Saturday, June 25, 2016

Today's links

Today's Quote: " a key factor in the Brexit crisis is the reality that masses of voters in Britain, as across Europe, have concluded that the EU is a socially regressive institution hostile to their interests. " Alex Lantier

Quote from WSJ: "The scale of the market reaction—with sterling hitting its lowest level since 1985—has a lot to do with complacency among investors who assumed “Brexit” couldn’t happen and who pushed stocks and the pound higher last week. After all that drama, the FTSE 100 ended up for the week."

1---Brexit vote driven by class warfare  An indictment of the "new order"

"Why would anyone want to blow up the euro?
Because the long term effect of the euro is going to be to drive western European wages down to eastern European levels" and global competition for export share with the Chinese..
Now if you have a system in which one side is running a surplus and the other side is not allowed to run a deficit because of the rules. The only thing the other side can do is permanently contract their economy to allow someone else to make money selling BMWs (Germany) 

For the last 25 years the center left has told the bottom 60% of the income distribution that globalization is good for you. It's awesome.  

The top reason for a Leave vote was a desire for greater national sovereignty...

Most of all, Brexit is the consequence of the economic bargain struck in the early 1980s, whereby we waved goodbye to the security and certainties of the postwar settlement, and were given instead an economic model that has just about served the most populous parts of the country, while leaving too much of the rest to anxiously decline. Look at the map of those results, and that huge island of “in” voting in London and the south-east; or those jaw-dropping vote-shares for remain in the centre of the capital: 69% in Tory Kensington and Chelsea; 75% in Camden; 78% in Hackney, contrasted with comparable shares for leave in such places as Great Yarmouth (71%), Castle Point in Essex (73%), and Redcar and Cleveland (66%). Here is a country so imbalanced it has effectively fallen over…
What defines these furies is often clear enough: a terrible shortage of homes, an impossibly precarious job market, a too-often overlooked sense that men (and men are particularly relevant here) who would once have been certain in their identity as miners, or steelworkers, now feel demeaned and ignored. The attempts of mainstream politics to still the anger have probably only made it worse: oily tributes to “hardworking families”, or the the fingers-down-a-blackboard trope of “social mobility”, with its suggestion that the only thing Westminster can offer working-class people is a specious chance of not being working class anymore....

And the message is beginning to get through to the chattering classes. From Edward Luce in the Financial Times:
Brexit’s lesson for the US — and other democracies — is that fear mongering is not enough. Western elites must build a positive case for reforming a system that is no longer perceived to be fair. The British may well repent at leisure for a vote they took in haste. Others can learn from its blunder.

2-- If you've got money, you vote in ... if you haven't got money, you vote out'

3--Confessions of a Payday Lender: “I Felt Like a Modern-Day Gangster”

4--Trump flies the Jolly Roger

Right now, Clinton and the Democrats are carrying the banner of the Establishment, while Trump and his Republican insurgents fly the Jolly Roger. In a political year when the anti-establishment wave seems to be cresting, the Democrats may regret their choice of a legacy, status-quo candidate.

5--Is Deutsche Bank in trouble?

6--Gross: 10-year USTs could hit 1.25%

7--UK “leave” vote batters financial markets

The Dow Jones Industrial Average closed down by 610 points, or 3.4 percent, its biggest fall since August 2015. The Standard & Poor’s 500 erased all of its gains for the year, while the Nasdaq suffered its biggest loss in five years, descending into correction territory. Major banks led the sell-off, with Citigroup falling 9.4 percent and JPMorgan Chase plummeting 6.9 percent.
Stock markets in the EU’s weaker “periphery” fared worst of all, with markets falling by more than 12 percent in Spain, Italy and Greece. Shares in Italy’s two largest banks, Sanpaolo and UniCredit, fell by more than 23 percent, and trading in some Italian banks never even opened...

Greenspan went on to say that the underlying problem was a “massive slowing” of real income growth across Europe and the US, which he linked to a decline in the growth of productivity and a “huge contraction” in capital investment. As a step toward resolving the crisis, he called for slashing the growth of social entitlements.
The vote also points to a growing tide of protectionist sentiment. Earlier this month, the World Trade Organization reported that anti-trade polices carried out around the world had hit the highest level since 2009. “This vote is a step away from free trade," Bob Doll, chief equity strategist at Nuveen Asset Management, told the Associated Press

8--Donald Trump Sees Brexit as Positive Sign for His Presidential Campaign

“People want to take their country back,’’ he said. “There are many other cases where they will want to take their borders back. You’re going to see that more and more... I love to see people take their country back.”...

The dramatic vote was just the latest surprise to unsettle the 2016 election. The campaign to leave the EU drew strength from frustration with the economic and political system, and from anxiety about immigration. Those same concerns have been central to the stunning rise of Mr. Trump, and the populist component has fueled the unexpectedly strong primary run by Vermont Sen. Bernie Sanders on the Democratic side against Mrs. Clinton

“A lot of people are being left behind in this global economy,” Mr. Sanders said on CBS CBS.A -3.51 %  on Friday. “The establishment sometimes forgets that real live, flesh-and-blood people in this country are hurting, and they’re hurting badly.”
In one measure of Americans’ frustration, an April survey by GOP pollster David Winston found that 79% of those surveyed believed that their voice wasn’t heard in political and public-policy discourse.
Pat Buchanan, who ran insurgent campaigns for the Republican nomination in 1992 and 1996 that included harsh rhetoric about immigrants, said that politicians of both parties ignore people’s frustration to their peril.

The movement for economic nationalism and ethno-nationalism and the preservation of national identity is far stronger than the elites realize, because the people who believe these things are constantly being berated and called names,” he said in an interview....

