Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1118.60 up $5.70 (comex closing time)
Silver $15.30 up 9 cents.
In the access market 5:15 pm
First, here is an outline of what will be discussed tonight:
At the gold comex today, we had a poor delivery day, registering 0 notice for nil ounces Silver saw 0 notices for nil oz
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 227.62 tonnes for a loss of 75 tonnes over that period.
In silver, the open interest fell by 364 contracts as silver was down in price by 18 cents on Friday. The total silver OI continues to remain extremely high, with today’s reading at 174,507 contracts In ounces, the OI is represented by .872 billion oz or 124% of annual global silver production (ex Russia ex China). This dichotomy has been happening now for quite a while and defies logic. There is no doubt that the silver situation is scaring our bankers to no end as they continue to raid as basically they have no other alternative.
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI rests tonight at 431,081. We had 0 notices filed for nil oz today.
We had no changes at the GLD today / thus the inventory rests tonight at 671.87 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. I thought that 700 tonnes is the rock bottom inventory in GLD gold, but I guess I was wrong. However we must be coming pretty close to a level of only paper gold and the GLD being totally void of physical gold. In silver, we had no changes in silver inventory at the SLV tune of / Inventory rests at 324.968 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver fall by 364 contracts down to 174,507 as silver was down 18 cents in price with respect to Friday’s trading. Again, we must have had some short covering. The OI for gold fell by 932 contracts to 431,081 contracts as gold was down by $2.80 on Friday. We still have close to 19 tonnes of gold standing with only 15.206 tonnes of registered gold in the dealer vaults ready to satisfy that which stands.
2.Gold trading overnight, Goldcore
3. Seven stories on China devaluing their yuan and how this will lead to a huge deflation throughout the globe and also discussing the ramifications of the toxic explosion in Tianjin.
(zerohedge,David Stockman,Raul Meijer/UKtelegraph/John Ficenec/)
5 Trading of equities/ New York
6. Two oil related stories
7. Stories on Brazil and Turkey
8. Explosion in Central Bangkok,Thailand
9. USA stories:
i Huge collapse in the Empire Manufacturing index
ii American Malls in total meltdown
i) 56 tonnes of gold demand into China
ii) Gold imports and exports out of the USA
(Steve St Angelo/SRSRocco report)
iii) Silver Report chart
showing deficit of 930 million oz of silver
(Steve St Angelo/SRSRocco report)
Let us head over and see the comex results for today.
August contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz||32.15 oz (Manfra/1 kilobar)|
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil|
|No of oz served (contracts) today||0 contract (nil oz)|
|No of oz to be served (notices)||2123 contracts (212,300 oz)|
|Total monthly oz gold served (contracts) so far this month||3824 contracts(382,400 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||552,940.1 oz|
Total customer deposit: nil oz
JPMorgan has 7.1966 tonnes left in its registered or dealer inventory. (231,469.56 oz) and only 741,358.273 oz in its customer (eligible) account or 23.05 tonnes
We lost 379 contracts or an additional 37,900 ounces will not stand for delivery. Thus we have 18.497 tonnes of gold standing and only 15.206 tonnes of registered or dealer gold to service it. today we must have had considerable cash settlements.
August silver initial standings
August 14 2015:
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||882,484.03 oz (Brinks,CNT,HSBC)|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory|
|No of oz served (contracts)||0 contracts (nil oz)|
|No of oz to be served (notices)||16 contracts (80,000 oz)|
|Total monthly oz silver served (contracts)||59 contracts (295,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||85,818.47 oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||7,424,066.4 oz|
Today, we had 0 deposits into the dealer account:
total customer deposits: nil oz
total withdrawals from customer: 882,484.02 oz
we neither lost nor gained any silver ounces standing in this non delivery month of August.
August 12./ a huge deposit of 4.18 tonnes of gold into the GLD/Inventory rests at 671.87 tonnes
August 7./no change in gold inventory at the GLD/Inventory rests at 667.93 tonnes August 6/no change in gold inventory at the GLD/Inventory rests at 667.93 tonnes August 5.we had a huge withdrawal of 4.77 tonnes from the GLD tonight/Inventory rests at 667.93 tonnes
August 4.2015: no change in inventory/rests tonight at 672.70 tonnes
And now SLV:
August 17.2015: no changes in inventory at the SLV/Inventory rests tonight at 324.968 million oz.
August 14/no changes in inventory at the SLV/Inventory rests at 324.968 million oz.
August 13.2013: a huge withdrawal of 1.241 million oz/Inventory rests tonight at 324.968 million oz
August 12.2015: no change in SLV inventory/rests tonight at 326.209 million oz.
August 11./ no changes in SLV inventory/rests tonight at 326.209 million oz.
August 7.no changes in SLV/Inventory rests this weekend at 326.209 million oz
August 6/no changes in SLV/inventory rests at 326.209 million oz
August 5/ a small withdrawal of 142,000 oz of inventory leaves the SLV/Inventory rests tonight at 326.209 million oz
August 4.2015: a small withdrawal of 476,000 oz of inventory at the SLV/Inventory rests at 326.351 million oz August 3.2015; no change in inventory at the SLV/inventory remains at 326.829 million oz
Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to CentralGoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64) Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis. Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer. Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer. * * * * *
Doomsday Clock Strikes One Minute To Midnight For Global Market Crash
It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.
China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations.
The Telegraph’s John Ficenec has written an excellent piece warning of a possible market crash in the coming weeks.
He identifies eight key “signs things could get a whole lot worse.”
1 – China slowdown
2 – Commodity collapse
3 – Resource sector credit crisis
4 – Dominoes begin to fall
5 – Credit markets roll over
6 – Interest rate shock
7 – Bull market third longest on record
8 – Overvalued US market
John Ficenec is a market and finance expert and is Editor of the Questor column at Telegraph Media Group working across the Daily and Sunday titles and online. He is a qualified accountant who trained at KPMG before moving into asset management and the private equity industry. He has worked in financial journalism since 2011 and joined the Telegraph in 2013. He won ‘Article of the Year’ in the 2013 CFA Society of UK awards.
As we know, a picture paints a thousand words and the article is replete with a number of excellent charts which should give even the most complacent investor pause for thought.
The convincing thesis can be read in GoldCore Commentaryhere
Today’s Gold Prices: USD 1,117.30, EUR 1006.17 and GBP 714.34 per ounce.
Friday’s Gold Prices: USD 1,116.75, EUR 1002.11 and GBP 715.29 per ounce
Gold and silver gained over 2% and 3% last week. After those gains, both precious metal took a breather on the COMEX on Friday. Gold and silver were mixed – gold was flat and silver fell 1%.
This morning, gold is 0.4% higher to $1,118.60 per ounce. Silver is 0.2% higher to $15.37 per ounce.
Platinum and palladium are 0.5% and 0.2% higher to $1,001 and $623 per ounce respectively.
Download Essential Guide To Storing Gold Offshore
China Surprises for a Second Time This Week With More Gold Data – Bloomberg
Gold Holds Gain After Posting First Weekly Advance Since June – Bloomberg
Gold steady as focus returns to U.S. rate hike view – Reuters
Bears Miss Gold’s Best Rally Since June as Analysts See Declines – Bloomberg
China Says Gold Hoard Climbs 1.1% in Data Transparency Push – Bloomberg
Doomsday Clock Strikes One Minute To Midnight For Global Market Crash – The Telegraph
Beware a China crisis that could crash down on us all – The Telegraph
How The Wall Street Ponzi Works——The Stock Pumping Swindle Behind Four Retail Zombies – David Stockman’s Contra Corner
The ‘Big Long’ Gets Bigger As Goldman And HSBC Gobble Up Tons More Gold – Seeking Alpha
Germany Continues To Lead The West In Physical Gold Demand – GoldSeek
Billionaire Stanley Drucknemiller Loads Up On Gold, Makes It His Largest Position For First Time Ever – Zero Hedge
Click on News and Commentary
Many follow the following gentleman: Stanley Druckenmiller:
for the first time he is buying gold:
(courtesy zero hedge)
Billionaire Stanley Drucknemiller Loads Up On Gold, Makes It His Largest Position For First Time Ever
Over the past several years, one of the biggest critics of the Fed’s ruinous monetary policy has been billionaire investor Stanley Druckenmiller, who in 2010 announcedhe would be shutting down his legendary Duquesne Capital Management, and convert it to a family office. Yet, despite his constant drumbeat of warnings that the period of ZIRP/QE/NIPR will end in tears, he had yet to put money where his mouth was (aside for a brief period in mid-2012 when we bought a lot of GLD calls, only to unwind the almost instantly).
This ended on June 30, when following Friday’s filing by the Duquesne Family Office, we learned that as of the end of Q2, the largest position for Stanley Druckenmiller was none other than gold, following the purchase of 2.9 million shares of the GLD ETF shares. In other words, as of this moment, gold amount to over 20% of Druckenmiller’s total holdings.
In a world in which starved for ideas alpha-chasers do anything and everything that billionaires report they did a month and a half ago, we wonder if this marks the end of the relentless liquidation in the GLD, which recently hit a multi-year low, as a result driving the price of paper gold to multi-year lows even as physical demand has approached record levels.
So with Druckenmiller now back and strapped in for the ride, we wonder which other prominent investor will promptly follow?
Chinese Gold Demand Still Running Extremely High For Summer Months
Contrary to some of the expressed media-disseminated information, Chinese physical gold demand, as indicated by gold withdrawals from the Shanghai Gold Exchange (SGE), remains at a very high level indeed for this time of year. The latest figure for withdrawals for the week ended August 7th was 56 tonnes, bringing the total for the year to date to a massive 1,520 tonnes. This is a full 135 tonnes higher than the previous record for Chinese gold demand at the same time of year – back in 2013.
A particular feature of this year’s SGE withdrawal figures has been the continuing strength of demand so expressed through the summer months when demand normally falls away. This year weekly demand over the period has been mostly above the 50 tonne mark – indeed it was well over 70 tonnes just three weeks ago – and this is at a time of year when 30 tonnes plus normally represents a strong demand week on the SGE! See chart below from sharelynx.com.
If one checks out the weekly withdrawals bar chart (the lower section), one can see just how strong recent movement through the exchange has been in comparison with previous years.
Interestingly, the Chinese Central Bank – the Peoples Bank of China (PBoC) – has also now started to report monthly updates in its gold reserves (see China gold reserves up 19 tonnes in July. Really?!) which could be seen as adding to overall Chinese demand, although many Western analysts are unconvinced about the accuracy of PBoC statements regarding the size of the nation’s real gold reserves.
The big question may well be has the recent devaluation of the yuan against the dollar, coupled with the admittedly fairly small gold price recovery to date, started to redress sentiment in the gold market in the West where prices are set. There is news now of some of the big bullion banks taking deliveries of physical gold on their own account, and also of shortages of registered gold available for delivery in COMEX warehouses having to be ‘rescued’ from dangerously low levels by a major reclassification of a big hunk of gold from the Eligible to the Registered category by JPMorgan. Is the tide turning at last? This could presage a very interesting second half of the year in the gold markets of the world.
THE U.S. EMPIRE INVESTMENT STRATEGY: Export All Of It’s Gold… The Barbarous Relic
by SRSrocco on August 17, 2015
As the world races towards another financial calamity, the U.S. Empire’s strategy to shield itself from this impending disaster, is to export all of its gold supply. That’s correct. The U.S. Gold Market can be explained in three simple words… ZERO SUM GAME.
This is quite a different strategy from the once great super power which held over 20,000 metric tons (mt) of official gold reserves in 1950. While the official figures now show the U.S. presently holds 8,133 mt of gold in reserve, anyone with an IQ greater than a “10”, realizes this is just an accounting gimmick. Unfortunately, most of that gold was probably dumped on the market (or leased) to help cap and rig the paper price lower.
According to the recently released USGS data, the U.S. exported every single ounce of its gold supply in April. Let’s take a look at the chart below:
U.S. gold production declined in April to 15 mt compared to 16.5 mt last year. Total U.S. gold production year to date is down a whopping 8%. When we add U.S. mine supply to imports for April, total U.S. gold supply for the month was 42 mt. Now, if we look at the total export figure, we can see the United States exported its entire gold supply. Thus, the net result was a BIG PHAT ZERO.
Again, a ZERO SUM GAME.
