Good evening Ladies and Gentlemen:
Here are the following closes for gold and silver today:
Gold: $1120.40 down $0.20 (comex closing time)
Silver $14.75 up 21 cents.
In the access market 5:15 pm
In this commentary I have spent a lot of time discussing Quantitative tightening by China coupled with the threat of an increase in rates by the USA. Both of these countries can be viewed as in the mode of tightening ie. removing liquidity from the markets. The two entities that are increasing QE and thus adding liquidity is the ECB and Japan. The problem with the latter two entities is the fact that they are running out of bonds to monetize so they too may be finished from increasing liquidity. I have provided many important commentaries on this subject. I urge you to take your time read them. You will be glad you did.
First, here is an outline of what will be discussed tonight:
At the gold comex today we had a poor delivery day, registering 0 notices for 0 ounces Silver saw 140 notices for 700,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 219.99 tonnes for a loss of 83 tonnes over that period.
In silver, the open interest rose by 886 contracts despite the fact that silver was down in price by 16 cents on Friday. Again, our banker friends used the opportunity to cover as many silver shorts as they could but failed. The total silver OI now rests at 157,506 contracts In ounces, the OI is still represented by .787 billion oz or 112% of annual global silver production (ex Russia ex China).
In silver we had 53 notices served upon for 265,000 oz.
In gold, the total comex gold OI surprisingly rose to 419,002 for a gain of 5,125 contracts. We had 0 notices filed for nil oz today.
We had a slight change in tonnage at the GLD today/ a slight withdrawal of .24 tonnes and this was to pay for fees./ thus the inventory rests tonight at 682.59 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. It sure looks like 670 tonnes will be the rock bottom inventory in GLD gold. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold will be the FRBNY and the comex. In silver, we had a big withdrawal in silver inventory at the SLV to the tune of 1.527 million oz/Inventory rests at 323.396 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver rise by 886 contracts up to 157,506 despite the fact that silver was down by 16 cents in price with respect to Friday’s trading. The total OI for gold rose by 5125 contracts to 419,002 contracts, despite the fact that gold was down by $3.10 on Friday.
2.Gold trading overnight, Goldcore
3. Trading overnight from Japan
4. Trading overnight from China.
5. Understanding Quantitative Tightening/POBC trying to shore up their economy
seven important stories/Stockman/Deutsche bank, Ray Dalio/Bridgewater/zero hedge)
6. Tensions mounting against Russia:
three stories/zero hedge
7. Why Soc Generale is worried this time with the world’s 9 trillion USA losses. It is due to the huge debt taken on by public companies buying back their stock
(Soc Generale/zero hedge)
8 Oil related stories
9. USA stories/Trading of equities NY
a) Goldman Sachs states 7 reasons why the USA will not raise rates on Sept 17
b) In the jobs report 698 native Americans have lost their jobs in August and yet over 200 foreign born Americans got jobs
c) Three Nomura traders charged criminally for skimming
d) retail sales as reported by Gallup shows a big downfall/numbers far different from the conference board junk
e. A good look at the public school finances inside Chicago
10. Physical stories:
- Peter Stoeferle on Gold metrics “IN Gold We Trust” 2015
- Bill Holter’s paper tonight: “Be Careful What You Wish For”
- Craig Hemke on the addition of 16 tonnes of gold added to China’s official reserves
- Bloomberg: on Bitcoins use in the Isle of Man
- Jessie of Amercain cafe on Ronan Manly’s paper on huge discrepancies reported by the LBMA on gold supplied for refining and supplied to China.
- John Embry interviewed by Kingworldnews
11. Two concluding pieces:
i) Greg Hunter interviews one of my favourites: Rob Kirby
ii) Dave Kranzler of IRS believes the USA will start a war to get out of its mess of huge debts and no gold
and well as other commentaries…
Let us head over and see the comex results for today.
September contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz||105,025.05 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||nil oz|
|No of oz served (contracts) today||0 contracts (nil oz)|
|No of oz to be served (notices)||175 contracts (175,000 oz)|
|Total monthly oz gold served (contracts) so far this month||12 contracts(1,200 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||153,611.2 oz|
Total customer deposit: nil oz
JPMorgan has only 0.6133 tonnes left in its registered or dealer inventory. (19,718.722 oz) and only 863,683.63 oz in its customer (eligible) account or 26.86 tonnes
September silver initial standings
September 8 2015:
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||1,282,159.83|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||nil|
|No of oz served (contracts)||700 contracts (700,000 oz)|
|No of oz to be served (notices)||712 contracts (3,560,000 oz)|
|Total monthly oz silver served (contracts)||804 contracts (4,020,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil|
|Total accumulative withdrawal of silver from the Customer inventory this month||6,021,596.2 oz|
Today, we had 0 deposits into the dealer account:
total dealer deposit; 0 oz
total customer deposits: 0 oz
total withdrawals from customer: 1,282,159.83 oz
And now SLV:
Sept 8/we had a huge withdrawal of 1.524 million oz of silver from the SLV/Inventory rests tonight at 323.396 million oz.
Sept 4.2015:no changes in inventory at the SLV/rests tonight at 324.923 million oz
sept 3/we had a small withdrawal of 140,000 oz of silver from the SLV/Inventory rests at 324.923 million oz
Sept 2: we had a small withdrawal of 859,000 oz of silver from the SLV vaults/inventory rests tonight at 325.063 million oz
September 1/no change in inventory over at the SLV/Inventory rests tonight at 325.922 million oz
August 31.a huge addition of 954,000 oz were added to inventory today at the SLV/Inventory rests at 325.922 million oz
August 28.2015: no change in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 27.no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 26.2015/no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 25.2015:no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 24./no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 21.2015/ no change in inventory at the SLV/Inventory rests at
324.698 million oz
August 20.2015:/no changes in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 19/no changes in inventory at the SLV/Inventory rests tonight at 324.698 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. * * * * *
China Buys 16 Tons Gold In August – Dumps $94 Billion
Given the strong demand fundamentals, particularly out of China, gold should go higher but as ever there is a risk of selling in the futures market leading to weakness in the short term as traders follow momentum and ignore fundamentals.
This demand continues and is being bolstered by official Chinese demand. The People’s Bank of China (PBOC) added another 15.98 tonnes of gold in August – at the same time its foreign exchange reserves fell a whopping $94 billion. The Chinese continue to diversify out of the dollar and into gold.
Today’s Gold Prices: USD 1120.85, EUR 1003.49 and GBP 728.27 per ounce.
Yesterday’s Gold Prices: USD 1121.00, EUR 1004.03 and GBP 734.75 per ounce.
Gold was marginally lower in gold trading in Singapore and this slight weakness continued to European trading with gold tethered to a remarkably tight $3 range between $1,123.70/oz and $1,120.50/oz.
Gold Inches up in Asia Trade – The Wall Street Journal
Gold stable, net long position up for fifth consecutive week – The Bullion Desk
Perth Mint Gold and Silver Sales Solid in August – CoinNews.net
China FX reserves fall record $93.9 bln in Aug as central bank supports yuan – Yahoo Finance
Hollande Readies Syria Air Strikes as Response to Refugee Crisis – Bloomberg
Data retention and the end of Australians’ digital privacy – The Sydney Morning Herald
China “Officially” Adds Another 16 Metric Tonnes – TF Metals Report
LBMA Apparently Altered Its Gold Refining Flow Statistics By 2,200 Tonnes – Jesse’s Café Américain
Did COMEX Counterparty Risk Just Reach A Record High? -Zero Hedge
Despite the turmoil in China by the selling of 115 billion dollars worth of treasuries, they still found time to buy 16 tonnes of gold in August. You could bet the farm that this gold was bought long ago as China will slowly “add” to their official reserve each month.
(courtesy Turd Ferguson/Craig Hemke/GATA)
TF Metals Report: People’s Bank of China adds 16 tonnes of gold in August
Submitted by cpowell on Mon, 2015-09-07 19:33. Section: Daily Dispatches
3:30p ET Monday, September 7, 2015
Dear Friend of GATA and Gold:
Even while it has been selling a lot of U.S. Treasury bonds, the People’s Bank of China continues to add to its gold reserves, in the amount of 16 tonnes in August, the TF Metals Report’s Turd Ferguson reports today. The monthly additions, Ferguson adds, are running at a rate of about 200 tonnes per year. His report is posted at the TF Metals Report here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
(courtesy Peter Stoeferle/Mark Valek/zero hedge)
In Gold We Trust – 2015 Edition
Monetary history, staggering mountains of debt, demographic problems, metrics relevant to the gold market, central bank debauchery and currency debasement in all their terrible glory, and even the beer price of gold – the latest Incrementum “In Gold We Trust”chartbook has it all…
There has been an astonishing synchronization between equity markets and the gold-silver ratio until 2011. A rising stock market almost always coincided with a declining gold-silver ratio, i.e. with silver outperforming gold. This may have been due to re-inflation being accomplished with conventional monetary policy – i.e., credit expansion by commercial banks – in previous cycles . This affected the real economy more quickly and fostered consumer price inflation. This time, re-inflation has been attempted by means of central bank securities purchases, which has led to price increases in investment assets, but has not been able to spur consumer price inflation.
Full Chartbook below…
Further to our discussion yesterday whereby Ronan Manly noted that the LBMA altered its gold refining stats into Hong Kong by 2200 tonnes:
(courtesy Jessie/American cafe)
LBMA Apparently Altered Its Gold Refining Flow Statistics By 2,200 Tonnes
Ronan Manly has published a fascinating analysis of the LBMA gold refining statistics today.
The gold refined by LBMA ‘good delivery’ refiners is sometimes involved in converting existing gold bars into kilobars which are suitable for export to the Asian Markets.
Ronan Manly offers quite a bit of detail with regard to a very large revision in the LBMA 2013 refining data and suggests that such a large restatement of gold statistics, almost 1/3, without explanation, seems odd.
The supposition is that the LBMA originally counted gold bars that were taken from existing sources, such as their own stores, ETFs, and the Bank of England and re-refined them into kilobars for delivery into Asia. Later they restated the number much lower, by 2,200 tonnes. We have not been given the exact reason for this, but one suggestion is that the gold did not come from new mining or traditional recycling. And the LBMA was reluctant to advertise such a huge spike in gold refining spurred on by Asian demand.
Depending on how the GFMS and the WGC uses the statistics and sources, this could result in a significant (~2,200 tonnes) understatement of the flow of gold from Western sources into Asia in just that one year. Considering how tight gold supplies have been this might explain quite a bit.
What exactly is the LBMA policy decision here, and what about subsequent years of 2014 and 2015?
What is the source of this gold? And what is so special about 2013?
The one thing that seems significant about 2013 is that the price of gold was hit rather hard by selling after hitting a peak in 2012, and the total amount of gold held in Western depositories and ETFs dropped considerably concurrent with that hit in price. A chart is included below for your convenience.
So far we have more questions than answers. Perhaps more information will be forthcoming. I am given to understand that the LBMA is not open to discussing the matter.
I have my own hypothesis. There was a major effort to hold down the price of gold in 2013 after it had run to a new high. That effort to suppress the price resulted in a huge spike in physical demand from China.
‘Stopgap measures’ were taken to meet that physical demand, but without allowing the price to increase.
As more and more gold was shaken loose from various sources, a campaign of stifling Western interest in gold was undertaken to permit even more gold to be taken out of ETFs and repositories.
However, the demand from China and India were not passing events, and have continued until even now. And so the stopgap measures of 2013 have turned into an ongoing shuffling around of existing bullion to try and keep the price of gold from running higher, and threatening some of the bullion banks and institutions who cannot possibly replace all that has been loaned out and sold at anything near today’s prices.
Or it *could* be something else entirely. Time will tell I am sure. But I think that there are now two events that might be remembered as potentially pivotal: one in 2007 in which the world’s central banks became net buyers of gold for the first time in about thirty or more years, and 2013, in which the flow of gold from West to East put the Gold Pool into unsustainable endgame from which it could not recover without allowing prices to eventually run higher.
Ronan Manly suggests that he will have a follow up article explaining his own analysis, and I will most likely defer to his more informed judgement and wait to see what he says. I do not have all the information and a few things still puzzle me a bit. But I do congratulate him on finding this and writing it up so well with so much thought.
For the detailed analysis about what happened read the entire piece Ronan Manly, The LBMA’s shifting stance on gold refinery production statistics
This is a quote from his article:
“There are 2,200 tonnes of 2013 gold refining output in excess of combined mine production and scrap recycling being signalled within the 6,601 tonnes figure that was removed from the LBMA’s reports on 5th August 2015.
Could it be that this 6,601 tonne figure included refinery throughput for the huge number of London Good Delivery gold bars extracted from gold ETFs and LBMA and Bank of England vaults and converted into smaller gold bars in 2013, mainly using LBMA Good Delivery Swiss gold refineries?And that maybe this 6,601 tonne figure stood out as a statistical outlier for 2013 which no one wanted to talk about?
The objectives of HM Treasury’s Fair and Efficient Markets Review (FEMR) include transparency and openness. It would appear that altering already published gold refinery statistics, especially for 2013, seems not to be in the spirit of these FEMR objectives.
Part 2 of this analysis of the LBMA’s 2013 gold refinery statistics looks behind the 6,601 tonne number at the phenomenon of Good Delivery bars being processed through the Swiss gold refineries in 2013, the gold withdrawals from the London-based gold ETFs, and the huge shipments of gold from the UK to Switzerland in 2013. Part 2 also examines the 2013 withdrawal of gold from the Bank of England, and how GFMS and the World Gold Council tried to, or tried not to, explain the non-stop processing of Good Delivery gold bars into smaller finer kilobars during 2013.”
Related follow up article from Ronan Manly: How Many Gold Bars Are In the London Vaults
Greetings from Bitcoin Island
Submitted by cpowell on Tue, 2015-09-08 00:56. Section: Daily Dispatches
By Jeremy Kahn
Monday, September 7, 2015
The Isle of Man is a strange place. Home to four-horned sheep, cats without tails, and perfectly preserved Victorian-era steam locomotives, this rock in the middle of the Irish Sea is perhaps best known for hosting the world’s most dangerous motorcycle race, the Manx TT.
It’s also a place where, after you take a 70-minute flight from London, a car service called The Lady Chauffeurs will meet you at the airport in a silver Mercedes-Benz S-Class. Imagine my surprise, then, when I’m greeted at arrivals by Keith, who, while courteous, impeccably dressed in a gray suit, and an able driver, is most decidedly not a lady. “All of our regular drivers are busy,” says an apologetic Nula Perren, who owns the company and has accompanied Keith to the airport. Not that I mind. I didn’t choose The Lady Chauffeurs for its ladies; I booked for the bitcoin.
Lady Chauffeurs is one of a growing number of businesses on the island that accept the digital currency. Bitcoin startups tend to cluster where the venture capital money is: London, New York, San Francisco. Taking on these behemoths might appear to be a stretch for a tiny British protectorate that can seem more time capsule than Tomorrowland. Yet the Manx government is indeed seeking to make the island the world’s foremost hub for the technology. Some 25 startups working with digital currencies or the blockchains that underpin them are already based here—and that number is growing steadily. …
… For the remainder of the report:
Putin aide’s advice: Default on foreign debt, put reserves into gold and BRICs bonds
Submitted by cpowell on Tue, 2015-09-08 12:37. Section: Daily Dispatches
8:35a ET Tuesday, September 8, 2015
Dear Friend of GATA and Gold:
Russia’s government long has understood gold’s secret power over the international monetary system. In an address in June 2004 at the summer meeting of the London Bullion Market Association at the Kempinsky Hotel in Moscow, the Russian central bank’s deputy chairman, Oleg Mozhaiskov, spoke only four words in English: “Gold Anti-Trust Action Committee”:
As far as GATA itself knew at that time, it had never had any contact with anyone in Russia or anyone connected with the Russian government.
But Russia’s expressions of interest in gold have multiplied since then and another one was reported today by the Moscow-based financial newspaper Kommersant (“The Businessman”), which described a plan to achieve Russia’s economic sovereignty that is to be presented next week to Russia’s Security Council by Sergei Glazyev, a politician and economist who is an assistant to President Vladimir Putin:
Glazyev is among the small number of Russian officials targeted specifically by U.S. economic sanctions, and according to Kommersant his plan includes a section about “neutralizing anti-Russian sanctions.”
Kommersant’s report is available only in Russian, but a Google translation of its 12th paragraph says Glazyev proposes authorizing Russian companies to “declare force majeure” against loans from countries that have imposed financial sanctions against Russia, “in effect the legalization of non-repayment of all private foreign debt”; converting the reserves of Russia’s central bank and the government’s Reserve Fund and National Welfare Fund into gold and obligations of the “BRICs” countries; and creating a system of international payments separate from the Western-controlled SWIFT system that would operate with China’s UnionPay system.
Of course these aren’t terribly original or insightful ideas. No country that uses another country’s currency for its international commerce is fully sovereign, and only gold is a neutral international reserve currency. It is precisely to rope the world into the U.S. imperial system that the International Monetary Fund prohibits its members from formally linking their currencies to gold, though commodity-producing countries like Russia, South Africa, Mexico, and those in the rest of the developing world are particularly oppressed by such rules.
