zondag 25 juni 2017

"It’ll Be An Avalanche": Hedge Fund CIO Sets The Day When The Next Crash Begins

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to "go to cash", none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management's CIO Eric Peters broke with that tradition and dared to "pin a tail on the donkey" of when the next market crash, one which he agrees with us will be driven by a collapse in the global credit impulse, will take place. His prediction: Valentine's Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche: “The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.”
Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk. “But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass. The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO. “This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along. “But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”
*) Of course, the global credit impulse is something that we have been exclusively warning about for the past 4 months...

But "apparently" it wasn't until Citi's report last week which explained it's all that matters...

SP 500 Index Update

# The last week of the month should be more volatile as there are a number of more potent Astrological signatures.
# Another cycle that is coming up is the 50 week cycle. These are shown as the pink vertical lines. The next one is by date is July 24th but I would say July or August. As I would expect a 5 - 10% decline this time may be unusual in that the markets have been distorted by Central Bank money.
# I’m looking for a low probably July; after reviewing it could be as late as July26...

# The blue line is a flag formation which is pointed to 2475. The next 9 / 18 month cycle is early August but this needs a broad orb and could occur in July. If this is marking a low nearby the market would have to turn down in the next few weeks to be in a position to put in a trough in late July or early August. The Primary cycle is also due in early August...

# The following chart of the SP500 includes the heliocentric Bradley indicator (blue line). There are two possible change in trend dates are June 23 and June 30th. After that look at July 3 then July 13th...

# These price lines can act as support / resistance. It has been at highs and lows...

BIS Lists The Four Biggest Threats Facing The Global Economy

After years of fire and brimstone sermons, also known as the Bank of International Settlements' annual reports delivered with doom and gloomy aplomb by Jaime Caruana (the 2014 report, in which the BIS was shocked at how broken the market has become, was a particular favorite) who year after year warned about the adverse side-effects of central bank intervention, today the BIS released its most upbeat reports in years, in which it praised the recent rebound in global growth and predicted that GDP may soon revert to long-term average levels after the sharp improvement in sentiment over the past year. Or maybe not, because even as talk of a "global coordinated rebound" continues, it has once again rolled over, with the US economy barely growing above stall speed, while the BIS explicitly notes that "despite the best near-term prospects for a long time, paradoxes and tensions abound" among these are the VIX...
# Financial market volatility has plummeted even as indicators of policy uncertainty have surged and the record disconnect between equities and bonds.
Stock markets have been buoyant, but bond yields have not risen commensurately. Meanwhile, optimism, at least as measured by various sentiment surveys such as the PMI and consumer confidence, is the highest since the financial crisis even as globalization, "a powerful engine of world growth, has slowed and come under a protectionist threat." While praising the recent economic rebound, the BIS notes that the main theme of this year’s Annual Report is the "sustainability" of the current expansion, specifically "What are the medium-term risks? What should policy do about them? And, can we take advantage of the opportunities that a stronger economy offers?" Of particular focus are the following four main risks (aside from geopolitical) listed by the BIS that could undermine the sustainability of the upswing.
- First, a significant rise in inflation could choke the expansion by forcing central banks to tighten policy more than expected. This typical postwar scenario moved into focus last year, even in the absence of any evidence of a resurgence of inflation.
- Second, and less appreciated, serious financial stress could materialise as financial cycles mature if their contraction phase were to turn into a more serious bust. This is what happened most spectacularly with the Great Financial Crisis (GFC).
- Third, short of serious financial stress, consumption might weaken under the weight of debt, and investment might fail to take over as the main growth engine. There is evidence that consumption-led growth is less durable, not least because it fails to generate sufficient increases in productive capital.
- Fourth, a rise in protectionism could challenge the open global economic order. History shows that trade tensions can sap the global economy’s strength
# Conveniently, just yesterday we reported that as Goldman noted on Friday. virtually every post-WWII recession was caused by the Fed's reaction to a spike in inflation (usually in the commodity sector), which itself may have been prompted by aggressively easy monetary conditions by central banks during the prior cycle. Separately, Citi discussed just how late stage the current cycle, showing that according to pair-wise correlations, a recession may be imminent...

As for the BIS, this is how it summarizes the overarching threats: [P]olicy tightening to contain an inflation spurt could trigger, or amplify, a financial bust in the more vulnerable countries. This would be especially true if higher policy rates coincided with a snapback in bond yields and US dollar appreciation: the strong post-crisis expansion of dollar-denominated debt has raised vulnerabilities, particularly in some emerging market economies (EMEs). On the topic of surging rates, one has to keep in mind the amount of dollar-denominated EM credit: from 2009 to end-2016, US dollar credit to non-banks located outside the United States, a bellwether BIS indicator of global liquidity, soared by around 50% to some $10.5 trillion; for those in EMEs alone, it more than doubled, to $3.6 trillion. But an even greater problem than an "inflationary spurt" facing the Fed, is the record global debt overhang: should Yellen et al hike rates too fast, the debt pyramid could implode under its own weight as debt service costs explode. An overarching issue is the global economy’s sensitivity to higher interest rates given the continued accumulation of debt in relation to GDP, complicating the policy normalisation process (Graph I.1). As another example, a withdrawal into trade protectionism could spark financial strains and make higher inflation more likely. And the emergence of systemic financial strains yet again, or simply much slower growth, could heighten the protectionist threat beyond critical levels. Charted, global debt has continued to climb to new all time highs...

While predictably rates and yields have declined to never before seen levels...

And yet, despite these great, latent risks, mostly due to high debt levels, low productivity growth and dwindling policy firepower, according to Reuters the BIS said central banks should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the "great unwinding" of quantitative easing programs and record low interest rates. Of course, if the "improving conditions" are a result of central bank policies, this intervention will be very brief. New technologies and working practices are likely to be playing a roll in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop. "Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way," BIS's head of research, Hyun Song Shin, told Reuters. Shin, one of the more rational voices within the BIS, said that "if we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization." It may be too late: as Citi's Matt King warned, the moment normalization officially begins, and is no longer just a bluff, markets will flounder. Which is why Shin added that it will be "very difficult, if not impossible" to remove all the central bank "bumps."
Ironically, the biggest question in the report was one that was not explicitly stated: how long can the Fed tighten before the next recessions sends rates crashing back to zero if not negative, and unleashes even more QE. or as Reuters puts it, the BIS report added that the lack of clarity over inflation also makes it far harder to judge how far rates could go up before they start coming down again. "In practice, therefore, central banks have little alternative but to move without a firm end-point in mind," the report said, another way of saying they are flying blind. Finally, the report discussed the growing threat of protectionism, perhaps the most dangerous of the four main risks it identified. In a sidebar to the main report, the BIS said estimated that if 10% tariffs were put on imports from Mexico or China, U.S. labor costs would have to drop by about 6% to compensate for the higher costs of "imported inputs." Translated: crashing wages, and political upheaval once globalization goes into reverse in earnest.
* The BIS simulation "reveals a comparatively large sensitivity of US production costs to tariffs on imports from Mexico or China. To put the resulting cost shocks in context, the centre panel of Graph III.B displays the reduction in US wages that would be required to fully compensate for the increasing costs of imported inputs. For example, such tariffs would lead to a 0.86% cost increase in the US transportation industry. To fully offset this increase, US labour costs would have to decrease by around 6%, satisfying 0.86% - 6% * 0.14 ? 0, where 0.14 is the labour cost share in the US transportation equipment industry"...

Needless to say, the BIS which was created in the post WWII vacuum to promote global trade, clearly is conflicted when it comes to globalization and says that "formal statistical evidence, casual observation and plain logic indicate that globalisation has been a major force supporting world growth and higher living standards." Unfortunately, when it comes to the middle class, the data clearly point in the opposite direction...

