Tuesday, August 23, 2016

Today's Links

Today's quote:  “Everything feels distorted and unnatural; you know the source of that is the central banks but equally there’s nothing to stop them carrying on,” said Matt King, head of credit strategy at Citigroup." WSJ


1--Droopy business investment signals recession


...belt-tightening by businesses on investment in new equipment and buildings could be a sign of a deeper slowdown ahead, according to economists at Credit Suisse.

"Extended periods of falling real business investment are strongly associated with US recessions," they wrote in a note to clients. "That's why the recent three consecutive quarters of contraction are concerning."

In fact, the last time business investment contracted over a prolonged period, without a recession following soon, was in 1986-87. That investment pullback also followed a sharp drop in oil prices, much like the recent collapse in spending and investment on oil and gas drilling.
But cuts in business spending and investment have spread beyond the oil patch, the Credit Suisse economists noted. In the past few quarters, investment in agricultural machinery has fallen hard.

2-It’s Getting Scarily Quiet in the Stock Market   --With the S&P 500 remarkably tranquil, the danger is not so much complacency about markets but complacency about central banks (Stocks hit news highs on historic low volume)


Calm has descended on the U.S. stock market.

The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995.

Back then, the Federal Reserve was paused between rate cuts. This time around, a combination of the summer lull in trading and super-easy global monetary policy has helped drive volatility to levels seen only a dozen times in the past half-century.
“Last week and the week before, you had to make sure your machine was actually on because it was flashing so infrequently,” said Jared Woodard, a strategist at Bank of America Merrill Lynch, referring to the changes in stock prices on computer terminals.

(Calm before the storm?)

Previous periods of very low volatility were in early 2011, before the U.S.’s near-default and loss of triple-A status, and January 2007, a few months before the collapse of two Bear Stearns Cos. hedge funds marked the beginning of the credit crunch....

“Everything feels distorted and unnatural; you know the source of that is the central banks but equally there’s nothing to stop them carrying on,” said Matt King, head of credit strategy at Citigroup.


3--Fed Admits Another $4 Trillion In QE Will Be Needed To Offset An "Economic Shock"


In a Fed Staff working paper released over the weekend titled "Gauging the Ability of the FOMC to Respond to Future Recessions" and penned by deputy director of the division of research and statistics at the Fed, the author concludes that "simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances


4--Seller’s Paradise: Companies Build Bonds for European Central Bank to Buy   -- Two European firms have sold debt directly to the ECB through private placements, a startling example of how the market is adapting to extremes of monetary policy


5--BOJ shows the world how to fu** up a perfectly decent stock market


"The market is driven completely by the BOJ's buying rather than views on each companies' earnings," said a fund manager at a Japanese asset management firm...

More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB) market and distorting interest rates.

"The increased BOJ purchasing provides a very favorable demand environment for listed equities," said Michael Kretschmer, chief investment officer at Pelargos Capital in the Hague. "Nevertheless, in the long run we strongly doubt these type of monetary gimmicks aimed at price setting of risk assets can have a sustained positive impact on economic growth."...

Some liken the increased purchases by the BOJ - the only central bank in the world that buys stocks at the moment - to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble.


The BOJ has sought to boost economic activity and dispel decades of deflation by flooding the system with cash through massive asset purchases. These have been mostly JGBs, but have included real-estate investment trusts, corporate bonds, commercial paper and stocks, in the form of exchange-traded funds, or ETFs.
The BOJ decided on July 29 to expand this stimulus by increasing its annual purchases of ETFs to 6 trillion yen ($60 billion) from 3.3 trillion yen....

Some worry the stock market could start to resemble the bond market, where the BOJ's purchases - about 110-120 trillion yen annually - have made traders fixate on its bond buying and pay scant attention to economic data.
The BOJ's tactics "could weaken the market's function in the long run," said Keita Matsumoto, head of investor sales at Citigroup Global Markets Japan. "I'm worried that could lead to a 'JGB-ification' of stocks...

Analysts estimate the central bank allocates about 60 percent of its buying in ETFs that track the Nikkei, 30 percent to the broader Topix .TOPX and the rest to the new JPX 400 .JPXNK400. That reflects the size of available ETFs but disproportionately benefits the 225 companies in the Nikkei over the nearly 2,000 companies listed in the Topix.

The Nikkei and Topix should roughly track each other, but the Nikkei has risen 0.7 percent while the Topix has fallen 0.3 percent since the BOJ's announcement.
Moreover, the Nikkei is a simple average, not weighted by market capitalization, as the Topix is. That means a handful of high-priced shares that have outsized weightings in the Nikkei benefit the most.

6--Monetary policy has nationalized the Japan stock market: CLSA


Even a resurgent yen hasn't dampened Japan's stock rally over the past couple months, but that's not necessarily because investors like the market.
The Nikkei 225 index has surged around 10 percent since late June, even as the yen has climbed against the dollar, with the pair testing levels under 100.

Normally this would be bad news for stocks as a stronger yen is a negative for exporters as it reduces their overseas profits when converted to local currency. So what explains the buoyant stock market?
Analysts attributed the gains to the Bank of Japan (BOJ), not fundamentals.

In a report titled, "BOJ nationalizing the stock market," Nicholas Smith, an analyst at CLSA, said that the central bank's exchange-traded fund (ETF) buying program was distorting the market. ...