The question long has been whether any of them will ever have the nerve to do something about it. Glazyev’s report may be an invitation.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
(courtesy John Embry/Kingworldnews)
Intensifying suppression of monetary metals hints at racket’s end, Embry says
Submitted by cpowell on Tue, 2015-09-08 17:55. Section: Daily Dispatches
1:55p ET Tuesday, September 8, 2015
Dear Friend of GATA and Gold:
Central bank intervention against the monetary metals is now so intense as to lead Sprott Asset Management’s John Embry to think that the racket is almost finished. Embry’s comments come in an interview with King World News that is excerpted here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Doom and gloom “porn”, this is the new troll term to describe the realities being described by those who use math and pure logic to derive conclusions. What other conclusions can one come to than “it’s been a great ride but it’s nearly over”? We are only a week away from the Fed meeting where interest rates may come off of “zero” (I dare them). Just reported was an unemployment rate at 5.1% …while 47 million Americans are on food assistance. Totally “unexpected” was the chemical “explosion of the week” in ChinaAnother Chinese Chemical Plant Explodes, Huge Clouds Of Black Smoke Billow Skyward.
I ask, what happens when you raise interest rates on a wobbly creditor (system) living day to day shuffling funds around just to settle? What happens when one of these well known creditors cannot and do not “settle”? I am talking of course about derivatives. You know, those wonderful contracts that allow creditors (even entire countries like Greece, Italy etc.) to hide true debt because they are “insured”. What happens when the insurance does not pay or the insurer goes broke?
As for unemployment, how can nearly 15% of your population eat on food assistance while the country is at or near “full employment”? Does anyone, even for a moment believe the country is at full employment? How does a country survive when more than half the population “gets” while the other, less than half “gives”. All of these social programs may have been noble in their infancy. Now they are used and abused as a “way of life”. The only problem is the unsustainable nature means there is an end date … an “exhaustion” so to speak!
As for most recent and “coincidental” chemical explosion in China, why now? Why didn’t they have lots of explosions along the way to their industrialization? Have they forgotten safety measures, just now? I do want to point out if these are not “accidents”, more “accidents” will occur in the West.
I could of course write 24/7 for a month or more on what has gone wrong and what is unsustainable. The point of this writing is not to give you new information or dots to connect. The dots have been identified and connected by many in what is termed the “alternative media”. Is common sense logic and truth actually “doom porn” for sensationalism or is it getting out because for some, truth still matters? In my opinion truth doesn’t “still matter”, it is ALL that matters and WILL matter.
I write this to tell you “be careful what you wish for”. I receive several hundred e-mails each day. Some are nuts, a few are trolls, some are well intentioned but uninformed, some are inquisitive and others demanding. The one response that seems to be standing out and growing are of the “I just want to get it over” type. I understand this and sometimes I feel the same way. It is a feeling of exhaustion while waiting for the exhaustion to happen! The problem with this is we are wishing for a “crashed” standard of living. Our current standard of living has been on borrowed money and is on borrowed time, I have to say it’s really been fun while it lasted!
Why do I write this now? It is safe to say, if you look around it is obvious. The computer algorithms have taken over, the little guy is long gone and we watch as volatility increases with volume continually decreasing …THE classic sign of exhaustion. Markets all over the world have unsettled and the carefully choreographed stability is being shaken. Debt, which the entire system has been built on has now come front and center with skepticism. Central banks far and wide (including The Fed) are having their “omnipotence” questioned …and thus so are their issued currencies.
Many of you have heard of or read the “Shemitah” http://usawatchdog.com/great-shaking-and-collapse-is-coming-jonathan-cahn/ seven year cycle ends next Saturday September 13th. Some believe it while others do not. Going back every seven years, 2008, 2001, 1994, 1987, 1980, 1973 ..etc. does show some very large and in some cases life changing inflection points. In fact, if we go back 10 seven year cycles, it was the end of WW II, 1945. I might add, this was the dawn of the American dominance of finance kicked off with Bretton Woods cementing the dollar as the world reserve currency.
Some believe in this seven year cycle while others do not. I believe with my own eyes and sense of history the world has been changed by something or some event each and every seven years. Some believe in God and his written word The Bible, while others do not. The Shemitah is Biblical and the seven year cycle is identified several times in The Bible. I am a Christian and thus believe the cycle exists because the Bible says it does, it does not hurt that I can observe this personally.
While not trying to turn this into a God “blog”, I would urge anyone with a religious belief to get your spiritual house in order. No matter what or who your own personal God is, it is quite clear something very big and very bad is about to occur. Whether you have religious belief or not, you must prepare physically for what is coming, this much is obvious. If it is not obvious to you, I am quite sorry as many good and well intentioned people have been trying for years to show you how, what and why this final debt exhaustion would occur. I will end with this piece of advice. Life is not a dress rehearsal and there are no do overs in life. You must not be one second too late in any of your preparations whether they be physical, mental or spiritual. The exhaustion of nearly every facet of our known way of life is upon us!
Comments welcome! firstname.lastname@example.org
1 Chinese yuan vs USA dollar/yuan lowers in value, this time at 6.3674/Shanghai bourse: green and Hang Sang: green
Surprisingly, last week, officially, China added another 19 tonnes of gold to its official reserves now totaling 1677.
2 Nikkei down 433.39 or 2.43.%
3. Europe stocks all in the green (on USA/Yen ramp) /USA dollar index up to 96.14/Euro up to 1.1161
3b Japan 10 year bond yield: falls to .365% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 119.92
3c Nikkei now below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI: 45.31 and Brent: 48.70
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 up 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 rises to .68 per cent. German bunds in negative yields from 4 years out
Greece sees its 2 year rate falls to 10.65%/Greek stocks this morning up by 3.11%: still expect continual bank runs on Greek banks /
3j Greek 10 year bond yield falls to : 9.02%
3k Gold at $1121.40 /silver $14.70 (8 am est)
3l USA vs Russian rouble; (Russian rouble down 85/100 in roubles/dollar) 68.27,
3m oil into the 45 dollar handle for WTI and 48 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 (already upon us). 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 1.0914 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 now enters in negative territory with the 10 year moving further from negativity to +.68%
3s The ELA lowers to 89.1 billion euros, a reduction of .6 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 2.15% early this morning. Thirty year rate below 3% at 2.92% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Soar After Dramatic Chinese Last Hour Intervention Scrambles To Mask Latest Terrible Trade Data
The last time we looked at Chinese stocks, just a few hours ago, they were down 2%, and on pace to close back under 3000, following the latest collapse in official Chinese trade data (so one can imagine what the real data was), where in August exports dropped 5.5% (vs -8.3% in July) while imports tumbled -13.8% in dollar terms (worse than the -8.1% prior). As the Reuters chart below shows, this was the 10th month in a row of declines and the worst stretch since the 2008 crisis, confirming China will need far more currency devaluation to stabilize the trade pain.
The terrible Chinese trade data was enough to initially push not only Chinese, but Asian stocks broadly lower, and served to slam the USDJPY back under 119 on the heels of another ugly Japan GDP report which rose only due to another surge in inventory accumulation even as capital spending dropped, which in turn pushed the Nikkei to a -2.4% close (despite a flash smash 400 points higher at the open), wiping out all Japanese stock gains for 2015.
And then Chinese authorities intervened with gusto, having learned from the mistake of its Monday intervention where it stepped in early in the session only to see all gains fizzle throughtout the day, this time the PBOC and various other state banks waited until the afternoon session, at which point a massive buying orgy ensued, and pushed the SHCOMP from down more than 2% to close at the day highs, up some 2.9%!
At the same time that China was buying stocks, its banks were intervening in FX and the newswires blasted that dealers reported big USD sales by Industrial and Commercial Bank of China and CITIC Bank in the final hour of trading.
The Chinese intervention in both equities and FX was in turn tracked by the USDJPY, and perhaps the BOJ, which sent the critical carry pair from below 119 over 100 pips higher in the span of an hour, pushing the USDJPY over 120 by the time Europe opened…
… and in turn dragged both the Dow Jones futures higher by 300 points while the S&P was up 2% at last check. Just because global trade is slowing down so much, China had no choice but to take out the big guns and get the first bazooka effect after 4 days of trying… and failing.
The waterfall from China’s intervention sent not only European equities and US futures higher, but helped Brent halt its two day selloff to lowest settlement since Aug. 27 while WTI traded above $45 before return of U.S. traders following Labor Day holiday. Ole Hansen, Saxo Bank head of commodity strategy commented that “we are stabilizing a bit, although there has not really been much to cheer about from a news perspective,” adding that “Russia saying ‘no thanks’ to cutting output, loading from the Atlantic looks like rising to 2-3 year high, China imports falling in August – so both increasing supply and slowing demand.”
In the new normal this appears to be bullish for oil, and when central banks are intervening, supply and demand are irrelevant.
Taking a closer look at Asian equities, the Nikkei 225 (-2.4%) as reported above, initially led the region lower after GDP final readings confirmed the economy contracted albeit at a slower than expected pace, before Chinese equities rose out of negative territory in the hours before the close to finish firmly in the green , with Shanghai Comp. (+2.9%) and Hang Seng (+3.6%) spending the session swinging between gains and losses following discouraging trade figures where both imports and exports continued to contract. ASX 200 (+1.7%) spent the day in positive territory led by the energy sector, following M&A flow for the index. Finally, JGBs traded in positive territory as stocks began to soften, this move also came in the context of a mixed 30yr JGB auction which saw a lower than prey. b/c and a narrower than previous tail.
Stocks in Europe traded have higher since the get-go (Euro Stoxx: +1.7%), with market participants shrugging off the release of the uninspiring trade balance data from China and instead focusing on M&A related flow. The less than impressive data from China came as no surprise and will likely reinforce the view that the PBOC and fellow government officials will continue to keep liquidity ample. The upside was led by financials sector in reaction to the takeover of Amlin by Mitsui Sumitomo.
Firmer stocks resulted in lackluster performance by Bunds, which traded lower, albeit marginally, with the downside likely propped up by the dovish stance by the ECB . At the same time, despite the upside in stocks, peripheral bond yield spreads were mixed, with 2y sector broadly wider, highlighting the cautious nature of the rally.
FX translation stemming from M&A related flow supported GBP, which outperformed its major peers, while EUR/GBP edged below 0.7300 level which is said to make up to USD 1bIn worth of expiring strikes . While the USD (USD-index: -0.2%) heads into the North American crossover in negative territory, weighed on by the aforementioned GBP strength and strength in EUR after the long US Labor Day weekend.
Elsewhere, despite the ongoing weakness in energy complex, AUD traded firmer and benefited from the ongoing upside in copper prices which is a by-product of the announcement by Glencore yesterday which would remove 400,000 tonnes of copper from the market, while the likes of CAD and NZD also head into the US session stronger against the USD.
Commodities have seen some strength overnight on the back of a slightly weaker dollar, with gold trading in the green. Copper has also continued in the same trend as yesterday, gaining on the back of the aforementioned Glencore news. The energy complex has also seen strength today on the back of comments from the Iranian Oil minister, who said they were prepared to take any measures necessary to improve the oil market.
In Summary: Europe’s Stoxx 600 rises 2% as of 12:05pm CET time, with gains accelerating following data that showed euro-area economy grew more than estimated in 2Q. European GDP rose 0.4% after expanding a revised 0.5% in 1Q. Shanghai Composite Index rises 2.9%; 1st gain in 5 sessions. China exports slide as tepid demand adds to growth challenge. Maersk Line Cuts Capacity by 16% on West Central Asia to Europe. The US econ calendar is virtually empty: we get NFIB small business conditions (95.9 vs Exp. 96.0), also labour market conditions index and consumer credit data. Kocherlakota speaks after the closing bell.
- DAX +2.3%; Shanghai Composite +2.9%; Nikkei 225 -2.4%, erases 2015 gain
- LME 3m Copper +2.3%
- Euro spot -0.1% at 1.1158, yen spot -0.7%
- V2X -9.9% at 31.6
- S&P 500 futures +2% at 1959.3
- For detailed market snapshot, click here
- Indexes: FTSE 100 up 1.7%, CAC 40 up 2%, DAX up 2.3%, IBEX 35 up 1.6%, FTSE MIB up 2.1%, Euro Stoxx 50 up 2.1%
- All of 19 Stoxx 600 sectors rise; autos the top gainer, up 3%; insurance up 2.3%, boosted by MS&AD takeover of Amlin
Bulletin headline summary from Bloomberg and RanSquawk
- Stocks in Europe traded higher since the get-go, with market participants shrugging off the release of the uninspiring trade balance data from China and instead focusing on M&A related flow
- FX translation stemming from M&A related flow supported GBP, which outperformed its major peers, while EUR/GBP edged below 0.7300 handle
- There is little in terms of tier 1data, with market participants likely focusing on any monetary policy related comments by Fed’s Kocherlakota due after the closing bell on Wall Street as well as the USD 24b1n note auction
- Treasuries decline before expected post-holiday resumption of U.S. investment-grade issuance, $24b 3Y auction; WI yield 1.045% vs. 1.013% in August.
- Shanghai stocks climbed in late trading, a pattern consistent with state intervention, leading most global equities higher despite trade data showing China’s exports fell last month
- China exports fell 5.5% in August, slightly above the median forecast of 6.6% decline in Bloomberg survey; imports fell 13.8%, leaving a trade surplus of $60.2b
- Japanese GDP shrank 1.2% in 2Q, less than expected, thanks to a buildup in inventories; businesses reduced investment more than first estimated, in a rebuff to Abe’s call for firms to deploy record cash holdings and profits into capex
- Euro-area GDP rose 0.4% in 2Q, est. 0.3%, after expanding a revised 0.5% in 1Q, the EU’s statistics office in Luxembourg said Tuesday
- Europe’s diverging approaches to the refugee crisis came into focus on Tuesday, with Germany vowing to prioritize funding to aid migrants and Hungary promising to speed up work on a barrier to keep them out
- Sovereign 10Y bond yields mixed. Asian and European stocks gain, U.S. equity-index futures decline. Crude oil mixed, with Brent higher, WTI lower; gold and copper gain
DB’s Jim Reid completes the market wrap in his own words:
It’s straight to China this morning where the latest trade numbers are out. Export numbers continue to remain soft, falling -5.5% yoy in US$ terms in August, although better than the -6.6% yoy expected drop and improving from an -8.3% yoy fall in July. Imports have declined significantly however, falling -13.8% yoy (in US$ terms) after expectations for a fall of -7.9%. That’s seen a surge in China’s surplus, rising $17bn to $60.2bn (vs. $48bn expected). The numbers in Yuan terms are similar, with exports down 6.1% and imports down 14.3%. Chinese equity markets have fallen into the midday break, with the Shanghai Comp down -1.38% and CSI 300 down -1.60%.
This morning’s release is also hot on the heels of the much anticipated foreign reserves data from the PBoC yesterday, with the decline coming in larger than expected. Reserves fell last month by $94bn (vs. $71bn expected) to $3.557tn. In absolute terms that represented the largest fall on record, while the -2.6% decline was the largest percentage fall in more than three years. Much of the commentary has suggested that taking account of valuation adjustments, the drop could well have been over $100bn. As we mentioned yesterday, this data is likely to become a closely watched monthly release with the QT debate now starting to move into focus.
Markets elsewhere this morning are fairly mixed. In Japan the Nikkei (-1.55%) and Topix (-1.12%) have both declined despite an upward revision to Japan’s Q2 GDP reading, revised up one-tenth to -0.3% qoq after expectations of a fall to -0.5%. Elsewhere it’s been a better start for the ASX (+0.77%), however the Hang Seng (-0.12%) and Kospi (-0.66%) are both lower. S&P 500 futures are pointing to a reasonable start, up half a percent while Treasury yields are more or less unchanged.
Taking a look back at markets yesterday now. With the US out is was unsurprisingly a fairly quiet day although European equities started the week on a firmer footing, seemingly helped by the comments from the PBoC Governor over the weekend and also a boost from mining stocks after Glencore’s announcement of a bumper debt reduction plan. Indeed the Stoxx 600 finished the session up +0.48%, although it did pare a stronger opening. The same of which was true for the DAX (+0.70%) and CAC (+0.59%). Gains were fairly broad-based across sectors, but energy stocks proved to be the exception after another decent leg lower for Brent (-3.99%) following suggestions that a Russian official has ruled out cooperation with OPEC on cuts in production. It was a weaker session for Gold (-0.22%) too although Copper (+0.55%) benefited from the Glencore news with copper production set to be suspended as part of the company’s plans.
There was little to report in fixed income markets yesterday. The Euro (+0.19%) saw some modest gains while Bund yields finished more or less unchanged. That was after a data-light calendar with just a weaker than expected German industrial production print for July (+0.7% mom vs. +1.1% expected) – although an upward revision to June gave our colleagues in Europe confidence that the production numbers are supportive of their +0.4% qoq Q3 GDP forecast.