For some of the largest emerging markets there were also concerns about dollar debt and protracted credit expansion, often alongside rising property prices, storing up risks. Low interest rates, though, have generally kept debt-service ratios below critical thresholds. "The policy challenge is to take advantage of the current tailwinds to put the expansion on a sounder footing," said Claudio Borio, head of the BIS monetary and economic department. "First and foremost, that requires building resilience, domestically and globally." One piece of advice: record high stock prices and record low volatility as a result of what Citi called "forced buying", which is also known as "buying without conviction" is exactly the wrong way to go about "building resilience"...

Gold Update

# Gold touched $1241.7 early Wednesday and reversed higher. This could be 4th wave bounce into the 6/23 New Moon or Gold could have put in a nominal 6 week cycle trough. If so Gold should continue up next week. So, turn made?

# If it turns down there could be trouble ahead. This is very important. We want to see a 6 week cycle trough and then a move up. If we continue down, Gold may be falling into a longer term cycle, For now I’m waiting to confirm a 6 week cycle trough on June 20th. I am looking at precious metals being the potential trade of the year, but there will be pullbacks...

# The next chart is a longer term monthly chart showing the 7.4 year cycle in Gold. They are the red vertical lines. Note that the 7.4 year cycle put in a low in late 2015. We are now in a pull back but we are early in the 7.4 year cycle which should be bullish in the long term...

Goldman Finds Most Modern Recessions Were Caused By The Fed

One week ago, Deutsche Bank issued a loud warning that as a result of the aging of the current economic expansion, now the third longest in history at 32 quarters, if with the lowest average growth rate of just 2%...

Coupled with the collapse in the yield curve...

The risk that the Fed could fall behind the inflationary curve as a result of near record low unemployment (assuming the Phillips urve still works which it doesn't)...

The risk is growing that the Fed could hike rates right into a recession that it itself causes...

Which makes sense: recall BofA's chart from earlier this year which showed that every tightening episode usually ends with a financial "event"...

Overnight, it was Goldman' turn to scare its clients with an extended analysis of when and under what conditions the next recession could strike, and as Hatzius and co write in "s economic team write in The Next Recession: Lessons from History, "with the current expansion already the third longest in US history, investors have begun to look ahead to the next recession. We ask how likely the next recession is to come soon and where it is likely to come from. While some frequent contributors to postwar recessions such as oil shocks look less threatening today, others such as declines in financial asset prices, sentiment-driven investment swings, and too-rapid tightening of monetary policy retain their relevance as recession risks. Combining lessons from this historical investigation, our cross-country recession model, and both our own research and academic research on US-specific leading indicators, we then develop a recession risk dashboard. The dashboard reinforces our view that recession risk remains only moderate.
While the answer to the first part remains elusive, and to Goldman it is still relatively low, the answer for the second part is clear: in the post WW2, virtually every recession (and depression) was caused by the Fed. Goldman starts with a historical overview of the causes of recessions. Looking at 33 US recessions since the 1850s, it finds that while many pre-WW2 recessions originated in the financial sector, most post-WW2 recessions were caused by monetary policy tightening and oil shocks and, and sentiment-driven swings in borrowing and investment led to recessions in both eras. A similar IMF study of the key contributors to 122 advanced economy recessions shows that even before 2008, financial crises were a fairly common source of modern recessions too. Here is what Goldman found:
*) A Historical Look at the Causes of Recessions; A starting point in understanding past recessions is to simply look at the contributions of the various components of GDP during prior downturns. Exhibit 1 shows the cumulative growth contributions over all quarters included in the NBER-defined recessions since the introduction of the national accounts. The main lesson is a familiar one: while consumption has declined more often than not in recessions, investment spending, including inventories, business fixed investment, and housing, has accounted for the largest contributions to declines in output. This same stylized fact holds for a broad international sample of advanced economy recession.
Exhibit 1: Investment Usually Dominates Output Declines During Recessions...

We turn next to classifying the most important causes of prior downturns to create a taxonomy of recessions. To expand our sample, we study all prior US recessions as defined by an NBER database that includes 33 business cycles back to 1854, shown in Exhibit 2. Of the 33, 21 occurred before World War 2, when the US economy was much more frequently in recession, and 12 have occurred since.
Exhibit 2: The US Economy Has Spent Much Less Time in Recession Since WW2...

Relying on several historical sources, we identify the key contributors to each recession.
Exhibit 3: summarizes our findings. We draw four lessons.
1) the most frequent contributors to modern recessions have been monetary policy tightening and oil price shocks, with the former in response to inflation that often gained momentum from the latter.
2) sentiment-driven swings between over-borrowing and heavy investment followed by deleveraging and investment cutbacks contributed to the two most recent recessions and also played a role in early recessions, especially during boom-and-bust cycles of railroad investment.
3) while the financial sector has not been the origin of as many modern US recessions, it was a very frequent source of early US recessions.
4) fiscal policy shocks have sparked US recessions, but only in the context of demobilizations from major wars.
Exhibit 3: Major Contributors to Early and Modern US Recessions...

# With all that in mind, what does Goldman's model say about probability of recession today? According to the bank's preferred tool for answering this question, its cross-country recession model shown in Exhibit 7, while recession risk has risen, primarily due to the decline in spare capacity in the US economy. recession risk remains only moderate at about 13% on a 1-year horizon (compared to an unconditional probability of 23% since 1980) and 24% on a 2-year horizon (compared to an unconditional probability of 34%).
Exhibit 7: US Recession Risk Has Risen, but Remains Only Moderate...

Of course, if Goldman is right, the current expansion, already the third longest, will surpass the 1961-1969 expansion as the second longest in history, and take aim at the 1991-2001, the last real economic cycle the US had before the Fed started inflating bubbles to "deal" with the consequences of previous burst bubbles.
# Goldman's conclusion: Both our cross-country recession model and our US recession risk dashboard suggest that near-term recession risk remains only moderate. But when the next recession does come, where will it come from? Our historical analysis offers three main lessons.
- First, the dominant cause of postwar US recessions, monetary policy tightening in response to high inflation often boosted by oil shocks, looks much less threatening in a world with well-anchored inflation expectations and shale-imposed limits on oil prices.
- Second, this does not mean that over-tightening is not a risk; tightening cycles in the late 1950s were quite tame, but nonetheless ended in recession.
- Third, the more timeless drivers of the business cycle, the sentiment-driven swings in both financial asset prices and borrowing and investment that are often attributed to “animal spirits”, retain their relevance as recession risks.
So while the Fed clearly has been the driver behind most modern recessions, the irony will be if the US economy is already contracting, as commercial loan data suggest, just as the Fed not only tightens but begins to shrink its balance sheet, a combination that would resut in such a massive expansion in the Fed's reserves (as QE4, 5 and so on are unleashed) some time in 2018, it will make everyone's head spin...