And, if you have been reading my articles in the past, it’s even worse than that. If we look at the total U.S. Gold Market supply and demand equation for the first four months of the year, this is the result:
Here we can see the U.S. domestic gold mine supply of 63 mt and total imports of 88 mt equaling 151 mt was less than total exports of 165 mt. Which means, the U.S. Gold Market had to cough up an addition 14 mt to satisfy demand (Jan-Apr). I did not include gold scrap supply or domestic consumption figures as these basically cancel each other out (actually Americans consume more gold than gold recycle scrap supply).
Now, why would the U.S. continue to export all of its gold supply? Well, we can certainly thank the folks on the financial networks, such as CNBC, for brainwashing Americans into believing gold is a “Barbarous Relic.”
As I stated before, you’ll never hear financial network hosts claiming that “Bread” or “Brooms” are barbarous relics. I imagine if you go to any large supermarket or home-improvement outlet you are going to find an entire shelf of bread and brooms. The Romans consumed a lot of bread and used lots of brooms, but these aren’t considered barbarous relics today.
To tell you the truth, I can’t stomach watching CNBC anymore. Some say it’s now just for entertainment. However, I think its worse than that. CNBC has been instrumental in totally destroying the ability for (most) Americans to understand the present economic and financial situation. So, when the next financial crisis finally arrives (worse than 2008), CNBC viewers will be more shocked and unprepared than ever.
Now, where did the U.S. export all of its barbarous relic (Jan-Apr)? According to the data, Switzerland received the most at 62.6 mt, followed by Hong Kong (39.6 mt), the U.K. (24.7 mt), India (19.2 mt), U.A.E. (8.7 mt), Thailand (3.9 mt) and Singapore (2.4 mt). The top four countries accounted for 88% of the total.
If we consider that most of the U.S. gold being shipped to Switzerland and the United Kingdom is being refined and exported to the East, then India and Asia are ultimately the largest importers of the U.S. gold supply. Which means, it’s nice to know that Americans are giving up their gold so Asians and Indians are better protected when the (next, even worse) financial crisis arrives. Who says Americans aren’t giving??
I will be putting out an article about the present Wholesale Silver Shortage situation in the next few days. There seems to be a great deal of misunderstanding of what this really means for the market. Please look out for this article which should be posted Wednesday or Thursday.
Lastly, if you haven’t checked out THE SILVER CHART REPORT, there’s a great deal of information on the Silver Industry & Market not found in any single publication on the internet. There is one chart in this report (Chart #19) that I can guarantee that 99.9% of precious metal investors haven’t seen before.
The following is one of Steve’s hard work in the silver arena.
He reports a deficit of 930 million oz of silver. Since there is no supply of above ground silver this silver had to come from somewhere!!
I wonder who would have supplied this much silver?
I know of no other nation other than China that could have had this much silver stored away
(courtesy Steve St Angelo/SRSRocco report/the Silver Chart Report)
The charts in these five sections give the investor a broad background of the silver industry and market. Silver will likely be one of the most sought-after physical assets in the future. Why? There are several factors that will impact its price (value) in the future, and they are explained thoroughly in The Silver Chart Report.
One factor is the huge cumulative global silver deficit developed over the past decade. Basically, the world invested and consumed a lot more silver than total global output. How large was the silver deficit? This answer can be found on one of the charts in The Silver Market section of the report, and here’s a sample:
The global silver market suffered annual deficits nine out of 10 years reaching a staggering 930 million ounces over the past decade. To fill this large deficit, silver was supplemented by government and private stocks. The report shows how government silver sales have plummeted since 2005 and why China refuses to sell anymore of its official silver stocks.
(courtesy Bill Holter/SGT report)
1 Chinese yuan vs USA dollar/yuan falls slightly this time to 6.3946/Shanghai bourse: green and Hang Sang: red
Surprisingly, last week, officially, China added another 19 tonnes of gold to its official reserves now totaling 1677.
2 Nikkei up 10081. or 0.49%
3. Europe stocks mostly in the green /USA dollar index up to 96.79/Euro up to 1.1085
3b Japan 10 year bond yield: remains at 39% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 124.56
3c Nikkei still just above 20,000
3d USA/Yen rate now just above the 124 barrier this morning
3e WTI 41.99 and Brent: 49.20
3f Gold up /Yen down
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and up for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund slightly rises to .65 per cent. German bunds in negative yields from 4 years out.
Except Greece which sees its 2 year rate falls to 10.26%/Greek stocks this morning up by 0.84%: still expect continual bank runs on Greek banks /
3j Greek 10 year bond yield falls to : 9.41%
3k Gold at $1116.40 /silver $15.25
3l USA vs Russian rouble; (Russian rouble down 6/10 in roubles/dollar) 65.52,
3m oil into the 41 dollar handle for WTI and 49 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation. This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9779 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0838 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 4 year German bund remains in negative territory with the 10 year moving further from negativity to +.65%
3s The ELA remains at 90.4 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.
4. USA 10 year treasury bond at 2.17% early this morning. Thirty year rate below 3% at 2.82% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Flat As Oil Drops To Fresh 6 Year Low; EM Currencies Crumble Under Continuing FX War
It was a relatively quiet weekend out of China, where FX warfare has taken a back seat to evaluating the full damage from the Tianjin explosion which as we reported on Saturday has prompted the evacuation of a 3 km radius around the blast zone, and instead it was Japan that featured prominently in Sunday’s headlines after its Q2 GDP tumbled by 1.6% (a number which would have been far worse had Japan used a correct deflator), and is now halfway to its fifth recession in the past 6 year,underscoring Abenomics complete success in destroying Japan’s economy just to get a few rich people richer. Of course, economic disintegration is great news for stocks, and courtesy of the latest Yen collapse driven by the bad GDP data which has raised the likelihood of even more Japanese QE, the Nikkei closed 100 points, or 0.5% higher.
Chinese stocks also rose by 0.7% to just shy of 4000 as a result of margin debt soaring once more, rising by $13 billion, and the longest streak in 2 months. What else can one say about Chinese investors except that they sure learned their lesson.
And while markets are levitating around the globe, if not so much in the US for now where futures are just fractionally in the red, which we expect will change in the now patented volumeless levitation into the market open and then close, economies are grinding to a halt, as expressed by the price of WTI, which earlier today dropped to a fresh 6 year low below $42 after Iran said OPEC production may rise to a record after sanctions on the
country are lifted and as U.S. drilling activity increased, although the black gold has since recouped some of its losses following unconfirmed reports of an explosion in Kuwait’s Shuaiba refinery.
Also confirming yet again just how clueless economists really are, is the following chart from the WSJ showing that at no point in the last 12 months did economists expect oil to drop as low as it is today.
A closer look at Asian equities reveals a mixed picture despite a positive Wall Street close on Friday amid light news flow. ASX 200 (+0.16 %) traded in positive territory following a bout of strong earnings, the Nikkei 225 (+0.49%) rose as participants shrugged off disappointing Q2 GDP figures as this increases calls for further measures by Japanese authorities. Chinese bourses began the week on the back foot after posting its strongest week of gains in 2-months, as the region was dragged lower by energy names. JGBs fell amid strength in equities coupled with the BoJ refraining from conducting its massive JGB purchase program. IMF forecasts China economic growth to slow to 6.8% in 2015 and 6.3% in 2016 but see more sustainable growth. There were also comments from PBoC’s Jun that China is likely to hit its target of 7% growth.
Stocks in Europe failed to hold onto the opening best levels and heading into the North American session are seen mixed, with the FTSE-100 index under performing, as the ongoing commodity market rout continues to take its toll on energy and materials sectors. The consequent retreat in stocks, in part driven by the uncertainty over the future growth prospects in China, as evidenced by the latest IMF growth forecasts.
In terms of Greek related news flow, ECB’s Coeure said rules that prohibit the buying of Greek bonds could be scrapped, while German Chancellor Merkel said there cannot be a Greek debt haircut but added there’s room for an extension of Greek debt maturities.
EUR/GBP held onto the 50% retracement level of Aug 5th low to Aug 12th high in early European trade, before the upside traction by EUR/USD towards the sizeable 1.1100 option strike saw the cross stage a recovery back into minor positive territory. At the same time, GBP failed to benefit from somewhat hawkish comments by BoE’s Forbes who said that a rate hike is needed ‘well before’ inflation reaches 2%, while departing BoE member Miles said that the case was building for a rise in Bank rate despite current low inflation.
More importantly, the EM currency war continues apace, as confirmed by headlines such as these:
- TAIWAN DOLLAR FALLS TO WEAKEST SINCE NOV. 2009
- INDIA’S RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 6, 2013.
- TURKISH LIRA DROPS TO RECORD 2.85 PER DOLLAR, DOWN 0.6% TODAY
Expect many more fireworks as everyone joins in the race to debase. Yes, here’s looking at you Janet Yellen…
Commodity prices remained under pressure, with copper prices falling amid subdued sentiment towards growth prospects in China, while Japan also posted weak data. Elsewhere, Dalian iron ore prices fell nearly 1% as demand from Chinese steel mills are said to weaken. While analysts at Goldman Sachs expect iron ore to lose 30% over the forthcoming 18-months. Despite the bearish sentiment towards commodity complex, analysts at Morgan Stanley believe that the slump in commodities following China’s devaluation may be overstated. Brent crude futures outperformed WTI following reports that an explosion has been witnessed at Kuwait’s Shuaiba refinery, damage to the site is unclear.
In summary: European stocks rise with euro falling vs dollar. U.S. equity index futures fall, with Asian stocks also declining. Gold, silver gain with corn and wheat while copper, cotton decline. WTI crude dropped as much as 2%. Yields on European 10-year notes fall, with those on Greek, Spanish, Italian bonds falling most. French, Italian bourses outperform in Europe, with FTSE 100 underperforming. U.S. Empire manufacturing, net TIC flows, NAHB housing market index due later.
- S&P 500 futures down 0.1% to 2087
- Stoxx 600 up 0.4% to 387.7
- US 10Yr yield down 3bps to 2.17%
- German 10Yr yield down 3bps to 0.63%
- MSCI Asia Pacific down 0.4% to 137.8
- Gold spot up 0.2% to $1117.4/oz
- Eurostoxx 50 +0.5%, FTSE 100 -0.3%, CAC 40 +0.5%, DAX +0.4%, IBEX +0.3%, FTSEMIB +0.4%, SMI +0.3%
Asian stocks fall with the Shenzhen Composite outperforming and the Taiex underperforming; MSCI Asia Pacific down 0.4% to 137.8
- Nikkei 225 up 0.5%, Hang Seng down 0.6%, Kospi down 0.8%, Shanghai Composite up 0.7%, ASX up 0.2%, Sensex down 0.5%
- Cargill to Buy Ewos for EU1.35b, Enter Salmon Market
- Goldman Said to Buy $150m Minority Stake in Piramal Realty: WSJ
- Euro down 0.29% to $1.1077
- Dollar Index up 0.32% to 96.83
- Italian 10Yr yield down 5bps to 1.77%
- Spanish 10Yr yield down 4bps to 1.97%
- French 10Yr yield down 4bps to 0.94%
- S&P GSCI Index down 0.8% to 362
- Brent Futures down 1.5% to $48.5/bbl, WTI Futures down 1.9% to $41.7/bbl
- LME 3m Copper down 0.7% to $5131/MT
- LME 3m Nickel up 0.3% to $10630/MT
- Wheat futures up 0.2% to 512.8 USd/bu
Bulletin headline summary from Bloomberg
- Treasuries gain overnight, volumes light amid summer holidays; data this week include consumer prices and FOMC minutes, both on Wednesday.
- Oil resumed its decline, with futures sliding as much as 2%, as Iran said OPEC production may rise to a record after sanctions on the country are lifted and as U.S. drilling activity increased.
