Gold: $1087.90 up $.30 (comex closing time)
Silver $14.42 down 27 cents
In the access market 5:15 pm
First, here is an outline of what will be discussed tonight:
At the gold comex today, we had a very poor delivery day, registering 0 notice for 100 ounces. Silver saw 0 notices for nil oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 208.82 tonnes for a loss of 94 tonnes over that period.
In silver, the open interest surprisingly fell by only 175 contracts despite silver being down 30 cents in Friday’s trading. The total silver OI now rests at 166,740 contracts In ounces, the OI is still represented by .834 billion oz or 119% of annual global silver production (ex Russia ex China).
In silver we had 0 notices served upon for nil oz.
In gold, the total comex gold OI surprisingly rose by a 2,745 contracts to 438,385 contracts despite the fact that gold was down $16.80 on Friday. We had 0 notices filed for 100 oz today.
We had a huge withdrawal in gold inventory at the GLD to the tune of 2.68 tonnes / thus the inventory rests tonight at 666.11 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. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. 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, after they deplete the GLD will be the FRBNY and the comex. In silver,no change in silver inventory / Inventory rests at 313.681 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver fall by only 175 contracts down to 166,740 despite the fact that silver was down 30 cents with respect to Friday’s trading. The total OI for gold rose by a rather large 2,745 contracts to 438,385 contracts despite the fact that gold was down $16.80 yesterday.
The fact that OI continues to remain high in silver necessitates the bankers to continue raiding hoping to shake the leaves from both the gold and silver trees. Remember that December is generally a big delivery month for both gold and silver
2.Gold trading overnight, Goldcore
iii) The ongoing saga on Greece where lenders are giving them a hard time on non performing loans. Greece does not want the lenders to repossess 80% of homes if foreclosed (they are asking for only a 20% repossession). Also social unrest is now beginning to overheat in Greece.
9 USA stories/Trading of equities NY
i) USA bond yields rising especially the 5 yr bond which indicates a policy failure
ii) IBM tumbles to a 5 yr low/ Buffet must now account for losses in his portfolio which includes IBM
iii) Charles Biderman is one smart cookie. He states that the global recession has been created by central bankers: here is why!!
(courtesy Charles Biderman/Trimtabs/zero hedge)
iv The former comptroller of the uSA, David Walker now states that the true USA debt is 65 trillion and not 18 trillion due to the massive unfunded liabilities.
vi The NY Fed itself just admitted that household income expectations are falling sharply. The Friday jobs report showed household income rose. Go figure!!(NY Fed.zero hedge)
vii) Greg Hunter interviews Eric Sprott
(Eric Sprott/Greg Hunter)
10. Physical stories
i) China “adds” another 14 tonnes to her official reserves which now stand at 1771 tonnes
ii) Koos Jansen reports on confusion in reporting gold’s demand in China
iii) Bill Murphy and GATA to have a conference in San Francisco in late November
iv) Mainsteam media beginning to ask for a gold standard instead of the corrupt practices of the Federal Reserve.
(courtesy Sean Fieler/Wall Street Journal)
iv) Bill Holter delivers a dandy commentary tonight, based on the phony jobs report where 165,000 jobs were fictitiously created by the plug B/D and another 70,000 jobs from seasonal adjustments. In other words of the 271,000 “added” jobs, most of the job gains were phony! (235,000)
(courtesy Bill Holter)
v) Mining companies may need to merge as debts keep rising and gold prices keep falling
(Randgold Biesheuvel/Business day/GATA)
vi) Lonmin on the ropes
vii) Then tonight, BHP Billiton in trouble due to a tailings dam burst
Three are dead and 28 missing. Very catastrophic!!
Let us head over to the comex:
November contract month:
INITIAL standings for November
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz nil|| 103.914 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||95,397.880 (JPMorgan/Scotia)|
|No of oz served (contracts) today||0 contracts
|No of oz to be served (notices)||211 contracts
|Total monthly oz gold served (contracts) so far this month||7 contracts
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||82,376.7 oz
Total customer deposits 128.60 oz
we had 0 adjustments:
November initial standings/First day notice
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory||803,216.592|
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||303,988.277 oz
|No of oz served (contracts)||0 contracts (nil oz)|
|No of oz to be served (notices)||5 contracts
|Total monthly oz silver served (contracts)||5 contracts (25,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil oz|
|Total accumulative withdrawal of silver from the Customer inventory this month||3,417,589.9 oz|
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
total customer deposits: 303,988.277 oz
total withdrawals from customer account: 803,216.592 oz
And now SLV
Nov 9/no change in silver inventory/rests tonight at 313.681
Nov 6/ we had a very tiny withdrawal of 136,000 oz (probably to pay for fees)/Inventory rests tonight at 313.681 oz
Nov 5/strange no change in silver inventory/rests tonight at 313.817 million oz/
Nov 4/2015: no change in silver inventory/rests tonight at 313.817 million oz/
Nov 3.2015; no change in silver inventory/rests tonight at 313.817 million oz/
Nov 2/a withdrawal of 716,000 oz from the SLV/Inventory rests tonight at 313.817 million oz
Oct 30.no change in silver inventory at the SLV/Inventory rests at 314.532 million oz
Oct 29/a big withdrawal of 1.001 million oz from the SLV/Inventory rests at 314.532 million oz
Oct 28.2015: no change in silver inventory at the SLV//inventory rests at 315.533 million oz.
Oct 27/no change in silver inventory at the SLV/Inventory rests at 315.533 million oz/
Oct 26/no change in silver inventory at the SLV/Inventory rests at 315.533 million oz/
Oct 23./no change in silver inventory at the SLV/Inventory rests at 315.533 million oz
Oct 22./no change in silver inventory at the SLV/Inventory rests at 315.533 million oz
Oct 21:a we had a small addition in silver ETF inventory of 381,000 oz/inventory rests tonight at 315.533 million oz
Oct 20.2015/ no change in silver ETF/Inventory rests at 315.152 million oz
China’s Central Bank Buys Another 14 Tons of Gold … Bullion Falls To 3 Month Low
– PBOC declared gold reserves now about 55.38 million troy ounces or 1,722.5 metric tonnes
– Central bank gold rose to $63.26 billion by end-month – less than 2% of $3.53 trillion FX reserves
– China disclosed on July 17th that its gold holdings had surged 57% since 2009
– China officially owns around 1,720 tonnes of gold – true total figure likely much larger
– China’s total gold holdings much higher as also owns gold in CIC
China’s central bank likely added another 14 tonnes of gold to its reserves in October as the People’s Bank of China (PBOC) continues to allocate to gold bullion as part of a plan to diversify its massive $3.53 trillion in foreign-exchange reserves and position the yuan as a global trading and reserve currency.