Things You're Not Being Told About The US War Against ISIS In Syria

It’s time to have a sane discussion regarding what is going on in Syria. Things have escalated exponentially over the past month or so, and they continue to escalate. The U.S. just shot down yet another Iranian-made drone within Syrian territory on Tuesday, even as authorities insist they “do not seek conflict with any party in Syria other than ISIS.” Col. Ryan Dillon, chief U.S. military spokesman in Baghdad, seemed to indicate that the coalition would avoid escalating the conflict following Russia’s warning that it will now treat American aircraft as potential targets. He stated: “As a result of recent encounters involving pro-Syrian regime and Russian forces, we have taken prudent measures to reposition aircraft over Syria so as to continue targeting ISIS forces while ensuring the safety of our aircrews given known threats in the battlespace.” So what is really going on in Syria? Is the U.S. actually seeking an all-out confrontation with Syria, Iran, and Russia?
# The first thing to note is that a policy switch under the Trump administration has seen the U.S. rely heavily on Kurdish fighters on the ground as opposed to the radical Gulf-state backed Islamist rebels, which the U.S. and its allies had been using in their proxy war for over half a decade. Even the Obama administration designated the Kurds the most effective fighting force against ISIS and partnered with them from time to time, but Turkey’s decision to directly strike these fighters complicates the matter to this day. Further muddling the situation is the fact that the U.S. wants the Kurds to claim key Syrian cities after ISIS is defeated, including Raqqa. However, the reason this complicates matters is that, as Joshua Landis, head of the Middle Eastern Studies Center at the University of Oklahoma explains, the Kurds have “no money” nor do they have an air force. “They’ll be entirely dependent on the US Air Force from now to eternity, and the United States will be stuck in a quagmire, defending a new Kurdish state that America had partnered with to defeat ISIL,” Landis said, as reported by Quartz.
# So what has the U.S. proposed as a solution to this perpetual dilemma? To put it simply, the U.S. is not only training the so-called Syrian Democratic Forces (SDF) to retain the vitally strategic border crossing area of al-Tanf, which, if owned and operated by the Syrian government, could link Iran to Syria, Iraq, and right through to Hezbollah in Lebanon (incidentally, al-Tanf is the latest instance of the U.S. shooting down an Iranian-made drone took place). The U.S. is now also backing these Kurdish fighters to retake an area known as Deir ez-Zor. The Syrian government retains an isolated outpost at Deir ez-Zor, and the region is almost completely encircled by ISIS fighters. Just last week, a video emerged of convoys of ISIS fighters fleeing the war in Raqqa unscathed. Anti-Media speculated that these fighters were most likely headed towards Deir ez-Zor as they have done in the past, and this area is now widely regarded to be the scene of ISIS’ last stand in Syria.
The U.S. needs a strong ISIS presence in Deir ez-Zor to justify an offensive to retake the city, especially considering the fact that Syrian government troops are already present there. This is why the U.S. delivered airstrikes to stop government forces from repelling ISIS fighters in an air raid in September of last year that reportedly lasted well over an hour and killed over 60 government troops. Deir ez-Zor is immensely important because it is home to Syria’s largest oil fields. As Quartz explains, according to Landis, America’s strategy is “for the Kurdish forces to take Deir al-Zour, the major regional city and the hub for its oil fields. That way, the Kurds would be able to afford to buy airplanes from the US, rather than require Washington to give them for free.” As Iranian-backed militiamen, supported by Iranian-made drones, amass upon a U.S. training base in al-Tanf, it is becoming increasingly clear that the Syrian government and its allies will not want to cede strategic territory to the U.S. without a fight. At the very least, Iran intends to encircle al-Tanf and cut the U.S. off from the rest of Syria, rendering the base useless for America’s goals in the country. However, Deir ez-Zor is where things could potentially get more heated than they already are between the U.S. and the pro-Assad alliance in al-Tanf and Raqqa. Russia, a staunch ally of Iran and Syria, is already bombing the areas around Deir ez-Zor in full preparation for this battle.
According to the Independent, Russia just claimed it killed around 180 ISIS militants and two prominent commanders, Abu Omar al-Belijiki and Abu Yassin al-Masri, very close to ISIS’ stronghold in Deir ez-Zor. Iran launched a mid-range ballistic missile attack on a position in Deir ez-Zor over the weekend, as well. According to Military Times, Iranian officials said the purpose of the strike was to send a message to the United States and Saudi Arabia and have warned of more strikes to come, with former Guard chief Gen. Mohsen Rezai, an Iranian politician, stating “the bigger slap is yet to come.” Landis believes these recent escalations only mark a “gnashing of teeth and growling” between the Russians and the Americans and that both powers are merely working out where the new boundaries will fall between American-backed forces and Syrian government forces. But there is a crucial difference between the Russian-led campaigns and the American-led campaigns within Syria: Russia was invited by the Syrian government and is not clearly not attempting to invade Syria in the traditional sense of the word, as they are relying on local troops to retake the territory that still belongs to the Syrian government. In contrast, the United States has invaded Syrian territory without authorization from Congress or the international community and has partnered with incredibly controversial militias on the ground to claim Syrian territory, further partitioning the country and over-complicating an already convoluted battle arena. 
What will happen if Syria decides that the oil-hub area of Deir ez-Zor is too important to allow the U.S-backed forces to take it away from them? The fact that Russia and Iran are already bombing this area speaks volumes as to its strategic value, and it seems increasingly unlikely that the pro-Assad alliance will give up the location freely. Further, having complete control of Deir ez-Zor without opening up the al-Tanf border to Syrian government control would make the liberation of Deir ez-Zor almost meaningless to Syria and its allies, as Deir ez-Zor would be cut off from the rest of Syria. The two offensives go hand in hand, and this is exactly why we see the war escalating rapidly on these two fronts. Not to mention, Syrian Member of Parliament Ammar al-Asad reportedly just told Russian state-owned Sputnik that the Syrian army will respond to America’s provocative actions by conducting “massive strikes” on positions held by American-backed militants.
# An optimist would view the recent developments in the humanitarian disaster that is the so-called Syrian revolution with the hope that the U.S, Iran, and Russia are merely muscle-flexing inside Syria in an attempt to control as much of the country as realistically possible following the downfall of ISIS, and will eventually settle amicably on a drawing of Syria’s new boundaries.
# A pessimist might not be so hopeful, as Iran and China held naval drills in the Strait of Hormuz just days after Secretary of State Rex Tillerson admitted the U.S. is officially targeting Iran for a regime change operation....

Albert Edwards: "Citizens Will Soon Turn Their Rage Towards Central Bankers"

During the populist revolt of 2016, which first led to the "shocking outcomes" of Brexit and then Trump, we cautioned that these phenomena were merely the "silent majority" of the developed world's middle class expressing their anger and frustration with a world that has left them - and their real disposable income - behind, while rewarding the Top 1% through policies that have led to a relentless and record ascent in global asset prices, largely the purview of the world's wealthiest. More recently, we also noted that it was only a matter of time before this latest "revolt" fizzled, as the realization that changing one politician with another would achieve nothing, and anger shifted to the real catalyst behind growing global inequality (and anger): central banks. In his latest note today, Albert Edwards picks up on this theme to write "Theft redux: the citizens will soon turn their rage towards Central Bankers." The core of his argument is familiar:
# While politics in the West reels from a decade of economic crisis and stagnation, asset prices continue to surge on the back of continued rapid growth in G3 QE. In an age of “radical uncertainty” how long will it be before angry citizens tire of blaming an impotent political system for their ills and turn on the main culprits for their poverty, unelected and virtually unaccountable central bankers? I expect central bank independence will be (and should be) the next casualty of the current political turmoil. That's just the beginning from Edwards, who appears to be getting increasingly angrier and more frustrated with a market that makes increasingly less sense: his fiery sermon continue with the following preview of the "inevitable catastrophe that lies ahead." Evidence of the impact of monetary madness on assets prices is all around if we care to look. I read that a parking spot in Hong Kong was just sold for record HK$5.18 million ($664,200). What about the 3.5x oversubscribed 100 year Argentine government bond? Sure, everything has a market clearing price, even one of the most regular defaulters in history.
But what concerned me most about the story was it was demand from investors ("reverse enquires") that prompted the issue. Is it just me or can I hear echoes of the mechanics of the CDO crisis? But no one cares when the party is still raging and investors, drunk with the liquor of loose money, are blind to the inevitable catastrophe that lies ahead. There is a lot of anger out on the streets, as demonstrated most visibly in recent elections. Even in France where investors feel comforted that a "moderate" has gained (absolute?) power, it is salutary to remember that the two establishment parties have just been decimated by a man who had never before stood for public office! This is perhaps even more radical than Trump's anti-establishment victory under the Republican umbrella. The global political situation is incredibly fluid and unpredictable. While a furious electorate has turned its pent up anger on the establishment political parties, the target for their rage is misguided. I am not completely alone in thinking it is the unelected and virtually unaccountable central bankers who are primarily responsible for the poverty of working people and who will be ultimately held to account in the next crisis...