- Senior Greek bank bonds tumbled after Eurogroup President Dijsselbloem said on Friday depositors will be shielded from any losses resulting from the restructuring of the nation’s financial system
- Merkel said she’s confident the IMF will join Greece’s third bailout and signaled willingness to consider debt relief to help make it happen
- China’s economy is growing more slowly than official data suggests and below potential, a Bloomberg survey indicates, helping explain why policy makers have stepped up stimulus and the move to boost exports with a weaker yuan
- China is planning to unveil a plan as early as this week to overhaul the way state-run companies operate and are regulated, according to people familiar with the matter
- Sovereign 10Y bond yields mostly lower. Asian, Europeanstocks mixed, U.S. equity-index futures decline.Crude oil and copper lower, gold gains
DB’s Jim Reid concludes the overnight wrap
In 18 years time we’ll reach our ‘china anniversary’ which is the only way I could think to link this into the most important story running at the moment. It’s been a quiet overnight session but it feels to us that the full ramifications of last week’s China move will take time to reverberate and might actually be out of China’s hand. For all their talk on Thursday last week about keeping the Yuan ‘basically stable’ and it being ‘groundless’ to talk of a 10% devaluation they have set off a chain of events around the world. They are continuing to try to ease fears with the PBoC’s chief economist and ex-DB economist Jun Ma yesterday suggesting that China has “no intention or need to participate in a currency war”. Well that might depend on how Europe, Japan, the rest of Asia and even the Fed respond to the move. If they ease policy further or in the Fed’s case keep policy looser than it would have been then China’s exchange rate may naturally appreciate again which may encourage further depreciations periodically at their daily fix. So maybe they’ve now lit the touchpaper and we’ll see how others react.
Overnight the PBoC made little change (+0.01%) to the Yuan fix, resulting in a modest fall for the onshore Yuan (-0.06%) but a slight strengthening for the more freely traded offshore Yuan (+0.18%). In a note on Friday, DB’s Zhiwei Zhang believes that this round of rapid RMB depreciation has come to an end. On the back of the moves however, Zhiwei has updated his USD/CNY forecasts and now expects the exchange rate to be around 6.5 by the end of 2015 (from 6.3) and 6.9 by the end of 2016 (from 6.5) but with high volatilities expected in both direction. Despite the expectation of depreciation in the currency however, Zhiwei does not think this alone will generate a visible impact on exports or overall growth and continues to forecast one more interest rate cut this year, as well as an RRR cut this year and next.
Even with the steady overnight fix, there’s been further weakness across the Asia FX space again with the Malaysian Ringgit (-0.62%) and Indonesian Rupiah (-0.65%) in particular suffering a sell off, the former in particular extending a slump which saw it plummet nearly 4% last week. There was plenty of concern in the weekend press about the Ringgit and the country’s dwindling reserves. Parallels to 1997/8 are being drawn. Capital controls were introduced in 1998 after a 30% FX decline. We are at 24% declines over the last year.
Looking at the rest of market moves this morning, Chinese equity markets have started the week on the back foot with the Shanghai Comp (-0.12%) and CSI 300 (-0.46%) both down at the midday break (although paring earlier heavy losses), while the Hang Seng (-0.99%) and Kospi (-0.38%) have also declined this morning. The ASX is +0.38% while the Nikkei has risen 0.20% after Japan, although soft, reported a slightly better than expected preliminary Q2 GDP report (-0.4% qoq vs. -0.5% expected), resulting in an annualized 1.6% yoy contraction (vs. -1.8% expected). Elsewhere, in the commodity space WTI (-1.41%) and Brent (-1.32%) have tumbled in early trading not helped by the latest Baker Hughes data showing an increase in the number of operating rigs in the US last week for the fourth straight week.
After the choppiness in markets for most of last week, Friday’s trading saw a much calmer session for the most part after the PBoC’s much more muted move in the fix, resulting in a 0.11% gain for the Yuan and halting the three-day selloff. European equities finished a tad lower after some softer than expected GDP reports while US equity markets firmed slightly, supported in some part by Greece headlines confirming Eurogroup approval of a third bailout programme which filtered through in the late afternoon. The S&P 500 closed up 0.39% along with gains for the Dow (+0.40%) and NASDAQ (+0.29%), while in Europe we saw the Stoxx 600 (-0.12%) and DAX (-0.27%) finish a touch weaker. Despite some weakness in energy stocks, it was actually a relatively more benign day of price action in the commodity complex with Brent (-0.89%) and WTI (+0.64%) mixed, Gold (0.00%) ending unchanged, Copper (-0.39%) slightly lower and Aluminum (+0.41%) a tad higher.
US rates markets saw yields tick up slightly in the afternoon session as the US data flow rolled in, although again the price action was reasonably muted. The benchmark 10y yield finished 1.2bps higher at 2.199%, while 2y yields closed up 1.4bps to 0.724%. The Dollar had a much more choppy session however, with the Dollar index firming +0.08% at the close. On the inflation front, July PPI rose +0.2% mom in July (and ahead of market expectations of +0.1%) but saw the annualized rate tick lower to -0.8% yoy (from -0.7%). The core firmed greater than expected (+0.3% mom vs. +0.1% expected), but again the annualized rate nudged down, declining two-tenths to +0.6% yoy. Industrial production (+0.6% mom vs. +0.3% expected) and manufacturing production (+0.8% mom vs. +0.4% expected) were both stronger than expected in July, however both saw downward revisions to prior month reports while capacity utilization was in-line with expectations at 78%. Finally, the first reading of the University of Michigan consumer sentiment reading declined a fairly modest 0.2pts from July to 92.9 (vs. 93.5 expected) with the expectations reading in particular dropping 0.3pts to 83.8 after forecasts for a rise to 85.0. Despite the slight nudge up in yields, the probability of a Fed rate move edged down slightly at Friday’s close to 48% from 50%, a range it’s hovered in since last Wednesday. That’s in stark contrast to the latest WSJ survey which shows 82% of economists surveyed expect the Fed to liftoff in September, unchanged on last month and up from 72% in June.
European data flow on Friday was centered on the various Q2 GDP reports. There was some modest disappointment in the Euro area reading which came in slightly below expectations for the quarter (+0.3% qoq vs. +0.4% expected), although it was enough to see the annualized rate nudge up to 1.2% yoy and the highest since Q3 2011. Regionally we saw quarterly misses out of Germany (+0.4% qoq vs. +0.5% expected), France (0.0% qoq vs. +0.2% expected) and Italy (+0.2% qoq vs. +0.3% expected) although annual rates nudged up slightly for each country. Meanwhile, there was no change to the final July CPI report at +0.2% yoy for the headline and +1.0% yoy for the core.
With the Eurogroup approval of Greece’s €86bn bailout deal, focus will likely turn to the Bundestag vote this week where it’s expected that, although legislative approval is highly certain, German Chancellor Merkel is likely to run into dissent from fellow lawmakers.
Ahead of this and over the weekend, Merkel has expressed that she is confident that the IMF will join Greece’s third bailout program, signaling in the process that she is ready to discuss debt relief and specifically ‘leeway on the extension of maturities on interest rates’.
The huge toxic blast in Tianjin may well be a huge black swan event as the authorities have now ordered a evacuation surrounding 3 km from the contaminated site. Authorities have found sodium cyanide which if it comes in contact with water or fire can release the deadly gas Hydrogen cyanide.
What is critical is the fact that Tianjin is the major export/importing port especially iron ore. With no areas to receive imports or to export, this would have a huge dampening effect on its economy and thus expect further devaluations in the yuan.
(courtesy zero hedge)
China Sends In Chemical Warfare Troops, Orders Tianjin Blast Site Evacuation After Toxic Sodium Cyanide Found
our years ago, following the Sendai tsunami and resulting explosion at the Fukushima nuclear power plant, the Japanese government had just one goal: to minimize panic among the population, even if it meant blatantly lying about the resulting deadly radioactive fallout the public was exposed to. After all the top prerogative among government bureaucrats has always been to minimize social disturbance even if it means sacrificing countless individuals to a death that could have been avoided if only the government had told the truth from the beginning.
This was also the playbook followed by the Chinese government three days ago after the massive chemical plant explosion in China’s port of Tianjin where the casualty count is increasing with every passing day (85 dead at last check and rising fast), but where the real danger is that toxic gases and chemical fallout, just as dangerous and lethal as Fukushima’s beta and gamma waves, have spread in the air and water, and are jeopardizing the local population.
Initially the government did everything in its power to cover up the spread of deadly contaminants. As we reported yesterday, People’s Daily openly lied to the local population: “Authorities tasked with marine monitoring announced there were no hazardous chemicals detected in waters off the blast site in north China’s port city Tianjin on Friday.
A statement from the State Oceanic Administration (SOA) said major measurement of seawater composition did not show any anomaly compared with historical records.
Hazardous materials such as cyanide and volatile phenol were not detected, while the variety of zooplankton was not affected either, it added.
The problem is that the Chinese government long ago lost all credibility and as we reported yesterday, local residents “wondered if even the air was safe because of the smoke, still billowing hours later from vestiges of the inferno, which destroyed an industrial zone near the port. Many people wore masks.”
“Right now, we don’t know anything,” said Sun Meirong, 52, an office cleaner who descended 13 flights of stairs with her 1-year-old grandson after the explosions blew in her apartment windows and front door.
… According to the Tianjin Tanggu Environmental Monitoring Station, calcium carbide was one of several toxic industrial chemicals stored by the company. The others included sodium cyanide, which can produce hydrogen cyanide, a volatile and flammable liquid; and toluene diisocyanate, which can also react violently in the presence of water.
We were quite skeptical the Chinese government can maintain the charade for long: unlike radiation whose effects take years to materialize, and thus afforded the Japanese government free reign to lie to the people with impunity for years, the effect of the Chinese toxic gases manifest themselves quickly, and usually with a combustible or deadly outcome.
Which is why we were not surprised to learn that Chinese authorities ordered the evacuation of residents within a 3km radius of the Tianjin blast site “over fears of chemical contamination” according to BBC.
Replace fears with reality: the evacuation came as police confirmed the highly toxic chemical sodium cyanide was found near the site.
People sheltering at a school used as a safe haven since the disaster have been asked to leave wearing masks and long trousers, reports say.
According to a tweet by The People’s Daily, anti-chemical warfare troops have entered the site to handle highly toxic sodium cyanide which had been found there.
The discovery was confirmed by police “roughly east of the blast site” in an industrial zone, state-run Beijing News said.
What is Sodium Cyanide?
The chemical sodium cyanide is white crystalline or granular powder which can be rapidly fatal if inhaled or ingested, as it interferes with the body’s ability to use oxygen.
It is mostly used in chemical manufacturing, for fumigation and in the mining industry to extract gold and silver.
It is soluble in water, and absorbs water from air, and its dust is also easy to inhale. When dissolved or burned, it releases the highly poisonous gas hydrogen cyanide.
* * *
Which means that the lies can now end: officials have so far insisted that air and water quality levels are safe.
BBC adds that officials have also confirmed the presence of calcium carbide, potassium nitrate and sodium nitrate. Calcium carbide reacts with water to create the highly explosive acetylene.
Ironically, just like in the case of Fukushima where the government is desperately hiding the fact that there has been a core meltdown, so in Tianjin the deadly chemicals have made such a toxic mix that some fires have continued to smoulder and at least one reignited on Saturday.
Xinhua said several cars at the site had “exploded again”.
* * *
Since the port of Tianjin a critical infrastructure hub in the inbound commodity pathway, handling a substantial portion of China’s iron ore and steel supply chain, today’s evacuation and the admission that the chemical fallout from the explosion was far worse than officially admitted, means that a non-trivial component of China’s trade is about to be mothballed indefinitely.
It also means that with both imports and exports set to suffer even more following last month’s shocking prolapse, which was the sole reason for China’s currency devaluation (the justification used by some pundits that China is simply eager to gain SDR acceptance is utter nonsense: China would not reveal it is adding to its gold holdings if it intended to appease the IMF, and certainly would not intervene daily to prop up its stock market, something the “free market” IMF finds abhorrent if only publicly), and with critical logistical networks now certain to be blocked indefinitely, resulting in GDP-crushing supply chain bottlenecks, Beijing – which was eager to slowdown its Yuan devaluation on Friday in order to avoid cross-asset contagion and further selling of stocks and an acceleration of the capital outflow – will have no choice but to devalue the currency even more in the coming week as the only offset to what may have well been a true black (or rather mushroom cloud shaped) swan event, one for which neither China nor the world, had absolutely any contingency plan.