Gold prices rose 2.5 % in October but fell nearly 5% last week on continuing speculation of a possible Fed interest rate rise. Despite much poor U.S. economic data in recent weeks, the positive jobs number on Friday saw safe haven gold fall.
Based on the London Bullion Market Association (LBMA) afternoon gold price on the last trading session of October, China’s reserves likely totalled 55.378 million troy ounces or 1,722.5 tonnes at the end of last month. That would be an increase of about 14 tonnes from September. The PBOC reveals the dollar value of its gold reserves early in the month, before revealing the volume numbers later on.
China’s gold reserves rose by about 15 tons in September, 16 tons in August and the highest monthly purchase was nearly 19 tonnes in July.
China disclosed on July 17th that its gold holdings had surged 57% since 2009. China has overtaken Russia to own the world’s fifth-largest national gold reserves. China is the world’s sixth largest official sector gold holder after the United States, Germany, the International Monetary Fund (IMF), Italy and France.
The United States, believed to be the top holder of gold with more than 8,000 tonnes of bullion, has 73 percent of its total foreign reserves in gold, according to the World Gold Council (WGC). These reserves have not been audited in decades leading to some concerns about the exact amount of unencumbered U.S. gold reserves.
The value of China’s gold reserves stood at $63.261 billion at the end of October, compared with $61.189 billion at the end of September, the People’s Bank of China (PBOC) said on its website. Gold still makes up a tiny fraction – less than 2 % of China’s total foreign exchange reserves at $3.53 trillion.
The U.S. and Germany’s gold reserves are believed to be 74 percent and 68 percent of total fx reserves respectively.
This means that the PBOC reserve diversification into gold is likely to continue and indeed could accelerate should relations with the U.S. further deteriorate or in the event of a Chinese financial crisis or another global financial crisis. Both of which we see as likely.
China should increase its gold holdings to about 5 percent of its total reserves to help diversify currency risks, a WGC official said this year. China previously considered its gold holdings a state secret and did not report its holdings on a monthly basis to the IMF like Russia and most other countries.
It has begun doing so as it campaigns to include the yuan in the IMF’s special drawing rights basket. Before the June update, China had last revealed its gold holdings in April 2009. Then, China ended six years of mystery over how much gold it’s central banks holds as it seeks to position the yuan as a global reserve currency and for greater global use of its currency in international trade. It is also pushing for the yuan to be included in the International Monetary Fund’s Special Drawing Rights basket.
We believe the 1,700 metric tonne PBOC gold reserve figure is an understatement of total Chinese official and governmental gold holdings.
There have been enormous volumes of gold imported through Hong Kong – and through Shanghai in more recent years – and indeed very large amounts that have been produced domestically and remained in China. China is now also the world’s largest producer of gold.
It is important to remember that other entities, besides the PBOC, have also been buying gold – namely the China Investment Corporation (CIC). China has been accumulating gold bullion quietly through the CIC – indeed they have been buying hundreds of gold mines in South America, Africa and internationally in recent years – securing another important source of gold supply.
If the combined holdings of the PBOC and CIC were added together, China may well be the second largest holder of gold bullion – after the U.S. – assuming that U.S. gold reserve figures are accurate.
It is likely that, in total and between the three China’s financial institutions, China may in fact be holding much more than 3,000 tonnes of gold.
China is playing the long game and they could be low balling their total gold holdings – official central bank reserves and non official, governmental holdings – in order to maintain confidence in their substantial US dollar holdings and to aid their bid to join the IMF.
Central banks internationally still hold physical gold as financial insurance. Investors and savers should do the same and have an allocation to gold bullion outside of the banking system, in the safest vaults in the world.
Must-read guides to international bullion storage:
Today’s Gold Prices: USD 1095.60 , EUR 1015.90 and GBP 725.95 per ounce.
Friday’s Gold Prices: USD 1107.70, EUR 1018.81 and GBP 731.64 per ounce.
Gold in USD – 10 Years
Both gold and silver suffered equally this week with both metals closing about 5% lower overall. Gold lost $15.50 to finish at $1088.00, a loss of 4.69% for the week. Silver lost 5.06% on the week to close at $14.74. Platinum lost $8 to $938.
Gold is ticking higher this morning, trading near $1,093/oz but remains near a three-month low of $1,084.90 reached on Friday.
China “buys” another 14 tonnes of official gold, now 1722 tonnes
(courtesy zero hedge)
China Buys Another 14 Tons Of Gold In October As FX Reserves Unexpectedly Rebound
Overnight, China’s PBOC released its updated October reserve asset data via the State Administration of Foreign Exchange. There was one surprising and one less surprising disclosure.
The less surprising one was that, as we forecast in Julywhen the PBOC admitted that during a 6 year silence in which it did not report any gold purchases and during which it had been feverishly accumulating gold, that “now that the seal has been finally broken after so many years, and since today’s update indicates that Chinese gold numbers are clearly goal-seeked with a specific policy purpose – to boost confidence – we await for the PBOC to start leaking incremental gold holding data every month which will bring us ever closer to what China’s true gold holdings are.”
Today we got yet another confirmation of this when China reported that its total gold holdings as of October 31 had risen to a record $63.3 billion, up $2.1 billion from $61.2 billion at the end of September, and an increase of 14 tons based on the month-end LBMA gold fix price, to 1,722 tons. This represents the fifth consecutive month in a row in which China has added to its gold.
This was not surprising: we expect China to continue to “announce” monthly additions of 10-20 tons of gold indefinitely, not only because the PBOC/SAFE/CIC fungible gold inventory is far greater and as a result this is merely the PBOC deciding to slowly reveal its true holdings (especially since the price of gold continues to slide even on months when China and/or Russia are aggressively buying physical), but because in China’s attempt to get an IMF stamp of approval it wants to show a diversified asset base.