In the immediate aftermath of the 2008 financial crisis, politicians skilfully diverted the publics' anger away from themselves by scapegoating "the bankers". After another eight years of economic stagnation that excuse no longer is tenable and politicians themselves are now taking the flak. But citizen revolutionaries will, I think, soon turn their fire on those who I believe are truly responsible for their plight. We explained back in January 2010 in a note entitled "Theft! Were the US & UK central banks complicit in robbing the middle classes?", how central banks in the US and UK had deliberately stocked up massive housing bubbles prior to the Global Financial Crisis (GFC) to disguise the rapid rise in income inequality in both countries. Rapidly rising house prices allowed the middle classes to maintain the illusion they were getting richer so that despite stagnant real incomes they could continue to consume by extracting housing equity. We know how that party ended!

After the GFC central bankers have collectively spent the last decade stepping up the pace of money printing to new extremes in an attempt to drown the global economy in liquidity, while couching their actions in plausible theories such as "secular stagnation". There is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights. Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes. Edwards continues, justifying why it has taken his 2010 prediction so long to play out, and predicting that the end result is nothing short of a full systemic break down: My dire prognostications back in January 2010 proved premature (as usual). It has taken another seven years of economic stagnation and falling living standards of working people, together with the sight of the rich getting richer as a result of central bank QE polices, for the patience of ordinary working people to snap - most visibly in the US and UK elections. That rage has not diminished and, as Bill Gross predicted, the system is in the process of breaking down. Amidst the current turmoil in the US and UK there is a huge sigh of establishment relief in the eurozone in the wake of the defeat of the far right in recent French and Dutch elections. The establishment hope the tide towards radicalism has turned - at least in continental Europe. That belief is wrong in my view and the current revolution will devour more political and establishment victims before it's over, most notably the central bankers themselves.
# Ultimately, it's all about wealth inequality however, and here it is central bankers again who are at fault: Anecdotally we all know wealth inequality has risen due to central bank QE and free money. Although we can see and feel it, it is reassuring to see firm evidence. This week the UK Resolution Foundation published a damning report into rising wealth inequality in the UK (this UK think tank is led by David Willetts, who during his political career was known as one of the most intellectual of MPs - his nickname being "two brains"). The report found the key driver for rising inequality was the collapse in UK home ownership since the 2008 financial crisis to a 30 year low. Like so many economic commentators and think tanks, the Resolution Foundation doesn't seem to want to pin the proverbial tail on the donkey, for it is not the lower homeownership that is the real problem per se but the fact that QE is driving up asset prices that households no longer own! (In addition, zero interest rates have driven up buyto- let investment demand for housing hence reducing the supply of housing for owner occupation). While UK home ownership is now at a 30-year low (link), the US too has seen a similar shocking plunge in home ownership (see chart below). At least in the run-up to the 2008 GFC, owner occupation in the UK and US surged along with house prices and so working people had the illusion they were getting richer along with the rest of the population. Now there is no such illusion for what has been dubbed "generation rent". In the US, to add insult to injury, rent inflation has rapidly outstripped CPI since the GFC...

If things are bad in the UK, ?generation rent? has been squeezed far more badly by soaring rents in the US (see chart below). No wonder the JAMs (just about managing) are in revolt...

There is much more, bust the gist is clear: it is only a matter of time before the general population realizes that it is not politics, but monetary policy. But how long? The simple answer: as long as stocks keep rising, all shalle be well: "no one cares when the party is still raging and investors, drunk with the liquor of loose money, are blind to the inevitable catastrophe that lies ahead." Which is also why the Fed will do everything in its power to keep the market ascent, and its existence, continue for as long as possible. And then, as a last diversion, they will blame Trump....

Open Letter To The Fed's William Dudley

Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your excuses for further rate hikes to prevent crashing unemployment and rising inflation stunk of rotten eggs.
# Crashing Unemployment; Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the going concern. Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around. What to make of it? For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit. The once impossible is now commonplace. For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality. The imminent danger of crashing unemployment will give way to the impossibility of negative unemployment. Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model. Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication. In short, Fed communication has regressed from backassward to assbackward. During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations. Through smiling teeth Greenspan would talk out of the side of his neck. He’d jawbone down inflation expectations while cutting rates. Certainly, a lot has changed over the years. So, too, the Fed seems to have reversed its jawboning tactic. By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.
# Congratulations and Thank You! History will prove this policy tactic to be a complete fiasco. But at least the Fed is consistent in one respect. The Fed has a consistent record of getting everything dead wrong. If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.” Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway. But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one? Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that “Stock prices have reached what looks like a permanently high plateau.” By the month’s end the stock market had crashed and crashed again, never to return to its prior highs in Fisher’s lifetime. To be fair, Fisher wasn’t a Fed man. However, he was a dyed-in-the-wool central planner cut from the same cloth. Moreover, it is bloopers like these from the supposed experts like Bernanke and Fisher that make life so amiably pleasurable. Do you agree? Hence, Mr. Dudley, words of congratulations are in order! Because on Monday you added what’ll most definitely be a sidesplitting quote to the annals of economic banter: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be,” said William Dudley, June 19, 2017 Thank you, sir, for your shrewd insights. They’ll offer up countless laughs through the many dreary years ahead.
# Too Little, Too Late; When it comes down to it, your excuses for raising rates are not about some unfounded fear of a crashing unemployment rate. Nor are they about controlling price inflation. These are mere cover for past mistakes. The esteemed James Rickards, in an article titled The Fed’s Road Ahead, recently boiled present Fed policy down to its very core: “Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago. They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months. “Economic research shows that in a recession, they [the Fed] have to cut interest rates 300 basis points or more, or 3 percent, to lift the economy out of recession. I’m not saying we are in a recession now, although we’re probably close. “But if a recession arrives a few months or even a year from now, how is the Fed going to cut rates 3 percent if they’re only at 1.25 percent? “The answer is, they can’t. “So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3 percent, before the next recession, so they have room to start cutting again. In other words, they are raising rates so they can cut them.” Unfortunately, Mr. Dudley, the Fed miscalculated. Efforts to now raise rates will be too little, too late. To be clear, there ain’t a snowball’s chance in hell the Fed will get the federal funds rate up to 3 percent before the next recession. You likely won’t even get it up to 2 percent.
Nonetheless, you should stay the course. If you’re gonna raise rates, then raise rates. Don’t cut them. Raise them. Then raise them some more. Crash stocks. Crash bonds. Crash real estate. Crush asset prices. Purge the debt and speculative excesses from financial markets. Let marginal businesses go broke. Let too big to fail banks, fail. You can even consult with Dick “The Gorilla” Fuld, if needed. Then let nature do its work. In essence, bring the paper money experiment to a close and shutter the doors of the Federal Reserve. No doubt, the economy and millions of people will suffer a painful multi-decade restructuring. But what choice is there, really? Let’s face it. The Fed can’t hold the financial order together much longer anyway. Why pretend you can with utter nonsense like crashing unemployment? It’s insulting. Your credibility’s shot. Better to get on with it now, before it’s forced upon you....