Elsewhere, the latest ECB asset purchases data was released yesterday for the month of August. The data showed that last month saw the lowest level of purchases since the start of the program, with just €42.8bn of public sector purchases which compares to over €51bn we saw in each of the previous two months. Our colleagues note that this August slowdown in buying now moves the ECB’s total purchases across PSPP, covered bonds and ABS back in line after ‘frontloading’ through May, June and July. Looking ahead to September, therefore, this reduces any need to moderate purchase further and so limits concerns of any ‘backloading’ highlighted by Coeure back in March.
Staying in Europe, Spain was the subject of some underperformance yesterday with the IBEX (-0.17%) one of the few equity markets to suffer a decline, while 10y Spanish bond yields widened nearly 7bps with the yield premium (+25bps) over similar maturity BTP’s now the widest in two years. That weakness is being attributed to the release of stronger new opinion polls for the Catalan pro-independence parties on Sunday which showed momentum turning in their favour. As DB’s Marco Stringa noted yesterday, the polls suggest that if they were able to join forces in the Catalan parliament, then they would have the majority of the seats. This is important given that they argue that this would be sufficient to declare a victory in the de-facto referendum for independence regardless of the share of votes. Marco continues to believe that to build a strong case, the pro-independence parties would need to obtain 50%+1 of the votes rather than the seats. That said, he notes that this gap has been closed quickly and that in any case the pro-independence camp, however, seem satisfied with a lower hurdle. With the Catalan elections due September 27th, it’s a situation worth watching closely and another important date for our diaries.
Taking a look at the day ahead now. It’s set to be a busier morning in Europe for data today with Euro area Q2 GDP and German and French trade data all due. On the back of the usual post payrolls lull in the US, there’s just the NFIB small business optimism reading, labour market conditions index and consumer credit print out across the pond this afternoon. The Fed’s Kocherlakota will be due to speak later this evening meanwhile.
Monday night: 8:30 pm/liftoff with the USA/JPY algo as Japan will get 3 more years of QE. Remember, however that they will have extremely difficulty in finding the necessary bonds to monetize:
USA/JPY started its ramp up to 119.53 at 8:30, by 9:30 lowered to 119.39 and then in the wee hours of the morning, it zoomed to 120.00 providing the necessary ramp for European stocks and the NYSE/Nasdaq
(courtesy zero hedge)
Japan’s Nikkei Flash-Smashes 400 Points Higher In Milliseconds After Abenomics Gets Three-Year Extension
Whether it is due to thin holiday liquidity, due to the BOJ intervening just ahead of its usual time, because Japan’s “legendary” Twitter trader “CIS” just went bullish (again), because prime minister Abe just learned he would be reinstalled as head of his ruling LDP party because no challenger had emerged unleashing three more years of unchallenged Abenomics, because Japan’s Q2 GDP was just revised modestly higher (to a less negative number) or just because this is how the New Normal rolls, moments ago the Nikkei flash smashed higher some 400 points higher, in a well-choreographed algorithmic frenzy, to take out Friday’s high stops.
Perhaps this latest ridiculous move was predicated by the USDJPY momentum ignition which today came 30 minutes ahead of its usual time…
… or by some of the economic data is neither relevant nor worth digging into. In this “market” things just happen…
Speaking of the economic data, this is what Japan reported: instead of a -1.8% drop in Q2 GDP, Japan – like the US – revised the number higher to “only” -1.2% (versus the initial -1.6% report) with the real sequential decline of -0.3% fractionally better than -0.5%, even as nominal GDP posted the smallest possible sequential gain.
Additionally, Japan reported that its July Current Account balance was higher than the JPY1.732 trillion expected, and rose to JPY1.809 trillion, up from JPY 559 billion in June.
Perhaps the catalyst was the report that Prime Minister Shinzo Abe has returned as president of the ruling Liberal Democratic Party on Tuesday, as rival Seiko Noda failed to garner signatures of support from 20 LDP Diet members, a requirement to file a candidacy for the Sept. 20 election. According to the Japan Times the deadline for filing the candidacy was set at 8:30 a.m. Tuesday, but Noda held a news conference to tell reporters that she gave up running prior to that the same day.
In other words, Abe’s new term as LDP president continues for another three years, which means his term as the prime minister will be extended for that period as well, assuming the increasingly jerky Nikkei – the only thing that has allowed Abe to keep his position as long he has – does not crash in the interim.
As a result, Abe is on course to become Japan’s longest-serving prime minister in more than four decades after standing unopposed in his party’s latest leadership election.
Abe’s re-selection Tuesday as president of the Liberal Democratic Party comes as protests flare over unpopular legislation to expand the role of the Japanese military;Abe isn’t required to hold a general election for another three years. If he stays in office until 2018, he would become the third-longest serving prime minister since World War II
There is no term limits for the prime minister, but a general election of the Lower House will be held at least once in every four years, and a new prime minister will be elected each time by members of the chamber.
“I tried to run for the presidential election, but I was unable to accomplish that,” Noda said. Noda continued her last-minute efforts to garner support from other LDP members but the LDP leadership led by Abe kept putting pressure on them not to support her.
Top LDP executives feared that if Noda succeeded to run, it could trigger internal strife within the party and give ammunition to opposition parties to further delay deliberations on contentious government-sponsored security bills, which are now being deliberated on in the Upper House.
And while Abe’s reign is now literally supreme and unopposed, Japan Times cautions that Abe’s ruling camp is now set to bulldoze the bills through the chamber and have the legislation enacted next week. This is expected to cause a big public stir and will likely push down the Cabinet’s approval rating in media polls.
Whether that means more or less Abenomics, read printing of money to make the rich richer, remains to be seen. Recall on Friday the IMF joined the chorus of warnings that the BOJ’s QQE will soon need to be tapered as Kuroda runs out of willing sellers.
Judging by today’s early market kneejerk reaction, the algos have not gotten the memo.
Dead Market Walking – Chinese Stock Trading Volume Collapses To 3 Year Lows
With “selling” outlawed and anything but cheer-leading strocks higher subject to detainment, it appears the Chinese government has managed to undo 3 years of liberalization and financial deregulation in the space of a week. Futures trading volume on the CSI-300 (China’s S&P 500) which for a while in May became the most actively traded financial contract in the world(surpassing S&P 500 e-minis), has utterly collapsed in the last week – since the arrests and detainment of various brokerage executives – to its lowest levels in three years. As one local trader noted – Chinese index futures trading is dead.
In May, CSI-200 Futures were the most actiuvely traded financial instrument in the world – topping S&P e-minis…
But that has all collapsed now to its lowest levels inm 3 years…
in the space of just over a week…
Re-capitalize your zombified over-leveraged SOEs now!!
China spends 600 billion yuan (94.4 billion USA) on its plunge protection team shoring up its worthless stock market.
(courtesy zero hedge)
China Loses All Control, Spends 600 Billion Yuan On Plunge Protection In August, Tightens Capital Controls
Back on July 20, Caijing reporter Wang Xiaolu suggested that China Securities Finance – the state-owned plunge protection vehicle – may be set to exit the market. That sent futures plunging and ultimately led to Mr. Wang’s arrest late last month. Under duress, Wang would later “admit” that he “shouldn’t have released a report with a major negative impact on the market at such a sensitive time.”
Of course Wang wasn’t the last person to speculate about how long China would be willing to spend billions propping up the market, and indeed it certainly seems as though Beijing tried to scale back the manipulation two weeks ago only to see the SHCOMP crash 8%, a move which promptly triggered a global rout of epic proportions. One additional 8% decline and a dual policy rate cut later, and CSF was back in the market desperately trying to arrest the inexorable slide ahead of Xi Jinping’s lavish military parade on September 3.
So in case anyone still harbored any doubts about the degree to which China most certainly has not wound down the plunge protection effort, Goldman has updated its analysis on the “national team’s” efforts on the way to concluding that China spent an additional CNY600 billion propping up the market in August.
In our note: China musings: How much has the government bought in the market? (Aug 5), we estimated potential government purchases in the stock market based on: (1) our top-down liquidity model; and (2) bottom-up analysis on fund flow changes in key investment channels based on public information released by relevant media sources. Our last estimate published in early Aug (based on July month-end data of 5 liquidity factors) was Rmb900bn, largely consistent with the July monetary data release which showed Rmb900bn of non-bank financial institutions lending and we suspect a majority of which went to China Securities Finance Corp (CSFC) which has been directly supporting the market during the correction. Using our top-down model and refreshing inputs based on Aug month-end data, we estimate that the “national team” has spent another Rmb600bn in August, raising the potential aggregate amount of buying to Rmb1.5tn, representing 3.5% and 9.2% of current total and free-float market cap.
And based on history (and probably also based on what we know about China’s unwillingness to relinquish control), the effort isn’t likely to end any time soon:
Overall, we reiterate our view that the lingering market concern over the Chinese government’s potential exit from its market support is probably overdone based on cross-country experiences, including the intervention from HKMA in Aug 1998 and the Quantitative Easing in the US since March 2008.
Speaking of futile attempts on the part of Beijing to manage expectations and get control of a potentially disastrous situation, MNI is out reporting that in the wake of the August 11 deval, SAFE began “urging” Chinese companies to “actively take measures to limit foreign exchange purchase for advance payment under imports… and postpone forex purchases.”
Although MNI does note that this represents more of a tightening of existing measures than it does the imposition of new capital controls, the writing on the wall is clear.That is, it’s all about capital controls at this point (as we tipped last week) as China desperately needs to stem the outward flow if it wants to limit costly interventions to stabilize the yuan, interventions which, as we learned on Monday, led directly to the liquidation of $94 billion in FX reserves during the month of August alone. “SAFE said the focus is outbound direct investment and remitting money overseas. It ordered branches and banks to check whether such investment is genuine, including the source of the money and where the money is being invested,” MNI adds.
As we said earlier this month, “while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which – as every Cypriot and Greek knows by now – is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.”
And the same goes for the stock market. The more authorities have to intervene, the more readily apparent it becomes that the market can’t stand on its own which only serves to undermine investor confidence leading to more selling pressure, necessitating still more intervention, until finally, Beijing will either be a majority owner of every mainland listed company or else will simply halt the entire market until such a time as the Politburo believes people’s “malicious” propensity to sell has subsided.
Peter Schiff explains perfectly the term: Quantitative Tightening vs QE.
QE allowed nations to massively accumulate dollars (otherwise known as the “great accumulation” to lower its exchange rate to keep their individual countries competitive. The USA dollar would lower due to this massive accumulation by emerging nations plus others. The USA benefited as they had a means of purchase of their bonds as 2007 -2008 saw massive deficits and the need to fund these deficits.
Now the process is reversed as nations must dishoard their bonds. Thus as nations sold their USA treasuries and also the resultant dollar short derivatives, USA dollars must rise in price. This should cause USA longer term interest rates to rise. With the massive cashing in of these bonds, you can say that this is tightening and the reverse of the multiplier effect and thus massive liquidity is withdrawn from the system. The big question that Peter raises is this: who will buy this massive amount of bonds that will be thrust onto the market.
This is an extremely important paper for you to read..
(courtesy Peter Schiff/Euro Pacific Capital)
Peter Schiff Warns: Meet QT – QE’s Evil Twin
There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet “Quantitative Tightening,” the pesky, problematic, and much less disciplined kid brother of “Quantitative Easing.” Now that QE is ready to move out…QT is prepared to take over.
Emerging markets are in serious trouble as aggregate demand has fallen off the face of the earth. These guys were already suffering with plunging currencies prior to the Chinese devaluation. On August 11, China devalued which caused further deterioration in the currency rates of our emerging nations such as Mexico, Chile, Columbia, Brazil and Peru. Brazil is no doubt the worse off as their twin deficits (fiscal and currency accounts) go off the charts.
In the following commentary, Goldman Sachs believes that these countries will have to raise interest rates to stem the decline in the currency despite the awful shape that their economy is in.
a must read..
(courtesy Goldman Sachs/zero hedge)
“This Time May Be Different”: Desperate Central Banks Set To Dust Off Asia Crisis Playbook, Goldman Warns
Early last month, Bloomberg observed that plunging currencies were “handcuffing bankers from Chile to Colombia.” The problem was described as follows:
Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.
That’s because the deepening price slump is also dragging down currencies in Colombia and Chile — a swoon that’s fanning inflation and tying policy makers’ hands.
That was six days before China’s decision to devalue the yuan.
Needless to say, Beijing’s entry into the global currency wars did nothing to help the situation and indeed, since the yuan devaluation, things have gotten materially worse. The real, for instance, has plunged 10.5%, the Colombian peso is down 6.6%, the Mexican peso is off 4.4%, and the Chilean peso is down a harrowing 8% (thanks copper). And again, that’s just since China’s devaluation.
Meanwhile, plunging commodity prices, falling Chinese demand, and depressed global trade aren’t helping LatAm economies. Just ask Brazil, where the sellside GDP forecast cuts are coming in fast (Morgan Stanley being the latest example) now that virtually every data point one cares to observe shows an economy that’s sliding into depression.
Of course a plunging currency, FX pass through inflation, and a soft outlook for growth is a pretty terrible place to be in if you’re a central bank, but that’s exactly where things stand for the “LA-5”(believe it or not, that’s not a reference to the Lakers, it’s short for Brazil, Chile, Colombia, Mexico, and Peru), who very shortly will be forced to decide whether the risks associated with further FX weakness outweigh those of hiking rates into a poor economic environment.
For Goldman, the outlook is clear: LatAm central banks will, in “stark” contrast to counter-cyclical measures adopted during the crisis, hike in a desperate attempt to shore up their currencies and control inflation.
First, we have the test:
The LA-5 economies are, once again, being tested. They currently face an acute external shock involving a combination of: low (likely for long) commodity prices, incoming monetary policy normalization in the US, and weaker CNY and growth in China with the latent risk of a sharper economic slowdown.
The last time these countries were tested, they had sufficient room to maneuver counter-cyclically:
The Global Financial Crisis of 2008-09 (GFC) provided almost the perfect applied experiment to test the shock-absorbing capacity of the new institutional framework. And the results were remarkably positive. The spike in risk aversion in the initial stages of the crisis was followed by sizeable capital outflows from EMs. Yet, officials across the LA-5 did not attempt to stop the hemorrhage of capital and the ensuing pressures on local currencies by hiking interest rates or by tightening fiscal belts (which would have been the classic pro-cyclical response of the past).To the contrary, the authorities managed to loose fiscal stances and cut interest rates aggressively to support domestic demand, letting exchange rates depreciate significantly along the way.
This time around, however, policy flexibility is severely constrained:
Financial conditions are very accommodative and most currencies are now slightly in undervaluation territory. Initial conditions differ considerably from those prevalent at the beginning of the GFC. Broad financial conditions are, on average, more accommodative today than before (lower real rates and currencies that underwent large adjustments since mid-2013 and are now, on average, slightly undervalued versus domestic fundamentals). Furthermore, with the notable exception of Mexico, inflation has been accelerating across the region (Exhibit 3) and is now tracking above the respective targets, the fiscal stances are on average weaker, and external imbalances are generally wider.
And the crisis – at least as it relates to LatAm, is actually more acute:
Arguably, these combined shocks may pose greater risks to the region compared to the challenges faced during the GFC as the later was largely a DM centered event. In fact, current external headwinds have compounded the effects of domestic developments in places (e.g., Brazil and to some extent Chile), imparting a sizeable adverse shock to sentiment and a negative impulse to growth across the LA-5 economies.
With less policy flexibility and a more acute crisis, comes a divergent response:
Against this backdrop, the continuation of a bearish FX market may be soon followed by higher policy rates, despite admittedly sluggish real business cycles all across the region. That is, a pro-cyclical monetary reaction may be imminent in a number of places – Chile, Colombia, Mexico, and Peru. Policy pro-cyclicality is knocking on the door.
What’s particularly interesting here is that round after round of the type of counter-cyclical policy measures Goldman suggests saved the LA-5 in the wake of the 2008 meltdown have not only failed to resuscitate the global economy, but have in fact contributed to the current worldwide deflationary supply glut that is at least partially to blame for the economic malaise plaguing EMs and the attendant pressure on commodity currencies.
That pressure has now put LatAm’s financially integrated countries in the position of having to hike rates even as the outlook for their economies – the same economies which were presumably saved by counter-cyclical post-crisis measures – deteriorates. Meanwhile, if the Fed hikes, it will only put further pressure on EM FX, which could serve to drive inflation still higher, prompting a still more hawkish EM CB response which would in turn put still more pressure on their underlying economies.