The more surprising finding in the reserve data is that while consensus was expecting China’s FX reserves to dip once more, from the $3.51 trillion reported at the end of September, especially with an unprecedented intervention spree by the PBOC after the Golden Week and in the last days of the month, China returned to its old bag of tricks of massaging FX data when instead it reported that FX reserves had increased to $3.53 trillion.
How is this possible, and is China openly fabricating data? Not at all. As RBC’ Hong Kong-based currency strategist Sue Trinh told Bloomberg, “China’s spot reserves don’t give the you the full picture since it does not account for the forward book. China, along with many other EM central banks, has been making increasing use of its forward book for intervention activity.”
As a reminder, we explained in detail precisely how China has shifted from FX intervention in the spot market, which would impact reserves directly, to forwards.
For those who missed it here, again, is:
Earlier this month, we asked if the market was being deceived about the pace of capital outflows in China.
Our concerns came on the heels of a rally in EM FX and other assets that may have been fueled by a “better-than-expected” read on China’s reserve drawdown in September. The figure came in at “just” $43 billion, which of course made no sense because on one measure, outflows totaled more than that by the middle of the month.
This is important because as we outlined three weeks after the deval, the monthly read on China’s FX reserves has to a certain extent become the new risk on/off triggerfor the market which means that if the data is unreliable or otherwise opaque, then investors will be operating with bad information. That is, what we really want to know is how much pressure there is in terms of capital outflows, and to the extent that China’s official FX reserve data doesn’t capture that, the data isn’t a useful indicator of where EM is headed on a more general level.
As Goldman began to discuss in September, Chinese banks appear to be absorbing some of the outflows using their own books. Here’s how they explained the situation last week:
Given possible PBOC balance sheet management (e.g., short-term transactions and agreements between with banks, e.g., forward transactions, FX entrusted loan drawdown or repayment), we interpret the FX reserves data with caution, as it might not give a complete picture of the FX flow situation. The large gap between today’s data and the other PBOC data for September suggests that banks might have used their own spot FX positions to help meet some of the outflow demand, although banks’ overall FX positions might still have been squared with the PBOC via forward agreements.
In short, our argument has been that much like the NBS will obscure any weakness below 7% in China’s GDP data, the PBoC will do “whatever it takes” (central bank pun fully intended) to make sure that the market doesn’t get wind of the fact that there’s still a tremendous amount of pressure in terms of capital outflows.
Now, the word is apparently out. Here’s Bloomberg:
The People’s Bank of China and local lenders increased their holdings in onshore forwards to $67.9 billion in August, positions that would boost China’s currency against the dollar. The amount is five times more than the average in the first seven months, PBOC data show. The positions are part of a three-stage process to support the currency without immediately draining reserves, according to China Merchants Bank Co. and Goldman Sachs Group Inc.
Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.
“If you can intervene without actually diminishing your reserves, it’s somehow viewed as better,” said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity “may not look quite as dramatic as the sale of reserves, and they may prefer that optically,” he said.
Using derivatives for intervention had the benefit of delaying any decline in the PBOC’s $3.5 trillion trove of foreign-exchange reserves, helping calm investors rattled by an economic slowdown and a slumping stock market. It was also faster as the monetary authority’s managers didn’t have to liquidate assets such as U.S. Treasuries to raise the dollars needed for direct yuan purchases.
Major Chinese banks borrowed dollars in the onshore swap market in late August and September, and then undertook “heavy dollar selling” in the spot market, said Frank Zhang, head of foreign-exchange trading at Shenzhen-based China Merchants Bank.
The PBOC then came in to offset, or “square”, the positions with the banks, essentially taking on their trades onto its own balance sheet, according to Goldman Sachs.
On a practical level, buying yuan forwards means the PBOC wouldn’t drain yuan liquidity out of the system as it would otherwise by buying its own currency in the spot market. Policy makers cut interest rates and the reserve-requirement ratio in August, partly to replenish the funds drained during intervention.
“If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic,” said Citigroup’s Englander. “Down the road you can’t avoid it.”
In the simplest possible terms (although really, this isn’t that complex a transaction to begin with), they’re just kicking the can in an effort to control the optics around the deval, which would be fine if everyone realized what’s going on, but rest assured they do not, because no matter how many Bloomberg or WSJ articles are published on the subject, the market (or the machines) will still read the headline figures and make a snap judgement about the extent to which the pressure on the yuan has mitigated.
At the end of the day, the takeaway is simply this: the narrative around Chinese capital outflows is extraordinarily important right now, and indeed, it’s influencing the Fed’s reaction function. Even as Beijing doesn’t necessarily want the Fed to raise rates, the PBoC doesn’t want to lose complete control of the narrative either, which is why you can expect to see more efforts on China’s part to mitigate near-term FX reserve burn, even if it means stacking the deck against the yuan down the road. And really, who can blame them? The entire world is involved in the largest can-kicking experiment of all time, so why should China’s central bank be any different?
* * *
Of course, the headlines on Monday will be that China’s reserve liquidation has stopped, when instead it has merely shifted into the swap market because as Citi’s Englander says “If you can intervene without actually diminishing your reserves, it’s somehow viewed as better.” As Goldman explained previously, “to assess the overall FX-RMB trend, including in the offshore RMB (CNH) market, other FX data sets such as the position for FX purchase would be useful supplements—these are not affected by valuation effects and include FX settlement between the onshore banking system and offshore banks, although they do not account for forward transactions.” Data on the position for FX purchase covering the PBOC should be out in mid-October, and similar data covering the whole onshore banking system (PBOC plus banks) should be released at around the same date.
For now, however, we expect the spin to be that China has finally managed to get its FX devaluation under control and is no longer liquidating bonds (which is bad news for the ECB), potentially serving to catalyze the next move higher in stocks.
As for China’s ongoing accumulation of gold, we expect it to get no coverage in the press at all.
Tonight,BHP Billiton sinks to a 7 year lows on news of a tailings dam burst.
Shares Of World’s Largest Miner Plunge To Seven-Year Low After Massive Toxic Mudslide Engulfs Brazilian Village
Ok, so if you’re the world’s largest mining company, one thing you don’t want is a global deflationary supply glut brought on by depressed demand from China and a worldwide excess capacity problem.
Another thing you don’t want is for a tailings dam to burst, sending a river of toxic mud into a nearby village in South America.
Well, BHP Billiton is now dealing with both of those issues and the market is punishing the stock, which hit a seven-year low on Monday as analysts and investors alike attempt to figure out how the company intends to clean up a spectacular (in a bad way) mess in Minas Gerais.