Sunday evening; trading in Chinese/Asian markets:
Chinese markets hold but Malaysian ringgit plummets. Japan reports a fall in GDP and thus is still in recession mode for the past 5 years:
(courtesy zero hedge)
Asian Currency Crisis Continues As China Holds, Malaysia Folds, & Japan Heads For Quintuple Dip Recession
Asia got off to an inauspicious start this evening withJapan printing a disappointing 1.6% drop in GDP – heading for its fifth recession in 6 years… so much for Abenomics, but, of course, Amari spewed forth some standard propaganda that he expects Japan to recover moderately (and Japanese stocks popped modestly assuming moar QQE). Then Malaysia continued its collapse with the Ringgit down another 1% hitting fresh 17-year lows and stocks dropping further, as the Asian Currency crisis continues. Heading into the China open, offshore Yuan signaled further devaluation but the CNY Fix printed very modestly stronger at 6.3969; and following last week’s best gains in 2 months, Chinese stocks are plunging at the open after Chinese farmers extend their streak of margin debt increases. Finally, WTI Crude drifted back to a $41 handle in early futures trading.
Japan heads for Quintuple Dip recession…
The Asian currency crisis continues (led by Malaysia)
- *MALAYSIAN RINGGIT DROPS 0.9% TO 4.1155 PER DOLLAR
- *MALAYSIA’S KEY STOCK INDEX OPENS DOWN 0.4% AT 1,590.81
But broad-based USD strength against Asian FX continues…
Then China opened..
Great news – Chinese farmers and grandmas are releveraging!!
- *SHANGHAI MARGIN DEBT HAS LONGEST STREAK OF RISE IN TWO MONTHS
And Chinese futures appeared to mini-flash-crash…
As China revalues modestly..
- *CHINA SETS YUAN REFERENCE RATE AT 6.3969 AGAINST U.S. DOLLAR (against 6.3975 fix Friday)
- *PBOC’S YUAN REFERENCE RATE SET WITHIN 0.1% OF FRIDAY’S CLOSE
Offshore Yuan leaking weaker…
And finally WTI Crude continues to drift lower… once again trading with a $41 handle…
So while China may have succeeded in jawboning/intervening the yuan back to some semblance of (temporary) stability, the global reverberations look to have just begun.
Zero hedge weighs in on what will happen in the coming months as China continues to devalue the yuan:
(courtesy zero hedge)
Why Everyone Is So Nervous About What China Does Next, In One Chart
Whether the motive behind China’s stunning August 11 devaluation announcement was to get one step closer to the SDR basket by promoting a market-based FX regime demanded by the IMF, to further ease financial conditions in China, to boost exports, or merely to telegraph to the Fed that with the US preparing to hike rates China will no longer be pegged to the USD, is unclear, but one thing that is certain is just how much everyone (if not this website) was shocked by the PBOC announcement. Goldman summarizes it best: “The sharp 3% devaluation in the CNY fix last week was a surprise to us.”
What happens next? Clearly more devaluation, or else China would not have pursued this step, especially since the paltry 4% devaluing in one week will hardly move the needle on Chinese exports, which is the real reason why China did this move (weeks after it boosted its official gold holdings by 57%). Goldman also admits as much: “It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness.”
The weakness is further guaranteed when one considers that China has all but tapped out its credit capacity (where even the IMF admits China’s debt/GDP is headed to 250%), forcing the country to seek growth not from within (via credit creation), but without, in the form of beggaring its neighbors and promoting its competitiveness using external devaluation (a similar internal devaluation to what Greece has undergone in the past 5 years would result in a very violent civil war), i.e. currency war, as much as the serious people want to avoid calling it for fear headlines such as these (from overnight) will become a daily event…
- TAIWAN DOLLAR FALLS TO WEAKEST SINCE NOV. 2009
- INDIA’S RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 6, 2013.
- TURKISH LIRA DROPS TO RECORD 2.85 PER DOLLAR, DOWN 0.6% TODAY
… and the FX war will spiral out of control.And yet that is precisely what will happen.
This is how Goldman pivots to the unpleasant reality of not only China now aggressively engaging fellow exporters, but those same fellow expoerters devaluing preemptively before China gets them:
It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness. The core of this argument rests on our view that China’s bumpy downshift in growth is likely to extend, making for greater macro and market volatility along the way. China has experienced a substantial credit build-up, which will need to be unwound in coming years. As Andrew Tilton and team have discussed, unwinding such a large credit imbalance is typically associated with a period of below-trend domestic demand growth, and this is coinciding with slowing potential growth as the impulses from labour and capital deepening slow. China’s current account surplus is also not what it used to be, with a growing services deficit offsetting a still large trade surplus. Given this macro backdrop, where a greater contribution to growth from net exports would be very welcome, a 25% appreciation in trade-weighted terms – as the CNY has experienced over the past three years on account of its tight link to the USD – looks increasingly untenable.
And while nobody wants to admit it, the writing on the wall is clear: the age of all out FX warfare is upon us, and only the Fed believes it is immune… if only for the time being.
The clearest implication of China joining the currency depreciation train is that it further increases depreciation pressures on the rest of the EM FX complex. There are two important channels of transmission here: First, because China as a producer competes with several EMs in global markets, those EM exporters just became a touch less competitive relative to Chinese exporters; and second because China as a consumer is also a large destination for exports from the rest of EM, although in this case there is at least the possibility of a partial offset from any improvement in demand if an easing in financial conditions is delivered. So for EMs that have been trying to address their external balance, and have seen depreciating currencies since 2013, some of that relative price shift has just been undone. And if the recent CNY moves are the start of a journey, even undoing half of the accumulated trade-weighted appreciation of the last three years, this may provoke a meaningful additional bout of currency depreciation across the EM complex.
Translation: once begun, the currency war, which for the time being is being fought with conventional means, has no choice but to become nuclear.
Here, in one chart, is the reason why anyone following China’s devaluation is very nervous. And if they aren’t yet, they should be. Because if China is indeed intent on catching up with the rest of the EM complex – whose FX is trading about 30% lower – then the resulting devaluation will lead to nothing short of a global FX neutron bomb.
Monday morning EST in China (evening China)
(courtesy zero hedge)
Toxic Rain Feared In Tianjin As Death Toll Rumored At 1,400
The fallout from last week’s massive explosion in the Chinese port of Tianjin continues to worsen, despite Beijing’s best efforts to play down the danger to the public.
The official death toll from the apocalyptic blast – which was described by witnesses as akin to a nuclear explosion – has risen to 114. Some reports suggest the number of people confirmed killed may ultimately rise to 1,400. Some 6,000 have been displaced and more than 700 are reported injured. “The whole sky was lit up, and the blast wave sent me into the air,” a first responder told local media, describing the scene that unfolded last Wednesday. “My helmet was gone. It was like a different world, with flames falling like raindrops on my head.”
(Harvey: the following is extremely important)
Speaking of raindrops, authorities now fear that storms in the area could transform sodium cyanide (which is water soluble) present on the scene into hydrogen cyanide. Here’s the CDC’s definition of hydrogen cyanide:
Hydrogen cyanide (AC) is a systemic chemical asphyxiant. It interferes with the normal use of oxygen by nearly every organ of the body. Exposure to hydrogen cyanide (AC) can be rapidly fatal. It has whole-body (systemic) effects, particularly affecting those organ systems most sensitive to low oxygen levels: the central nervous system (brain), the cardiovascular system (heart and blood vessels), and the pulmonary system (lungs). Hydrogen cyanide (AC) is a chemical warfare agent (military designation, AC). It is used commercially for fumigation, electroplating, mining, chemical synthesis, and the production of synthetic fibers, plastics, dyes, and pesticides. Hydrogen cyanide (AC) gas has a distinctive bitter almond odor (others describe a musty “old sneakers smell”), but a large proportion of people cannot detect it; the odor does not provide adequate warning of hazardous concentrations. It also has a bitter burning taste and is often used as a solution in water.
Tianjin’s vice mayor said “around 700 tonnes” of sodium cyanide was being stored at the facility. That’s a problem because as it turns out, the warehouse was only authorized to store around 24 tonnes.
As we noted over the weekend, China has tried its best to go by the Fukushima playbook. In short, the overarching goal is to minimize panic among the population, even if it means blatantly lying about exactly what it is that the public is exposed to. After all, the priority among government bureaucrats has always been to minimize social disturbance even if it means sacrificing countless individuals that could have been saved if only the government had told the truth from the beginning.
This mentality led China to claim last week that no hazardous chemicals had leaked into the water. That contention has come under increased scrutiny. “The closest water test point to the blast site revealed cyanide 27.4 times standards on Sunday”,AFP says. The State Oceanic Association admitted that “minute traces of cyanide have been detected in waters near the Tianjin port.” Here’s more from The Guardian:
With the official death toll raised to 112 and the number of missing people at 95, rescue workers wearing gas masks and hazard suits were racing to clear the area before the weather changes because of concerns that wind could spread the toxins and rain could cause a dangerous reaction with chemicals at the site.
Eric Liu, a campaigner at Greenpeace East Asia, said that without precise data on how much calcium carbide was involved in the blast, it was impossible to predict how serious these reactions could be.
“The other danger rain poses is that chemicals stored in warehouse could be washed into water supplies, with a potentially large impact on local ecosystems,” Liu said. “However, again, without more specific information it is difficult to say what impacts exactly.”
Meanwhile, the public is getting restless as some suspect the government of obscuring the facts and masking possible corruption. Here’s NBC again:
State media Monday carried large photographs of Premier Li Keqiang with local officials in identical whites shirt and trousers visiting the scene of massive toxic Tianjin explosions.
Li has promised a thorough investigation and punishment for those responsible — even while the authorities were busy closing down dozens of “rumor-mongering” websites for demanding pretty much the same thing.
Tianjin is tricky for the Communist Party because, according to numerous local reports, there appear to have been big regulatory and legal failures — from the type and quantity of highly toxic chemicals stored at the site to the apparent lack of an inventory and the location of such a dangerous stockpile so close to residential areas.
While the name of the company that owned the warehouse complex has been made public — Ruihai International Logistics, a four-year-old firm that employed about 70 workers — the company’s website has been taken down, as has the corporate registry database of the city of Tianjin. That has fueled online speculation that local officials were involved with the company. No evidence to that effect has been presented, but such involvement would not be unusual in China.
And here’s The Globe and Mail:
Online, meanwhile, authorities struggled to cleanse a raging conversation that attacked the official response and the system that had allowed such a disaster to happen. Social-media users shared photos of families rallying behind a giant handwritten banner demanding an details about the missing: “Either we see them alive or see their bodies,” read one.
Anger emerged in hashtags calling the situation “A real life Pinocchio” and demanding “Tanggu explosion truth,” a reference to the Tianjin neighbourhood where the blasts left a gaping crater.
“We demand the truth, and strict punishment to comfort the victims!” wrote one person on China’s Facebook-like Weibo site.
And while citizens can “demand the truth” until they are blue in the face, they will apparently have to do so very quietly and not in a public forum, because as The Guardian goes on to note, “fifty websites have been punished for ‘spreading Tianjin blast rumours’ and close to 400 Weibo and WeChat accounts have been shut down.” So while the public will always be at an informational disadvantage in the wake of a disaster thanks to government efforts to maintain order, that goes double in China, where we imagine the suppression of online discussion will continue until the death toll and the fallout becomes so difficult to downplay that Beijing will be forced to either acknowledge the true extent of the catastrophe or face widespread social upheaval.
Two extremely important papers and both dealing with the devaluation of the yuan. In the first paper Meijer states that we are now at the end of the line and the game changes.
This is your most important paper this year:
(courtesy Raul Meijer)
“We’ve Reached The End Of The Line; Now, The Game Changes”
Eventful days in the middle of summer. Just as the Greek Pandora’s box appears to be closing for the holidays (but we know what happens once it’s open), and Europe’s ultra-slim remnants of democracy erode into the sunset, China moves in with a one-off but then super-cubed renminbi devaluation. And 100,000 divergent opinions get published, by experts, pundits and just about everyone else under the illusion they still know what is going on.
We’ve been watching from the sidelines for a few days, letting the first storm subside. But here’s what we think is happening. It helps to understand, and repeat, a few things:
• There have been no functioning financial markets in the richer parts of the world for 7 years (at the very least).Various stimulus measures, in particular QE, have made sure of that.
A market cannot be said to function if and when central banks buy up stocks and bonds with impunity. One main reason is that this makes price discovery impossible, and without price discovery there is, per definition, no market. There may be something that looks like it, but that’s not the same. If you want to go full-frontal philosophical, you may even ponder whether a country like the US still has a functioning economy, for that matter.
• There are therefore no investors anymore either (they would need functioning markets). There are people who insist on calling themselves investors, but that’s not the same either. Definitions matter, lest we confuse them.
