Friday, April 22, 2016

Today's Links

" ...fundamentally, it’s very hard to believe in US stocks. Earnings and profit margins are dropping and companies basically are borrowing money to pay dividends and to buy back shares."   Jeffrey Gundlach

“We have had the biggest monetary stimulus that the world must have ever seen, and we still have not solved the problem of weak demand. The idea that monetary stimulus, after six years... is the answer doesn’t seem [right] to me”. Lord (Mervyn) King, the former governor of the Bank of England

"I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result." Albert Edwards, Societe Generale

1--The dollar is the secret driver of the stock market comeback

Schlossberg said that by not raising rates, the Fed is consciously allowing the dollar to weaken, thus giving a competitive advantage to U.S. exporters who benefit from a weaker greenback, in turn strengthening U.S. equities.

The U.S. dollar index has fallen 4 percent this year, while stocks have rallied 4 percent.

"The reason why all of this is happening," Schlossberg said, "is because they really want to make sure that we do not tip over into any kind of a global financial panic."

2--Inequality anyone?

Eight years after the financial crash of 2008, the disastrous reality of life in America is drastically at odds with official proclamations of “economic recovery.” While nominal unemployment has fallen since the depths of the recession, this is largely because millions of Americans have dropped out of the labor force. All the growth in jobs over the past decade has been in the form of contingent, part-time or temporary labor.

Social inequality today is greater than ever before. The top 20 billionaires in the US have as much wealth as the bottom 150 million Americans. The rich not only enjoy untold wealth and privilege, they live longer. The life expectancy gap between the richest and poorest Americans averages almost 15 years for men and 10 years for women.

Young people are burdened by more than $1 trillion in student loan debt, millions of people are being cut off from food stamps, and millions more are seeing their pensions and health care slashed or eliminated.

3--(archive 2015) 

Since the demise of Lehman in 2008, there have been more than 600 rate cuts. Over the same period, central banks have injected more than $12trn (£8trn) into money markets under quantitative easing (QE) programmes. Over $26trn of government bonds are now trading at yields of below 1 per cent, with more than $6trn currently yielding less than 0 per cent. These policies, according to policymakers, have been crucial to the “recovery”.

4--One and done?

In the U.S. specifically, the economy grew just 1.4 percent in the fourth quarter and probably only rose 0.3 percent in the first quarter, according to the Atlanta Fed. Job growth continues apace but manufacturing remains in a slump and corporate earnings are tracking for an 8 percent decline in the first quarter, according to S&P Capital IQ.

Importantly, however, stock prices have jumped off the Feb. 11 low and financial conditions overall are easing. Depending on the Wall Street source, conditions are at their loosest since August (Goldman) or at least December (Nomura). The Chicago Fed's National Financial Conditions Index reflects a 17 percent loosening in conditions over the past three months...

Traders currently assign a zero percent chance to an April hike

5--Goldman's crystal ball

"We continue to expect that the strengthening of the U.S. labour market will force the Fed to hike rates three times this year, which will lead to a stronger dollar and a gradual increase in U.S. real rates, pushing gold down," Goldman analysts said in a note.

6--Revolt of the Rich (Today's "must read")  The real reason Dilma Rousseff’s enemies want her impeached

The story of Brazil’s political crisis, and the rapidly changing global perception of it, begins with its national media. The country’s dominant broadcast and print outlets are owned by a tiny handful of Brazil’s richest families, and are steadfastly conservative. For decades, those media outlets have been used to agitate for the Brazilian rich, ensuring that severe wealth inequality (and the political inequality that results) remains firmly in place.

Indeed, most of today’s largest media outlets – that appear respectable to outsiders – supported the 1964 military coup that ushered in two decades of rightwing dictatorship and further enriched the nation’s oligarchs. This key historical event still casts a shadow over the country’s identity and politics. Those corporations – led by the multiple media arms of the Globo organisation – heralded that coup as a noble blow against a corrupt, democratically elected liberal government. Sound


For more than a year, those same media outlets have peddled a self-serving narrative: an angry citizenry, driven by fury over government corruption, rising against and demanding the overthrow of Brazil’s first female president, Dilma Rousseff, and her Workers’ party (PT). The world saw endless images of huge crowds of protesters in the streets, always an inspiring sight.

But what most outside Brazil did not see was that the country’s plutocratic media had spent months inciting those protests (while pretending merely to “cover” them). The protesters were not remotely representative of Brazil’s population. They were, instead, disproportionately white and wealthy: the very same people who have opposed the PT and its anti-poverty programmes for two decades.

Slowly, the outside world has begun to see past the pleasing, two-dimensional caricature manufactured by its domestic press, and to recognise who will be empowered once Rousseff is removed. It has now become clear that corruption is not the cause of the effort to oust Brazil’s twice-elected president; rather, corruption is merely the pretext.