In the end, Goldman concludes that should LatAm resort to pro-cyclical measures to shore up their currencies at the expense of their economies, it will represent a return to the policies adopted by EMs during the Asian Financial Crisis. This would appear to provide the final piece of evidence we need to conclusively determine that all pundit/analyst protestations aside, we have indeed turned back the clock two decades and sit on the verge of another outright emerging market meltdown. And on that note, we’ll give the final word to Goldman:
The LA-5 economies have already spent part of their policy ammunition fighting the initial stages of the current turmoil.In the meantime, a number of economies are still grappling with visible domestic (inflation/fiscal deficits) and external (current account deficits) imbalances. Therefore, the room to ease policy further, i.e., to adopt counter-cyclical policies, is now much more limited than in the past. To the contrary, in some cases monetary tightening may be needed (despite weaker real business cycles) in order to continue to attract foreign capital, anchor domestic currencies and preserve the integrity of the respective inflation targeting frameworks. Hence, we may soon enter a period of weaker FX and higher policy and market rates: i.e., market dynamics thatwould resemble more the 1997 Asian Financial Crisis (where the authorities hiked rates to stabilize the respective domestic currencies despite the recessionary real sector dynamics) rather than the 2008-09 Global Financial Crisis (where weakening currencies coincided with sharply declining short-term interest rates).
You will need to read the following passage a few times to understand the importance of what zero hedge and Deutsche bank are stating:
We basically have two entities: the USA (threatening a rate rise and thus tightening) and China (devaluing and thus Quantitative tightening). Both of these countries by tightening are thus “recalling liquidity”. The two other nations who have been adding liquidity, namely the Bank of Japan and the EU are still in QE mode and increase liquidity.
Europe’s Biggest Bank Dares To Ask: Is The Fed Preparing For A “Controlled Demolition” Of The Market
Why did we focus so much attention yesterday on a postin which the IMF confirmed what we had said since last October, namely that the BOJ’s days of ravenous debt monetization are coming to a tapering end as soon as 2017 (as willing sellers simply run out of product)? Simple: because in the global fiat regime, asset prices are nothing more than an indication of central bank generosity. Or, as Deutsche Bank puts it: “Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system.“
The problem is that the BOJ and the ECB are the only two remaining central banks in a world in which Reverse QE aka “Quantitative Tightening” in China, and the Fed’s tightening in the form of an upcoming rate hike (unless the Fed loses all credibility and reverts its pro-rate hike bias), are now actively involved in reducing global liquidity. It is only a matter of time before the market starts pricing in that the Bank of Japan’s open-ended QE has begun its tapering (followed by a QE-ending) countdown, which will lead to devastating risk-asset consequences. The ECB, which is also greatly supply constrained as Ewald Nowotny admitted yesterday, will follow closely behind.
But while we expanded on the Japanese problem to comein detail yesterday, here are some key observations on what is going on in both the US and China as of this moment – the two places which all now admit are the culprit for the recent equity selloff, and which the market has finally realized are actively soaking up global liquidity.
Here the problem, as we initially discussed last November in “How The Petrodollar Quietly Died, And Nobody Noticed“, is that as a result of the soaring US dollar and collapse in oil prices, Petrodollar recycling has crashed, leading to an outright liquidation of FX reserves, read US Treasurys by emerging market nations. This was reinforced on August 11th when China joined the global liquidation push as a result of its devaluation announcement, a topic which we also covered far ahead of everyone else with our May report “Revealing The Identity Of The Mystery “Belgian” Buyer Of US Treasurys”, exposing Chinese dumping of US Treasurys via Belgium.
We also hope to have made it quite clear that China’s reserve liquidation and that of the EM petro-exporters is really two sides of the same coin: in a world in which the USD is soaring as a result of Fed tightening concerns, other central banks have no choice but to liquidate FX reserve assets: this includes both EMs, and most recently, China.
Needless to say, these key trends covered here over the past year have finally become the biggest mainstream topic, and have led to the biggest equity drop in years, including the first correction in the S&P since 2011. Elsewhere, the risk devastation is much more profound, with emerging market equity markets and currencies crashing around the globe at a pace reminiscent of the Asian 1998 crisis, while in China both the housing and credit, not to mention the stock market, bubble have all long burst.
Before we continue, we present a brief detour from Deutsche Bank’s Dominic Konstam on precisely how it is that in the current fiat system, global central bank liquidity is fungible and until a few months ago, had led to record equity asset prices in most places around the globe. To wit:
Let’s start from some basics. Global liquidity can be thought of as the sum of all central banks’ balance sheets (liabilities side) expressed in dollar terms. We then have the case of completely flexible exchange rates versus one of fixed exchange rates. In the event that one central bank, say the Fed, is expanding its balance sheet, they will add to global liquidity directly. If exchange rates are flexible this will also mean the dollar tends to weaken so that the value of other central banks’ liabilities in the global system goes up in dollar terms. Dollar weakness thus might contribute to a higher dollar price for dollar denominated global commodities, as an example. If exchange rates are pegged then to achieve that peg other central banks will need to expand their own balance sheets and take on dollar FX reserves on the asset side. Global liquidity is therefore increased initially by the Fed but, secondly, by further liability expansion, by the other central banks. Depending on the sensitivity of exchange rates to relative balance sheet adjustments, it is not an a priori case that the same balance sheet expansion by the Fed leads to greater or less global liquidity expansion under either exchange rate regime. Hence the mere existence of a massive build up in FX reserves shouldn’t be viewed as a massive expansion of global liquidity per se – although as we shall show later, the empirical observation is that this is a more powerful force for the “impact” of changes in global liquidity on financial assets.
That, in broad strokes, explains how and why the Fed’s easing, or tightening, terms have such profound implications not only on every asset class, and currency pair, but on global economic output.
Liquidity in the broadest sense tends to support growth momentum, particularly when it is in excess of current nominal growth. Positive changes in liquidity should therefore be equity bullish and bond price negative. Central bank liquidity is a large part of broad liquidity and, subject to bank multipliers, the same holds true. Both Fed tightening and China’s FX adjustment imply a tightening of liquidity conditions that, all else equal, implies a loss in output momentum.
But while the impact on global economic growth is tangible, there is also a substantial delay before its full impact is observed. When it comes to asset prices, however, the market is far faster at discounting the disappearance of the “invisible hand”:
Ultimately in a fiat money system asset prices reflect “outside” i.e. central bank money and the extent to which it multiplied through the banking system. The loss of reserves represents not just a direct loss of outside money but also a reduction in the multiplier. There should be no expectation that the multiplier is quickly restored through offsetting central bank operations.
Here Deutsche Bank suggests your panic, because according to its estimates, while the US equity market may have corrected, it has a long ways to go just to catch up to the dramatic slowdown in global plus Fed reserves (that does not even take in account the reality that soon both the BOJ and the ECB will be forced by the market to taper and slow down their own liquidity injections):
Let’s start with risk assets, proxied by global equity prices. It would appear at first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically “late” so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market “leads” anticipated” additional liquidity by something similar.This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period.
Some more dire predictions from Deutsche on what will happen next to equity prices:
If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one level still the same, absent Fed and FX reserve expansion,equity prices look more likely to decelerate and quite sharply.
The Fed’s balance sheet for example could easily be negative 5 percent this time next year, depending on how they manage the SOMA portfolio and would be associated with further FX reserve loss unless countries, including China allowed for a much weaker currency. This would be a great concern for global (central bank liquidity).
Once again, all of this assumes a status quo for the QE out of Europe and Japan, which as we pounded the table yesterday, are both in the process of being “timed out”
The tie out, presumably with the “leading” indicator of other central bank action is that other central banks have been instrumental in supporting equities in the past. The largest of course being the ECB and BoJ. If the Fed isn’t going doing its job, it is good to know someone is willing to do the job for them, albeit there is a “lag” before they appreciate the extent of someone else’s policy “failure”.
Worse, as noted yesterday soon there will be nobody left to mask everyone one’s failure: the global liquidity circle jerk is coming to an end.
What does this mean for bond yields? Well, as we explained previously, clearly the selling of TSYs by China is a clear negative for bond prices. However, what Deutsche Bank accurately notes, is that should the world undergo a dramatic plunge in risk assets, the resulting tsunami of residual liquidity will most likely end up in the long-end, sending Treasury yields lower. To wit:
… if investors believe that liquidity is likely to continue to fall one should not sell real yields but buy them and be more worried about risk assets than anything else. This flies in the face of recent concerns that China’s potential liquidation of Treasuries for FX intervention is a Treasury negative and should drive real yields higher.… More generally the simple point is that falling reserves should be the least of worries for rates – as they have so far proven to be since late 2014 and instead, rates need to focus more on risk assets.
The relationship between central bank liquidity and the byproduct of FX reserve accumulation is clearly central to risk asset performance and therefore interest rates. The simplistic error is to assume that all assets are treated equally. They are not – or at least have not been especially since the crisis. If liquidity weakens and risk assets trade badly, rates are most likely to rally not sell off. It doesn’t matter how many Treasury bills are redeemed or USD cash is liquidated from foreign central bank assets, US rates are more likely to fall than rise especially further out the curve. In some ways this really shouldn’t be that hard to appreciate. After all central bank liquidity drives broader measures of liquidity that also drives, with a lag, economic activity.
Two points: we agree with DB that if the market were to price in collapsing “outside” money, i.e. central bank liquidity, that risk assets would crush (and far more than just the 20-40% hinted above). After all it was central bank intervention and only central bank intervention that pushed the S&P from 666 to its all time high of just above 2100.
However, we also disagree for one simple reason: as we explained in “What Would Happen If Everyone Joins China In Dumping Treasurys“, the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below…
… into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage.
And, as we showed before, all else equal, the unwinding of the past decade’s accumulation of EM reserves, some $8 trillion, could possibly lead to a surge in yields from the current 2% back to 6% or higher.
In other words, inductively reserve liquidation may not be a concern, but practically – when taking in account just how illiquid the global TSY market has become – said liquidation will without doubt lead to a surge in yields, if only occasionally due to illiquidity driven demand discontinuities.
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So where does that leave us? Summarizing Deutsche Bank’s observations, they confirm everything we have said from day one, namely that the QE crusade undertaken first by the Fed in 2009 and then all central banks, has been the biggest can-kicking exercise in history, one which brought a few years of artificial calm to the market while making the wealth disparity between the poor and rich the widest it has ever been as it crushed the global middle class; now the end of QE is finally coming.
And this is where Deutsche Bank, which understands very well that the Fed’s tightening coupled with Quantiative Tightening, would lead to nothing short of a global equity collapse (especially once the market prices in the inevitable tightening resulting from the BOJ’s taper over the coming two years), is shocked. To wit:
This reinforces our view that the Fed is in danger of committing policy error.Not because one and done is a non issue but because the market will initially struggle to price “done” after “one”. And the Fed’s communication skills hardly lend themselves to over achievement. More likely in our view, is that one in September will lead to a December pricing and additional hikes in 2016, suggesting 2s could easily trade to 1 ¼ percent. This may well be an overshoot but it could imply another leg lower for risk assets and a sharp reflattening of the yield curve.
But it was the conclusion to Deutsche’s stream of consciousness that is the real shocker: in it DB’s Dominic Konstam implicitly ask out loud whether what comes next for global capital markets (most equity, but probably rates as well), is nothing short of a controlled demolition. A premeditated controlled demolition, and facilitated by the Fed’s actions or rather lack thereof:
The more sinister undercurrent is that as the relationship between negative rates has tightened with weaker liquidity since the crisis, there is a sense that policy is being priced to “fail” rather than succeed. Real rates fall when central banks back away from stimulus presumably because they “think” they have done enough and the (global) economy is on a healing trajectory. This could be viewed as a damning indictment of policy and is not unrelated to other structural factors that make policy less effective than it would be otherwise – including the self evident break in bank multipliers due to new regulations and capital requirements.
What would happen then? Well, DB casually tosses an S&P trading a “half its value”, but more importantly, also remarks that what we have also said from day one, namely that “helicopter money” in whatever fiscal stimulus form it takes (even if it is in the purest literal one) is the only remaining outcome after a 50% crash in the S&P:
Of course our definition of “failure” may also be a little zealous. After all why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks.
And there it is: Deutsche Bank saying, in not so many words, what Ray Dalio hinted at, namely that the Fed’s tightening would be the mechanistic precursor to a market crash and thus, QE4.
Only Deutsche takes the answer to its rhetorical question if the Fed is preparing for a “controlled demolition” of risk assets one step forward: realizing that at this point more QE will be self-defeating, the only remaining recourse to avoid what may be another systemic catastrophe would be the one both Friedman and Bernanke hinted at many years ago: the literal paradropping of money to preserve the fiat system for just a few more days (At this point we urge rereading footnote 18 in Ben Bernanke’s “Deflation: Making Sure “It” Doesn’t Happen Here” speech)
While we can only note that the gravity of the above admission by Europe’s largest bank can not be exaggerated – for “very serious banks” to say this, something epic must be just over the horizon – we should add: if Deutsche Bank (with its €55 trillion in derivatives) is right and if the Fed refuses to change its posture, exposure to any asset which has counterparty risk and/or whose value is a function of faith in central banks, should be effectively wound down.
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While we have no way of knowing how this all plays out, especially if Deutsche is correct, we’ll leave readers with one of our favorite diagrams: Exter’s inverted pyramid.
Why Hedge Fund Hot Shots Finally Got Hammered
The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take.Many of them have been riding the bubble ever since Alan Greenspan got it going after the crash of 1987 and now not only claim to be investment geniuses, but also get downright huffy if the Fed or anyone else threatens to roil the casino.
Leon Cooperman, who is an ex-Goldman trader and now proprietor of a giant fund called Omega Advisors, is one of the more insufferable blowhards among these billionaire bubble riders. Earlier this week he proved that in spades.
It seems that his fund had a thundering loss of more than 10% in August during a downdraft in the stock market that the Fed for once took no action to counter. But rather than accept responsibility for the fact that his portfolio of momo stocks took a dive during a wobbly tape, Cooperman put out a screed blaming the purportedly unfair tactics of other casino gamblers:
Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.
Well now. Exactly how was Bridgewater counting the cards so as to cause such a ruction at the gaming tables?
In a word, Ray Dalio, the storied founder of the giant Bridgewater “All-Weather” risk parity fund, has been doing the same thing as Cooperman, and for nearly as many decades. Namely, counting the cards held-out in plain public view by the foolish monetary central planners domiciled in the Eccles Building.
To be sure, Dalio’s fund has had superlative returns and there is undoubtedly some serious algorithmic magic embedded in Bridgewater’s computers. But at the end of the day its all a function of broken capital markets that have been usurped and rigged by the Fed.
The only thing your need to know about the vaunted “risk parity” strategies that have served Bridgewater and their imitators so handsomely, and which have now aroused the ire of more primitive gamblers like Cooperman, is the graph below:
The above, of course, is the Fed’s “wealth effects” printing press at work. There have been about 30 identifiable “dips” since the March 2009 low and every one of them have been bought by the casino gamblers. And for good reason.
The Bernanke Fed’s egregious, desperate and utterly unwarranted bailout of Wall Street at the time of the post-Lehman crash taught the gamblers a profound lesson. That is, they could be exceedingly confident that the Fed would keep the free money flowing at all hazards, and that it would resort to any price rigging intervention as might be necessary to keep the stock averages rising.
Indeed, never in all of history have a few ten thousand punters made so many trillions in return for so little economic value added. But what Dalio did in this context was to invent an even more efficient machine to strip-mine the Fed’s monumental largesse.
To wit, Bridgewater’s computers buy more stocks on the “rips”, when equity volatility is falling and prices are rising; and then on the “dips” they rotate funds into more bonds when equity volatility is rising and the herd is retreating to the safe haven of treasuries and other fixed income securities, thereby causing the price of the latter to rise.
In short, there is a payday in every type of short-run financial weather because Bridgewater’s computers are monetary sump pumps; they constantly purge volatility from the portfolio.
But here’s the thing. The above chart could never exist in an honest free market.
You couldn’t create algorithms to safely pump out volatility and milk the market on alternating strokes because the regularity of the waves on which it is based are not natural; they are the handiwork a central bank that has been taken hostage by the casino gamblers.
Nor is “hostage” too strong a word. In the days of Paul Volcker and William McChesney Martin anybody who even speculated about 80 months of ZIRP would have been assigned to the William Jennings Bryan school of monetary crankery.
As it happened, however, in the last few weeks the long reign of the global money printers has begun to sprout fractures. Over on the other side of the earth in China what had become a 20-year long $4 trillion cumulative “bid” for US treasuries and other DM fixed income securities has gone serious “offers”.
This will prove to be one of the great financial pivots of history. During the course of their stupendous inflation of China’s $28 trillion Credit Ponzi, the red suzerains of Beijing bought treasuries hand over fist and thereby kept their price rising and the volatility of the world bond market falling.
To be sure, this wasn’t charity for America’s debt besotted shoppers and governments. It was done in order to peg the RMB exchange rate and thereby keep its mercantilist export machine humming and the people grateful to their beneficent communist party rulers.
But at length it became too much of a good thing because every time the Peoples Bank Of China (PBOC) bought Uncle Sam’s debt it similtaneously expanded the internal banking system and supply of RMB credit. Moreover, after Beijing launched its madcap infrastructure building campaign in response to the the 2008 financial crisis the phony construction and investment boom which ensued attracted increasing waves of hot money from abroad, thereby inflating the domestic Chinese economy to a fever pitch.