Here’s what happened, in BHP’s words:
The Samarco operations include a three tiered tailings dam complex. Within this complex, the Fundão dam failed and the downstream Santarém dam has been affected. This resulted in a significant release of mine tailings, flooding the community of Bento Rodrigues and impacting other communities downstream. The third dam in the complex, the Germano dam, is being monitored by Samarco. At this time, there is no confirmation of the causes of the tailings release.
Samarco is jointly operated with Brazilian giant Vale and BHP has been keen to note that the joint venture is “responsible for the entirety” of the Minas Gerais operations. After the company’s operating license was revoked on Monday, its debt plunged, with some $2.2 billion in paper due 2022, 2023, and 2024 hitting record lows.
For those who might have missed it, the following images will tell you pretty much all you need to know about what happened:
And here’s Deutsche Bank’s take, which underscores the significance:
BHP and Vale’s 30Mtpa Samarco iron ore mine in Southern Brazil (50/50 JV) has suffered a catastrophic tailings dam failure. The mine represents c. 10% of our BHP earnings and 3% of NPV, we now assume the mine is shut until FY19. Pellet production was recently expanded to 30Mtpa at a cost of US$3.2b. Media reports have stated that there is a significant and tragic loss of life. Based on public images of the failure we estimate that the dam contained over 300Mt or 150Mm3 of tailings and Samarco could be down for years while the clean-up costs may exceed US$1b. This accident will add further pressure to BHP’s cash flow, growth and safeguarding of the progressive dividend
At around 0530am AEST on Nov 6, Samarco’s largest tailings facility failed causing slurry to race through the open pit and down the valley into the local village of Bento Rodrigues and into local waterways. The media is reporting that between 15 and 17 people have died and 45 others are missing. Samarco states in its FY14 sustainability report that it employs a management system referred to as “Failure Modes and Effects Analysis (FMEA) system” to control tailings dam failure risks. It could be months before Vale, BHP, State and Federal governments complete their assessment of the incident. The clean-up, community support, litigation and rebuilding of the tailings dam (if approved and deemed feasible) could mean that Samarco is shut for years. The mine employs 3,100 people and is one of the largest employers in the region. Samarco contributed US$369m to BHP earnings in FY15 and before this incident we estimated it would contribute US$308m in FY16. We have assumed the mine is shut until FY19, the workforce remains employed, and BHP’s share of the clean-up and dam rebuild costs US$500m. We have excluded any recouping of costs from insurance at this stage.
Of course this is the sellside penguin brigade so naturally, all of that somehow translates to a “Hold“:
As WSJ notes:
Brazilian officials on Sunday raised the death toll to three people, two of whom were found in the path of the mud flow, and a third who died while receiving medical treatment. That number is expected to rise, as at least 28 people are now confirmed missing.
“BHP Billiton will continue to work with Samarco, Vale, the local communities, local authorities, regulators and insurers to assess the full impact of this tragic incident,” BHP said.
The shutdown will reduce BHP’s iron-ore production this fiscal year—cutting into profit when falling commodity prices already are already making it more difficult for the company to keep its promise to maintain or lift shareholder dividends. Samarco last year accounted for roughly 3% of BHP’s underlying earnings.
Right, so in other words, this is an unmitigated disaster.
On the “bright” side, the fallout could take some excess supply offline, and could impact prices. Here’s more, via Bloomberg:
- Deactivation of production at Samarco Mineracao mine, a JV between BHP Billiton and Vale, is likely to pressure iron-ore prices, Christopher Tuck, mineral commodity specialist at U.S. Geological Survey’s National Minerals Information Center, says in interview in Rio.
- “Any deactivation, on this scale, will have an impact on seaborne trade. The varying factor that would affect prices is the length of time this mine remains inoperable. The larger time it remains idled, the greater the likelihood it will have an impact on prices’’
- Potential impact on price of pellets much more significant than effect on overall market
- Short-term idling could level off prices through end of 2015; if output is halted long-term, prices could increase slightly
We suppose the takeaway here is that an already abysmal backdrop for BHP just got a lot worse, which means you may want to brace yourself if you’re a shareholder and if you’re a Brazilian villager, just hold your breath and wait for your compensatory check from Samarco – we’re sure it’s in the mail.
Koos Jansen: The LBMA conference and the ‘confusion’ about gold round-tripping
Submitted by cpowell on Sat, 2015-11-07 19:10. Section: Daily Dispatches
2:10p ET Saturday, November 7, 2015
Dear Friend of GATA and Gold:
Gold researcher and GATA consultant Koos Jansen today disputes assertions made at the recent meeting of the London Bullion Market Association in Vienna that commodity financing deals are exaggerating gold demand in China. Jansen’s commentary is headlined “The LBMA Conference and the ‘Confusion’ about Gold Round-Tripping” and it’s posted at Bullion Star here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Merge or die, major gold miners told by Randgold’s Bristow
Submitted by cpowell on Sat, 2015-11-07 21:59. Section: Daily Dispatches
By Thomas Biesheuvel
Business Day, Johannesburg, South Africa
Friday, November 6, 2015
LONDON — The biggest gold miners, weighed down by record debt and with prices near a five-year low, will have to merge with others to survive, according to Randgold Resources, the best-performing producer of the metal in the past 10 years.
“The big producers have the biggest challenges of all,” Randgold CEO Mark Bristow said on Thursday. “Eventually, you’re going to see survival mergers.”
Gold’s 42-percent price slump from a record set four years ago is cutting profits and stressing balance sheets for mining companies, with the largest producers weighed down by debt totalling almost $35 billion.
In September the benchmark 30-member Philadelphia Stock Exchange gold and silver index, which includes Barrick Gold and Newmont Mining, fell to the lowest level since 2000. …
… For the remainder of the report:
Mainsteam media beginning to ask for a gold standard instead of the corrupt practices of the Federal Reserve.
(courtesy Sean Fieler/Wall Street Journal)
Sean Fieler: Competition for the Fed’s money monopoly
Submitted by cpowell on Sat, 2015-11-07 23:32. Section: Daily Dispatches
By Sean Fieler
The Wall Street Journal
Sunday, November 1, 2015
History suggests that the only way to rein in the sprawling Federal Reserve is to end its money monopoly and restore the American people’s ability to use gold as a competing currency.