Paul Craig Roberts Warns "The World Is Going Down With Trump"

On June 21 the editorial board of the Washington Post, long a propaganda instrument believed to be in cahoots with the CIA and the deep state, called for more sanctions and more pressure on Russia. One second’s thought is sufficient to realize how bad this advice is. The orchestrated demonization of Russia and its president began in the late summer of 2013 when the British Parliament and Russian diplomacy blocked the neoconned Obama regime’s planned invasion of Syria. An example had to be made of Russia before other countries began standing up to Washington. While the Russians were focused on the Sochi Olympic Games, Washington staged a coup in Ukraine, replacing the elected democratic government with a gang of Banderite neo-nazi thugs whose forebears fought for Hitler in World War II. Washington claimed it had brought democracy to Ukraine by putting neo-nazi thugs in control of the government.
Washington’s thugs immediately began violent attacks on the Russian population in Ukraine. Soviet war memorials were destroyed. The Russian language was declared banned from official use. Instantly, separatist movements began in the Russian parts of Ukraine that had been administratively attached to Ukraine by Soviet leaders. Crimea, a Russian province since the 1700s, voted overwhelmingly to seperate from Ukraine and requested to be reunited with Russia. The same occurred in the Luhansk and Donetsk regions. These independent actions were misrepresented by Washington and the presstitutes who whore for Washington as a “Russian invasion.” Despite all facts to the contrary, this misrepresentation continues today. In US foreign policy, facts are not part of the analysis. The most important fact that is overlooked by the Washington Post and the Russophobic members of the US government is that it is an act of insanity to call for more punishment and more pressure on a country with a powerful military and strategic nuclear capability whose military high command and government have already concluded that Washington is preparing a surprise nuclear attack.
Are the Washington Post editors trying to bring on nuclear armageddon? If there was any intelligence present in the Washington Post, the newspaper would be urging that President Trump immediately call President Putin with reassurances and arrange the necessary meetings to defuse the situation. Instead the utterly stupid editors urge actions that can only raise the level of tension. It should be obvious even to the Washington Post morons that Russia is not going to sit there, shaking in its boots, and wait for Washington’s attack. Putin has issued many warnings about the West’s rising threat to Russian security. He has said that Russia “will never again fight a war on its own territory.” He has said that the lesson he has learned is that “if a fight is unavoidable, strike first.” He has also said that the fact that no one hears his warnings makes the situation even more dangerous. What explains the deafness of the West? The answer is arrogance and hubris. As the presstitute media is incapable of reason, I will do their job for them.
I call for an immediate face-to-face meeting between Trump and Putin at Reykjavik. Cold War II, begun by Clinton, George W. Bush, and Obama, must be ended now. So, where is President Trump? Why is the President of the United States unable to rise to the challenge? Why isn’t he the man Ronald Reagan was? Is it, as David Stockman says, that Trump is incapable of anything except tweeting? Why hasn’t President Trump long ago ordered all intercepts of Russian chatter gathered, declassified, and made public? Why hasn’t Trump launched a criminal prosecution against John Brennan, Susan Rice, Comey, and the rest of the hit squad that is trying to destroy him? Why has Trump disarmed himself with an administration chosen by Russiaphobes and Israel? As David Stockman writes, Trump “is up against a Deep State/Dem/Neocon/mainstream media prosecution” and “has no chance of survival short of an aggressive offensive” against those working to destroy him. But there is no Trump offensive, “because the man is clueless about what he is doing in the White House and is being advised by a cacophonous coterie of amateurs and nincompoops. So he has no action plan except to impulsively reach for his Twitter account.” Our president twitters while he and Earth itself are pushed toward destruction....

Guido Hulsmann; Four Reasons Central Banks Are Wrong To Fight Deflation

The word “deflation” can be defined in various ways. According to the most widely accepted definition today, deflation is a sustained decrease of the price level. Older authors have often used the expression “deflation” to denote a decreasing money supply, and some contemporary authors use it to characterize a decrease of the inflation rate. All of these definitions are acceptable, depending on the purpose of the analysis. None of them, however, lends itself to justifying an artificial increase of the money supply. The harmful character of deflation is today one of the sacred dogmas of monetary policy. The champions of the fight against deflation usually present six arguments to make their case. One, in their eyes it is a matter of historical experience that deflation has negative repercussions on aggregate production and, therefore, on the standard of living. To explain this presumed historical record, they hold, two, that deflation incites the market participants to postpone buying because they speculate on ever lower prices.
Furthermore, they consider, three, that a declining price level makes it more difficult to service debts contracted at a higher price level in the past. These difficulties threaten to entail, four, a crisis within the banking industry and thus a dramatic curtailment of credit. Five, they claim that deflation in conjunction with “sticky prices” results in unemployment. And finally, six, they consider that deflation might reduce nominal interest rates to such an extent that a monetary policy of “cheap money,” to stimulate employment and production, would no longer be possible, because the interest rate cannot be decreased below zero. However, theoretical and empirical evidence substantiating these claims is either weak or lacking altogether.
1) In historical fact, deflation has had no clear negative impact on aggregate production. Long-term decreases of the price level did not systematically correlate with lower growth rates than those that prevailed in comparable periods and/or countries with increasing price levels. Even if we focus on deflationary shocks emanating from the financial system, empirical evidence does not seem to warrant the general claim that deflation impairs long-run growth.
2) It is true that unexpectedly strong deflation can incite people to postpone purchase decisions. However, this does not by any sort of necessity slow down aggregate production. Notice that, in the presence of deflationary tendencies, purchase decisions in general, and consumption in particular, does not come to a halt. For one thing, human beings act under the “constraint of the stomach.” Even the most neurotic misers, who cherish saving a penny above anything else, must make a minimum of purchases just to survive the next day. And all others, that is, the great majority of the population, will by and large buy just as many consumers’ goods as they would have bought in a nondeflationary environment. Even though they expect prices to decline ever further, they will buy goods and services at some point because they prefer enjoying these goods and services sooner rather than later (economists call this “time preference”). In actual fact, then, consumption will slow down only marginally in a deflationary environment. And this marginal reduction of consumer spending, far from impairing aggregate production, will rather tend to increase it. The simple fact is that all resources that are not used for consumption are saved; that is, they are available for investment and thus help to extend production in those areas that previously were not profitable enough to warrant investment.
3) It is correct that deflation, especially unanticipated deflation, makes it more difficult to service debts contracted at a higher price level in the past. In the case of a massive deflation shock, widespread bankruptcy might result. Such consequences are certainly deplorable from the standpoint of the individual entrepreneurs and capitalists who own the firms, factories, and other productive assets when the deflationary shock hits. From the aggregate (social) point of view, it does not matter who controls the existing resources. What matters from this overall point of view is that resources remain intact and be used. The important point is that deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.
4) It is true that deflation more or less directly threatens the banking industry, because deflation makes it more difficult for bank customers to repay their debts and because widespread business failures are likely to have a direct negative impact on the liquidity of banks. For the same reasons we just discussed, while this might be devastating for some banks, it is not so for society as a whole. The crucial point is that bank credit does not create resources; it channels existing resources into other businesses than those which would have used them if these credits had not existed. A curtailment of bank credit does not destroy any resources; it simply entails a different employment of human beings and of the available land, factories, streets, and so on.
# In the light of the preceding considerations it appears that the problems entailed by deflation are much less formidable than they are in the opinion of present-day monetary authorities. Deflation certainly has much disruptive potential. However it mainly threatens institutions that are responsible for inflationary increases of the money supply. It reduces the wealth of fractional-reserve banks, and their customers-debt-ridden governments, entrepreneurs, and consumers. But as we have argued, such destruction liberates the underlying physical resources for new employment. The destruction entailed by deflation is therefore often “creative destruction” in the Schumpeterian sense....

David Stockman Warns Of "Huge Air Pocket Between Wall Street Fantasy And Economic Reality"

David Stockman joined Boom Bust to discuss the massive storm that is building and about to slam into Wall Street. During the discussion Stockman reveals what he believes is ahead for the stocks in the market and the economy. The interview began with the Boom Bust host asking the acclaimed author about his concern surrounding a government shutdown. David Stockman began “we’re in the midst of the biggest political train wreck in modern history. There will be no governance in Washington. There will be no tax bill, stimulus or infrastructure.”
* “We’re heading for an expiration of the debt ceiling and running out of cash that will create an enormous crisis by August or September. They’re not going to be able to cope with it.”
* “I think the odds by the day are increasing that we’re going to have a government shutdown. Expect the mother of all debt ceiling crisis. The market is utterly unprepared and it really is the orange swan that is about ready to take Wall Street by surprise.”
When prompted about the potential shocks to the S&P 500 and the threats stocks face in a severe decline Stockman continued to offer his sobering analysis. The former Reagan cabinet member noted,
* “The market today is trading at 25 times S&P 500 earnings which were $100 a share in the period ending in March. That represents a tiny growth from $85 a share back in June 2007, ten years ago. We’re about 1.2% over the last decade.”
* “Why would you pay 25 times earnings for one percent growth after a tepid expansion of 100 months that’s near the end of its “sell by date?”
* “We’re going to have a recession, likely sooner than later, and the market is dramatically overpriced. I would say sixteen times earnings given all the headwinds in the world and chaos in Washington.”
* “The Fed is now finally going to begin to shrink its balance sheet and not just a little bit but by $2 trillion over the next two or three years. With all of that staring us in the face, the market is barely worth 1,600. There is a huge air pocket between the huge fantasy that prevails on Wall Street and the reality of the economic world”...