In fact, the PBOC was forced to let the RMB slowly rise against the dollar to keep its banking system from becoming a financial runaway. But the steadily rising RMB drastically accelerated the inflow of foreign capital and speculative funds into the Chinese economy, thereby filling the vaults of the PBOC to the brim at more than $4 trillion early this year compared to a few hundred billion at the turn of the century.
But these weren’t monetary reserves in any meaningful or historic sense of the term; they were the fruits of an utterly stupid mercantilist trade policy and the conversion of a naïve old man, and survivor of Mao’s depredations, to the view that communist party power could be better administered from the end of a printing press than from the barrel of a gun.
But Mr. Deng merely unleashed a Credit Monster that sucked in capital and resources from all over the globe into a domestic whirlpool of digging, building, borrowing, investing and speculation that was inherently unstable and incendiary. It was only a matter of time before this edifice of economic madness began to wobble and sway and to eventually buckle entirely.
That time came in 2015—-roughly 30 years after Mr. Deng proclaimed it is glorious to be rich. So saying, he did not have a clue that a credit swollen simulacrum of capitalism run by communist apparatchiks was a doomsday machine.
In any event, what is happening in China now is that the speculators—-both domestic and foreign—–see that the jig is up. That is especially the case after Beijing’s incredibly botched effort to alleviate its massive corporate debt problem by inciting a $5 trillion stock market bubble that is now being blown to smithereens.
This has happened notwithstanding the party bosses sending out truckloads of cash to arrest the stock market’s collapse and then doubling down by sending fleets of paddy wagons to arrest any one who might be tempted into overzealous offers to sell what the PBOC is trying to buy. It means that confidence in the Red Ponzi has at last been shattered.
Accordingly, money is leaking out of China thru a thousand rivulets, by-ways and financial back alleys. To prevent the RMB exchange rate from plunging and thereby inciting even more capital fright and flight, the PBOC has shifted into reverse gear in a large, sustained and strategic way—-as opposed to tactical FX management—– for the first time since the putative miracle of red capitalism incepted.
Ray Dalio wasn’t counting on this because despite Bridgewater’s proficiency in concocting trading algorithms, its vaunted macroeconomics staff consists of standard issue Keynesians—-with a dash of Minskyites thrown in for good measure. Alas, they were not prepared for the possibility that Austrians have said is inevitable all along.
To wit, that Beijing’s experiment with Red Capitalism would eventually end in a crackup boom, causing the seemingly endless Red Bid for US treasuries to become a disruptive and unwelcome Red Offer to sell hundreds of billions of said paper and like and similar dollar/euro/yen liabilities.
To make a long story short, during the gyrations of August bond prices didn’t rise like they were supposed to when the stock market plunged by 12% to its Bullard Rip low at 1867 on the S&P 500. Accordingly, Bridgewater’s risk party portfolio became swamped with too much volatility on both the bond and equity side of Dalio’s big boat. So the algorithmic sump pumps went into over-time dumping stocks in order to drain the ship.
Consequently, Bridgewater wiped out its entire profits for the year in a few days during August, pushing the momo chasers like Cooperman into the drink in the process. Needless to say, the capsizing Big Boats in the casino are now firing at each other, but also lining-up for a full court press at the Eccles Building.
Ray Dalio has already said its time for QE4. He apparently realizes that the Fed’s big fat bid is needed to replace the missing Red Bid in the treasury market, and thereby get his risk parity algorithms working again.
At the same time, Goldman today sent out its chief economist to pronounce that today’s Jobs Friday report tipped the case to no rate increase at the Fed’s upcoming September meeting. Why we need an 81st month of ZIRP when 80 months so far have not succeeded, he didn’t say.
No matter. You can be sure of this. If the market holds above next week’s retest of the 1967 Bullard Rip low, the Fed will likely announce a “one and done” move in September, causing the casino to stage a short-lived, half-heated rally.
By the same token, if the market drops through the Bullard Rip low, the Fed will plead market instability and defer its 25 bps pinprick yet again, thereby causing the same short-lived half-hearted rally.
What won’t happen, however, is another leg higher in the phony bull market engineered by the Fed and its fellow- traveling central banks. That’s because the global “dollar short” is finally coming home to roost.
For nearly two decades the central banks of EM mercantilists have been buying treasury paper, as have the commodity producers and the petro-states. So doing they have helped the Fed drive the benchmark rate to absurdly non-economic levels.
That’s what happens when the printing press is used to generate $12 trillion of so-called FX reserves and $22 trillion of total footings for the consolidated monetary roach motels of the world, otherwise known as central banks and sovereign wealth funds.
In turn, this massive stash became the collateral for the private issuance of friskier dollar denominated corporate and sovereign credits throughout the EM world, thereby slacking the thirst for yield among desperate money managers.
But now China’s house of cards is cratering, causing economies to plunge throughout the worldwide China supply chain. Witness Brazil where industrial production is down 8% from a year ago, and slipping rapidly from there; or South Korea where exports have plunged by double digits.
Metaphorically speaking, dollars are hightailing back to the Eccles building. China and the petro-states are selling and off-shore dollar lenders are effectively making a margin call.
At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting.
Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive.
Can the masters of the universe hanging around in the Hedge Fund Hotels say “portfolio insurance”?
Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.
“We Do Not Think This Is Sustainable”: Barclays Warns On Massive Cost Of China’s FX Intervention
One of the most important things to understand about China’s doomed attempt to simultaneously manage the stock market, the economy, a deleveraging in some sectors, a re-leveraging in others, and the yuan is that it’s bound to produce all manner of conflicting directives and policies that trip over each other at nearly every turn. One rather poignant example of this is the attempt to rein in shadow lending without choking off credit growth.Another – and the one that will invariably receive the most attention going forward – is the push and pull on money markets by the PBoC’s FX intervention and offsetting liquidity injections.
Recall that Beijing’s open FX ops in support of the yuan necessitate the drawdown of the country’s vast store of USD reserves. In other words, they’re selling USTs. The effect this historic liquidation of US paper will have on global liquidity, core yields, and Fed policy has become the subject of fierce debate lately although, as we’ve been at pains to make clear, this is really just a continuation of the USD asset dumping that was foretold nearly a year ago when Saudi Arabia killed the petrodollar.
In any event, when China liquidates its reserves, it sucks liquidity out of the system. That works at cross purposes with the four RRR cuts the PBoC has implemented so far this year. In short, Beijing, in a desperate attempt to boost lending and invigorate the decelerating economy, has resorted to multiple policy rate cuts, but to whatever degree those cuts freed up banks to lend, the near daily FX interventions undertaken after the August 11 deval effectively offset the unlocked liquidity.
What this means is that each successive round of FX intervention must be accompanied by an offsetting RRR cut lest managing the yuan should end up completely negating the PBoC’s attempts to use policy rates to boost the economy – or worse, producing a net tightening. What should be obvious here is that this is a race to the bottom on two fronts. That is, the more you intervene in the FX market the more depleted your reserves and the more you must cut RRR until eventually, both your USD assets and your capacity to deploy policy rate cuts are exhausted. There are only two ways to head off this eventuality i) move to a true free float, or ii) implement a variety of short- and medium-term lending ops to offset the tightening effect of FX interventions in the hope of forestalling further RRR cuts. Clearly, this is a spinning plate if there ever was one, as attempting to figure out exactly what the right mix of RRR cuts and band-aid reverse repos is to offset FX interventions is well nigh impossible. It’s against this backdrop that Barclays is out with what looks like one of the more cogent attempts yet to outline and illustrate the above and explain why it simply isn’t sustainable. Below, find some notable excerpts.
First, here’s Barclays explaining what we’ve said for weeks and what BNP recently highlighted as well, namely that while the PBoC used to manipulate the fix to control the spot, it now simply manipulates the spot to control the fix, which in fact leads to less of a role for the market, not more:
Since China’s FX policy change on 11 August, spot CNY has traded close to the daily fixings. However, this apparent success may have come at a heavy cost. While the daily USDCNY fixings are more aligned to the previous day’s close, the close itself appears not to fully reflect market forces.
Of course less of a role for markets means more of a role for the PBoC, and that means FX reserve liquidation. There’s been no shortage of attempts to quantify the burn rate, but for what it’s worth, here’s Barclays estimate:
Our analysis suggests that the PBoC stepped up its FX intervention to USD122bn in August, from ~USD50bn in July, which underscores the significant pressure from capital outflows.Nonetheless, this suggests that the recent relative stability of spot USDCNY could be misleading. Based on the available data for FX intervention in July and our estimates for August, the PBoC has spent around USD172bn on intervention in both July and August. While the PBoC has huge FX reserves (USD3.65trn as of July 2015), if the current level of capital outflow pressures is sustained, we believe this currency defence could become costly. If the pace of FX intervention remains at USD86bn per month, we estimate that the PBoC could lose up to USD510bn of its reserves between June and December 2015, which would represent a nonnegligible decline of 14%.
As should be clear from everything said above, FX interventions and liquidity injections are, as Barclays puts it, simply two sides of the same coin, and to the extent the interventions continue, so too will the liquidity ops. Here’s an in-depth look:
So what’s the solution? Well, there isn’t one. As Barclays concludes, until expectations of further yuan weakness subside, the situation can’t stabilize: “We do not think the present policy is sustainable given the associated costs in terms of FX reserves depletion and liquidity imbalances [and] as such, we maintain our view that the CNY will need to depreciate further to stabilise capital outflows; we forecast a further 7% fall by year-end.”
So unless suddenly everything is fixed or, as SocGen puts it, “for the RMB to appreciate compared to its current value will require a very positive environment for EM coupled with a cessation of capital outflows and a vibrant cyclical growth and an export recovery,” the road ahead looks rather precarious, and not just for China, but for the Fed and by extension for the entire global economy. And on that note, we’ll close with what we said earlier this week:
As the Fed debates whether or not to hike, and how much, the acceleration in Chinese capital outflows starting on August 11 has set the path for the Fed, and at this point any incremental delay in hiking merely adds more to the already vast cross-capital and currency confusion around the globe. However, no longer is the Fed’s quandary open ended:with every passing day, China is suffering incremental tens of billions in capital flight and reserve liquidation, and thus, tighter global financial conditions, as can be expected from the unwind of the world’s largest depository of USD-denominated reserves.
Finally, what all of this really means, is that having pushed China to the point of dissociating itself from the USD peg officially, the more the Fed tightens, the more China will have to push back through devaluation or otherwise, and the more capital outflows it will be subject to, thereby amplifying the Fed’s tightening posture around the globe. In this very unstable arrangement, suddenly the smallest policy error will reverberate exponentially, and result in the only possible outcome: the Fed’s admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque “helicopter money” episode.
More “Seller Strikes”? ECB Monetizes Fewest Bonds In August Since Start Of Q€
Back On May 19, ECB executive board member Benoit Couere caused a scandal of heretofore unseen proportions, when it was revealed that he had disclosed European central bank policy in private to a group of hedge funds almost 12 hours before the ECB publicly revealed a substantial shift in QE policy, namely that the central bank would front-load its program in May and June while slowing down monetization later in the summer.
The result was millions in profits to those hedge funds who had acquired the information about ten hours ahead of the public, and shorted the EURUSD appropriately:
Sure enough, a few weeks later we found out that the ECB had done precisely as it had originally leaked to the “smartest people in the room”, when it was revealed that in May the ECB had bought about 9% more in government bonds among the key issuers: Germany, France, Italy and Spain.
Fast forward three months, when earlier today we received the latest ECB asset-buying update, and just as the ECB has warned, after a brief surge period early in the summer, monetization under the ECB’s Public Sector Purchase Programme tumbled in August, when the ECB monetized just €42.8 billion in Eurozone bonds, down 17% from the €51.4 billion the month before, and the lowest full-month since the start of the ECB’s QE in March of this year.
Adding €7.5 billion in covered bonds and €1.3 billion in ABS purchases, took the monthly total to just €51.6 billion, far below the ECB’s stated goal of monetizing €60 billion in securities each month, and is well below the May and June peak totals of €61 and €63 billion, respectively.
The European Central Bank’s asset purchases last month slowed to the weakest since quantitative easing started in March as liquidity dried up during Europe’s summer holiday period.
While the Frankfurt-based central bank intends to buy 60 billion euros a month of debt through September 2016 to revive euro-area inflation, it has repeatedly said the program can be adjusted to take account of market conditions. Purchases were frontloaded before the summer and ECB President Mario Draghi has signaled that the same strategy may be used before December.
Draghi also said last week that the size, composition and duration of the QE program can be altered if needed for the ECB to reach its goal of returning medium-term inflation to just under 2 percent. Consumer prices rose an annual 0.2 percent in August and the euro-area recovery risks being undermined by a China-led slowdown in global growth, spurring speculation that the ECB may need to ease monetary policy further.
What is the reason for the drop? Well, one can believe the ECB’s stated explanation which is that due to European summer vacations, activity in Europe has ground to a halt. Of course, this would suggest that monetization in the Eurozone is continent on managers’ summer vacation plans, which is probably an even more troubling explanation of ECB activity bottlenecks than what may be really going on in Europe.
The alternative? As we noted over the weekend when we reported that now even the IMF is discussing the upcoming limits to BOJ QE as a result of a “seller strike” – i.e., current holders (and sellers) running out of BOJs to hand over to the BOJ, the same may be taking place in Europe. Recall that none other than the ECB’s Nowotnyadmitted on Friday that the ECB’s asset-backed securities purchasing program “hasn’t been as successful as we’d hoped” adding that “it’s simply because they are running out. There are simply too few of these structured products out there.”
And if the ECB is hitting its monetization limits with ABS, why not also with Treasurys? Because if that is indeed the case, then with the US tightening financial conditions by way the upcoming (?) rate hike, and China now engaged in Quantitative Tightening, the last thing global stocks can withstand is news that the ECB will also be forced to taper its own QE monetization, not because it wants to but because there is not enough paper left to buy.
Somehow we doubt global equities will take this news in stride, especially when it was none other than Deutsche Bank which over the weekend hinted that just the tightening by the Fed and the PBOC the potential to lead to a “-20 or even 40 percent” drop in equities.
Now add to that the IMF’s concerns that the BOJ will be soon tapering, and the just announced slowdown in ECB monetization, and suddenly all BTFD bets seem very off…
Why SocGen Is Very Nervous About The Recent Loss Of $9 Trillion In Global Market Cap
The good news: the collapse in global market cap since May of 2015 is not the worst ever.
The bad news: the $9 trillion drop in combined market cap between the MSCI All World index and Chinese stocks, is the second highest ever, surpassed only by the $13 plunge in global market capitalization in late 2008.
Wait, $9 trillion? Yes: for all the focus on the modest correction in the S&P500, what most have forgotten is that in addition to the US, various other development markets, not to mention emerging markets, have lost trillions and trillions in value since their May peaks. According to SocGen calculations, there has been a $1 trillion drop in emerging markets, a $4 trillion decline in development equity markets, and let’s not forget, the bursting of the Chinese stock bubble, which from a peak market capitalization of $10 trillion in early June, or about the same as China’s GDP, has lost some $4 trillion, since despite the Chinese government’s increasingly more desperate and futile attempts to reflate the bubble.
Combining all this, SocGen summarizes, “we are looking at an overall $US9 trillion loss of market capitalisation in less than 3 months! To put that number in context the most severe loss in market capitalisation over 3 months during the 2008/09 financial crisis was $12.8 trillion.” The drop is almost the same as China’s $10 trillion GDP (and likely well higher if one uses credible calculations).
But that’s not the worst news. As SocGen’s Andrew Lapthorne suggests, “such a decline in market values will impact implied leverage calculations and as such all eyes should now be on credit markets. Asian credit is already reacting to the price declines, with the likes of the Markit iTraxx Asia ex Japan CDS index moving significantly wider. However there has, as yet been no significant de-rating of credit in the likes of the US.”
Worse, as Lapthorne showed a few weeks ago when he documented that despite the price drop, EV/EBITDA ratios still remain extremely elevated…
… the drop in the market capitalization, and thus enterprise value (aka the EV used in the EV/EBITDA calculation) with debt sticky, will lead to far higher gross leverage ratios. To be sure, the $2 trillion in total debt (and $1 trillion in net debt) added to the balance sheets of non-financial firms since 2009 will not help. In fact, if the market suddenly realizes just how overlevered US firms are, now that the Fed is set to begin hiking rates and pushing interest rates higher, something just may snap in the bond market which has been extremely generous to corporate CFOs in the past 7 years.
US corporates also have an insatiable appetite for more debt, with non-financials raising a further $450bn over the past year, according to their latest report and accounts. Why do they need to borrow so much? Well to buy back their own market capitalisation of course!
… reminds us that any day now the old Baron Munchausen trick of pulling yourself up by your bootstraps, i.e., issuing debt to push up your equity value, will no longer work.
Should the biggest buyer of stocks in the past several years – corporations themselves using buybacks – disappear from the bid side, then there is only one possible source of end-demand for risk we can think of…
Putin Confirms Scope Of Russian Military Role In Syria
Over the past 48 hours or so, we’ve seen what certainly appears to be visual confirmation of a non-negligible Russian military presence in Syria. For anyone coming to the story late, overt Russian involvement would seem to suggest that the geopolitical “main event” (so to speak), may be closer than anyone imagined.
