Thursday, June 16, 2016

Today's links

1--China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale

The nation’s stash of American stocks sank about $126 billion, or 38 percent, from the end of July through March, to $201 billion, Treasury Department data show. That far outpaces selling by investors globally in that span -- total foreign ownership fell just 9 percent. Meanwhile, China’s U.S. government-bond stockpile was relatively stable, dropping roughly $26 billion, or just 2 percent....

While the amount China unloaded is a sliver of the $23 trillion U.S. equity market, it’s significant when compared with holdings of other big investors. The largest American mutual fund, the Vanguard Total Stock Market Index Fund, oversees about $373 billion....

“The Chinese, or other people for that matter, are taking the view that sitting in U.S. equities is presumably quite risky, and I’m not surprised they’re shifting," said Fredrik Nerbrand, global head of asset allocation at HSBC Bank Plc in London. “This seems like more of a generation of cash more than anything else, and probably a de-risking of their portfolio.” 

2--Treasury 10-Year Note Yield Falls to Lowest Level Since 2012

3--More Americans See Economy Worsening Than at Any Time Since 2013

4--The Fed Surrenders

The Fed keeps saying its policies are “accommodative,” and while they have contributed to higher prices in stocks, real estate and other assets, they aren’t accommodating faster growth or broader prosperity.....

the Fed now predicts growth won’t improve even in 2017-2018. In previous years the FOMC median forecast typically predicted that growth would accelerate in the future to a more normal rate above 3%. But now even the Fed has accepted the new abnormal of 2% being the best we will do. This may be more realistic than its previous optimism, but it also underscores America’s depressing slow-growth reality.
The Keynesian economists who have run U.S. economic policy since 2008 are clearly stumped. First they said $800 billion in fiscal stimulus would stir a return to prosperity, then they said that monetary stimulus would do the trick. Now they blame their failure on “secular stagnation” and Republicans in Congress whose pro-growth proposals have been blocked at every turn by Senate Democrats and President Obama. ...

Seven years after the recession ended, we know the score: The slowest expansion in decades, falling labor participation rates last seen in the 1970s, mediocre business investment, a declining pace of business start-ups, disappointing wage growth, rising inequality, and an outbreak of angry populism on the left and right. If we were responsible for that result, we’d try to deny paternity too.

5--World Isn’t Ready for Another Fed Increase
Today's "must read"

Because of the dollar’s global role, tighter Fed policy already has squeezed many other countries, especially commodity exporters...

it’s not just the trajectory of the U.S. economy that should guide their decision. While the Fed is the U.S. central bank, the dollar’s central role in the international financial system means it also is the world’s central bank and the world may not be ready for another rate increase.
In theory, the influence of the Fed on the world economy should be receding, not growing. The U.S.’s share of global output has shrunk, as has the number of countries pegging their currencies to the dollar (China is a notable exception).

Yet the dollar is now more influential than ever. It accounts for 87% of currency transactions, 60% of global reserves and 62% of cross-border debts, according to Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management. Oil prices are supposed to respond to supply and demand but nowadays they also respond to the dollar, he says, because trading of oil far exceeds actual consumption, and trading is conducted in dollars.

Similarly, the Bank for International Settlements has found that when the dollar is weak, dollar loans are plentiful, but when it rises, the supply shrinks. “The global banking system runs on dollars,” Hyun Song Shin, the BIS’s research chief,

The Fed responded to a collapsing housing bubble in 2008 by cutting interest rates to near zero and beginning to buy bonds. It had the desired effect in the U.S., by bringing down unemployment and warding off deflation, but unintentionally helped create a new bubble abroad.
Commodity prices had already been climbing sharply for several years on rising Chinese demand, which got another big boost in 2008 when the Chinese government responded to the global crisis with a massive, credit-fueled stimulus.

Investors in search of better yields than the paltry returns that U.S. Treasurys and bank deposits offered saw an opportunity. Between 2011 and 2014, they lent $1.2 trillion to commodity producers, a quarter of it to U.S. oil and gas companies.

That money financed a vast expansion of capacity. In 2014, energy, commodity and other materials companies plus related industries and utilities accounted for 60% of world-wide capital spending (excluding finance and real estate), according to the Organization for Economic Cooperation and Development, an international government-backed research group.

All that began to reverse, first in 2013 when the Fed wound down its bond-buying and then in 2014 as it signaled it would raise rates in the coming year. Meanwhile, China slowed, and Saudi Arabia boosted oil production. Commodity prices tumbled, and both U.S. shale companies and emerging-market companies suddenly found it far harder to borrow. Commodity-related investment slumped 16% globally last year, according to the OECD.

Those shockwaves helped send oil, emerging-market currencies and U.S. stocks down earlier this year. They have since stabilized, in part because the Fed has foregone further rate increases. An actual financial crisis, similar to what swept through east and southeast Asia in 1997, has been avoided, largely because countries have floating currencies instead of pegs that must be defended with scarce reserves.