David Stockman Stocks Storm

# Deep State and the Stocks on Wall Street; When asked whether he still felt nothing would pass in Washington before 2018 Stockman stood firm. “I am sure they would like to pass something. They don’t have the votes. They don’t have the consensus.”
# David Stockman Stocks Storm; “Here we are and June is almost over. They haven’t even passed in the Senate yet a bill to repeal and replace Obamacare. If they do, it is totally incompatible with the House. They can’t get a Conference report before Labor Day, if ever.” Speaking on the budgetary concerns awakening the halls of Washington, Stockman leveled, “They haven’t even started on the budget resolution for 2018. Without a budget resolution, there’s no tax bill because you need reconciliation to pass any tax bill at all. The reason I saw a government shutdown is because the debt ceiling is now frozen at $19.8 trillion. They have $150 billion in cash. It is draining away by $2-$3 billion a day. They will be out of cash and there is no majority in the House or the Senate, for that matter, to pass a clean debt ceiling bill.” Stockman left with a final warning for stocks noting that, “Without a clean bill, you’re having an enormous fight over what’s that quid-pro-quo to raise the debt ceiling. That will not end easily. It is likely to end in a complete breakdown like we saw in 2011”....

Don Quijones; Contagion From The Two Friday-Night Bank Collapses In Italy?

This is how desperate the Italian Banking Crisis has become. When things get serious in the EU, laws get bent and loopholes get exploited. That is what is happening right now in Italy, where the banking crisis has reached tipping point. The ECB, together with the Italian government, have just this weekend to resolve Banca Popolare di Vicenza and Veneto Banca, two zombie banks that the ECB, on Friday night, ordered to be liquidated. Unlike Monte dei Pachi di Siena, they will not be bailed out primarily with public funds. Senior bondholders and depositors will be protected while shareholders and subordinate bondholders will lose their shirts. However, as the German daily Welt points out, subordinate bondholders at Monte dei Pachi di Siena had billions of euros at stake, much of it owned by its own retail customers who’d been sold these bonds instead of savings products such as CDs. So for political reasons, they were bailed out. Junior bonds play a smaller role at the two Veneto-based banks.
According to the Welt, the two banks combined have €1.33 billion (at face value) in junior bonds outstanding. They last traded between 1 cent and 3 cents on the euro. So worthless. Only about €100 million were sold to their own customers, not enough to cause a political ruckus in Italy. So they will be crushed. The good assets and the liabilities, such as the deposits, will be transferred to a competing bank. According to a rescue plan apparently drawn up by investment bank Rothschild that surfaced a few days ago, Intesa Sao Paolo, Italy’s second largest bank, would get these good assets and the deposits (liabilities), for the token sum of €1, while all the toxic assets (non-performing loans) would be shuffled off to a state-owned “bad bank”, and thus, the taxpayer. According to the Italian daily Il Sole 24 Ore, the bad bank would be left holding over €20 billion of festering assets. “Intesa gets a free gift, the state takes on all the bad stuff and the taxpayer pays,” said at the time Renato Brunetta, parliamentary leader for former prime minister Silvio Berlusconi’s Forza Italia party. It is testament to just how desperate the situation has become in Italy’s banking crisis. The country’s largest lender, Unicredit, is in no position to help out: it had to raise €13 billion of new capital earlier this year just to keep itself afloat. Whether the deal with Intesa is still possible after the ECB’s decision to liquidate the banks, and what form this deal, if any, will take, and how much the taxpayer will have to fork over, and how to sugarcoat this in the most palatable terms is what the Italian government is currently trying to hammer out in its emergency meeting.
# So how did it get this far? Italy’s government has tried just about everything to save its banks. First it set up a bad bank called Atlante, but the Luxembourg-based fund was unable to raise enough funds to make any real difference. So the government set up another one, Atlante II. That, too, ran out of money. In the absence of anything resembling a functioning market for deteriorated credit or a bad bank with enough funds to make a real difference, Italy’s banks were unable to offload their estimated €360 billion of non-performing loans, many of them with very weak, if any remaining, collateral underpinning them. Yet on average, they are marked at around 50 cents on the euro. In addition, Italy’s bankruptcy court system makes collecting on collateral very difficult, and it takes many years, as funds have found out that bought non-performing loans. Hence the refusal by market players to buy non-performing loans now. The next partial solution to Italy’s banking problem involved trying to save its most troubled lender, Monte dei Paschi di Siena. To stave off collapse, it hired JP Morgan Chase and Italian investment bank Mediobanca to help raise €5 billion of private capital. But that didn’t work either, with investors refusing to play along having already been burnt twice in two previous capital expansions. In December last year, JP Morgan Chase gave up on any hopes of raising new cash from the private sector. The Italian government responded by announcing it would recapitalize the banks with €20 billion of public funds.
There were two problems with this plan: First, €20 billion was never going to be enough to save the banking system; second, bailing out the banks, without at least bailing in some of their creditors, was no longer allowed by EU law. But when things get serious in the EU, laws get bent. At the beginning of June, the European Commission gave MPS a provisional green light to begin offloading €26 billion of bad loans onto the Atlante II fund. The non-performing loans would be securitized and transferred to an ad hoc vehicle at a value close to 20% of their face value. The assets would be divvied up between the Atlante rescue fund and interested private investors. If the transaction is completed by June 28, €8.8 billion of public funds will be released to plug MPS’ gaping capital shortfall. The European Commission also agreed that all investors who had bought MPS junior bonds would be eligible for a taxpayer funded refund But two of the private investors, hedge funds Fortress and Elliott, walked away from the negotiating table in “a dispute over the sales terms,” which likely means that even an 80% mark down on MPS’ non-performing loans may not be enough to attract private investors. If they don’t come back, Monte dei Paschi will have only one willing investor to turn to: Atlante.
In other words, back to square one. The hedge funds’ withdrawal prompted fears that it could jeopardize not only the government’s efforts to save Monte dei Paschi but also Banca Popolare di Vicenza and Veneto Banca. That has now happened. Contagion at work. And the risk of contagion is still huge. There are dozens of small or mid-size institutions in similar shape as Banca Popolare di Vicenza and Veneto Banca, while the problem of what to do with MPS is still not resolved. Taxpayers are already on the hook for a banking crisis that was caused by years of reckless and, in some cases, criminal mismanagement. Now the ECB’s decision to wind down two banks in an orderly manner may end up triggering the disorderly failure of others. And if that pick up momentum, all bets would be off. ECB Shuts Down Veneto Banca and Banca Popolare di Vicenza....