Today’s so-called ‘investors’ put to shame both the definition and the profession; I’ve called them grifters before, and we could go with gamblers, but that’s not really it: they’re sucking central bank’s udders. WHatever we would settle on, investors they’re not.
• The stimulus measures, QE, were never designed to induce economic recovery.They were meant to transfer private losses to public purses. In that, they have been wildly successful.
• China is the end of the line. It was the only economy left that until recently could boast actual growth on a scale that mattered to the global economy. Growth stopped when China, too, introduced stimulus measures. To the tune of some $25 trillion or more, no less.
The perhaps most pivotal importance of China is that it was the world’s latest financial hope. The yuan devaluation shatters that hope once and for all. The global economy looks a lot more bleak for it, even if many people already didn’t believe official growth numbers anymore.
Because we’ve reached the end of the line, the game changes. Of course there will be additional attempts at stimulus, but China’s central bank has de facto conceded that its measures have failed. The yuan devaluations, three days in a row now, mean the central People’s Bank of China has, openly though reluctantly, acknowledged its QE has failed, and quite dramatically at that. They just hope you won’t notice, and try to bring it on with a positive spin.
Central banks are not “beginning” to lose control, they lost control a long time ago. The age of central bank omnipotence has “left and gone away” like Joltin’ Joe. Omnipotence has been replaced by impotence.
This admission will reverberate across the globe.China is simply that big. It may take a while longer for other central bankers to admit to their own failures (though ‘failures’, in view of the wealth transfer, is a relative term here), but it won’t really matter much. One is enough.
What will happen from here on in will be decided by how, where and in what amounts deleveraging will take place. This will of necessity be a chaotic process.
Debt deleveraging leads to, or can even be seen as equal to, debt deflation. This is a process that has already started in various places and parts of economies (real estate), but was kept at bay by QE programs. It will now accelerate to wash over our societies like a biblical plague.
The Automatic Earth started warning about this upcoming deflation wave many years ago. I am wondering if I should rerun some of the articles we posted over the past 8 years or so. I might just do that soon.
It is fine for people to say that since it hasn’t happened yet, we were wrong about this, but for us it was never, and is not now, about timing. If you think like an investor -or at least you think you do- timing may seem to be the most important thing in the world. But that’s just another narrow point of view.
When deflation takes its inevitable place center stage, it will wipe away so much wealth, be it real or virtual or plain zombie, that the timing issue will be irrelevant even retroactively. Whether the total sum of global QE measures is $22 trillion or $42 trillion, its deflation-driven demise will wipe out individuals, companies and nations alike at such a pace, people will wonder why they ever bothered with trying to get the timing right.
This may be hard to understand in today’s world where so many eyes are still focused on central banks and asset- and equity markets, on commodities and precious metals, on housing markets. In that regard, again, it is important to note that there have been no functioning markets for many years. Those eyes are focused on something that merely poses as a market.
For us this was clear years ago. It was never about the timing, it was always about the inevitability. Back in the day there were still lots of voices clamoring for – near-term or imminent – hyperinflation. Not so much now. We always left open the hyperinflation option, but far into the future, only after deflation was done wreaking its havoc. A havoc that will be so devastating you’ll feel silly for ever even thinking about hyperinflation.
Deflation will obliterate our economies as we know them. Imagine an economy for instance where next to no-one sells cars, or houses, or college educations, simply because next to no-one can afford any of it.
Where everything that today is bought on credit will no longer be bought, because the credit will be gone. Where homes are not worth more than the cardboard they’re made of, and still don’t sell.
Where ships won’t sail because letters of credit won’t be issued, where stores won’t open in the morning because they can’t afford their inventory even if it arrives in a nearby port.
As for today’s reality, the Chinese leadership has been eclipsed by its own ignorance about economic systems, the limits of their control over them, and the overall hubris they live in on a daily basis. These people were educated in the 1960s and 70s China of Mao and Deng Xiaoping. In the same air of omnipotence that today betrays all central bankers. Why try to understand the world if you’re the one who shapes it?!
It was obvious this moment would arrive in Beijing as soon as the one millionth empty apartment was counted. There are some 60 million ’empties’ now, a number equal to half the total US housing contingent.
Beijing then heavily promoted the stock market for its citizens, as a way to hide the real estate slump. All the while, it kept the dollar peg going. And now all this is gone. And all that’s left is devaluation. As Bill Pesek put it: “China Adds a Chainsaw to Its Juggling Act”.
Ostensibly to improve the country’s trade position, for lack of a better word. Whether that will work is a huge question. For one thing, the potential increase in capital flight may turn out to be a bigger problem than the devaluation is a solution.
Moreover, one of the main reasons to devalue one’s currency is the idea that then people will start buying your stuff again. But in today’s deflationary predicament, one of the main failures of mainstream economics pops up its ugly head: the refusal to see that many people have little or nothing left to spend.
This as opposed to economists’ theories that people must be sitting on huge savings whenever they don’t spend “what they should”. Ignoring the importance of personal debt levels plays a major part in this. Any which way you define it, the result is a drag on the velocity of money in either a particular economy, or, as we are increasingly witnessing, a major spending slowdown in the entire global economy.
Seen in that light, what good could a 1.9% devaluation (or even a, what is it, super-cubed 5% one, now?!) possibly do when China producer prices fell for the 40th straight month, exports were down 8.3% in July, and cars sell at 30% discounts? Those numbers indicate a fast and furious reduction in spending.
Which in turn lowers the velocity of money in an economy. If money doesn’t move, an economy can’t keep going. If money velocity slows down considerably, so does the entire economy, its GDP, job creation, everything.
This of course is the moment to, once again, point out that we at the Automatic Earth define deflation differently from most. Inflation/deflation is not rising/falling prices, but money and credit supply relative to available good and services, and that, multiplied by the velocity of money.
When this whole debate took off, even before Lehman, there were only a few people I can remember who emphasized the role of deflation the way we did: Steve Keen, Mike Mish Shedlock and Bob Prechter.
And Mish doesn’t even seem think the velocity of money is a big factor, if only because it is hard to quantify. We do though. Steve is a good friend, he’s the very future of economics, and a much smarter man than I am, but still, last time I looked, stumbling over the inflation equals rising prices issue (note to self: bring that up next time we meet). Prechter gets it, but believes in abiotic oil, as Nicole just pointed out from across the other room.
So yeah, we’re sticking out our necks on this one, but after 8+ years of thinking about it, we’re more sure than ever that we must insist. Rising prices are not the same as inflation, and falling prices are but a lagging effect of deflation.
Spending stops when people are maxed out and dead broke. And then prices drop, because no-one can afford anything anymore.
We’ve had a great deal of inflation in the past decade or two, like in US housing. We still have some, for instance in global stock markets and Canada and Australia housing. But these things are nothing but small pockets, where spending persists for a while longer.
Problem is, those pockets pale in comparison to diving -consumer- spending in the US, China, Europe, Japan. Spending that wouldn’t even exist anymore if not for QE, ZIRP and cheap credit.
The yuan devaluation tells us the era of cheap credit is now over. The first major central bank in the world has conceded defeat and acknowledged the limits to its alleged omnipotence.
It always only took one. And then nothing would stand in the way of the biblical plague. It was never a question. Only the timing was. And the timing was always irrelevant.
The second paper by Stockman basically states the same as Meijer that we will now have a complete economic and financial trainwreck due to the devaluation of the yuan. The huge deflation that will travel around the globe will devastate the world’s finances:
(courtesy David Stockman)
The Great China Ponzi – An Economic And Financial Trainwreck Which Will Rattle The World
There is an economic and financial trainwreck rumbling through the world economy. Namely, the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles.
But here’s the Wall Street meme that is stupendously wrong and that engenders blind complacency with respect to the impending upheaval.To wit, the same folks who brought you the myth of the BRICs miracle would now have you believe that China is undergoing a difficult but doable transition –from an economy driven by booming exports and monumental fixed asset investment to one based on steady as she goes US-style consumption and services.
There may well be some bumps and grinds along the way, we are cautioned, such as the recent stock market and currency turmoil. But do not be troubled—–the great locomotive of the world economy will come out the other side better and stronger. That’s because the wise, pragmatic and powerful leaders and economic managers who deftly guide China’s version of capitalism have the capacity to make it all happen.
No they don’t!
China is not a clone-in-the-making of America’s $18 trillion consume till you drop economy—-even if that model were stable and sustainable, which it is not. China is actually sui generis—–a historical freak accident that has no destination other than a crash landing.
It’s leaders are neither wise nor deft economic managers. In fact, they are a bunch of communist party political hacks who have an iron grip on state power because China is a crude dictatorship. But their grasp of the fundamentals of economic law and sound finance can not even be described as negligible; it’s non-existent.
Indeed, their reputation for savvy and successful economic management is an unadulterated Wall Street myth. The truth is, the 25 year growth boom in China is just a giant, credit-driven Ponzi. Any fool can run a central bank printing press until it glows white hot.
At the end of the day, that’s all the Beijing suzerains of red capitalism have actually done. They have not created any of the rudiments of viable capitalism. There are no honest financial markets, no genuinely solvent banks, no market driven allocation of capital and no financial discipline which comes from the right to fail as well as succeed.
There are, for instance, 287 million equity trading accounts in China, most of them opened within the last year and overwhelmingly held by retail punters with sub-high school educations. In less than 12 months they took down upwards of $1 trillion of margin debt through official brokerage channels and a massive network of shadow banking sources including dodgy peer-to-peer lending arrangements.
So fortified, they clambered after a stock market bubble that expanded by $3 trillion in just 60 trading days ending on June 14, and then broke into a panicked selling stampede that liquidated that very same $3 trillion of bottled air in hardly 20 trading days thereafter.
Then the state sent out the paddy wagons to arrest and intimidate the panicked sellers and threw-open the central bank’s credit lines to fund hundreds of billions of unwanted stocks. That is not capitalism, red or otherwise; it’s desperate, mindless madness.
Likewise, there are no credible institutions of contract law and bankruptcy. There is not even minimally honest corporate financial reporting and no restraints at all on the propensity of China’s newly affluent masses to gamble in real estate, stocks, commodity financing schemes, dodgy private lending clubs, chain letters and endless similar get rich quick schemes.
Most importantly, there are no lines of demarcation between the property of the state and the license of officialdom and their cronies to expropriate it. In a word, China wallows in the greatest cesspool of corruption known to history because that’s what happens when you erect a $10 trillion command economy virtually over night.
And the swaying edifice of red capitalism has indeed been stood up overnight. At the time that Mr. Deng radically changed the party line——proclaiming that it is glorious to be rich and the PBOC slashed the RMB exchange rate by 60% in 1994 in order to jump start an export boom——there was less than one half trillion dollars of credit market debt outstanding. Alas, that figure today is $28 trillion according the cautious reckoning of McKenzie, and most likely far more.
Here’s the thing. You can not safely, sanely or efficiently grow by 56X in hardly two decades something as combustible as cheap, come-and-get it state supplied credit in an environment where the rudiments of market capitalism do not even exist. If you pursue that kind of financial Frankenstein, that’s exactly what you will get, and that’s what the comrades in Beijing actually got.
Now, however, the iron law of financial bubbles has caught up with them. That is, when you stop supplying increasingly massive amounts of new credit to what eventually becomes an elephantine bubble, it begins to fall inward.
This happens slowly at first, then with accelerating momentum, and finally culminates in a panic-riven meltdown. That sequence encapsulates the entirety of the 2006-2008 securitized mortgage meltdown on Wall Street, the late 1980s and early 1990s Tokyo real estate boom and bust, the 1979-1980 silver and gold bubbles and countless others stretching back centuries in time.
So the passive-aggressive posture of China’s officialdom about what even they recognize as the out-of-control credit bubbles in their realm has no rhyme or reason. Beijing’s recent hoping from one foot to the other, first stimulating and then braking, is rooted in pure desperation and seat of the pants adhockery.
Wall Street sees none of this, however, and for a reason dripping with irony. Namely, since the ascension of Alan Greenspan to the Fed in 1987, the epicenter of world capitalism——that is, the money and capital markets of Wall Street—-has fallen prey to a regime of monetary central planning. Price discovery in the financial auction markets has been supplanted by price administration decreed by the twelve mortals who comprise the FOMC. A monetary politburo, if you will.
Not only has this increasingly heavy-handed central bank intrusion falsified financial asset prices, subsidized rampant carry trade speculation, eliminated an honest risk-reward calculus and destroyed short sellers and other natural instrumentalities of financial discipline, but it has also drastically changed the culture of the financial markets.