Rousseff’s moderately leftwing party first gained the presidency in 2002, when her predecessor, Luiz Inácio Lula da Silva, won a resounding victory. Due largely to his popularity and charisma, and bolstered by Brazil’s booming economic growth under his presidency, the PT has won four straight presidential elections – including Rousseff’s 2010 election victory and then, just 18 months ago, her re-election with 54 million votes.

The country’s elite class and their media organs have failed, over and over, in their efforts to defeat the party at the ballot box. But plutocrats are not known for gently accepting defeat, nor for playing by the rules. What they have been unable to achieve democratically, they are now attempting to achieve anti-democratically: by having a bizarre mix of politicians – evangelical extremists, far-right supporters of a return to military rule, non-ideological backroom operatives – simply remove her from office.

Indeed, those leading the campaign for her impeachment and who are in line to take over – most notably the house speaker Eduardo Cunha – are far more implicated in scandals of personal corruption than she is. Cunha was caught last year with millions of dollars in bribes in secret Swiss bank accounts, after having falsely denied to Congress that he had any foreign bank accounts. Cunha also appears in the Panama Papers, working to stash his ill-gotten millions offshore to avoid detection and tax liability.

It is impossible to convincingly march behind a banner of “anti-corruption” and “democracy” when simultaneously working to install the country’s most corruption-tainted and widely disliked political figures. Words cannot describe the surreality of watching the vote to send Rousseff’s impeachment to the Senate, during which one glaringly corrupt member of Congress after the next stood to address Cunha, proclaiming with a straight face that they were voting to remove Rousseff due to their anger over corruption.

As the Guardian reported: “Yes, voted Paulo Maluf, who is on Interpol’s red list for conspiracy. Yes, voted Nilton Capixaba, who is accused of money laundering. ‘For the love of God, yes!’ declared Silas Camara, who is under investigation for forging documents and misappropriating public funds.”

A New York Times article last week reported that “60% of the 594 members of Brazil’s Congress” – the ones voting to impeach Rousseff – “face serious charges like bribery, electoral fraud, illegal deforestation, kidnapping and homicide”. By contrast, said the article, Rousseff “is something of a rarity among Brazil’s major political figures: she has not been accused of stealing for herself”.

Last Sunday’s televised, raucous spectacle in the lower house received global attention because of some repellent (though revealing) remarks made by impeachment advocates. One of them, prominent rightwing congressman Jair Bolsonaro – widely expected to run for president and who a recent poll shows is the leading candidate among Brazil’s richest – said he was casting his vote in honour of a human-rights-abusing colonel in Brazil’s military dictatorship who was personally responsible for Rousseff’s torture. His son, Eduardo, proudly cast his vote in honour of “the military men of ’64” – the ones who led the coup.

Until now, Brazilians have had their attention exclusively directed towards Rousseff, who is deeply unpopular due to the country’s severe recession. Nobody knows how Brazilians, especially the poor and working classes, will react when they see their newly installed president: the pro-business, corruption-tainted nonentity of a vice-president who, polls show, most Brazilians want impeached.

Most volatile of all, many – including the prosecutors and investigators who have led the corruption probe – fear that the real plan behind Rousseff’s impeachment is to put an end to the ongoing investigation, thus protecting corruption, not punishing it. There is a real risk that once she is impeached, Brazil’s media will no longer be so focused on corruption, public interest will dissipate, and the newly empowered faction in Brasilia will be able to exploit its congressional majorities to cripple that investigation and protect themselves.

7--Japan ambles closer to the cliffedge

In Japan, where the sub-zero rate became effective in February, a survey of senior loan officers showed this week that banks’ profit margins from lending to highly rated companies dropped to the lowest level in almost a decade. The BOJ’s quarterly survey also showed that demand for credit from large, medium and small-sized firms all dropped.

“This wouldn’t address the underlying structural problem for the banks, which is not a loan supply issue but a demand issue,” Jefferies Group LLC analysts including Mac Salman wrote in a report.

8--A top for stocks?

Since hitting its February low, the S&P 500 has rallied 15 percent and come within 2 percent of its all-time highs. But according to one market watcher, the top could be in for the year, if history is any guide.

Technical analyst John Kosar said that from a seasonal standpoint, Friday marks the end of peak week for stocks in the second quarter.

"Since 1957 we have April being the strongest month of the year for the S&P 500, and on average it has closed 1.5 percent higher on the month since that time," Kosar said Thursday on CNBC's "Futures Now." The S&P 500 is currently up 1.6 percent this month. "That tells me that we've already gone, seasonally, as high as we should," he said

9--Lower rates mean higher asset prices. Duh

Look at this chart that shows the 10-year, risk-free Treasury bond rate. Today, it stands around 1.79%. When adjusted for three-year average inflation rates, it’s much lower:

After years of non-stop QE, its yields had actually fallen to 0% in late 2014, and today it’s still only around 0.4% – practically zero!