Saudi Arabia, UAE Leak 13 Demands To End Qatar Crisis

On June 5, four Arab countries, Saudi Arabia, United Arab Emirates (UAE), Bahrain and Egypt, imposed a land, sea and air blockade on Qatar. Other Arab countries followed suit. Many international politicians have said they were "mystified" by what the Arab countries were demanding of Qatar to end the crisis. The US asked Saudi Arabia to produce a list of demands that were "reasonable and actionable." It's known that Saudi Arabia and UAE had heavily criticized Qatar for its strong support of the Muslim Brotherhood, considered a terrorist organization by America and some European nations, for its continuing trade and diplomatic relations with Iran, with whom Saudi Arabia and some other Arab countries have broken diplomatic relations entirely, and for its use of al-Jazeera to propagate a message of support for the Muslim Brotherhood, and criticism of the leaders of other Arab states. However, the detailed demands were not known.
On Friday, a list of 13 demands appeared in the media. It's not clear where the list came from. The Saudis claim that the list was supposed to remain secret, so that negotiations would be effective. The Saudis claim that Qatar leaked the list in order to sabotage the negotiations. Other reports claim that the list came from Kuwait, which is acting as a mediator. Here are the demands, as leaked to AP:
1. Curb diplomatic ties with Iran and close its diplomatic missions there. Expel members of Iran’s Revolutionary Guard from Qatar and cut off any joint military cooperation with Iran. Only trade and commerce with Iran that complies with U.S. and international sanctions will be permitted.
2. Sever all ties to “terrorist organizations,” specifically the Muslim Brotherhood, the Islamic State group, al-Qaida, and Lebanon’s Hezbollah. Formally declare those entities as terrorist groups.
3. Shut down Al-Jazeera and its affiliate stations.
4. Shut down news outlets that Qatar funds, directly and indirectly, including Arabi21, Rassd, Al Araby Al-Jadeed and Middle East Eye.
5. Immediately terminate the Turkish military presence currently in Qatar and end any joint military cooperation with Turkey inside of Qatar.
6. Stop all means of funding for individuals, groups or organizations that have been designated as terrorists by Saudi Arabia, the UAE, Egypt, Bahrain, the United States and other countries.
7. Hand over “terrorist figures” and wanted individuals from Saudi Arabia, the UAE, Egypt and Bahrain to their countries of origin. Freeze their assets, and provide any desired information about their residency, movements and finances.
8. End interference in sovereign countries’ internal affairs. Stop granting citizenship to wanted nationals from Saudi Arabia, the UAE, Egypt and Bahrain. Revoke Qatari citizenship for existing nationals where such citizenship violates those countries’ laws.
9. Stop all contacts with the political opposition in Saudi Arabia, the UAE, Egypt and Bahrain. Hand over all files detailing Qatar’s prior contacts with and support for those opposition groups.
10. Pay reparations and compensation for loss of life and other, financial losses caused by Qatar’s policies in recent years. The sum will be determined in coordination with Qatar.
11. Align itself with the other Gulf and Arab countries militarily, politically, socially and economically, as well as on economic matters, in line with an agreement reached with Saudi Arabia in 2014.
12. Agree to all the demands within 10 days of it being submitted to Qatar, or the list becomes invalid. The document doesn’t specify what the countries will do if Qatar refuses to comply.
13. Consent to monthly audits for the first year after agreeing to the demands, then once per quarter during the second year. For the following 10 years, Qatar would be monitored annually for compliance.
Many analysts have said that these demands are not "reasonable and actionable," and that in fact the demands are so drastic that the list appears to have been designed to be rejected. Atlantic
# UAE threatens 'parting of the ways' unless Qatar meets 13 demands. According to reports from Qatar, the land, sea and air blockade has little effect on the daily lives of the citizens. Although Qatar imports 90% of its food, and formerly imported most of it from Saudi Arabia and UAE, the grocery store shelves are fully stocked, with supplies coming in from Iran and Turkey. According to one reporter, the main difference is that there are more Turkish dairy products, "which have proven to be higher quality and less expensive" than previous products. To all appearances, the blockade has been a failure. UAE's foreign affairs minister Anwar Gargash spoke out on Saturday to say that the purpose of the blockade was not to punish Qatar, but to change its behavior: "The alternative is not escalation, the alternative is parting of ways, because it is very difficult for us to maintain a collective grouping. This is not about regime change, this about behavioral change. The mediators’ ability to shuttle between the parties and try and reach a common ground has been compromised by this leak the leak of the 13 demands. Their success is very dependent on their ability to move but not in the public space." Gargash says that unless Qatar meets the demands, it will be expelled from the Gulf Cooperation Council (GCC). Beyond that, it's not clear what is being threatened by "parting of ways".... Doha News and The National (UAE)

zaterdag 24 juni 2017

US-China Agree On Need For "Complete, Irreversible" Korean Denuclearization

After terse public exchanges this week, each proclaiming the other is not working hard enough on 'solving' the Kim Jong Un 'situation', Chinese state media said on Saturday, reporting the results of high level talks in Washington this week, that China and the United States agreed that efforts to denuclearize the Korean Peninsula should be "complete, verifiable and irreversible." The week started off tense, with the President tweeting that "while I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!"
# Donald J. Trump ✔ @realDonaldTrump While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!
Which received a quick response from China. China has “played an important and constructive role” in seeking peace on the Korean peninsula, Foreign Ministry spokesman Geng Shuang told reporters in Beijing. China strictly implements United Nations Security Council resolutions and isn’t the crux of the North Korean issue, he said.
*) But now, as Reuters reports,US and China have agreed on a path forward after high-level talks. U.S. Secretary of State Rex Tillerson had said on Thursday that the United States pressed China to ramp up economic and political pressure on North Korea, during his meeting with top Chinese diplomats and defense chiefs. China's top diplomat Yang Jiechi and General Fang Fenghui met Tillerson and Defense Secretary Jim Mattis during the talks. Yang later met with U.S. President Donald Trump in the White House, where they also discussed North Korea, Xinhua reported. "Both sides reaffirm that they will strive for the complete, verifiable and irreversible denuclearization of the Korean Peninsula," a consensus document released by the official Xinhua news agency said. The consensus document also highlighted the need to fully and strictly hold to U.N. Security Council resolutions and push for dialogue and negotiation, which has long been China's position on the issue. Military-to-military exchanges should also be upgraded and mechanisms of notification established in order to cut the risks of "judgment errors" between the Chinese and U.S. militaries, the statement also said.
# Chinese state media described the talks, the first of their kind with the Trump administration, as an upgrade in dialogue mechanisms between China and the United States, following on from President Xi Jinping's meeting with Trump in Florida in April...

Citi; "Is The Equity Market Irrational Yet?"

One of the bigger mysteries plaguing sellside analysts in recent weeks has been the seemingly inexplicable divergence between the euphoric market which keeps making new all time highs, and the expectations that global central banks will soon start reducing their balance sheets. it is this divergence that prompted Citi's popular strategist Matt King to predict that he "expects markets to flounder as central banks try to exit"...

Prompted JPM's famous "quant wizard", Marko Kolanovic to warn that central bank balance sheet unwind will be the catalyst the leads to "market turmoil", to wit: Risky assets have been rallying for years, and market volatility is near record lows. Valuations are high, arguably supported by low interest rates and record pace of central bank monetary expansion. However, this may change in the near future. In the US rates are rising and monetary accommodation from the ECB and BOJ is expected to recede. Medium term, this is likely to lead to market turmoil, and a rise in volatility and tail risks...

Yet with the upcoming central bank "turn" so obvious, not only have risk assets failed to price it in, but stocks stubbornly refuse to drop even fractionally, as nobody wants to be the first to sell. Discussing this phenomenon, King recently mused that central banks have broken the market to such a degree it no longer can discount the very event that could be its doom: our models suggest markets are unlikely to react until the reductions in purchases are actually implemented. This is in stark contrast to the widespread presumption of immediate and full discounting. Asset prices have rarely been able to pre-empt future changes in the pace of purchases, even when these have been announced in advance, over the last seven years. We think this is unsurprising when one set of buyers is so completely distorting the market. This in turn has prompted a bigger debate: has the equity market become irrational? To Matt King the answer, at least in part, is yes. Meanwhile, in a separate discussion on Citi's equity side, strategist Jeremy Hale asked the very same question in the context of whether traders are now confined to an "irrational, end-cycle" market.
As Hale writes, "we watch corporate leverage trends closely to asses where we are in the credit cycle, which is often a good indicator for the economic cycle. We have recently been highlighting the slowdown in commercial bank credit/loan creation and also the Fed Flow of Funds report which suggested corporates’ borrowing via credit market instruments had slowed significantly. As a reminder, when both these series turn decisively, grey shading can often be seen in the charts, recessions follow...