The overwhelming share of players in what has become a central bank enabled casino are now de facto statists. They believe that the agencies of the state can and should peg money market interest rates, prop up the bond market via massive monetization of the public debt, and eliminate “contagion” outbreaks in the equity and other risk asset markets.
Except “contagion” is a red herring. Its just another name for old-fashioned market breaks and bear raids on speculative excesses and reckless leveraged gambling. This kind of bear market liquidation is essential for healthy capital and money markets, but its been extinguished by the Greenspan/Bernanke/Yellen “put” and the casino’s overwhelming conviction that the central bank will flood the market with liquidity should another Lehman-style meltdown ever manage to incept.
All of this adds up to the conviction that governments drive the process of economic growth and wealth creation and that capitalism thrives best when it is nourished and guided by the helping hand of the state, most especially its central banking branch.
Needless to say, that self-serving but misbegotten ideology would never have taking root in Wall Street 50 years ago. In the days when the great William McChesney Martin took away the “punch bowl” just six months after the 1957-1958 recession ended by a series of stiff interest rate increases and by raising stock margin requirements to 90% of market value, the captains of finance would never have dreamed of 80 straight months of zero money market rates, as has now occurred.
They would have been screaming to high heaven that such radically unsound finance was a mortal danger to the nation’s wealth. By contrast, today they think they are entitled to central bank “accommodation” for as long as might be necessary to keep the stock averages rising. So while 80 months of ZIRP is nothing less than a recipe for massive speculation that will inexorably lead to a resounding bust they don’t even notice the danger.
Worse, the Wall Street casino inhabitants have no clue that while bubble finance is dangerous enough in a relatively mature capitalist economy like that of the US, it is pure monetary nitroglycerin in a setting like the China credit Ponzi.
Nor do they have the slightest inkling that PBOC head, Zhou Xiaochuan, is not just an Asian version of Janet Yellen who wears trousers and dyes his hair black.
Stated differently, Wall Street cannot see straight when it comes to China because its crypto-Keynesian lenses lead it to suppose Mr. Zhou will stump up whatever liquidity and bailouts may be necessary and that his colleagues in Beijing will open the fiscal stimulus spigots if growth continues to falter.
Well, Mr. Zhou may talk the idiom of central banking, but he’s just a servant of the communist overlords whose overwhelming purpose is to stay in power and whose colossal economic and financial ignorance will lead them to destructive expedients that will make the paddy wagon brigades now combing the brokerage houses look mild by comparison.
Its too late for a soft landing and managed deflation of the Great China Ponzi. But in their desperation to forestall the inevitable crash, the suzerains of red capitalism will increasingly turn to the mailed fist of state repression.
For instance, the Chinese steel industry grew by 11X during the last 20 years, expanding from 125 million tons, which was already larger than the US and Japanese steel industries in the mid-1990s, to 1.1 billion tons today. But neither China nor the world can use that much steel, even as China’s aggressive “dumping” on the world market gathers force.
In fact, China’s steel production is already swooning—–with output in the most recent month down nearly 5% Y/Y and prices off 26% since January and 40% since the three-year ago peak. During the first half of 2015, China’s large and medium steel mills spewed $3.5 billion of red ink, and that just a warm up for the carnage yet to come.
In a word, China has upwards of 400- 500 million tons of steel capacity that will be idle once its construction boom stops and the rest of the world throws barriers up against its exports. That amounts to economically destructive malinvestment on an unprecedented scale. The idling of China’s giant steel mills, in turn, will create an economic void which will cause a massive collapse of business, employment and incomes up and down the iron and steel food chain.
Likewise, China’s construction infrastructure is grotesquely overbuilt from cement kilns, to construction equipment manufacturers and distributors, to sand and gravel movers, to construction site vendors of every stripe. For crying out loud, in three recent year China used more cement than did the United States during the entire 20th century!
That is not indicative of a just a giddy boom; its evidence of a system that has gone mad digging, hauling, staging and building because there was unlimited credit available to finance the outpouring of China’s runaway construction machine.
To get a feel for this outbreak of collective insanity, look at Shanghai’s financial district in 1987 and again in 2013:
The setting is Shanghai’s financial district of Pudong, dominated by the Oriental Pearl Tower at left, and the new 125-story Shanghai Tower, China’s tallest building and the world’s second tallest skyscraper, at 632 meters (2,073 ft) high, scheduled to finish by the end of 2014. Shanghai, the largest city by population in the world, has been growing at a rate of about 10% a year the past 20 years, and now is home to 23.5 million people — nearly double what it was back in 1987.
Or take a gander at China’s ghost cities, fully equipped with everything, except people. This is merely an example of the stunning economic waste which covers the Chinese landscape:
In short, China’s freakish economy is just one great collection of impossibilities that cannot be stabilized or propped-up much longer. But in their desperation to forestall the inevitable crash, the suzerains of red capitalism will increasingly turn to the mailed fist of state repression.
Indeed, they can’t any longer rely on the proposition that party power comes from the end of Mr. Deng’s printing press. To do so will only exacerbate the massive capital flight that is already underway and which threatens a devastating further plunge of the RMB exchange rate.
The latter is the Achilles Heel of the whole Ponzi. To arrest capital flight they will have to do the opposite of what they have done for the last 20 years. That is, they will have to shrink the domestic money supply and banking system in order to sell dollars and euros rather expand domestic credit in order to sequester dollar liabilities (i.e. treasury bonds) in the PBOC.
In due course, China will be aflame with campaigns against corruption and enemies of the state as it seeks to cope with its collapsing financial bubbles and endless herds of economic white elephants. Chairman Mao’s axiom as to where state power really comes from——that is, the barrel of a gun—-will become the increasingly evident modus operandi of the communist party rulers.
The resulting deflationary spiral will suck the global economy into its vortex. And Wall Street will go down for the count because this time the Fed will be utterly powerless to reverse the tide.
This morning, the UKTelegraph also weighs in on the Chinese yuan devaluation and comes to the same conclusion as zero hedge, Raul Meijer, and David Stockman:
Doomsday clock for global market crash strikes one minute to midnight as central banks lose control
China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations
By John Ficenec
8:00PM BST 16 Aug 2015
When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.
Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.
The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.
1 – China slowdown
China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.
The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.
The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.
Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.
The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.
2 – Commodity collapse
The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.
The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.
Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.
Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.
The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.
3 – Resource sector credit crisis
Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.
With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.
Nowhere has this been felt more acutely than shale oil and gas drilling in the US. Tumbling oil prices have squeezed the finances of US drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.
As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.
4 – Dominoes begin to fall
The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.
The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.
Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a €1.1 trillion quantitative easing programme devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.
5 – Credit markets roll over
As central banks run out of silver bullets then, credit markets are desperately seeking to reprice risk. The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.
Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).
6 – Interest rate shock
Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.
7 – Bull market third longest on record
The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.
UK markets have been a beneficiary of the huge balance-sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.
8 – Overvalued US market
In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.
* * *
But apart from that BTFATH!!!
War breaks out again in the Ukraine:
(courtesy IWB Investment Watch)
BREAKING — NOW! Ukraine Erupts into all-out WAR! Cease Fire Ends as multiple cities come under attack, hundreds dead, cities burning!
The French/German-brokered “Minsk Agreement” designed to bring a cease fire and peace to Ukraine has been abandoned by both sides this evening. EXTREMELY HEAVY FIGHTING has erupted in multiple Ukrainian cities which are now under attack by rockets, mortars and heavy artillery fire.Several cities are now burning and hundreds are already dead.
Liveuamap @Liveuamap 15 min.
Donetsk, Starobesheve, Bezimenne, Komsomolske, Horlivka, Tel’manovo, Staroihnativka, Avdiivka, Makiivka, Yakovlivka – attacks everywhere
Video of Donetsk being shelled (right Now) below. . . . .More to follow
DPR officially announces they have returned heavy artillery to the front ! ! !
(courtesy IBT and special thanks to Robert H for sending this to us)
Putin calls an emergency defense meeting as tensions mount in Ukraine
At Least 15 Dead After Large Explosion Rips Through Central Bangkok
An large explosion has ripped through central Bangkok.
Details are sparse thus far but early indications suggest multiple casualties. As AP reports, “a reporter at the scene said he saw one body and body parts, and two people taken into ambulances. The explosion took place at the Rajprasong intersection, which was the center of many contentious political demonstrations in recent years. It appeared to have occurred in front of the Erawan Shrine, a tourist landmark also popular with Thais.”
Here are the headlines:
- THAI MEDIA REPORTING BLAST IN BANGKOK’S RATCHAPRASONG DISTRICT
- THAI REPORTS DON’T GIVE CAUSE OF EXPLOSION HEARD IN BANGKOK
- THAI POLICE SAY BANGKOK BLAST MAY HAVE BEEN IMPROVISED DEVICE
The following footage captures the moment of the explosion:
And the visuals:
And more color from BBC:
There has been a large explosion close to a shrine in the centre of the Thai capital, Bangkok.
The BBC’s Jonathan Head, who is at the scene, says there appear to be both dead and injured, amid a huge amount of chaos.
He says there is a massive amount of damage and a crater that indicates this could be a bomb.
Our correspondent says that if it is a bomb, this would be a rare attack for the capital.
The explosion occurred at about 19:00 local time (12:00 GMT), with police saying it may have been caused by a motorcycle bomb.
No-one has yet claimed the attack.
There are burnt motorbikes on the main road, with paramedics and police trying to take the injured away, he says.
The shrine is to the Hindu god Brahma, but is also visited by thousands of Buddhists each day.
National police spokesman Lt Gen Prawut Thavornsiri told Agence France-Presse news agency: “I can confirm it was a bomb, we can’t tell which kind yet, we are checking.”
Lately we have seen expressions of a lack of liquidity.. What does it mean? Here is Citibank with a great explanation:
(courtesy Citibank/zero hedge)
Don’t get us wrong, we’re happy that the entire world has finally woken up to the fact that liquidity is rapidly disappearing from every corner of global capital markets.Indeed, the wholesale adoption of the illiquidity meme serves as a ringing endorsement of the arguments we’ve been making in these very pages for years.
And while we’ve grown accustomed to seeing tin foil hat conspiracy theories gradually metamorphose into undeniable conspiracy facts (much to the chagrin of the begrudging pundit echo chamber), the degree to which everyone from the mainstream financial news media to the C-suite is suddenly screaming about illiquid credit markets has surprised even us.
And while it’s not always clear that everyone talking about illiquid markets completely understands what it is they’re saying, they’ve undeniably picked up on the fact that somewhere deep inside the secondary market for govies and corporate credit, something sinister is amiss and they can’t afford to be the only ones not talking about it.
Having said all of that, one of the few people who, like us,began documenting the disappearance of liquidity long ago and who is generally quite adept when it comes to illustrating the problem is Citi’s Matt King, and for anyone still confused as to what exactly we mean when we discuss the admittedly amorphous concept of “liquidity”, we present the following graphics from King’s latest missive by way of explanation.
And here is what it looks like when liquidity dries up…
The Turkish lira falls to an all time low. The government continues to create turmoil:
(courtesy zero hedge)
Turkey Declares Curfew In Latest Wartime Escalation, Lira In Record Plunge On More Government Turmoil
The tension continues to rise in Turkey as the country hurdles towards civil war and political gridlock.
President Recep Tayyip Erdogan is keen on sending the country back to the polls in an effort to nullify a stunning ballot box victory by the pro-Kurdish HDP in June. Erdogan – who hopes to consolidate his power by rewriting the constitution – has launched a renewed military offensive against the PKK and has been accused of obstructing lawmakers’ efforts to form a coalition government, leading at least on opposition leader to compare the President to Hitler.
In what looks like the latest escalation in a string of wartime crackdowns, Turkey has declared a curfew for citizens of Lice, a district of Diyarbakir province. As Bloomberg reports, “citizens are prohibited from going out on streets from 9pm tonight until 7am on Tuesday.”
Additionally, “the Governor of Diyarbakir [has] declared ‘special security zones’ in Silvan, Lice, Kulp and Dicle,” citing the PKK “terror” threat.
Meanwhile, the lira had plunged to a new low against the dollar amid the political turmoil,although amusingly, the currency pared some losses after reports indicated Prime Minister Ahmet Davutoglu is set to make “very nice statements” after another round of coalition talks.