Mr. Trump wasted no time in bringing the spirit of the Brexit fight into his campaign. Before the day was out Friday, he had sent out a fundraising email praising U.K. voters.
“These voters stood up for their nation—they put the United Kingdom first and they took their country back,” he said in the email asking for donations. “Let’s send another shockwave around the world.’’

9--Brexit Collateral Damage Puts Japan in Hot Seat...With the yen strengthening against the dollar, the Bank of Japan will need to prepare a response

London caused mayhem in Tokyo...Touching less than 99 yen to the dollar, this brings Japan’s currency back to where it started just as Abenomics was ramping up in 2013. With interest rates already negative, a weak currency is one of the few tools Japan has at its disposal. A strong currency will be devastating for efforts to engineer inflation.

Japan will need to prepare a response. Currency intervention seems likely, though history shows fighting against the tide of currency movements usually only helps in the short term, especially if such moves aren’t coordinated with other central banks. And the BOJ, which has held fire in recent months on further easing, now has to prove it has mojo to move markets. On this score, the prospects seem dim.
Japan is already in negative-rate territory, and with U.S. 10-year Treasury yields plunging near multiyear lows Friday, the differential between owning U.S. assets and Japanese assets is shrinking again. This has long been a driver of the yen versus the dollar...

Bank of Japan Gov. Haruhiko Kuroda will be under pressure to go deeper on negative rates, even though doing so in the first place, in January, has seen the yen strengthen, not weaken. With inflation hovering near zero, real interest rate differentials are again in favor of a strengthening yen. Meantime, Japan’s current-account surplus remains robust, creating a structural demand for yen.

If negative rates aren't the answer, what is? Increasing asset purchases of bonds and exchange-traded funds are an option, but there is limited room to expand those programs and the effect, only marginal at this point. Mr. Kuroda has been dismissive of more aggressive helicopter money-like moves that toe into fiscal policy. But such drastic measures, which several analysts think are technically legal, would seem to remain on the table should the fallout from Brexit endure.
U.K. voters have presented Japan with a much harder job than it would have had otherwise. The BOJ can now either go big, or go home.

10--Panic in repo?  ‘Repo’ Rates Spike as Banks Hoard Cash But Markets Functioning.....‘Panic’ in early-morning ‘repo’ trade; fed-funds rate rises

The moves in the overnight “repo” rate—to 0.8% around noon Friday from 0.57% Wednesday before the referendum—were unusually large for the $3 trillion market that is a key source of funding among banks. Repo rates typically only move by a hundredth of a percentage point or two a day, and the bigger swing signaling the level of concern amid sharp moves in currencies, stocks and government bonds.

“The volatility and flight to quality in the overall U.S. Treasury market caused a panic this morning in the repo market,” said Scott Skyrm, a repo and securities financing expert at Wedbush Securities, who said he saw one borrower pay 1.15% for overnight money.

The surprise result of the referendum set off enormous drops in U.S., European and Japanese stocks; the British pound; and emerging-market currencies. But while trading was volatile and voluminous, it was for the most part orderly and free of the disruptions that accompanies big market moves in August....

The increasing cost of overnight loans spilled over into the federal-funds market, which sets the cost of related overnight loans between banks and is used by the Fed to set its benchmark interest rate. The daily effective fed-funds rate has been rising in recent days. ICAP quoted the intraday fed-funds rate at 0.40% early Friday, up from 0.39% on Thursday and 0.37% last week.

(Fed still providing liquidity to foreign banks) The Fed said Friday it is prepared to supply dollars to central banks overseas as needed to ease pressure on the markets around the globe where banks raise needed funds. The Bank of England and the European Central Bank have made billions of euros and pounds available in order to prevent a 2008-style credit crunch with the referendum vote.

“Banks want to lock up cash over the weekend to make sure they are on steady footing amid the uncertainty,” said Michael Watt, senior managing director of sales in INTL FCStone Financial’s interest-rates group in Jersey City, N.J.

11--Not a Plunge but a Long, Slow Grind Lower

It’s as if everything in the real economy were stuck in this pattern where a period of stagnation is followed by decline. Not a crash – but an uneven, long, slow grind lower that then begins to feed on itself without any real end in sight, and without that V-shaped recovery that would follow a plunge in economic activity.

This comes as the Fed and other central banks have been flooding the economy for nearly eight years with essentially free liquidity, while debt everywhere has blown off the charts and as QE and the negative-interest-rate absurdity rule in Europe and Japan. That’s what’s different this time!

Before the Fed decided to embark on its perhaps endless journey of financial repression, when businesses saw trouble, they reacted to stay alive. This time, the world is awash in cheap liquidity. There’s no sense of urgency. Investors can no longer demand any real return on their money. The calculation of risk has been eliminated from the financial equation.

So the economy, doped to its ears with monetary cocaine and bogged down in debt, can barely stumble along zombie-like, perhaps for years to come, without catalyst for growth, and without catalyst for that plunge that is necessary to cleanse out the excesses and provide a fresh start. And this is what central banks have accomplished with their monetary policies.

12--This is what happens when markets believe only those soothsayers that confirm their wishful thinking

The carnage instantly spread to Asia, particularly Japan. The Nikkei has crashed through the 15,000 level, and is now at 14,870 down a breathtaking 8.4%, which brings its year-to-date loss to over 25%! Companies that depend on exports are getting crushed.

Investors are seeking refuge in Japanese Government Bonds, which jumped, as yields dropped. The 10-year JGB yield fell to negative -0.19%, the lowest ever, and is still falling as I’m writing this. The 20-year yield is hanging on to a positive number by its fingernails, now at 0.15%, and the 30-year yield isn’t far behind at 0.16%. At this rate, they’ll all be negative soon. The yen soars 4% against the dollar.

13--Philly Fed recession indicator

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