This, of course, is something this website has also been closely following, and as we warned two weeks ago, at the current rate of loan contraction, the US economy may have just a few weeks left before it slides into outright recession. Hale continues: We would need a sustained uptick in borrowing in order to be convinced that the credit cycle hasn’t turned just yet and that time is ticking in our approach to endcycle. Sure, Trump could still come with the much needed adrenaline shot, the Citi base case is for fiscal stimulus to still emerge eventually, which might well buy us another year or two. But, if not, the case for overweight cash/ FI and underweight equities would rise. Which bring us to the key question: "Is The Equity Market Irrational Yet?"
# Here is the answer from Citi, or rather equity-City; we already know the answer from debt-Citi (and the subsequent warning). Another way of looking at this debate is via the question of whether the equity market is behaving irrationally, as it sometimes does towards the very end of the cycle. In trying to answer this, we looked at many intra-equity market correlation, dispersion and breadth measures for both price and earnings series. The bottom line is that we didn’t really find a holy grail to be used as the end-cycle indicator to follow. Conditions are just too different across history, and passive investment trends are influencing some of these calculations this time round. As one would expect, there never is an explicit answer to whether the market is "acting irrationally", especially since one man's irrational is another man's "perfectly rational" source of wealth effect. Still, Citi did share one particular chart of interest, which we present below: it shows the pair-wise correlation measure of the price action among S&P 500 sectors.
Here Citi finds that as the cycle matures, pair-wise correlations drop. When the cycle turns and stock markets drop, correlation picks up rapidly as investors “sell what they own”. In 2000/2001 and 2006/2007, this correlation indicator fell to around 20% before markets peaked out. As Hale concludes "we are currently at 30%. Perhaps not quite in the “danger zone” but definitely worth keeping an eye on"....

Ben Hunt; Janet Yellen Broke Up With You Last Week

Let’s review, shall we? Last fall, the Fed floated the trial balloon that they were thinking about ways to shrink their balance sheet. All very preliminary, of course, maybe years in the future. Then they started talking about doing this in 2018. Then they started talking about doing this maybe at the end of 2017. Two days ago, Yellen announced exactly how they intended to roll off trillions of dollars from the portfolio, and said that they would be starting “relatively soon”, which the market is taking to be September but could be as early as July. Now what has happened in the real world to accelerate the Fed’s tightening agenda, and more to the point, a specific form of tightening that impacts markets more directly than any sort of interest rate hike? Did some sort of inflationary or stimulative fiscal policy emerge from the Trump-cleared DC swamp? Umm, no. Was the real economy off to the races with sharp increases in CPI, consumer spending, and other measures of inflationary pressures? Umm, no. On the contrary, in fact. Two things and two things only have changed in the real world since last fall. 
1) Donald Trump, a man every Fed Governor dislikes and mistrusts, is in the White House. 
2) The job market has heated up to the point where it is, Yellen’s words, close to being unstable, and is, Yellen’s words, inevitably going to heat up still further. 
What has happened (and apologies for the ten dollar words) is that the Fed’s reaction function has flipped 180 degrees since the Trump election. Today the Fed is looking for excuses to tighten monetary policy, not excuses to weaken. So long as the unemployment rate is on the cusp of “instability”, that’s the only thing that really matters to the Fed (for reasons discussed below). Every other data point, including a market sell-off or a flat yield curve or a bad CPI number, data points that used to be front and center in Fed thinking, is now in the backseat. I’m not the only one saying this about the Fed’s reaction function. Far more influential Missionaries than me, people like Jeff Gundlach and Mohamed El-Erian, are saying the same thing. If you think that this Fed still has your back, Mr. Investor, the way they had your back in 2009 and 2010 and 2011 and 2012 and 2013 and 2014 and 2015 and 2016. 
Well, I think you are mistaken. I think Janet Yellen broke up with you this week. The Fed is tightening, and they’re not going to stop tightening just because the stock market goes down 5% or 10% or (maybe) even 20%. Bigger game than propping up market prices is afoot, namely consolidating a reputation as a prudent central banker before the inevitable Trump purge occurs, and consolidating that reputation means keeping the evilest of all evil genie, wage inflation, firmly stoppered inside its bottle. Let’s be clear, not all inflation is created equal. Financial asset price inflation? Woo-hoo! Well done, Mr. or Mrs. Central Banker. That’s what we’re talkin’ about! Price inflation in goods and services? Hmm, a mixed bag, really, particularly when input price inflation can’t be passed through and crimps corporate earnings. But we can change the way we measure all this stuff and create a narrative around the remaining inflation being a sign of robust growth and all that. So no real harm done, Mr. or Mrs. Central Banker. Wage inflation, though surely you must be joking, Mr. or Mrs. Central Banker. How does that possibly advance economic efficiency and social utility? I mean, even a first year grad student can prove with mathematical certainty that wage inflation only sparks a wage-price spiral where everyone is worse off. What’s wrong with you, don’t you believe in math? Don’t you believe in science? Maybe you’re just not as smart as we thought you were. But I’m sure you’ll be very happy as an emeritus professor at a large Midwestern state university. No, Ken Griffin is not interested in taking a meeting.
I know I sound like a raving Marxist to be saying this, that the Federal Reserve system and all its brethren systems were established specifically to serve the interests of Capital in its age-old battle with Labor. But yeah, that’s exactly what I’m saying. Propping up financial markets? That’s a nice-to-have. Preserving Capital as the apex predator in our social ecosystem? There’s your must-have. Whatever you think full employment might be in the modern age, 4.3% is at the finish line. And 4.1% or 3.9% or wherever the unemployment rate is going over the next few months is well past the finish line. You’re already seeing clear signs of labor shortages, particularly skilled labor shortages, in lots of geographies. Wage inflation is baked in, and modern populist politics make it impossible for corporations to play the usual well-we’re-off-to-Mexico-then card. Not that wages in Mexico or China are really that much better anymore, depending on what you’re doing, and there are inflationary wage pressures there, too. 
# Bottom line: I think that the Fed is going to do whatever it takes to prevent wage inflation from getting away from them, and shrinking the balance sheet is going to be a vital part of that tightening, maybe the most important part. Why? Because the Fed thinks it will push the yield curve higher as it lets its bonds and mortgage securities roll off, which will help the banks and provide an aura of “growth” and a cover story for the interest rate hikes. Otherwise you’ve got an inverted yield curve and a recession and who knows what other sources of reputational pain. But here’s the problem, Mr. Investor. Ordinarily if the Fed was determined to take the punchbowl away by tightening monetary policy and raising interest rates, your reaction function was pretty clear. Get out of stocks and get into bonds. Wait out the inevitable bear market and garden-variety business cycle recession, and then get back into stocks. Or just ride your 60/40 vanilla stock/bond allocation through the cycle, which is the whole point of the 60/40 thing (even, though, of course, you’re really running a 95/5 portfolio from a risk perspective).
But now you’re going to have both stocks *and* bonds going down together as the Fed hikes rates and sells bonds, in a reversal of both stocks *and* bonds going up together over the past eight years as the Fed cut rates and bought bonds. ‘Tis a dilemma. What to do when indiscriminate long-the-world doesn’t work? What to do when nothing works? Maybe, with apologies to the old Monty Python line, active management isn’t quite dead yet. And just at the point of maximum capitulation to the idea that it is. Wouldn’t be the first time. In fact, that’s kinda how maximum capitulation works. Is everything as neat and clean in reality as I’m making it out to be? Of course not. Other central banks are still buying bonds. Maybe global growth pulls everything through. Maybe President Pence / Ryan / whoever-is-fourth-in-line pushes through all the tax cuts and regulatory rollback and infrastructure build programs that your little old capitalist heart desires. Plus, this isn’t some cataclysmic event like “China floats the yuan” or “Italy has a bad election”. It’s a slow burn. But I think that if your investment mantra is “don’t fight the Fed”, you now must have a short bias to both the U.S. equity and bond markets, not the long bias that you’ve been so well trained and so well rewarded to maintain over the past eight years. This is a sea change in how to navigate a policy-driven market, and it’s a sea change I expect to last for years....