The BOJ's purchases of Japan real-estate investment trusts (J-REITs) had also lost market-based "price discovery," analysts at Deutsche Bank said in a note Friday.

7---Bank loans, Japan savings, Comments on the economy


... the economy is most likely already in a recession and there never was a viable economic recovery. Investors need to keep their eyes open as equity prices march further into all-time high territory. And, most importantly, have a strategy to protect their portfolios once sanity returns to the market.

8--...proof that the economic recovery is over-- This begs the salient question: If the employment condition is booming why are payroll taxes falling?


However, according to the Treasury Department, the deficit came in at $112.8 billion in July, the highest since February's $192.6 billion. For the first ten months of the fiscal year, which ends Oct. 1, the budget deficit was $513.7 billion, up from $465.5 billion a year earlier.

Obviously, the government runs a deficit when it spends more than it collects in taxes and other revenue, as is almost always the case. But this year the Congressional Budget Office (CBO) is predicting the 2016 deficit will total $590 billion, up more than 34 percent from last year's budget shortfall. Most importantly, this growing gap comes primarily because of lower-than-expected receipts to the Treasury

A closer look at tax receipts over the past few years reveals that the growing number of employed has not had the effect on cash flows to the Treasury that you would expect. Receipts from the Federal Unemployment Tax Act (FUTA) have been falling steadily since 2012, according to the Office of Management and Budget, moving counter to the growing number of people employed. The FUTA tax is levied at 6 percent on the first $7,000 of an employee's wage...

In 2012 receipts totaled $66.6 billion, in 2013 those receipts fell to $56.8b, in 2014 they were down to $54.9b, and in 2015 they dropped to $51.8b.
The decrease in the FUTA rate in July of 2011 from 6.2 percent, to 6.0 percent may explain some of the shortfalls, but FUTA has continued its decline since 2012 despite the steady rise in employed persons.

This begs the salient question: If the employment condition is booming why are payroll taxes falling?
There are a couple of answers to that question and neither is favorable. The BLS numbers are either wrong or the quality of new jobs created must be very poor. The latter response seems the most credible; a combination of an increase in the proportion of part-time workers and full-time jobs that provide lower compensation.

The true employment condition, as well as the quality of those jobs, can be found in the tax receipt story, which is more comprehensive than the BLS's estimate. But it's not just payroll taxes that have declined; corporate tax receipts have fallen 12.8 percent year-to-date, while individual taxes are down 0.4 percent...

The bottom line is that our standard of living cannot be improving when productivity has been negative for three quarters in a row. The economy isn't getting better while earnings on S&P 500 companies have been negative five quarters in a row, and are projected to come in negative for the 6th time. There can be no real growth when tax policy remains unchanged and receipts are falling.

9--Turkey prepared to work with Assad


The comments were the latest signal from Ankara it is now prepared to work actively with world powers that have so far shared radically different viewpoints on the Syria conflict.

Russia and Iran are the major backers of Syrian President Bashar al-Assad, whose ouster Ankara has always said is essential for ending the over five-year civil war.

Yıldırım had on Aug. 20 recognized, for the first time, that al-Assad was “one of the actors” in Syria and could remain temporarily in a transition period.

10-- Turkey gets its act together on Syria-- Onward to Jarablus!

...
A weakened and fragmented Syria becomes a liability for Turkey. If the report is true that the deputy head of the Turkish intelligence traveled to Damascus on Sunday to discuss the security of Syria’s northern regions, it only dramatically underscores an emergent convergence of interests.
Equally, if Foreign Minister Mevlut Cavusoglu had to travel to Tehran Thursday for a sensitive conversation, because phone lines have become so very insecure and Big Brothers might eavesdrop, it only shows how there are wheels within wheels....

Turkey’s rethink on Syria has the following elements: a) Turkey must re-establish ties with Syria; b) Turkey cannot allow the IS or Kurds to control the border regions with Syria; c) Turkey is a stakeholder in Syria’s unity and stability; d) Turkey must promote a government that ensures Syria will remain a secular country with genuine power-sharing that disallows domination by any ethnic group or region.
Of course, the core issue concerns the Kurdish problem in Syria. Turkey fears that a Kurdistan will be detrimental to its own stability. Arguably, this is the starting point of Turkey’s rethink on Syria.....

Ankara, pending Biden’s visit, has drawn up the operational plans to inject its own proxy groups into the northern Syrian town of Jarablus and practically cut off the westward march of Syrian Kurds. If push comes to shove, and a clash ensues between Syrian Kurds and Turkish proxy groups, of course, there is no need to second guess where Ankara’s loyalty would lie.
Turkey has widely publicized the Jarablus offensive. Some reports say Ankara even notified the Russians and the Americans in advance that Turkey may be left with no choice but to create new facts on the ground in northern Syria.

11--Propaganda rules supreme!  Secret British Papers on Afghanistan Reveal Parallels With Syria Tactics


12--French intelligence orchestrated Ghouta poison gas attack: Syria


13--The Obamacare counterrevolution six years on

By Kate Randall
22 August 2016
More than six years after it was signed into law, and nearly four years after it began operation, the Affordable Care Act (ACA) is increasingly acknowledged to be a disaster. The viability of the scheme it authorized is openly being called into question, even by its proponents. The Obama administration’s signature domestic “achievement” stands exposed as a plan concocted by and for the insurance companies and corporate America to slash their costs and increase their profits.

14--Twenty years since Clinton’s welfare “reform”









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