Here’s the latest from Bloomberg on the negotiations which appear to have reached a stalemate:
“I believe I’ve tried all paths for a government,” acting prime minister and AK Party leader Ahmet Davutoglu says in televised remarks after meeting nationalist MHP leader Devlet Bahceli today in Ankara.
Bahceli said a coalition with the ruling AK Party isn’t possible
Bahceli also said that MHP wouldn’t support a short-term govt with AKP, a minority AKP govt, or early elections
Davutoglu says next steps to follow meeting with President Recep Tayyip Erdogan
Turkey’s AKP unable to form a govt w/ CHP or MHP: Davutoglu
Davutoglu says he told Bahceli presidency not under discussion during talks to form a govt, while MHP said that making Erdogan retreat to the constitutional limits of the presidency was a precondition for any partnership
Expect Erodgan to call for snap elections soon, paving the way for the complete subversion of the democratic process on the way to the forced institution of an executive presidency which Erdogan claims is already the “de facto” form of government.
Roussef’s approval rating is only 8% as thousands take tot he streets in Brazil demanding the President’s impeachment:
(courtesy zero hedge)
Hundreds Of Thousands Take To The Streets In Brazil Demanding President’s Impeachment
Protests are underway in Brazil as hundreds of thousands take to the streets to call for the impeachment of President Dilma Rousseff. Here’s Bloomberg:
An estimated 25,000 protesters in Brasilia marched toward Congress, chanting against Rousseff and corruption, carried a long banner demanding “Impeachment Now.”
Rouseff monitored proceedings from her official residence, due to meet with some of her cabinet in the afternoon, said Justice Minister Jose Eduardo Cardozo.
When the world’s foremost mainstream media outlets begin to run stories with titles like: “How to Impeach a Brazilian President: A Step-by-Step Guide“, you know your political career may be in trouble.
Brazil’s Dilma Rousseff – who recently became the country’s most unpopular democratically elected president since a military dictatorship ended in 1985, with an approval rating of just 8% – faces a litany of problems, not the least of which are accusations around fabricated fiscal account data and corruption at Petrobras where she was chairwoman from 2003 to 2010.
But beyond that, Brazil is mired in stagflation and, as Morgan Stanley recently noted, is at the center of the global EM unwind triggered by falling commodity prices, slowing demand from China, and an imminent Fed rate hike. Underscoring the depth of the economic malaise is the following graphic from Goldman which shows that when it comes to inflation-growth outcomes, it doesn’t get much worse than what Brazil suffered through in Q2.
Now, frustrations have apparently reached a boiling point (again) and mass demonstrations are planned for Sunday. Here’s Bloomberg with more:
As allegations of corruption and incompetence swamp Brazil’s government, and plummeting commodity prices sap its economy, hundreds of thousands of angry citizens are expected to descend on central squares across the country on Sunday, posing a key test for President Dilma Rousseff.
This will be the year’s third mass protest against Rousseff, who is facing growing calls for her impeachment. A strong showing could help support her ouster and deepen a sell-off on financial markets.
The Free Brazil Movement, one of the groups organizing the demonstrations, says rallies are confirmed in 114 cities.
Congress is watching the turnout both to judge the support for impeachment proceedings and to measure the level of discontent in their home districts.
Since narrowly winning reelection last October, Rousseff, Brazil’s first female president, has embarked on an austerity program that has cost her political capital. Her popularity has plummeted to 8 percent, a record low, and more than two-thirds of Brazilians support impeachment, according to Datafolha, a polling firm. The economy in 2015 is forecast to post its worst performance in 25 years amid ongoing corruption probes into politicians and executives.
Rousseff has reversed herself on some popular but expensive measures such as caps on electricity and gasoline prices. The middle class that doesn’t qualify for subsidies has been hardest hit as power bills rose an average 23 percent, and more than 50 percent in some regions. Higher interest rates are restricting consumer credit, unemployment has hit 6.9 percent and inflation is rising, inching toward 10 percent.
Rousseff won election in 2010 following Luiz Inacio Lula da Silva, the central figure of the Workers’ Party. She rode his popularity for most of her first term until demonstrations in 2013 brought millions to the streets protesting corruption and spending on the World Cup hosted by Brazil last year.
Rousseff recovered enough to win reelection but protests in March and April took aim at her.
Renan Machado, a 29-year-old lawyer from Sao Paulo said Sunday’s rallies will be an opportunity to demonstrate the outrage shared by many Brazilians.
“I’m going to protest to end this wave of corruption because I can’t stand this incompetent government any longer,” Machado said.
And more from AP:
Demonstrators are taking to the streets of cities and towns across Brazil for a day of nationwide anti-government protests.
Sunday’s protests, which were called mostly via social media by a variety of groups, are seen as a barometer of popular discontent with President Dilma Rousseff. Her second term in office has been shaken by a snowballing corruption scandal involving politicians from her Workers’ Party, as well as a spluttering economy, spiraling currency and rising inflation.
Thousands of people brandishing green and yellow Brazilian flags streamed onto Rio’s Copacabana Beach, and smaller demonstrations were under way in the Amazonian city of Belem and the central city of Belo Horizonte.
It was the third large-scale anti-government demonstration this year.
Funds For Fracking Finally Dry Up: One Last Hail Mary Pass Remains
Is Saudi Arabia on the verge of winning the war on US Shale firms? It appears the spigot of malinvestment-subsidizing liquidity that kept numerous zombie energy firms alive has been shut off almost entirely. As oil prices return to cycle lows, so credit risk has spiked to record highs and issuance of life-giving bonds has collapsed. As Reuters reports, this has opened up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks’ slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow.
Credit risk has soared back to record levels…
As public market demand for this sector has collapsed…
And as Reuters reports, this has pushed Shale firms into the willing-to-deal-at-much-lower-prices private equity business…
Throughout much of the crude market rout that started in mid-2014 oil firms could rely on generous capital markets investors betting on a quick recovery in prices, which made any asset sales look unattractive. But since crude prices began tanking again in early July after a partial three-month recovery, oil firms have finally started to feel the squeeze.
A torrent of $44 billion in high-yield debt and share sales in the first half of this year has slowed to a trickle with oil now at just above $42 a barrel, 30 percent below its June levels and 60 percent down from June 2014, CLc1 and a more pessimistic view taking hold that global oversupply could keep oil cheap for years.
The number of high-yield bond and share issues has tumbled more than two-thirds from levels seen in May, Thomson Reuters data show.
That opens up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as many oil companies need cash to replenish banks’ slimmed-down lending facilities, service their bonds and finance drilling of new wells to keep pumping oil and sustain cash flow.
“The capital markets showed up in force in the first quarter much to everyone’s surprise,” said Carl Tricoli, managing partner at Denham Capital, a private equity fund in Houston.
“It didn’t solve people’s problems, so now when you roll to 2016 …there will be an opportunity for private equity-backed companies with plenty of capital in place to go out and start buying.”
On Monday, shale producer Magnum Hunter Resources Corp. (MHR.N) said it would get an unnamed private equity fund to pay for up to $430 million of drilling work in Ohio in return for rights to the land.
Dealmakers say potential sellers of oilfield assets are now discussing bids they would have rejected a few months ago while the changed outlook for oil allows buyers to adjust bids down.
But hope is fading as Bill Conway, co-CEO of The Carlyle Group, a giant in alternative funding, struck a cautious tone…
“I would say, this is a good time to be careful when it comes to investing in energy.”
Perhaps that explains this divergence…
Except investors seem not to realize that the PE shops will only deal at much lower prices – which is what the credit market already implies.
Charts: Bloomberg and Reuters
Crude Oil Pump’n’Dump Ends At Lowest Close Since March 2009
For the first time since March 2009, WTI Crude closed with a $41 handle. After an all-day levitation (along with stocks), it appears the world and their pet rabbit is now aware of the pre-NYMEX close ramp and thus outspoofed themselves and so WTI fell through a bidless vacuum to the lows of the day…
Low volume steps up.. and high volume elevator down…
Euro/USA 1.1085 down .0021
USA/JAPAN YEN 124.56 up .309
GBP/USA 1.5629 up .0033
USA/CAN 1.3142 up .0054
Early this Monday morning in Europe, the Euro fell by 21 basis points, trading now just below the 1.11 falling to 1.1085; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece and the Ukraine, rising peripheral bond yields, and flash crashes and another Chinese currency devaluation although last night it surprisingly strengthened a tiny .0038.
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen continues to trade in yoyo fashion as this morning it settled down again in Japan by 31 basis points and trading just above the 124 level to 124.56 yen to the dollar.
The pound was up this morning by 33 basis points as it now trades well above the 1.56 level at 1.5629, still very worried about the health of Barclay’s Bank and the FX/precious metals criminal investigation/Dec 12 a new separate criminal investigation on gold, silver and oil manipulation.
The Canadian dollar fell by 54 basis points to 1.3142 to the dollar. (Harper called an election for Oct 19)
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially last week with the fall of the yuan carry trade.
2, the Nikkei average vs gold carry trade (still ongoing)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this Monday morning: up by 100.81 or 0.49%
Trading from Europe and Asia:
1. Europe stocks mostly in the green
2/ Asian bourses mostly in the green … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai slightly in the green (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)green/India’s Sensex in the red/
Gold very early morning trading: $1116.40
Early Monday morning USA 10 year bond yield: 2.17% !!! down 3 in basis points from Friday night and it is trading well below resistance at 2.27-2.32%
USA dollar index early Monday morning: 96.79 up 18 cents from Friday’s close. (Resistance will be at a DXY of 100)
Closing currency crosses for Monday night/USA dollar index/USA 10 yr bond: 4 pm
USA/Chinese Yuan: 6.3935 up .0027 ( Chinese yuan down 27 basis points)
LOLume Lifts Stock; Bonds Bid As Crude, Copper, & Credit Crumble
On a day such as this, there is only one clip to sum it all up…
First things first – there was NO Volume!!!!
The opening oif the US equity market was incredibly bullish ‘fundamentally’ as disnal-date-driven weakness was BTFD’d all the way to last week’s highs…
Cash indices all soared off the opening highs… Note the S&P 500 cash tested down to its 200DMA today (2077), and ripped back above its 50DMA (2095)…
S&P 2100 baby!!
The Russell 2000 rallied right up to its 200DMA…
Homebuilders squeezed higher once again on a completely self-serving NAHB sentiment print…
Energy stocks held onto gains in the face of surging credit risk and plunging oil prices…
Financial stocks have had a good couple of days but we note that credit risk continues to tick wider (most notable among the moves is Goldman Sachs). While the moves are small in absolute terms, relative to stocks they suggest some conuterparty risk starting to bleed into banks (and most notably a decent leg wider after China’s move)…
Another day, another collapse in VIX…
Bonds, stocks, and bullion were all higher on the day…
Credit markets were not as excited about the crappy data today as stocks…
As HYG has now dumped into the close for the 4th day in a row…
The Treasury Complex gagged lower in yield after the collapse in Empire Fed…
The US Dollar limped higher all daya with some volatility around the data…
Crude & Copper were clubbed amid crazy volatility intraday as Gold and silver snapped higher after the data and held on to gains..
And the idiocy of the day would nt be complete without reference to crude oil’s farcical moves today… all on no news whatsoever!!
Bonus Chart: Bloomberg IPO Index is having its worst year since 2011…
Empire Fed Collapses To Six Year Lows As New Orders Signal Recession Imminent
Having ‘stabilized’ in recent months, The Empire Fed Manufacturing Survey just collapsed to -14.92 (from 3.86) missing expectations of 4.50 by the biggest margin since 2010. Across the board it was a bloodbath with New Orders crashing, inventories plunging and employment lower (with both workweek and number of employees falling). The headline data would have been worse were it not for the concurrent spike in ‘hope’ – highest since April.
- *EMPIRE STATE FACTORY INDEX FALLS TO LOWEST SINCE APRIL 2009
As New Orders Flash Recessionary signals…
American Malls In Meltdown – The Economic Recovery Is Complete & Utter Fraud
The government issued their monthly retail sales this past week and four of the biggest department store chains in the country announced their quarterly results. The year over year retail sales increase of 2.4% is pitifully low in an economy that is supposedly in its sixth year of economic growth with a reported unemployment rate of only 5.3%. If all of these jobs have been created, why aren’t retail sales booming?