The legislative compromise that created the Fed in 1913 recognized that the power to print money, left unchecked, could corrupt both the government and the economy. Accordingly, the Federal Reserve Act created the Federal Reserve System without a centralized balance sheet, a central monetary-policy committee or even a central office.
The Fed’s regional banks were prohibited from buying government debt and required to maintain a 40-percent gold reserve against dollars in circulation. Moreover, each of the reserve banks was obligated to redeem dollars for gold at a fixed price in unlimited amounts.
Over the past century, every one of these constraints has been removed. Today the Fed has a centrally managed balance sheet of $4 trillion and is the largest participant in the market for U.S. government bonds. The dollar is no longer fixed to gold, and the IRS assesses a 28-percent marginal tax on realized gains when gold is used as currency.
The largest increases in the Fed’s power have occurred at moments of financial stress. Federal Reserve banks first financed the purchase of government bonds during World War I. The gold-reserve requirement was dramatically reduced and a central monetary policy committee was created during the Great Depression. President Richard Nixon broke the last link to gold to stave off a run on the dollar in 1971.
This same combination of crisis and expediency played out in 2008 as the Fed bailed out a series of nonbank financial institutions and initiated a massive balance-sheet expansion labeled “quantitative easing.” To end this cycle, Americans need an alternative to the Fed’s money monopoly.
A competing currency would not only offer people a monetary choice in a crisis. More important, it would give the Fed a clear incentive to anticipate and avoid such crises. In a competitive system, before it embraced another bout of monetary adventurism, the Fed would have to contemplate a decline in market share. For if the Fed were even perceived to be debasing the dollar, many would seek out a sounder alternative.
The continuing revolution in payment technology makes the introduction of competition not only possible, but practical. Bitgold, a Canadian company, is already offering gold-denominated transaction accounts with a debit card. The tag line on the company website reads: “Spend gold with the Bitgold prepaid card. Accepted anywhere globally that accepts credit cards, including ATM machines to withdraw local currency.”
With a gold-based currency up and running north of the border, why not offer Americans a monetary choice as well? The proposition is simple. Americans who prefer the incumbent monopoly provider of money are free to keep their accounts as is. Those who prefer gold are free to switch. And the Fed is free to defend its market share with sound monetary policy.
Mr. Fieler is president of Equinox Partners LP, a New York-based hedge fund, chairman of the American Principles Project, a Washington advocacy group, and an investor in Bitgold.
The infamous mining company Lonmin is now on the ropes.
They now must do a rights offering and the strike price is 94% below the current prevailing price.
This 106 year old mining company will not survive:
(courtesy John Ficenec/UKTelegraph)
Lonmin to unveil record losses as it fights for survival
World’s third largest platinum miner will unveil yawning losses in annual results as it struggles with tumbling prices and the rising cost of labour
Lonmin, the world’s third-largest platinum miner, is expected to unveil record losses as it discloses support for a $400m (£266m) rescue rights issue.
Alongside annual results, due tomorrow , the 106-year-old miner is to publish a prospectus for the lifeline rights issue, detailing investor support.
The group has been hammered as platinum prices have plunged to six-and-a-half-year lows, due to oversupply and slowing demand from China, as well as rising South African labour costs.
The company will write down the value of its mines by as much as $2bn, with operating losses reaching $207m, in results for the year to September 30.
It is the third time in six years that Lonmin has gone cap in hand to shareholders. Investors paid $457m in 2009, at £9 per share, and $777m at a deeply discounted 140p per share in 2012.
The measures, including thousands of job losses, are necessary for banks to agree to refinance $563m in debt.
Investors will meet in London to vote on the proposals on Nov 19. The issue is backed by Lonmin’s third-largest shareholder, the Public Investment Corporation, which owns about 7pc, and the Bapo Community, which owns 2pc.
The firm, founded in 1909 as the London and Rhodesian Mining and Land Company (Lonrho), was turned into a sprawling conglomerate under chief executive Roland “Tiny” Rowland. The shares have fallen more than 90pc this year, closing last week at 16.3p.
Join GATA at the Silver Summit in San Francisco Nov. 23-24
Submitted by cpowell on Sun, 2015-11-08 19:59. Section: Daily Dispatches
3p ET Sunday, November 8, 2015
Dear Friend of GATA and Gold:
GATA Chairman Bill Murphy and Board of Directors member Ed Steer will be among many speakers of interest to GATA supporters at the 2015 Silver Summit and Resource Expo, co-sponsored by Cambridge House and Katusa Research, to be held Monday and Tuesday, November 23 and 24, at the Park Central Hotel in beautiful San Francisco.
In addition to Murphy, proprietor of LeMetropoleCafe.com, and Steer, editor of Ed Steer’s Gold and Silver Daily, speakers will include Mike Maloney of GoldSilver.com, Frank Holmes of U.S. Global Investors, Rick Rule of Sprott U.S. Holidings Inc., David Morgan of Silver-Investor.com, McEwen Mining CEO Rob McEwen, Grant Williams of Vulpes Investment Management and Real Vision, First Majestic Silver CEO Keith Neumeyer, retired Gold Mining Stock Report editor Bob Bishop, and CPM Group Managing Director Jeff Christian.
Dozens of resource companies will be exhibiting at the conference as well.
While admission to the conference ordinarily will cost $40, GATA supporters can gain free admission by registering at the conference’s Internet site —
— and using the promotion code “SFGATA.”
The conference’s Internet site also includes information for registering at the Park Central, one of San Francisco’s premier hotels, in the center of the city, close to museums, galleries, restaurants, and all sorts of shopping, facilities that will make the conference even more exciting.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Bill Holter delivers a dandy commentary tonight, based on the phony jobs report where 165,000 jobs were fictitiously created by the plug B/D and another 70,000 jobs from seasonal adjustments. In other words of the 271,000 “added” jobs, most of the job gains were phony! (235,000)
(courtesy Bill Holter:)
1 Chinese yuan vs USA dollar/yuan falls in value , this time at 6.3619 Shanghai bourse: in the green, hang sang:red
2 Nikkei closed up 377.14 or 1.96%
3. Europe stocks all in the red /USA dollar index down to 98.89/Euro down to 1.0777
3b Japan 10 year bond yield: rises to .335% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 123.46
3c Nikkei now just above 18,000
3d USA/Yen rate now well above the important 120 barrier this morning
3e WTI: 44.65 and Brent: 47.94
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 .692 per cent. German bunds in negative yields from 4 years out
Greece sees its 2 year rate rise to 7.85%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield falls to : 7.71% (yield curve flat)
3k Gold at $1094.15 /silver $14.76 (8:00 am est)
3l USA vs Russian rouble; (Russian rouble down 1/5 in roubles/dollar) 64.31
3m oil into the 44 dollar handle for WTI and 47 handle for Brent/ China purchases huge supplies from Saudi Arabia
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 1.0026 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0808 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 on criminal charges/
3r the 4 year German bund now in negative territory with the 10 year rises to +.693%/German 4 year rate negative%!!!