Russia’s excuse for being in Syria is the same as everyone else’s: they’re there, ostensibly, to fight ISIS. As we mentioned yesterday, and as we’ve detailed exhaustively as it relates to Turkey, the fact that ISIS has become a kind of catch-all, go-to excuse for legitimizing whatever one feels like doing is a dangerous precedent and Turkey’s crackdown on the Kurds proves beyond a shadow of a doubt that Islamic State will serve as a smokescreen for more than just the preservation/ouster (depending on which side you’re on) of Bashar al-Assad.
Having said all of that, going into the weekend Russia had yet to confirm publicly that it had commenced military operations in Syria despite the fact that it’s the next closest thing to common knowledge that at the very least, the Kremlin has provided logistical support and technical assistance for a period that probably spans two or more years.
But on Friday, Vladimir Putin looks to have confirmed the scope of Russia’s military role, even if he stopped short of admitting that Russian troops are engaged in combat. Here’s The Telegraph:
Russia is providing “serious” training and logistical support to the Syrian army, Vladimir Putin has said, in the first public confirmation of the depth of Russia’s involvement in Syria’s civil war.
And while the highlighted passage there is actually impossible to prove given that the term “depth” is subjective, it certainly does appear that Putin is now willing to concede that support for Assad goes far beyond “political”. Here’s AFP as well:
Asked whether Russia could take part in operations against IS, Putin said: “We are looking at various options but so far what you are talking about is not on the agenda.”
“To say we’re ready to do this today — so far it’s premature to talk about this. But we are already giving Syria quite serious help with equipment and training soldiers, with our weapons,” RIA Novosti state news agency quoted Putin as saying.
And back to The Telegraph briefly:
Speculation is growing that Russia has significantly expanded its involvement in recent months, including with deliveries of advanced weaponry, a raft of spare parts for existing machines, and the deployment of increasing numbers of military advisers and instructors.
Last week Syrian state television released images showing an advanced Russian-built armoured personnel carrier, the BTR-82a, in combat. Videos have also appeared in which troops engaged in combat appear to shout instructions to one another in Russian.
Of course whether or not the troops Russia has on the ground were sent to Syria with explicit orders to join the fighting is largely irrelevant when the bullets start flying. As Pavel Felgenhaeur, an independent commentator on Russian military affairs told The Telegraph, “it was quite conceivable that members of the advisory mission occasionally found themselves in combat or had even suffered casualties.”
So in other words, they’re at war, and even as Putin is now willing to admit, with a two year (at least) lag, that Russian boots are indeed on the ground, it may be a while before he admits to their role in direct combat and if Ukraine is any guide, he might never acknowledge the extent of Russia’s involvement. But make no mistake, the Russian presence has nothing to do with the “threat” ISIS poses to the world and everything to do with ensuring that Assad’s forces can fight on – at least for now.
The absurd thing about the whole effort is that ISIS itself is now just cannon fodder both for Russia and for the US led coalition flying missions from Incirlik that Turkey has suggested may soon include Saudi Arabia, Qatar, and Jordan. Even more ridiculous is the fact that since none of this has anything to do with eradicating ISIS in the first place, the bombing of ISIS targets by the US, Turkey, and Russia doesn’t really serve much of a purpose at all.
That is, everyone’s just biding time to see how far the other side is willing to go in support of their vision for Syria’s political future – a political future which, as we noted yesterday, almost certainly will not be decided at the ballot box, that is unless it’s after US Marines have stormed Damascus at which point the US will benevolently allow whatever civilians are still alive in Syria to choose between two puppet leaders vetted and supported by Washington.
And lest anyone should forget what this is all about…
In Major Escalation, Washington Demands Greece Blocks Its Airspace For Russian Flights To Syria
Last week, when reporting that at least according to the White House,Russian presence in Syria is no longer disputed, we said that regardless if Russian troops are indeed on the Syrian ground, this admission that the current Syrian state of play “effectively ends the second “foreplay” phase of the Syrian proxy war (the first one took place in the summer of 2013 when in a repeat situation, Russia was supporting Assad only the escalations took place in the naval theater with both Russian and US cruisers within kilometers of each other off the Syrian coast), which means the violent escalation phase is next. It also means that Assad was within days of losing control fighting a multi-front war with enemies supported by the US, Turkey and Saudi Arabia, and Putin had no choice but to intervene or else risk losing Gazprom’s influence over Europe to the infamous Qatari gas pipeline which is what this whole 3 years war is all about.”
Moments ago, following ever louder hints – if still unconfirmed by the Kremlin – that Russian forces are either en route to Syria or already there (Russian soldier’s VK post stating troops are in Syria, interceptedcommunication from a Russian An-124 military cargo plane en route to Latakia, Russian Roll-on/roll-off shipallegedly carrying military equipment to Syria), the US made a dramatic diplomatic escalation ahead of what is now assured to be the second major showdown between the US and Russia in Syria, over a Qatari gas pipeline no less, when according to Reuters, it asked Greece to deny Russia the use of its airspace for supply flights to Syria, a Greek official said on Monday, after Washington told Moscow it was deeply concerned by reports of a Russian military build up in Syria.
Reuters also notes that the Greek foreign ministry said the request was being examined. “Russian newswire RIA Novosti earlier said Greece had refused the U.S. request, quoting a diplomatic source as saying that Russia was seeking permission to run the flights up to Sept. 24.”
We very much doubt Athens will refuse to comply with western (either US or European) demands: now that Greece is officially a European debt colony with permanent capital controls, and deposits whose evaporation is merely a function of Brussels (and Frankfurt’s) good will, what the “democratic powers” demand – if only from Greece – the “democratic powers” get, which is why we are confident that within 48 hours Greece will fully roll over and make it clear to Putin that all Russian military flights will have to be diverted going forward.
We have previously explained the state of play, which Reuters summarizes as follows:
U.S. Secretary of State John Kerry told his Russian counterpart Sergei Lavrov on Saturday that if reports of the build-up were accurate, that could further escalate the war and risk confrontation with the U.S.-led alliance that is bombing Islamic State in Syria.
Lavrov told Kerry it was premature to talk about Russia’s participation in military operations in Syria, a Russian foreign ministry spokeswoman told RIA Novosti on Monday.
Lavrov confirmed Russia had always provided supplies of military equipment to Syria, saying Moscow “has never concealed that it delivers military equipment to official Syrian authorities with the aim of combating terrorism”.
Russia has been a vital ally of President Bashar al-Assad throughout the war that has fractured Syria into a patchwork of areas controlled by rival armed groups, including Islamic State, leaving the government in control of much of the west.
Foreign states are already deeply involved in the war that has killed a quarter of a million people. While Russia and Iran have backed Assad, rebel groups seeking to oust him have received support from governments including the United States, Saudi Arabia and Turkey.
The Syrian army and allied militia have lost significant amounts of territory to insurgents this year. Assad said in July the Syrian army faced a manpower problem.
Still, the simplest confirmation and the proof that the Syrian intervention was never about ISIS (which from day one was a US creation designed to remove Assad from power), is that Russia has been trying to build a wide coalition including Damascus to fight Islamic State.
But the idea has been rejected by enemies including the United States and Saudi Arabia, who see Assad as part of the problem.
But wait a minute, the only reason Assad is on the verge of losing control is because of ISIS which earlier today was reported to have captured a key Syrian oil field near the city of Palmyra. It appears that only when it comes to affairs involving ISIS, the enemy of America’s enemy is double its enemy.
Then again, once one realizes that ISIS was from day one nothing but window dressing for a mythical opponent created in Hollywood, and designed to spook the masses into providing the media cover for what is shaping as an inevitable western intervention in Syria, and that the real enemy was none other than the same Assad who in the summer of 2013 was shown on a fabricated YouTube clip to have gassed his population in another transparent attempt to rally the population around the offensive war flag, then all falls into place.
Meanwhile, what we first reported is quietly but rapidly taking place behind the scenes: Russia is preparing for what appears to be the latest inevitable proxy war: one which will pit Syria (with Russian support, on and off the ground) against ISIS, the “moderate Syrian rebels”, and various Turkish forces (with US support, on and off the ground).
A senior U.S. official told Reuters on Saturday that U.S. authorities have detected “worrisome preparatory steps,” including transport of prefabricated housing units for hundreds of people to a Syrian airfield, that could signal that Russia is preparing to deploy heavy military assets there.
The official, speaking on condition of anonymity, said Moscow’s exact intentions remained unclear but that Kerry called Lavrov to leave no doubt about the U.S. position.
A Syrian military official has said Syrian-Russian military relations have witnessed a “big shift” in recent weeks.
A Lebanese newspaper reported on Monday that Russian military experts who arrived in Syria weeks ago have been inspecting air bases and working to enlarge some runways, particularly in the north, though Moscow had yet to meet a Syrian request for attack helicopters.
As-Safir, citing a Syrian source, said there had been “no fundamental change” in Russian forces on the ground in Syria, saying they were “still operating in the framework of experts, advisers, and trainers”.
Well would you look at that: the US is not the only country that can send military “instructors”, “consultants” and “trainers” to a distant country to prepare the locals for war.
As-Safir said the Russians had “started moving toward a qualitative initiative in the armament relationship for the first time since the start of the war on Syria, with a team of Russian experts beginning to inspect Syrian military airports weeks ago, and they are working to expand some of their runways, particularly in the north of Syria.”
The newspaper, which is well-connected in Damascus, said nothing had been decided about “the nature of the weapons that Damascus might receive, though the Syrians asked to be supplied with more than 20 Russian attack helicopters, of the Mi-28 type”.
Bottom line: the battle lines are now fully drawn and the only question, just like in the case of the Greek near-default, is who gets the blame: if the western full court media press to represent Syria as colluding with Putin – when in reality Assad’s forces were about collapse under relentless US pressure, which with the help of ISIS, meant from day one to remove the Syrian president from power and replace him with a pro-US puppet, one who would allow the passage of the Qatari gas pipeline – succeeds, then the media spin is already prepared. It will mean that the imminent invasion in Syria by US and European powers will be portrayed as another escalation involving Russia, just like in 2013 and 2014.
And yes, we said Europe because as France’s president pivoted earlier today, Europe’s refuge crisis is about to be portrayed as the responsibility of Assad (but apparently not of the Western powers whose intervention in Syria has led to the country being torn by a bloody civil war), and as a result France is now preparing to bomb Syria to retaliate for a tragic refugee crisis, that has been years in the making not without Washington’s, or CIA’s, blessing. In other words, just like the fabricated “chemical attack” youtube clips of 2013 were the media pretext to attack Syria, so Europe’s great refugee crisis of 2015 will be the catalyst for the second attempt to remove Assad from pwoer.
On the other hand, Russia will deny any involvement in Syria, a la Crimea, even as its troops are positioned deep inside Syrian territory in preparation for what will soon be the latest mid-east proxy war.
None of the above, however, should not detract from the seriousness of the situation: suddenly Syria is months if not weeks or even days away from a repeat of the summer of 2013 which some may have forgotten, but on several occasions the US and Russia were this close from launching another world war.
Which is also why while we appreciate the impact of China’s economic hard landing on the price of oil, should the upcoming conflict, which now seems inevitable, spark a metaphorical (or literal) fire in, say, Saudi’s Ghawar oil fields – an outcome Putin would be delighted by – then oil may be poised for substantial upside from here.
This is what we said last week:
Finally, while we have no way of knowing how the upcoming armed conflict will progress, now may be a safe time to take profits on that oil short we recommended back in October, as the geopolitical chess game just shifted dramatically, and with most hedge funds aggressively short, any realization that the middle east is suddenly a far more violent powderkeg – one which may promptly include the Saudis in any confrontation – could result in an epic short squeeze.
With every day that we get closer to the all-out Syrian war, said squeeze becomes virtually assured.
Today, Bulgaria sides with the USA and will not allow Russia to fly over it’s airspace.
Remember this is all about the Qatar/Syrian pipeline that the uSA wants to build and knock off Gazprom from its perch as the major supplier of natural gas to Europe:
(courtesy zero hedge)
War Drums Beating: Bulgaria Blocks Russian Access To Its Airspace For Syria Flights
On Monday we flagged a notable escalation in the build up to the geopolitical “main event” in Syria where, thanks largely to the West’s ambition to break Gazprom’s leverage over Europe, the US and Russia are one “accidental” run-in away from taking the “proxy” out of the term “proxy war.”
With the Kremlin now ramping up its military presence around the Assad stronghold of Latakia, the US is scrambling to do anything and everything in its power to slow the Russian build up – including putting pressure on Greece to deny Russia the use of its airspace for supply flights to Syria.
This isn’t the first time Greece has found itself in the middle of Cold War 2.0, as Athens (and notably Panagiotis Lafazanis) used Greece’s geographical position to field competing gas pipeline bids from Washington and Moscow during the height of the country’s fraught bailout negotiations.
So while we wait for Greece to pick a side between the US and Russia by either allowing Moscow to use its airspace on the way to supplying Assad or else snubbing the Kremlin and jeopardizing a potentially lucrative gas deal, at least one country has been quick to make a decision: Bulgaria…
Why, you ask? According to a spokeswoman, the Bulgarian foreign ministry has “enough information that makes [it] have serious doubts about the cargo of the planes, which is the reason for the refusal.”
What’s particularly amusing here is that all of the above (Greece’s reluctance to immediately acquiesce to Washington’s demands, Bulgaria’s move to deny Russia use of its airspace, and the whole Syrian civil war) is the direct result of energy disputes. As mentioned above, Greece is being pulled between The Southern Gas Corridor and the Turkish Stream, while the South Stream debacle means Bulgaria has no reason not to side with the West. And of course the entire crisis in Syria all comes down the proposed Qatar-Turkey line.
So once again, it all comes down to natural gas and if the conflict in Syria has taught us anything so far, it’s that when it comes to energy, the world’s most powerful nations are willing to sacrifice hundreds of thousands of lives to protect their interests.
Turkey Invades Iraq: Two Battalions Launch Ground Incursion In “Hot Pursuit” Of “Terrorists”
On Monday we warned that the violence in Turkey stemming from Ankara’s politically-motivated, NATO-sponsored crackdown on the PKK is escalating rapidly as are efforts to censor the media and attack (verbally or otherwise) the pro-Kurdish HDP, whose strong showing at the ballot box in June triggered an absurdly transparent effort on the part of President Recep Tayyip Erdogan to undermine the country’s fragile democracy by using ISIS as a smokescreen to gain international support for the resumption of civil war with the Kurds.
As a reminder, Ankara is on the offensive after a series of attacks blamed on the PKK killed multiple Turkish soldiers over the weekend. Here’s what we said yesterday: Erdogan told the the press that the war on terror would now be waged “with much greater determination” and that means more violence and more crackdowns on the media and anyone deemed to be a PKK sympathizer. Sure enough, AKP supporters massed outside the headquarters of the Hurriyet newspaper on Sunday, accusing the paper of misquoting Erdogan and on Monday, HDP offices were attacked across the country. More from Zaman:
Dozens of buildings belonging to local branches of the pro-Kurdish Peoples’ Democratic Party’s (HDP) were attacked on Monday in several cities across Turkey, after the General Staff confirmed that 16 soldiers had been killed in an ambush by the terrorist Kurdistan Workers’ Party (PKK) on Sunday.
In Ni?de a group of nearly 500 protesters, who gathered in Cumhuriyet Square, attacked the HDP’s Ni?de branch building with stones. Some of those involved climbed up to the window of the HDP office and broke the signboard of the party, after police failed to disperse the group.
Similar attacks were staged in the provinces of Antalya, Mersin, Sakarya and Kayseri and the districts of Manavgat and Çorlu, with protesters stoning the party’s local headquarters and hanging Turkish flags on the buildings.
The windows of the HDP’s Eski?ehir branch were broken in a separate attack.
In Çorlu, protesters also attempted to lynch the HDP’s Tekirda? provincial co-chair, ?ehnaz Kaya.
Private television station IMC claimed that a total of 126 of the HDP’s provincial and district branches buildings were attacked on Monday.
On Tuesday, things got worse – much worse. After more than a dozen Turkish policemen were killed in yet another roadside bombing, Ankara sent ground troops into Iraq in pursuit of those the Erdogan regime says are responsible. Here’s The New York Times with more:
Turkish ground troops entered northern Iraq on Tuesday as part of a short-term operation to capture Kurdish rebels who had crossed the border after an attack that killed 16 soldiers, a government official in Turkey said.
The military had crossed the Iraqi border in pursuit of militants from the Kurdistan Workers’ Party, or P.K.K., who had been involved in recent attacks against Turkish security forces, the official said, speaking on the condition of anonymity in line with government protocol.
The size of the operation was not immediately clear, but the Dogan news agency, citing military sources, said two battalions had entered northern Iraq.
The incursion comes after 14 Turkish police officers were killed in a roadside bomb attack in eastern Turkey on Tuesday, a day afterTurkish warplanes struck Kurdish insurgent targets in northern Iraq and killed dozens of rebels.