The year to date numbers are even worse than the year over year numbers. With consumer spending accounting for 70% of our GDP and real inflation running north of 5%, it’s pretty clear most Americans are experiencing a recession, despite the propaganda data circulated by the government and Fed. The only people not experiencing a recession are corporate executives enriching themselves through stock buybacks, Wall Street bankers using free Fed Bucks while rigging the the markets in their favor, politicians and government bureaucrats reaping their bribes from billionaire oligarchs, and the media toadies who dispense the Deep State approved propaganda to keep the ignorant masses dazed, confused, and endlessly distracted by Cecil the Lion, Bruce/Caitlyn Jenner, Ferguson, and blood coming out of whatever.
You won’t hear CNBC, Bloomberg, the Wall Street Journal or any corporate mainstream media outlet reference the fact retail sales growth is at the exact same levels as when recession hit in 2008 and 2001. Their job is to regurgitate the message of economic recovery and confidence in the future, despite overwhelming evidence to the contrary.
Retail sales are actually far worse than the 2.4% reported number. Excluding the subprime debt fueled auto sales, retail sales only grew by 1.3% in the last year. The automakers are practically giving vehicles away as their lots are stuffed with inventory. The length of auto loans and the average amount of auto loans are now at all-time highs. The percentage of subprime auto loans is surging to record levels, as defaults begin to rise. The percentage of vehicles being leased is also at an all-time high. To call these “auto sales” strains credibility. These people are either perpetually renting their vehicles or just driving them until the repo man shows up.
The relatively strong year over year furniture sales is also driven by the fact that you can finance the purchase at 0% interest for seven years. All is well for the Ally Financial, GE Capital and the myriad of fly by night subprime lenders until the recession arrives, unemployment soars, and defaults skyrocket. Then their bloated debt ridden balance sheets will explode in an avalanche of defaults. That’s when they insist on another taxpayer bailout to “save the financial system”.
The year over year crash in oil prices was supposed to result in a huge spending splurge by the masses, according to the media talking heads. You don’t hear much about that storyline anymore. The talking heads are now worried that oil prices are too low. I guess the tens of thousands of layoffs in the oil industry and the obliteration of the Wall Street financed shale oil fraud storyline is offsetting the $10 per week in gasoline savings for the average driver.
At least restaurant and bar sales remain strong. It seems Americans have decided to eat, drink and be merry, for tomorrow they die. I do believe there is some truth to that saying in today’s world. I think people are drowning their sorrows by drinking and eating. They’ve drastically reduced buying stuff they don’t need with money they don’t have. Spending their gas savings at a restaurant or bar is still doable.
With real median household income at 1989 levels, real unemployment north of 15%, a massive level of under-employment, young people unable to buy a home – saddled with $1 trillion of student loan debt, middle aged parents struggling to take care of their aging parents and struggling children, and Boomers who never saved for their retirement, the mood of the country is decidedly dark and getting darker by the day. The rise of Trump and Sanders in the polls is an indication of this dissatisfaction with the existing social order.
The part of the retail report flashing red is the sales of General Merchandise stores, and particularly department stores. This category includes the likes of Wal-Mart, Target, Costco, Sears, Macy’s, Kohls, and JC Penney. General merchandise sales fell 0.5% in July, with Department store sales dropping by 0.8%. Sales at these behemoth retailers have barely budged in the last year, with overall sales up a dreadful 0.3%. The dying department stores have seen their sales plummet by 2.7%. The talk of a retail revival is dead on arrival. Wal-Mart and Target muddle on with lackluster results, while JC Penney and Sears continue their Bataan Death March towards the retail graveyard.
The false narrative of economic recovery can be blown to smithereens by the historical data on the Census Bureau website. Their time series data goes back to 1992. GDP has supposedly risen by 22% since 2007. General merchandise sales were $48.4 billion in July 2007. They were $56.1 billion in July 2015. That’s a 15.9% increase in eight years. Even the manipulated and massaged BLS CPI figure has increased 14.5% over this same time frame. That means that REAL retail sales at the nation’s biggest retailers has been virtually flat for the last eight years. Does that happen during an economic recovery?
The department store data is almost beyond comprehension. July department store sales were the lowest in the history of the data series. Sales of $13.8 billion were 22% below the July 2007 level of $17.6 billion. They were 28% below the peak level of $19.2 billion in 1999. Real department store sales are 36.5% BELOW where they were in 2007, and Wall Street shysters have had buy ratings on these stocks the whole way down. These worthless hucksters remove the buy rating the day before these dinosaur department stores declare bankruptcy. Excluding the debt driven auto sales, real retail sales are flat with 2008 levels.
The data from the Census Bureau has been more than confirmed by the absolutely atrocious financial results reported by Macy’s, Kohls, Sears and J.C. Penney. Retailers do not report results this poor during economic recoveries. The results clearly point to an ongoing recession for the middle and lower classes who do the majority of working and spending in this country. The rich continue to spend their stock market winnings at exclusive boutiques and high end retailers like Nordstrom, but the average American is being sucked into the abyss by rising food prices, rent, home prices, tuition, and the Obamacare driven health insurance and medical costs. With declining real wages, they have less and less disposable income to spend buying cheap Chinese crap at their local mall department stores.
Here is a glimpse into the results of department store dinosaurs headed towards extinction:
- Overall sales fell 2.6%, while comparable store sales fell by 2.1%, as Macy’s continues to close under-performing stores. News flash: there are many more stores to close.
- Profits crashed by 25.7% as gross margins declined and expenses rose.
- Cash flow from operations has declined by a staggering 46% in the first six months of this year.
- The bozos running this sinking retailer have mind bogglingly burned through $787 million of cash, while adding $452 million in long term debt to buyback their own stock. Executive compensation is stock based, so wasting close to $1.6 billion in the last year as sales and profits fall, is considered prudent management by the CEO.
- Despite falling sales, the management of this sinking ship have increased inventory by $200 million in the last year. This bodes well for margins in the second half of the year.
- The long-term future for this retailer gets bleaker by the day as their long-term debt, pension liabilities, and other long term obligations total $10.4 billion, while their declining stockholder’s equity totals $4.8 billion.
- To show you how far Macy’s has come in the last nine years you just need to compare their results from the 2nd quarter of 2006 to today. They registered sales of $6.0 billion versus $6.1 billion today. On a real, inflation adjusted basis, their sales have fallen by 16% over the nine year period. They had profits of $317 million in 2006, 46% more than the $217 million in the 2nd quarter of 2015. They had $13.6 billion of equity and $8.2 billion of long-term debt.
- And now for the best part. Despite generating 46% less income than they did 9 years ago, Macy’s stock sits at $63 per share, while it traded at $36 per share in 2006. A company with declining revenue, declining profits and a bleak future should not be sporting a PE ratio of 16. When this recession really takes hold, their 2009 price level of $9 per share will be challenged on its way to Radio Shack land – $0 per share.
- Overall sales were up a pathetic 0.6% after last year’s 2nd quarter sales were lower than 2013. Comp store sales were up only 0.1% after being down 1.3% the previous year.
- Profits fell precipitously by a mere 44% versus the prior year, down by $102 million. Margins fell while expenses rose.
- In the lemming like behavior of corporate CEOs across the land, this struggling retailer thought it was a brilliant idea to go $330 billion further into debt, while buying back $543 million of stock in the first six months.
- While sales are essentially flat, the executives of this company ratcheted up their inventory levels by 9% in the last year. Flat sales growth and surging inventory levels leads to plunging margins and profits. I guess that’s why I got a 30% off everything coupon in the mail last week.
- Cash from operations has crashed by 52% in the first six months. You would think prudent executives would be using a half a billion of cash to buy stock and boost their compensation packages.
- Another comparison to yesteryear provides some perspective on how well Kohl’s is performing. During the 2nd quarter of 2007 they generated $3.6 billion of sales and $269 million of profits. Their overall sales are up 19% (3% on a real basis) even though they have increased their store base by 38%. Profits in 2015 were 52% lower than 2007.
- Sales per store is 14% lower today than it was in 2007. And even more worrisome for their long term survival, inventory levels are up 59% compared to the 19% increase in sales.
- Again, the stock price peaked in 2007 at $76 and earlier this year reached a new all-time high of $79. Despite deteriorating financial conditions, poor management, plunging cash levels, and nothing on the horizon to portend a turnaround, the stock trades at a PE ratio of 13.
- Sears hasn’t reported their 2nd quarter results yet, but pre-announced that same store sales crashed by 10.6% versus last year. They are truly dead retailer walking, as Eddie Lampert’s real estate maneuvers attempt to hide the coming bankruptcy from unsuspecting investors is nothing but smoke and mirrors perpetuated by Eddie and his Wall Street shyster bankers. Excluding his desperate real estate schemes, they will lose another $300 million.
- In the last four years, during an economic recovery, Sears has seen their sales crater from $43 billion to $31 billion, and still falling. They have managed to lose $7.4 billion in just over four years and their stock still trades at $25 per share – proving there is a sucker born every minute.
- They continue to close hundreds of stores and still can’t stop the hemorrhaging. The decade of using financial gimmicks rather than investing in his stores is coming home to roost for Eddie “the next Warren Buffett” Lampert. Of course, he will arrange matters in a way where he wins, while the stockholders lose when the bankruptcy papers are filed.
- The balance sheet is a disaster. They have generated a Negative cash flow from operations of $1.4 billion in the last twelve months. They have burned through $556 million of cash. They have $8.4 billion of long-term debt and other liabilities, with equity of NEGATIVE $1.2 billion.
- Sears may be the worst run business in America, and its chances of going bankrupt are 100%, but the Wall Street hype machine has its stock price at $25 per share, 20% higher than it was in late 2008. For some perspective, Sears’ 2nd quarter 2008 revenues totaled $11.8 billion and they made a $65 million profit. Sales in the 2nd quarter of 2015 will be approximately $6 billion with a loss of at least $300 million. Of course their stock should be higher.
- I found it humorous to see the Wall Street hucksters and their mainstream media mouthpieces cheering on the J.C. Penney 2nd quarter results as “better than expected” and proof they have turned the corner. Their overall sales went up by 2.7% and comp store sales went up by 4.1%, as they continue to close stores. For some perspective on this tremendous sales gain to $2.9 billion, their sales in the 2nd quarter of 2009 were $3.9 billion. When your sales are still 26% below where they were six years ago, maybe you shouldn’t be crowing too much.
- It seems Wall Street and the MSM didn’t really want to focus on the only thing that matters – profits. They lost another $138 million and have racked up $305 million of losses so far this year. They have lost money for 13 consecutive quarters. That is no easy feat. They have managed to lose $3.6 billion in the last four and a half years, while driving their annual sales from $18 billion to $12 billion.
- Their balance sheet isn’t as horrific as Sears’, but it is nothing to write home about. They have $6.2 billion of long-term debt and other liabilities, supported by a mere $1.6 billion of equity. Back in 2011 they had $5.5 billion of equity to support $4.9 billion of long term liabilities. The deterioration of this once proud retailer is clear to anyone with two eyes and a brain. So that eliminates all CNBC pundits and guests.
- Wall Street pumped the stock 5% higher on Friday to celebrate their $138 million loss. A company that is on track to lose $500 million has seen its stock price rise 32% this year on hopes and dreams. Wall Street has had buy ratings on this stock from its peak of $82 per share in 2007 on its 90% downward path to its current price. I’m sure they’re right this time.
The truly disturbing revelation from the Census Bureau data and the terrible financial results being reported by some of the biggest retailers in the world is that it is occurring with unemployment at 5.3%, the economy in the sixth year of a recovery, and a Fed who has pumped $3 trillion into the banking system while still keeping interest rates at 0%. What happens when we roll back into the next official recession, unemployment soars, and consumers really stop spending?
What is revealed when you look under the hood of this economic recovery is that it is a complete and utter fraud. The recovery is nothing but smoke and mirrors, buoyed by subprime auto debt, really subprime student loan debt, corporate stock buybacks, and Fed financed bubbles in stocks, real estate, and bonds. The four retailers listed above are nothing but zombies, kept alive by the Fed’s ZIRP and QE, as they stumble towards their ultimate deaths.The coming recession will be the knife through their skulls, putting them out of their misery.
“Retail chains are a fundamentally implausible economic structure if there’s a viable alternative. You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20 to 30 percent in revenues. It just doesn’t make any sense for all this stuff to sit on shelves.”