3s The ELA lowers to 82.4 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.35% early this morning. Thirty year rate above 3% at 3.10% /
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Emerging Markets Slide On Strong Dollar; China Surges On Bad Data, IPOs; Futures Falter
Once again, the two major macroeconomic announcements over the weekend came from China, where we first saw an unexpected, if still to be confirmed,increase in FX reserves (and gold), and then Chinese trade data once again disappointed tumbling by 6.9%, missing for the 4th consecutive month, while imports plunged 18.8% putting the government’s trade, and economic recovery, plan in jeopardy.
MarketNews put this number in context:
“January-October total trade was down 8.5% in U.S. dollar terms, making a mockery of the 6% increase in overall trade that was planned for this year. Exports have fallen 2.5% this year through October and imports have slumped 15.7% – heading for the first annual declines since 2009 in the middle of the global financial crisis. This year’s miss is far bigger than in 2014, when total trade rose 3.4% compared with a goal of 7.5%, and brings into sharp relief the slowdown in China’s own economy and the lacklustre recovery in the global economy. The global picture has been far worse than the assumptions underpinning the Chinese government’s target.”
How did the market react? The Shanghai Composite Index rose for a fourth day and reached its highest since August 20 now up 25% from its summer lows, because more bad data means another devaluation is imminent, means more easing from the PBOC, and just to give what few investors are left the green light to come back to stocks, overnight Chinese brokers soared as CICC became the first company to go public after a 5 month hiatus.
However, while China was rebounding (and Japan soaring thanks to the latest surge in the USDJPY carry trade), other emerging markets were doing far worse. As a result of the strong Friday NFP, the dollar soared to multi-month highs as odds of a December rate hike have jumped to 68%. As such, the prospect of a U.S. interest rate increase in December and weak China trade data is weighing on emerging market stocks, which have dropped 2.6% in the past three trading sessions, the biggest fall in six weeks. Bloomberg’s index tracking developing nation currencies also slipped to a five-week low, with Malaysia’s ringgit falling 1.3 percent. The MSCI Emerging Markets Index has risen 10 percent since hitting a six-year low in August.
Elsewhere in Asia, equity markets traded mixed following Friday’s flat close on Wall St. coupled with the weak Chinese trade figures over the weekend. While the aforementioned Shanghai Comp. (+1.6%) traded at 11-week highs led by brokerages following China’s CSRC resuming IPOs, which signalled that regulators were confident that markets have stabilised. Nikkei 225 (+2.0%) was lifted by USD/JPY as it traded near its highest level since late August supporting exporters, while the ASX 200 (-1.8%) underperformed amid pressure from BHP Billiton, following reports Brazilian prosecutors seek to revoke iron ore licenses following the Samarco mine disaster. 10yr JGBs tracked USTs lower as a Fed rate hike looms ominous, while the BoJ purchasing JPY 1.18trl of bonds failed to support the paper.
Key Asian News:
- Santos Raising Takes Australian Oil Share Sales to 6-Year High: AU oil producers and utilities are on track to sell almost $5b in new shares this yr, most in at least 6 yrs
- Return-Starved Japanese Megabanks Boost Lending 25% in Australia: Japan’s biggest banks are expanding loans in AU 2% in the past yr
- Modi Losing Streak May Prompt Tactical Shift to Reform India: The win by Modi’s opponents in India’s third-most- populous state gives Modi political momentum for economic reform
- 7 out of 10 sectors fall with energy, materials underperforming and consumer, health care outperforming
- MSCI Asia Pacific down less than 0.1% to 134
- Nikkei 225 up 2% to 19643
- Hang Seng down 0.6% to 22727
- Shanghai Composite up 1.6% to 3647
- S&P/ASX 200 down 1.8% to 5119
In Europe, for once there was some good news out of Germany which has seen a series of negative economic reports in the past month, when Exports rose 2.6%, on expectations of a 2.0% rebound. Equities have traded mixed in the first session of the week (Euro Stoxx: -0.32%), with energy names among the best performers. This comes after comments from Saudi Arabia’s Oil Minister al-Naimi suggesting that growth will soon be seen as a result of low oil prices, something he has been repeating for just about a year since the Great OPEC Thanksgiving massacre. Elsewhere, stock specific stories are weighing on the indices after Continental (-4.6%) reported earnings, Intercontinental (-4.2%) denied takeover reports and Deutsche Lufthansa (-2.3%) suffered as a consequence of their cabin crew strike.
Despite somewhat mixed performance by stocks in early trade, Bunds are also seen lower as market participants position for this week’s supply of approx. EUR 16.25 Bn (92k Bund futures) as well as a potential ESM syndication, whilst also of note, there are no coupon & redemptions this week. Separately Portuguese bonds have underperformed in early trade, with PO/GE 10y spread wider by 14bps following reports that Portugal’s socialists plan to form coalition to oust Coelho.
In FX markets we have seen the USD leading much of the price action, with the USD-index residing in negative territory (-0.4%), amid touted profit taking after Friday’s NFP inspired gains. Over in the UK, scaled back expectations of rate hike by the BoE have failed to weigh on GBP/USD this morning, with the pair supported by rate differential flows vs. EUR short-end rates, as Short-Sterling strip trades a touch heavy following US NFP last Friday, while JPY remains weaker across the board, supported by growing expectation of Fed rate hike in December, with USD/JPY at its highest level since mid-August and RSI (14-day) in overbought territory at 71.45.