A police vehicle escorting customs official to the border with Armenia in Igdir Province was the target of attackers believed to be rebels from the insurgent group, the semiofficial Anadolu Agency reported. Several other police officers were wounded in the assault.
And more from AFP:
Fourteen Turkish police were killed Tuesday in a new attack by Kurdistan Workers’ Party (PKK) militants as violence in the east of the country threatened to spiral out of control.
“Turkish security forces crossed the Iraqi border as part of the hot pursuit of PKK terrorists who were involved in the most recent attacks,” a Turkish government source told AFP.
“This is a short-term measure intended to prevent the terrorists’ escape,” added the official, without specifying the timing of the incursion.
The 14 police were killed in the eastern region of Igdir in a bomb attack by militants on a minibus taking them to the Dilucu border post with neighbouring Azerbaijan, Anatolia reported.
A PKK spokesman in northern Iraq confirmed to AFP that the PKK had carried out the attack.
Note that this isn’t without precedent. In early 2008, Turkish soldiers entered Iraq in a similar effort to eradicate the PKK. “Operation Sun”, as the incursion was called, was conducted with Washington’s blessing for the most part. “Washington described the PKK as a ‘common enemy’, and only urged Ankara to keep its incursion short and closely focused,” BBC noted at the time, adding that “the positions of the UN and EU have been similar, suggesting a degree of sympathy with Turkey’s cause.”
And then there was “Operation Steel” in 1995. And “Operation Hammer” in 1997.” And “Operation Dawn.” And the aplty named “Operation Northern Iraq.”
You get the idea.
So while history doesn’t repeat itself, it damn sure rhymes and here we are again watching as the Turkish military crosses the Iraqi border as though it’s not even there (which the US does routinely) chasing “terrorists” up into the mountains.
Of course Turkish soldiers aren’t the only ones fighting Kurds in Iraq. So is ISIS. And that means that just like in Syria, Turkey (with Washington’s implicit ok) is at best distracting from and at worst impeding the battle against Islamic State, the same Islamic State which is being used by Ankara as a cover for the PKK crackdown. Of course as Erdogan will patiently explain, he’s only after the “bad” Kurds which we suppose means no US-backed Peshmerga will be harmed in the making of the latest Turkish invasion of Northern Iraq.
The Biggest Red Herring In U.S. Shale
Rig productivity and drilling efficiency are red herrings.
A red herring is something that takes attention away from a more important subject. Rig productivity and drilling efficiency distract from the truth that tight oil producers are losing money at low oil prices.
Pad drilling allows many wells to be drilled from the same location by a single rig. Rig productivity reflects the increased volume of oil and gas thus produced by each of a decreasing number of rigs. It does not account for the number of producing wells that continues to increase in all tight oil plays.
In other words, although the barrels produced per rig is increasing, the barrels per average producing well is decreasing (Figure 1).
Figure 1. Bakken oil production per rig vs. production per well.
Source: EIA, Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Rig productivity is a potentially deceptive measurement because it does not consider cost and apparently italways increases. It gives a best of all possible worlds outcome that seems to defy the laws of physics. Drilling productivity gives the false impression that as the rig count approaches zero, production approaches infinity.
Barrels per rig is interesting but the cost to produce a barrel of oil is what matters.
Similarly, drilling efficiency measures the decrease in the number of days to drill a certain number of feet. This is also interesting but, unless we know how it affects the cost to produce a barrel of oil, it is not useful.
The data contained in 10-Q and 10-K SEC forms provides a continuing view of a company’s financial position during the year. This allows us to determine a company’s cost per barrel and its components that rig productivity and drilling efficiency do not provide.
Pioneer, EOG and Continental SEC Filings for The First Half of 2015
First-half 2015 SEC filings for Pioneer, EOG* and Continental show that these companies are all losing money at an average realized crude oil price of $48 and range of $44-52 per barrel that includes hedges. I chose these companies to study because they have good positions in the best tight oil plays, and provide a weighted cross-section of Bakken, Eagle Ford and Permian production performance (Table 1).
Table 1. Play representation of Pioneer Natural Resources Company, EOG Resources, Inc. and Continental Resources, Inc.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
First, I looked at operating costs summarized in Table 2.
Table 2. Second quarter (Q2) and first half (H1) 2015 operating costs for Pioneer, EOG and Continental compared with the same periods in 2014.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Operating costs for Pioneer, EOG and Continental decreased by about 15%, 12% and 16%, respectively, in 2015 compared with 2014. This had nothing to do with rig productivity or drilling efficiency since those are capital costs; we are talking here about operating costs.
Decreases were because of reduced staffing costs, lower taxes because of lower oil prices and revenues, and generally lower costs of doing midstream business as service providers lowered their prices to remain competitive in a lower oil-price environment.
Next, I investigated how production rates changed in response to lower oil prices. Continental’s production increased 12% in 2015. Both Pioneer’s and EOG’s 2015 daily production rates, however, were flat compared with 2014 as these companies apparently exercised discipline in the face of lower prices (Table 3).
Table 3. 2015 vs. 2014 daily production rate comparison for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
This is important because it means that capital expenditures by Pioneer and EOG in the first half of 2015 were to maintain rather than grow production.
Table 4 and Figure 2 summarize operating and maintenance capital costs for H1 2015 for these three companies along with their realized prices per barrel of oil equivalent (BOE) and calculated net margins per BOE. BOE prices represent a blend of crude oil ($44-52 per barrel), natural gas liquids ($15-16 per barrel) and natural gas ($2.45-2.53 per Mcf) prices.
Table 4. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Figure 2. First half (H1) 2015 cost per barrel of oil equivalent summary for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Even though Continental’s capital expenditures were for both maintenance and growth, I used 80% of its capex for a potential comparison with Pioneer’s and EOG’s full maintenance capital costs.
All three companies lost money on a unit basis for H1 2015. EOG lost the least at $9.74 per Boe (28% of its realized price). Pioneer lost $23.48 (75% if its realized price per Boe) and, Continental, $24.04 (69% of its realized price per Boe).
Any analyst or journalist who says that tight oil companies are doing fine at lower oil prices because of rig productivity, drilling efficiency or any other factor needs to look at the data. For less substantial and less well-positioned companies than the three in this study, the losses are probably far worse.
These observations are consistent with the trends in cash flow shown in Table 5.
Table 5. Cash flow summary for 2014 and 2015 for Pioneer, EOG and Continental.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
All three companies had negative free cash flow in H1 2015. Pioneer out-spent cash flow by $781 million; EOG out-spent cash flow by $966 million; and, Continental out-spent cash flow by $1.1 billion.
Table 5 also reveals that EOG was cash-flow positive in 2014 before oil prices collapsed although Pioneer and Continental lost money even at higher oil prices. I wanted to compare EOG’s costs when the company was cash-flow positive to more recent costs when it was cash-flow negative (Table 6).
Table 6. EOG Resources’ 2015 vs. 2014 costs per barrel of oil equivalent.
Source: Company SEC filings and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
I have already discussed the probable causes for lower operating costs but the 20% decrease in capital costs is significant and may be behind some of the claims that rig productivity and efficiency are important. I do not know what percentage of capex for 2014 was for growth vs. maintenance. My allocation of 85% of capex is, therefore, arbitrary but probably over-states the amount of capex savings between 2015 and 2014. It provides a net margin per BOE that is consistent with the positive cash flow for 2014 shown in Table 5, and with recent statements by the company that it would resume full drilling at around $60 per barrel oil prices.
One of my clients just drilled a well to more than 14,000 feet onshore Texas using a high-horse power top-drive rig designed for horizontal drilling. The day rate for the drilling rig decreased by almost 40% from the initial quote in the fall of 2014 to when the contract was signed in the spring of 2015.
This leads me to believe that most, if not all, of the recent capex savings by EOG and other tight oil producers is because of price deflation and not because of increases in rig productivity or efficiency.
The EIA Drilling Productivity Report
If we have learned anything watching the rig count fall since December 2014 without much corresponding fall in oil production, it is that rig count is a very poor predictor of anything except where capital is going. Drilling productivity is just another variant or derivative of rig count and comes burdened, therefore, with all of its vagaries.
At the same time, there are problems with how the EIA uses rig productivity in their monthly Drilling Productivity Report (DPR). EIA assumes a 2-month lag between well spud and first production for all unconventional plays but this is incorrect for the three most important tight oil plays.
Figure 3 shows that the average time from spud to first production for the Eagle Ford is at least 75 days; for the Bakken, 120 days; and, for the Permian “shale” plays, 90 days.
Figure 3. Data analysis for well spud to first production for the Bakken, Eagle Ford and Permian basin tight oil plays.
Source: Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
There are additional problems with EIA’s DPR such as inclusion of considerable conventional oil production in the Permian basin, and with the broad definitions of play regions that include many wells and plays not relevant to the tight oil and shale gas plays of interest (EIA acknowledges these issues in its methodology explanation).
The best way to understand the details and changes in the cost of producing oil and gas is by evaluating data in 10-Q and 10-K SEC filings. Costs have declined since oil prices collapsed and hard times hit the industry. Most of this decrease in cost is part of a larger deflationary trend in commodities and currencies and not because of rig productivity and drilling efficiency as many believe.
To some extent, lower costs compensate for the lower price of oil but none of the tight oil companies evaluated in this study are profitable in the $44-52 per barrel range of reported realized oil prices. They are all losing money.
Rig productivity and drilling efficiency measurements do not account for declining average well productivity. They will only become useful if they can be related to the marginal cost of producing a barrel of oil. For now, they are distractions from the more important subject of tight oil profitability.
Euro/USA 1.1161 up .0002
USA/JAPAN YEN 119.91 up .492
GBP/USA 1.5377 up .01030
USA/CAN 1.3236 down .0060
Early this Tuesday morning in Europe, the Euro rose by 2 basis points, trading nowwell above the 1.11 level rising to 1.1161; 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. Last night the Chinese yuan lowered in value . The rate at closing last night: 6.3674, down .0125
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 now trades in a southbound trajectory as settled down again in Japan up by 101 basis points and trading now just below the 120 level to 119.92 yen to the dollar.
The pound was well up this morning by 100 basis points as it now trades well above the 1.53 level at 1.5377.
The Canadian dollar reversed course by falling 44 basis points to 1.3233 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 with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
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 Friday morning: down by 433.39 or 2.43%
Trading from Europe and Asia:
1. Europe stocks all in the green/(USA/Yen ramp)
2/ Asian bourses mostly in the green except Japan … Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai green (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the green/
Gold very early morning trading: $1120.50
Early Tuesday morning USA 10 year bond yield: 2.15% !!! up 3 in basis points from Friday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.92 up 3 basis points.
USA dollar index early Tuesday morning: 96.14 up 9 cents from Friday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.3657 down .0108
Stocks & Commodities Pumped, Bonds & Yen Dumped After Massive Chinese Intervention
Overheard in China last night…
It all started with China… after droppiong 100s of billion of Yuan to “stabilize” the market already, why not do some more…
On the lowest volume EVER!!!
Japanese stocks were utterly insane!!!
And everything lifted with it… FOR ANYONE WHO SAYS CHINA DOESN’T MATTER – YOU’RE WRONG!!
European and US stocks followed…
Trannies won the day overall but it was a one-way street after Europe closed. Dow closed +380 points!! (12 of the last 14 days triple digit change)
“Out Of Correction”
Note – Dow Futures back to the 50% Retracement level… and making lower highs…
VIX term structure remains in backwardation, VVIX (vol of vol) holding above 100, and VIX skew is extremely high..
Here is a thought though – BABA was a massive hedge fund hotel… so one wonders how much of this move today is covering Momo names and unwinding the index hedge against them…
NOTE that NFLX weakness weighed on the S&P (on concerns AAPL announces streaming video competition)
FANG is F##ked…
And GRUB snubbed to record lows as Amazon starts restaurant deliveries…
Crude & Copper soared, Silver also ripped, gold was flat…
NOTE – Brent Crude Implied Vol surged to 60 – its highest since 2009…
And USO and OVX remain nmotably decoupled after the month-end melt-up…
As Stocks and USDJPY danced together all night and all day… until tyhe last 30 when momo was ignited and stock were on ther own with VBIX
But The US Dollar ended the day modestly lower from Friday (with AUD and GBP strength countered by CHF and JPY weakness)…
Treasuries were dumped unceremoniously – though we do note that the calendar for corporate issuance is extremely heavy and the velocity of today’s move suggests heavy rate-lock pressure…
This is the highest closing print for 30Y yields in 6 weeks – though remained below the crucial 3.00% level all day.
Copper was the big story of the day – rising 5.4% on the day – the most since May 2013 – and busting above its 50DMA after crashing following its break below in May…
A September Rate Hike Is “Not Even Close”: Goldman’s Seven Reasons Why Yellen Will Delay… Again
On one hand, every economist, virtual portfolio manager,Yahoo Finance Twitter expert, and TV talking head is certain that a September rate hike is inevitable.
On the other hand, the bank that runs the NY Fed (and whose chief economist Jan Hatzius has dinner with NY Fed head Bill Dudley at the Pound and Pence every other month), Goldman Sachs is doubling down on its call that the Fed will not hike in September.
We’ll go with Goldman (only because in this case it really is a dumb vs dumber moment).
Incidentally, here is Hatzius in January 2014 predicting “above-trend growth” for the US (and “for what it’s worth”, Joe Wisenthal naturally agreeing with him).
So here, without further ado for those who still care about this most farcical of discussions, is Goldman’s Jan Hatzius with seven reasons why Yellen will delay. Again.
* * *
From Goldman’s Jan Hatzius
Shouldn’t Be Close
1. We do not expect a rate hike at the September 16-17 FOMC meeting. This call was originally based on our interpretation of the June “dot plot” and Chair Yellen’s July 10 speech, which suggested to us that her own expectation was liftoff in December, not September. If this interpretation was correct at the time, and if we are right in assuming that Yellen’s views are ultimately decisive, the key question is how the economy and the financial markets have performed relative to her expectations of 2-3 months ago. If developments have beaten her expectations, it is possible that she might now support a hike. In contrast, if developments have been in line with or weaker than her expectations, she will presumably resist a hike.
2. Even if we focus only on the economic data, it is difficult to argue that developments have beaten expectations. Although growth has been decent and the labor market has improved further, both wage and price inflation have fallen short of consensus expectations. Our wage tracker stands at just 2.1% as the Q2 employment cost index surprised on the downside, and core PCE inflation just made a four-year low of 1.24%. Moreover, the notion that the weakness in core inflation is principally due to the temporary effects of a stronger dollar and lower commodity prices does not look right; core PCE goods inflation, where such effects should be concentrated, is only 0.4pp below its 20-year average, a gap that is worth just 0.1pp for the overall core PCE index. This suggests that most of the inflation shortfall relative to the Fed’s 2% target is due to more persistent factors, including continued labor market slack.
3. Once we broaden the perspective to include financial markets, developments have been substantially worse than almost anyone expected in June or early July, leading many forecasters (ourselves included) to shave their expectations of future growth. Our GS Financial Conditions Index (GSFCI) is at the tightest level since 2010, as the dollar has appreciated further, credit spreads have widened, and stock prices have fallen substantially. At this point, our “GSFCI Taylor rule” suggests that actual financial conditions are much tighter than the level suggested by the current levels of employment and inflation relative to the Fed’s targets. In a similar vein, market inflation expectations have fallen back to the lows of early 2015; the five-year five-year forward TIPS breakeven stood at 1.88% on Friday, which we think is consistent with a market expectation for PCE inflation of just 1½%, half a point below the Fed’s target.
4. So how do we explain Vice Chairman Fischer’s relatively hawkish CNBC interview and speechat the Jackson Hole symposium? While Fischer did not comment directly on the timing of liftoff, he did provide a fairly upbeat interpretation of the labor market and inflation picture, which many have interpreted as a signal that he will support a hike on September 17. However, an alternative interpretation is a desire to avoid pre-empting the actual FOMC meeting, at a point in time when the market-implied probability of a September hike stood below 25%. In support of this interpretation, we would note that Fischer also gave a speech widely interpreted as hawkish just three weeks before the March 17-18 FOMC meeting, which featured sizable downward revisions to the committee’s inflation and funds rate paths.
5. There are also some logistical difficulties with a hike on September 17. Right now, the market-implied probability of a hike is 30%-35%. We believe that the FOMC will want to be reasonably sure that the first rate hike in nearly a decade is well anticipated by the market on the day it occurs. This implies that a strong signal between now and the meeting may be necessary to put the committee in a position where it feels it actually can hike without potentially causing a significant amount of market disruption. But again, the desire to avoid pre-empting the discussion at the meeting itself presumably argues against sending such a signal. The path of least resistance is therefore to wait, which might mean that the market-implied probability of a hike on the day of the meeting itself will be close to current levels. If so, we think that market pricing in itself would become a strong argument around the FOMC table against pulling the trigger on September 16-17 [ZH: which means that as many have suggested, it is the market’s tantrums and not the Fed, which calls the shots].
