked on a series of failed loan modification programs.

These were sold to the public as ostensibly helping struggling borrowers, but they were really designed to allow banks to kick-the-can loan-loss recognition and squeeze a few more payments out of hopeless borrowers before they imploded. These programs largely failed homeowners, but succeeded for bankers by providing operating cash while delaying loss recognition for a later equity sale.


Manipulated Mortgage Rates

Ultimately, banks don’t want to recognize losses. They would far rather delay their necessary foreclosures until the loans had collateral backing, allowing them to recover their capital. However, since potential buyers of these properties couldn’t afford to pay an amount which would recover the outstanding debt, the bubble needed to be reflated before the foreclosures could go forward.


To facilitate reflation of the housing bubble, the federal reserve lowered interest rates to zero, and embarked on a program of buying 10-year Treasuries (operation Twist) and directly buying mortgage-backed securities to ensure the flow of capital into the housing market and dramatically lower mortgage interest rates. At the peak of the housing bubble, mortgage interest rates were between 6% and 6.5%. They bottomed out near 3.35% in 2012 — a near 50% reduction. These super-low interest rates gave buyers the ability to borrow amounts commensurate with peak prices under stable loan terms.

Manipulated Supply

Due to the collapse of prices when the housing bubble burst, comparable sales were far below peak prices, and continued foreclosure processing was keeping prices down. The solution was simple; stop foreclosure processing and restrict inventory until the housing bubble reflates.

Lenders stopped foreclosure processing to dry up the inventory, and underwater homeowners patiently wait to list their properties because if they wait, they might escape through an equity sale, avoiding credit problems. With almost no foreclosures or inventory to burden the market, supply is greatly reduced further facilitating a rapid reflation of the housing bubble.

Once the problem of excessive MLS inventory was resolved, we quickly reflated the bubble to allow lenders to recover capital at peak prices, mostly through equity sales, which is where we are today.

9--Unemployment drops below 5%, marketwatch

10--Obama Readies to Fight in Libya, Again, counterpunch

On Jan. 27, the Times declared in an editorial: “This significant escalation is being planned without a meaningful debate in Congress about the merits and risks of a military campaign that is expected to include airstrikes and raids by elite American troops. That is deeply troubling. A new military intervention in Libya would represent a significant progression of a war that could easily spread to other countries on the continent.”

Stratfor analyst Scott Steward predicted a month before the first U.S./NATO attack in March 2011 that pandemonium would ensue. Now, on Jan. 27, he wrote:

“As the United States and its European and regional allies prepare to intervene in Libya, they should be able to reduce the jihadist’s ability to openly control territory. However, they will face the same challenge they did in 2011 — building a stable political system from the shattered remains of what was once a country. Now, Libya is a patchwork of territories controlled by a variety of ethnic, tribal and regional warlords. The last five years of fighting has led to significant hatred and blood feuds between these competing factions, which will only compound the challenges ahead.”....

The Bush Administration’s 2001 war in Afghanistan is still going on and will not end with a U.S. military victory. Washington’s 2003 illegal invasion of Iraq is still going on in its second excruciating incarnation. President Obama’s call for regime change in Syria and support for the rebels has transformed this country into a slaughterhouse, resulting in up to 250,000 deaths and millions of refugees. Last year’s U.S. backed and equipped Saudi Arabian invasion of Yemen is still going on with no end approaching 


11--Who is really on the left? Margaret Kimberley

Not anyone who clings to the Democrats after being cast aside again and again while still suffering from unrequited love. Leftists are opposed to imperialism in all its forms....

Leftists demand that the federal government spend however much is necessary to restore the people of Flint, Michigan to health and safety. Leftists are anti-zionist and anti-imperialist. They oppose all neo-liberal “free trade” deals like the Trans Pacific Partnership. They want killer police to go to jail but want to free the masses from it. They want to end gentrification and displacement and they don’t like the scam of charter school privatization of public education....

Leftists ought to be revolutionaries..... A revolutionary isn’t fooled by the quadrennial circus of the Democrats and Republicans. Revolutionaries aren’t browbeaten into lesser evilism. They say without hesitation that capitalism cannot be reformed and must be jettisoned altogether. They aren’t fooled by propaganda that legitimizes intervening in foreign countries. They want an empty prison system and community control of the police. Revolutionaries don’t exult over Bernie Sanders vis a vis Hillary Clinton because they know that great change comes from mass action and not the ballot box..... The word Democrat is not synonymous with leftist. Sander fans are Democrats with all of the flaws of the party they still support. The people who yearn to find a good person in a corrupt system have some choices to make, but putting the Sanders lipstick on the Democratic pig should not be among them

12---Russia’s Ambassador: Syria’s Opposition linked to Al-Qaeda

13---Why Aleppo Matters

if Russia and Hezbollah manage to recapture the city, it would effectively restore the Assad government in Syria even if the east of the country is still controlled by Islamic's key to Russia and Iran's plans to consolidate Assad's power in the west of the country.

As noted above, if the SAA can retake Aleppo, Assad will have control of most of the country's major urban centers, effectively restoring his grip on power. ...

"Backed by Russian firepower and Hezbollah militants, Syrian government troops have cut off rebel supply lines between the northern city of Aleppo and Turkey," Bloomberg writes. "Taking Aleppo, Syria’s former commercial hub, would give Russia, Iran and Assad more bargaining power at any future settlement talks and more say in how the region will be redefined."....

Washington, Riyadh, and Ankara know that if Aleppo falls, that's it for the "moderate" opposition.

Sure there will still be elements of the FSA and other groups explicitly backed by the West and its regional allies, and they'll undoubtedly wage a long war of attrition against the SAA. But once the urban centers are secured, Assad can begin the slow process of rebuilding his security apparatus and restablishing some semblance of normalcy in the country's west

14--Camp Bucca: ISIS University

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