Commodities have seen a bid today on the back of a weaker USD, with spot gold higher by over USD 4.00/oz in a slight paring of some of Friday’s NFP inspired losses, while WTI and Brent both head into the NYMEX pit open in modest positive territory amid a host of OPEC comments from the likes of Saudi Arabia, Iran and Libya. According to Saudi officials, the nation will continue to produce enough oil to protect their global market share, despite the economic squeeze this could place on the nation. Saudi Prince Abdulaziz states the country remains committed to investing in its oil and gas sector and believes that suggestions that oil has moved to a new low equilibrium will be proved incorrect.
On the calendar today, there is no tier one data scheduled out of the US and as such focus will instead fall in potential comments from ECB’s Mersch and Fed’s Rosengren.
Key European News:
- Eurozone November Sentix Investor Confidence 15.1 vs Est. 13.1
- Germany September Exports +2.6% M/m; Est. +2%
- Germany September Imports Seasonally Adj. +3.6% M/m; Est. +1%
- Lufhansa Cancels Monday Flights as Strikes Expand to Munich: Almost 1,000 flights cancelled amid the longest strike by cabin crew in the airline’s history
- Lonmin Avoids Collapse by Offering Shares at 94% Discount: Public Investment Corp. will take up its rights in the new stock, while HSBC, JPMorgan, Standard Bank will support the offer
- Trelleborg Buys Czech Company CGS Holding for $1.25 Billion: Co. expects to extract annual synergies of 300m kronor from the purchase
- Portugal’s Socialists Forge Four-Way Alliance to Oust Coelho: Raises the prospect of a new govt committed to speeding the reversal of spending cuts tied to country’s intl bailout
- Global GDP Worse Than Official Forecasts Show, Maersk Says: Trade is “currently significantly weaker” than it normally would be under the growth forecasts co. sees, Maersk CEO said
- 14 out of 19 Stoxx 600 sectors fall with real estate, personal & household underperforming and basic resources, oil & gas outperforming
- 58% of Stoxx 600 members decline, 39% gain
- Stoxx 600 down 0.4% to 379
- FTSE 100 up less than 0.1% to 6359
- DAX down 0.3% to 10955
- German 10Yr yield up 2bps to 0.71%
- Italian 10Yr yield up 3bps to 1.81%
- Spanish 10Yr yield up 7bps to 1.99%
- S&P GSCI Index up 0.6% to 355.8
- Banks May Need to Raise $1.2 Trillion to Prevent Another Lehman: Financial Stability Board, created by the G-20 in the aftermath of the crisis, published plan for tackling banks seen as too big to fail
- Weyerhaeuser to Buy Timber Rival Plum Creek for $8.4b: Deal would create largest private owner of timberland in U.S.
- Electrolux May Swallow Bitter Pill to Get GE Appliance Deal: Co. may prefer to sell brands than factories if it tries to reach a settlement to salvage the deal before the verdict
- With Long Handshake, China and Taiwan Affirm Better Ties: China, Taiwan ties at their best since civil war, Ma says; Xi says Taiwanese independence biggest threat to peace
- Fed’s Williams Says October Rate Decision Was a Close Call: Williams says economy is at his estimate of full employment
- Apache Said to Get Takeover Approach for $18 Billion Co.: Said to reject initial offer and is working with Goldman Sachs on defense
- Goldman’s BRIC Era Ends as Fund Folded After Years of Losses: BRIC fund is being swallowed up by the Emerging Markets Equity Fund as part of GS’s efforts to “optimize” its assets and “eliminate overlapping products”
- PrairieSky to Acquire Majority of Canadian Natural Royalty Assets for C$1.8b in Cash, Stock: Combination will have more than 14.7 million acres of royalty lands
- U.S. Says Takata Air Bag Recalls May Widen to More Carmakers: VW, Daimler, Jaguar Land Rover, Tesla among those still using Takata air bags
- Credit Suisse May Cut Bonuses by 60% After Writedown, SamS Says: Calculations made by Schweiz am Sonntag come as CEO Tidjane Thiam wants to substantially write down assets
- China Bonds Drop Most Since May as IPOs to Resume; Stocks Climb: Chinese bonds fell as plans to resume IPO fueled concern that investors will switch out of debt and into equities
- Plane Crash Seen Adding to Pressure on Egypt to Devalue Currency: Govt had hoped tourism revival would help FX shortage
Bulletin headline summary from Bloomberg and RanSquawk
- Asian and European equities kicked off the weak in mixed territory, with energy names among the best performers in Europe
- FX markets have seen USD lead much of the price action, with the USD-index residing in negative territory (-0.4%), amid touted profit taking after Friday’s NFP inspired gains
- Looking ahead, there is no tier one data scheduled out of the US and as such focus will instead fall in potential comments from ECB’s Mersch and Fed’s Rosengren
- Treasuries decline, extending losses seen Friday after better than expected employment and wage growth in October payrolls report; week’s auctions begin with $24b 3Y notes, WI 1.265%, highest since 2011, vs 0.895% last month.
- China exports fell 6.9% in October in dollar terms, a bigger decline than estimated by all 31 economists in a Bloomberg survey, while weaker demand for coal, iron and other commodities helped push imports down 18.8%, leaving a record trade surplus of $61.6b
- Banks may need to raise $1.2 trillion to avert another Lehman moment, according to the FSB, which said most systemically important lenders must have total loss- absorbing capacity equivalent to at least 16% of risk- weighted assets in 2019, 18% in 2022
- The scale of the global oil and gas industry’s spending cuts are making another surge in energy prices possible by diminishing future supply, Saudi Vice Minister of Petroleum & Mineral Resources Prince Abdulaziz bin Salman said.