6. If we are right about the will-they-or-won’t-they issue, the next question is what message the committee will send about future policy on September 17. On this, it is harder to be confident. The tightening of financial conditions has greatly strengthened the case of commentators such as former Treasury Secretary Summers that the committee should not be signaling a 2015 liftoff; taken literally, our GSFCI rule implies that the committee should be looking for ways to ease, not tighten, policy. And the simplest way to do that would be to signal a later liftoff than the market is currently discounting. Against this, many meeting participants will argue that the tightening of financial conditions could reverse quickly and a 2016 liftoff is too late given the further improvement in the labor market and the sharper-than-expected decline in the headline unemployment rate in recent months. In the end, our baseline expectation is that the message from the meeting, including the “leadership dots”, will remain broadly consistent with liftoff in December but Chair Yellen will make it clear in the press conference that financial conditions need to improve for the committee to actually hike this year.
7. Other aspects of the meeting are also likely to be mostly dovish. Although the unemployment rate path will once again have to come down, we expect this to be largely offset by a reduction in the committee’s estimate of the structural unemployment rate. The forecasts for real GDP growth, inflation, and the longer-term funds rate are also likely to decline modestly. That said, the Fed’s funds rate expectations are likely to remain well above the distant forward rate, which now suggests a market view of the equilibrium funds rate of just 2%. We agree with the Fed’s view that this is likely too low, although the question will not be definitively settled for several years.
698K Native-Born Americans Lost Their Job In August: Why This Suddenly Is The Most Important JOBS REPORT
(courtesy zero hedge)
After the Fed admitted over a year ago that the US unemployment rate (which in 2012 was supposed to be a rate hike “threshold” once it hit 6.5% and is now at 5.1%) has become irrelevant in a country where a record 94 million people have left the labor force, and with the Fed poised to hike rates even though US hourly wages have not only not increased for the past 7 years, but for the vast majority of the labor force continue to decline, some have asked – is there any labor-related chart that matters any more?
The answer: a resounding yes, only it is none of the conventional charts that algos and sometimes humans look at.
The one chart that matters more than ever,has little to nothing to do with the Fed’s monetary policy, but everything to do with the November 2016 presidential elections in which the topic of immigration, both legal and illegal, is shaping up to be the most rancorous, contentious and divisive.
The chart is the following, showing the cumulative addition of foreign-born and native-born workers added to US payrolls according to the BLS since December 2007, i.e., since the start of the recession/Second Great Depression.
The chart is especially important because what it shows for just the month of August will be enough to provide the Trump – and every other – campaign with enough soundbites and pivot points to last it for weeks on end: namely, that in August a whopping 698,000 native-born Americans lost their job. This drop was offset by 204,000 foreign-born Americans, who got a job in the month of August.
But the punchline: since December 2007, according to the Household Survey, only 790,000 native born American jobs have been added. Contrast that with the 2.1 million foreign-born Americans who have found a job over the same time period…
… and you have a combustible mess that will lead to serious fireworks during the next GOP primary
Retail sales as reported by Gallup and not the phony conference board junk:
(courtesy Gallup/zero hedge)
Retail Sales Slump On Deck: Consumer Spending Slides To Lowest Since March After Worst August Since 2012
When it comes to exposing the disturbing, some say desperate, propaganda wave sweeping the nation, nothing has quite captured the unprecedented decoupling between policy-accepted “confidence indicators” such as the Conference Board, which in August printed at its 2015 highs and those which actually poll people such as Gallup, whose economic outlook indicator collapsed to the lowest level in one year.
Which, considering the general state of the economy, begs the question: has Gallup now officially become the one poll-based indicator that has not been tained by “policy-supervision.”
We don’t know the answer, but we do know that if Gallup indeed provides an accurate representation of the US economy, then August retail spending – that most important driver of the US economy, more important even than the backward looking GDP print – is set to come crashing down with a bang. The reason: according to the latest Gallup report on US consumer spending, in which a random sample of 15.724 adults were interviewed by phone, Americans’ self-reported daily spending averaged just $89 in August, down not only from August in 2014 and 2013…
… but the fourth month in a row of year-over-year spending declines, as well as was also the lowest monthly spend since March of 2015.
And this time there are no “scapegoats” to blame the spending slowdown on: the weather in August was uniformly gorgeous around the US.
A quick reminder what Gallup foes actually measure:
Gallup’s daily spending measure asks Americans to estimate the total amount they spent “yesterday” in restaurants, gas stations, stores or online — not counting home, vehicle or other major purchases, or normal monthly bills — to provide an indication of Americans’ discretionary spending. The average for August 2015 is based on Gallup Daily tracking interviews with more than 15,000 U.S. adults.
As Gallup reminds us, “spending peaked at $114 in May 2008 before waning and then plunging amid the global economic crisis that took hold later in the year. From 2009 to 2012, spending stagnated, ranging between $58 and $83. Americans’ spending picked up in late 2012, and continued in 2013 and 2014, ranging from $78 to $98.” Since then it has clearly tapered off and is a long, long way away from the pre-crisis peaks hit in mid-2008 before the trapdoor opened.
If August is indeed confirmed to be weak, September will be even weaker:
If monthly spending patterns in recent years are any indication of what is to come, spending is not likely to increase in September. In each of the previous five years, spending in September has been lower than in August, including sharp declines of $11 in 2013 and $7 in 2014. In 2008 and 2009, it increased slightly, but only by a dollar or two.
Regular declines in spending from August to September are understandable given the end of the vacation season and the end of back-to-school shopping, one of the busiest times of the year for retailers.
The bottom line: “Though down slightly, Americans’ spending remains in somewhat of a holding pattern, having stayed within a $2 range for the last five months. But while the average for August is on par with recent months, it remains below averages recorded for August in 2013 and 2014.”
Finally, we should note that the market swoon which saw a vicious correction in the S&P500, did not start until after August 19, the day the FOMC minutes were released. Expect to see substantial sticker shock once “mom and pop” open their monthly 401(k) or brokerage statement and find their net worth was quietly truncated by 10% or more. Do not expect a sharp spending rebound to follow.
Criminal charges filed against 3 Nomura traders for skimming:
(courtesy zero hedge)
Criminal Charges Filed Against Nomura Traders For Skimming Off Bid/Ask Spreads, Making Millions In The Process
Nearly three years ago, we explained why when it comes to fixed income traders in the traditional, and very lucrative, over the counter market, “the days of rampant skimming on top of the bid/ask spread, and with them record bonuses for bond traders and salesmen, may just ended with a whimper not a bang, and all bond traders hoping to make millions by misrepresenting what the true purchase or sale prices are to buysider clients, even if completely voluntary on both sides, may want to seek employment elsewhere.
They have Jesse Litvak to thank for it.
Jesse is a former MBS trader from Jefferies, who got just a little too greedy, and proceeded to rip virtually all of his clients on seemingly every single trade he executed for the three years he was employed at Jefferies, lying to everyone in the process: both clients and in house colleagues, generating some $2.7 million in additional revenue for Jefferies for the duration of his tenure, and who knows how much in personal bonuses.”
Today, in the first official criminal action following the Litvak bust from 2013, the SEC confirmed that our assessment was spot on after the regulator announced fraud charges against three traders “accused of repeatedly lying to customers relying on them for honest and accurate pricing information about residential mortgage-backed securities (RMBS).”
In the complaint, the SEC alleges that Ross Shapiro, Michael Gramins, and Tyler Peters defrauded customers to illicitly generate millions of dollars in additional revenue for Nomura Securities International, the New York-based brokerage firm where they worked. They misrepresented the bids and offers being provided to Nomura for RMBS as well as the prices at which Nomura bought and sold RMBS and the spreads the firm earned intermediating RMBS trades. They also trained, coached, and directed junior traders at the firm to engage in the same misconduct.
In a parallel action, the U.S. Attorney’s Office for the District of Connecticut announced criminal charges against Shapiro, Gramins, and Peters, who no longer work at Nomura.
“The alleged misconduct reflects a callous disregard for the integrity and obligations expected of registered securities professionals,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Not only did these traders lie to their customers, but they created a corrupt culture on Nomura’s trading desk by coaching more junior traders to employ the same deceptive and dishonest trading practices we allege in our complaint.”
Why did they do it? Simple: millions in bonuses paid to those who generated the most revenue, no matter how it was achieved. To witL
- The lies and omissions to customers by Shapiro, Gramins, and Peters generated at least $5 million in additional revenue for Nomura, and lies and omissions by the subordinates they trained and coached generated at least $2 million in additional profits for the firm.
- Nomura determined bonuses for Shapiro, Gramins, and Peters based on several factors including revenue generation. Nomura paid total compensation of $13.3 million to Shapiro, $5.8 million to Gramins, and $2.9 million to Peters during the years this misconduct was occurring.
- Customers sought and relied on market price information from these traders because the market for this type of RMBS is opaque and accurate price information is difficult for a customer to determine. Therefore it was particularly important for the traders to provide honest and accurate information.
- Shapiro, Gramins, and Peters went so far as to invent phantom third-party sellers and fictional offers when Nomura already owned the bonds the traders were pretending to obtain for potential buyers.
Looks like the three won’t be trading much any time soon. Others were luckier: the SEC separately entered into deferred prosecution agreements (DPAs) with three other individuals who have extensively cooperated with the SEC’s investigation and provided enforcement staff with access to critical evidence that otherwise would not have been available.
“The SEC is open to deferring charges based on certain factors, including when cooperators come forward with timely and credible information while candidly acknowledging their own misconduct,” said Michael Osnato, Chief of the SEC’s Complex Financial Instruments Unit. “The decision to defer charges in this matter reflects the early and sustained assistance provided by these individuals.”
Which, of course, is the punchline: as we warned in January 2013, “all bond traders hoping to make millions by misrepresenting what the true purchase or sale prices are to buysider clients, even if completely voluntary on both sides, may want to seek employment elsewhere” because now that the SEC is apparently cracking down on bid/ask misrepresentation, all it will take is one disgruntled former employee and suddenly all those bonuses accumulated for the past 5 years become clawback-able, and is also the reason why fixed income sales and trading bonuses have been steadily leaking from the top left to the bottom right, and will continue to do so until all bonds are also traded on exchanges courtesy of “liquidity-providing” HFTs.
Now if only the SEC had the same ambition to crack down on market manipulation taking place every single day among the HFTs industry, one could almost say that the SEC will finally be doing its job for once.
Desperate” Chicago Schools Need Half Billion To Avoid Mass Layoffs, Partial Shutdown
Last month, we noted with some incredulity that Illinois isnow paying lottery winners in IOUs. Long story short, the state’s inability to pass a budget means big winners will have to wait on their prize money, a ridiculous situation which prompted one Illinoisan to remind state officials that “if we owed the state money, they’d come take it and they don’t care whether we have a roof over our head; our budget wouldn’t be a factor.” State Rep. Jack Franks agreed, noting that the “government is committing fraud on the taxpayers.”
The lottery debacle is just the latest example of Illinois’ deepening fiscal crisis which was catapulted into the national spotlight in May when a state Supreme Court decision that struck down a pension reform bid prompted Moody’s to cut the city of Chicago into junk territory. Since then, the media has been awash with tales of the labyrinthine, incestuous character of the state’s various state and local governments and the deplorable condition of the state’s pension system.
The fallout from the budget crisis is far-reaching in the state with the latest example being Chicago’s public school system (the third-largest in the country), which opened this week with a budget shortfall of nearly a half billion dollars. Here’s WSJ with the story:
Chicago Public Schools—with 394,000 students and nearly 21,000 teachers—has closed more than half of a projected $1.1 billion shortfall through cuts, borrowing and other means, but is looking to the state to come up with the rest. The school board warns of deep cuts later this year if Illinois, which faces its own fiscal crisis, doesn’t deliver an additional $480 million in the coming months, representing roughly 8% of annual district spending.
“It is like the board is a desperate gambler at the end of their run,” said Jesse Sharkey, vice president of the Chicago Teachers Union, in a recent speech.
“We are really now at a point where further cuts would reach deep into the classroom,” said Forrest Claypool, who was named chief executive of the city schools in July.
Since 2011, the school board has made nearly $1 billion in cuts—including $200 million this year that involved eliminating 1,400 positions, mostly through layoffs. Enrollment declines, due to shifting demographics and Chicago’s shrinking population, have led to school closings, including nearly 50 elementary schools in 2013 alone.
Mayor Rahm Emanuel has clashed with the teachers union, which went on strike three years ago and is currently without a contract. Another strike isn’t out of the question as the two sides are wrestling over the district’s effort to get teachers to pay more of their pension costs.
A group of parents, educators and activists with the support of union leaders launched a hunger strike Aug. 17 in a push to reopen a closed high school in a historically black neighborhood on the city’s South Side. The group argues the board concentrates money in Chicago’s wealthy, predominantly white neighborhoods. Hispanic and black students make up a vast majority of enrollment in city schools, and more than 85% of students are considered economically disadvantaged.
“There is a priorities crisis,” said Jitu Brown, a community organizer and parent who is participating in the hunger strike.
Of course one problem is a sharp increase in pension costs thanks to a “holiday” the board decided to take from 2011 through 2014:
The district’s pension costs have more than doubled in recent years after the board took a partial “holiday” for three years from paying the amount needed to put the retirement system on a path to long-term solvency.
And all the classic options – raising taxes, taking on new debt to payoff the old debt, etc. – have apparently been exhausted:
At first, the board drained reserves and paid off old debt with new, but those options are running out. The district also is raising property taxes as much as it can under a state cap. At the same time, Mr. Emanuel is weighing a much larger increase to confront the city government’s own pension problems, but that wouldn’t go to the schools.
Which means asking the ineffectual state legislature for $480 million, but thanks to gridlock in Springfield, there are no assurances that aid is forthcoming and that, in turn, means that once it’s all said and done, the third largest school system in the country will be forced to layoff thousands and implement what amounts to a partial shutdown.
Senate President John Cullerton, a Chicago Democrat who sponsored the legislation, said without it the schools would see the layoffs of 3,000 teachers, increased class sizes and a shortened academic year. “We have to resolve this,” he said.
Yes, this has to be resolved and because we want to help, we suggest Governor Bruce Rauner not do things like squander hundreds of thousands of dollars in taxpayer money on celebrity budget gurus like Donna Arduin, who, until she was dismissed two Fridays ago for not being very guru-ish when it came to Illinois’ budget, was making $30,000 a month or, more than half of what a Chicago public school teacher makes in a year.
This worries me as well!!
courtesy Dave Kranzler/IRD)
When everything else fails, start a war…
I’ve always said that the U.S. Government would start a World War when it was pushed to the brink of having to disclose that fact that it no longer has any gold and that the U.S. financial and economic system is nothing but one massive Ponzi scheme that rests on an unaccountably enormous maze of derivatives, debt and fraud. We saw evidence of no gold in the cupboard when the Fed failed to deliver on Germany’s request for immediate repatriation of over 600 tonnes of gold. That saga is still being written.
Following this line of thinking, it makes senses that the mainstream media is not questioning or spending resources on reporting the escalating military activities in Syria. Especially in light of the fact that the mainstream media has caught on to the fact that the U.S. Government is primary cause of the refugee problem in Europe.
I wasn’t shocked when the U.S. Government announced that it was ramping up its military efforts in Syria to “fight ISIS,” or whatever conjured up acronym is being used to labal the world’s newest “boogieman.”
This is clearly a thinly disguised attempt to move into Syria and remove the Assad Government, which would enable the U.S. Government to achieve the dual purpose of moving forward with the pipeline that Big Oil wants to put through Syria and to consolidate U.S. military control around the Middle East.
And I was equally unimpressed when Russia announced that it would be moving military equipment and personnel into and around the Assad Government stronghold areas in order to help fortify the “effort” against ISIS.
We saw this movie playing in September 2013, when the Obama regime tried to toss out Assad and put its own puppet in power. Russia drew a line in the sand from which Obama backed off.
This time around it looks a bit more serious. Literally a few days after Russia announced its reinforced military presence in Syria, the U.S. exercised its control over the Greek Government by imploring it to block Russia from using Greek airspace.
Yesterday Bulgaria announced that it would deny Russia use of its airspace for military transport planes, which were ostensibly transporting humanitarian supplies to Syria.
This is a clear escalation in the military conflict that has been slowly heating up between Russia and the United States. Perhaps the most troubling aspect of what is fomenting is not the finger-pointing propaganda between the U.S. and Russian Governments, but the fact that the media – especially in the U.S. – is spending very little resources on covering and reporting this brewing war.
The cover stories for the big wars throughout history have always been religious or political in nature. But the root cause can always be traced to underlying economic causes. We know the entire world is plunging into a deep recession. With the global balance of economic power shifting from West to East – perhaps best symbolized by the massive flow of gold from West to East – my biggest fear is that the U.S. will act in desperation in order to cling to the global hegemonic power that is slipping from its grasp…this is how the big wars always start. The only difference is that historically, the Empire in collapse did not possess weapon which could literally incinerate the earth…
One of my favourite commentators: Rob Kirby
Here Rob is being interviewed by Greg Hunter USAWatchdog/
Well that about does it for tonight
I will see you tomorrow night