Most people don’t understand that all other financial assets are heavily influenced by the 10-Year Treasury bond rate (or similar sovereign bonds in other countries). Higher-risk bonds from AAA corporate to junk are valued as a risk premium for default above the risk-free rate. Lower risk-free rates mean lower bond yields and higher bond values all the way up the junk bond scale.

Loans for mortgages and auto loans, etc. go down in rates, with a risk premium that is very low on government guaranteed mortgages. That pumps up prices of real estate and other highly financed assets, as everyone can buy more for the same monthly payment.

Lower rates mean higher stock values as well. Stocks are basically valued by projecting earnings 10 years out, and then discounting their value to the present by adjusting for the interest on the 10-year, risk-free rate.

At lower long-term rates, companies can borrow at near zero adjusted for inflation, and buy back their own stocks to increase earnings per share – even if earnings are not growing. Or, they can buy out or merge with a company financed by cheap debt… the list goes on.

It’s all about financial engineering – not about productive investment in future assets and employment.

This final bubble since 2009 is a total illusion from QE and financial engineering – not the normal fundamentals of rising demographics, innovation and productivity. And as an illusion, it will disappear much faster than it was created when it finally bursts

10--Manufacturing plunges

Commenting on the flash PMI data, Chris Williamson, chief economist at Markit said:

“US factories reported their worst month for just over six-and-a-half years in April, dashing hopes that first quarter weakness will prove temporary.

“Survey measures of output and order book backlogs are down to their lowest since the height of the global financial crisis, prompting employers to cut back on their hiring.

“The survey data are broadly consistent with manufacturing output falling at an annualized rate of over 2% at the start of the second quarter, and factory employment dropping at a rate of 10,000 jobs per month.

“With prior months’ survey data pointing to annualized GDP growth of just 0.7% in the first quarter, the deteriorating performance of manufacturing suggests that growth could weaken closer towards stagnation in the second quarter.

“The survey responses reveal an increase in business uncertainty in relation to both the economic and political outlook during the month, which is weighing on spending and investment decisions and exacerbating already-weak demand both at home and abroad.” 

11--(archive) Moment of truth: Market Rises After Fed Keeps Interest Rates Unchanged

“It probably eases investors’ minds that we’re unlikely to see a rate increases in April, and it probably takes June off the table,” he said.

12--Stocks Rise When the Dollar Falls?

13--The Fed changes its mind about normalization

The chair of the Federal Reserve has dropped the broadest of hints that it has put future US interest rate increases on hold following the plunge in global stock markets since the start of the year.

In testimony before Congress, Janet Yellen admitted that the selloff in shares on Wall Street had affected the growth prospects for the world’s biggest economy and left investors in little doubt that the US central bank had no intention of following last December’s increase in the cost of borrowing with a second increase in March.

“Financial conditions in the US have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar,” she said.

“What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path” for monetary policy, Ms. Yellen told a news conference on Wednesday.

The Fed’s Statement:      

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

14--From Mario Draghi With Love: How ECB Cash Could Boost U.S. Stocks

The European Central Bank may be about to hand billions of euros to American shareholders.

On Thursday, the ECB set unexpectedly generous conditions for buying corporate bonds, part of its effort to refloat the eurozone economy with a deluge of free money.

The relaxed conditions mean the money can easily wash up on U.S. shores. Big American companies have long sold bonds in Europe, and last year these “reverse Yankee” issues hit a record after European interest rates turned negative. Reverse Yankee issuance hit €66 billion ($74.6 billion) in 2015, according to Dealogic. That was a fifth of all euro-denominated bond issuance, says Fitch Ratings. This year, so far, the level is the second highest on record.

Euro-denominated bonds issued by any eurozone-based company will qualify for ECB buying, so long as the company isn’t a bank. All a U.S. company has to do is set up a eurozone subsidiary to issue its debt. Even better, The ECB can buy up to 70% of each bond, and can buy at issue.

If the ECB spends money on U.S. debt, that cash is likely to end up in the hands of shareholders. Large U.S. companies have been rapidly increasing their borrowing and using the money mainly to finance share buybacks, rather than to increase investment.

Handing out money to foreign companies may prove controversial for the ECB, particularly because the central bank will take a financial hit if the bonds aren’t repaid in full.

In an ideal world, ECB President Mario Draghi wouldn’t have to worry about this. The ECB would like European companies to borrow in order to invest, boosting both the real economy today and growth tomorrow. This is the least likely outcome, though. Europe is awash in spare production capacity, and there is no sign that big investments have been on hold awaiting access to bond finance.


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