Another Fed rate increase wouldn’t have the same shock value as the first. But it would still push the dollar higher, putting renewed downward pressure on commodity prices since it makes the goods more expensive for other countries. It also would reignite capital flight from China and other emerging markets. The Fed is “stuck in this terrible feedback loop,” says Mr. Sharma.

Even if financial markets remain stable, the reversal of the commodity investment boom has “become and will remain a major headwind to world economic growth going forward,” the OECD says.
At today’s prices, most of the globe’s energy and materials companies aren’t profitable enough to justify their borrowing costs. Commodity exporters such as Russia, Brazil, Nigeria, Canada and Saudi Arabia are being battered by reduced business investment and in some cases by belt-tightening governments robbed of resource revenue.

The U.S. isn’t immune to the downdraft in commodity prices. Lower oil prices have already set back shale oil production and business investment, and weaker growth abroad has cut into U.S. exports and factory employment, which has fallen in three of the last four months.

The world may have passed the most intense part of its adjustment, but that doesn’t mean the adjustment is over. It can take years for a bubble to deflate, and in the meantime, the Fed must be careful not to make it hurt more than it must.

6--Zero Yields, the Fed and ‘Brexit,’ Oh My

The problem is, the U.S. is the only big country where the economy may be healthy enough to raise rates. By not acting, the Fed has allowed the dollar to weaken this year, effectively boosting currencies in Japan and Europe, which is the opposite of what central banks in those places had wanted. They have had to adopt increasingly extreme monetary policies, which have become a source of skepticism, not reassurance, for investors.

This has pushed cash into haven government bonds, driving the bund yield below zero. Falling global yields have boosted the allure of U.S. bonds for foreign investors. The odd consequence: Even as the Fed has embarked on raising rates, yields have fallen. Low rates are encouraging companies to borrow, pushing up leverage in the U.S. and emerging markets. That has added another risk to the economy.

The status quo could hold, as there is no obvious prospect for a more synchronized global recovery. Brexit could generate a fresh wave of turmoil. But the longer this situation and the attendant search for yield persists, the more challenges investors will face if the world economy breaks from its muddle-through path.

7--Global Stocks Fall as Bank of Japan Stands Pat

8--Fed holds interest rates amid mounting global turmoil

When the Fed announced a 0.25 percentage point rise in its base rate last December, Yellen said the US economy was on a “path of sustainable improvement” and added that “we are confident in the US economy.”
In the two months that followed, global financial markets experienced considerable turmoil, part of which was attributed to the December Fed action.

The prospect of “sustainable improvement” was dealt a major blow with the release of data for the first quarter of 2016 that showed gross domestic product in the US rising at an annual rate of just 0.8 percent, repeating a pattern of first quarter declines over the last several years. Then the jobs data for May showed that employment had increased by only 38,000 in May, well below forecasts.

The unemployment rate fell, but that was only because the labour force shrank by 485,000 people, as thousands gave up looking for work. Other data shows that the percentage of men aged 25 to 54 who are not working is at an all-time high, and median household income is 1.3 percent below where it was in 2007...

Answering a question at her press conference, Yellen said: “We are quite uncertain about where rates are heading in the longer term.”
In her prepared remarks, she noted that non-energy business investment was “particularly weak” during the winter and appeared to have remained so in the spring. The growth in household spending “slowed noticeably” earlier in the year.

The immediate reaction in financial markets was that any rate rise was off the table for the rest of the summer, with the earliest date for an increase being September, or even December.
The Fed decision came in the wake of a day of turbulence on global financial markets Tuesday when yields on German and Japanese government bonds hit new lows, with the 10-year German Bund entering negative territory for the first time. The increase in bond prices, which have an inverse relationship to yields, was fuelled by opinion polls showing that the Leave option in next week’s Brexit referendum had attained a majority.

In addition to the falls in German and Japanese bonds, the yield on British 10-year bonds fell to a new low and the yield on the 30-year bond dropped to below 2 percent for the first time. The interest rate on US ten-year treasury bonds fell to 1.6 percent, just above its lowest level since 2012.
The British pound fell heavily on currency markets, with the cost of protecting swings in its value against the euro rising to a record high, exceeding levels reached in the global financial crisis of 2008....

what was once considered the “normal” functioning of the global capitalist economy, where investments were made in the real economy in the search of increased profits leading to higher growth, and investment in government bonds returned a positive rate, securing a long-term source of income for insurance firms and pension funds, has completely broken down.
The various “quantitative easing” measures pursued by the world’s central banks have not only completely failed to increase real growth, they have created a mass of cash surging like a wrecking ball though financial markets as it seeks speculative profits.

9--15 facts about the sinking economy

10--US Recession Odds Hit 55% According to Deutsche Bank Model

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