- Goldman folded its money-losing BRIC fund and merged it last month with a broader emerging-market fund, saying it doesn’t expect “significant asset growth in the foreseeable future”
- Credit Suisse may need to cut bonuses by as much as 60% this year because of losses incurred by a writedown, according to calculations made by Schweiz am Sonntag
- Dutch Prime Minister Mark Rutte warned the U.K. against leaving the EU, saying that life outside the world’s biggest trading bloc would harm Britain’s status as a global financial center
- Rutte also complained that eastern European nations such as Poland, Hungary and Slovakia are not taking in refugees to the same extent as countries in western Europe
- Portugal’s Socialists approved plan to join forces with 3 other parties and oust PM Passos Coelho’s administration, raising prospect of new govt committed to speeding the reversal of spending cuts tied to the country’s international bailout
- Sovereign 10Y bond yields rise. Asian, European stocks mostly lower, U.S. equity-index futures decline. Crude oil and gold higher, copper little changed
- S&P 500 futures down 0.2% to 2089
- Stoxx 600 down 0.4% to 379
- MSCI Asia Pacific down less than 0.1% to 134
- US 10-yr yield up 2bps to 2.34%
- Dollar Index down 0.22% to 98.95
- WTI Crude futures up 0.6% to $44.55
- Brent Futures up 0.8% to $47.79
- Gold spot up 0.4% to $1,094
- Silver spot down 0.2% to $14.76
DB’s Jim Reid completes the overnight wrap
Friday’ payrolls certainly had the X-Factor. Indeed it was hard to fault the much better-than-expected 271k print and the 12k of upward revisions to September and August. Also average hourly earnings rose +0.4% (YoY 2.5%, the highest since July 2009) and the unemployment rate declined a tenth to 5.0%. In so far as the Fed is desperate to raise rates, they will be pleased to see the probability of a December move rise from 56% pre-number to 70% now. What’s important now is the market’s reaction to the print over the days and the month or so ahead to see if its sets the Fed back to square one by creating volatility and down trending markets or whether stability allows them to do what they’ve been desperate to do now for some time. On the plus side Friday saw the S&P 500 close pretty flat (-0.03%) but on the negative side Oil fell 2% (although has recovered a bit this morning) with the Dollar up 1.3% (vs. the Euro). 2yr and 10yr US Treasury yields rose +6.0bps and +9.3bps respectively and emerging markets FX sold-off heavily with the likes of Russia, Colombia, Poland, Turkey and Mexico all weakening at least 1.5%. At the moment it seems risk asset positioning is less extreme than it was in the late summer so if data holds up the Fed have a better chance of being able to push through their desired rate hike than they did back them. On balance although we’ve had a long standing view that the Fed won’t raise rates in 2015, the chances are getting stronger that they will. We’ve thought hard all weekend as to whether this changes our constructive view on credit but for now valuations remain compelling and the market has probably got more used to the idea of a hike. We still think it risks being a policy mistake but there is a long lag in monetary policy so we may not know until 2017 if it is. Anyway a lot to watch and play for over the next five weeks until decision day.
The Fed also won’t be able to ignore international developments and China has again added some intrigue to the debate about the global economy. Over the weekend both exports and imports declined by a larger margin than expected and down on last month. Exports declined by -6.9% yoy (-3.6% in RMB terms) versus -3.2% expected. Imports went down more sharply by -18.8% (-16% in RMB terms) versus -15.2% expected. The trade surplus was only slightly smaller at $61.6bn against $62bn expected. So activity globally seems to have still been weak in October. The reserve data was stronger though increasing $11bn against expectations of a $49bn decline. Although there are lots of smoke and mirrors in this number it’s fair to say that China seems to be stabilising from a systemic risk point of view with the house view that the data will now start to pick up. As you’ll see in the week ahead Wednesday is a big day on this front with CPI tomorrow also interesting.
The data has caused little concern in Chinese equity markets this morning where the Shanghai Comp is currently +1.55% and CSI 300 is +1.36%. Helping the better tone there is the news on Friday that the securities regulator is set end its five-month freeze on IPO’s before the end of the year which was previously put in place to help mitigate the huge slide in Chinese bourses earlier in the summer. That news appears to have sparked some concern of outflows from Chinese government bonds as a result, with 10y yields up 10bps to 3.25%, marking the biggest rise since December 5th last year. Elsewhere this morning it’s been a strong start to the week for the Nikkei (+1.81%) having been supported by some better than expected cash earnings data. The Kospi is -0.57% and Hang Seng -0.09% while the weakness in commodity markets on Friday has seen the ASX (-1.83%) tumble this morning.
Also out over the weekend were comments from San Francisco Fed President Williams. The Fed official, while noting that October’s decision to stay put was a ‘close call’ is of the opinion that ‘it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are’. When questioned on whether or not he is in support of a December hike specifically, Williams said that there is a lot of data between now and then and that he will ‘wait and see on that’. Post Friday’s data Chicago Fed President Evans said that ‘the real side of the economy is looking a lot better’ and that ‘we’ve indicated that conditions look like they could be right for an increase’ and that December is ‘absolutely’ a live meeting. St Louis Fed President Bullard hawkishly added that ‘the case continues to be compelling for liftoff’ and that ‘I would emphasize cumulative progress in labour markets and not just the latest jobs report, which was obviously strong’.
Moving on, earnings season is winding down in the US with 443 S&P 500 companies, or 89% having reported their latest quarterly numbers. As it stands 71% have beaten earnings expectations and just 44% have beaten top line estimates. That’s a weaker trend compared to what we’ve seen in the last two quarters. In Q1 earnings and sales beats stood at 73% and 48% respectively, before improving slightly to 75% and 49% in Q2. If we take a look at the aggregate moves, the obvious weakness is at the sales line where YoY aggregate sales are -5.0%. As we noted last week a lot of this weakness has been driven by the energy sector so if we strip this out then aggregate sales are actually a little higher YoY (+0.6%) based on Bloomberg calculations. Aggregate earnings YoY are now down -3.5%, although this is again driven to a large extent by the energy sector. The number actually rises to +3.5% excluding these names. Meanwhile, over in Europe and with 318 Stoxx 600 companies having now reported, 48% have beaten earnings expectations and 45% sales expectations. That’s well down on both Q1 (57% and 72% respectively) and also Q2 (61% and 67% respectively) this year although it’s worth noting that the data is a little less reliable for European companies given not all have earnings expectations are on Bloomberg.
Sovereign bond yields in Europe moved higher with the move in Treasuries on Friday too. 10y Bunds closed 8.6bps higher at 0.692% and to their highest level since September 17th, while 5y yields (+0.003%) closed back in positive territory. Despite the weakness in the bulk of risk assets post-payrolls on Friday, the big depreciation in the Euro helped nudge up European equity markets through the afternoon. The Stoxx 600 eventually finished +0.31% while the Dax was up a strong +0.92% despite the latest German IP numbers. On the back of the soft orders data the day before, German industrial production was down -1.1% mom in September (vs. +0.5% expected), dragging the YoY rate down now to just +0.2%. Our colleagues in Europe noted that this meant we saw negative Q3 industrial output growth (-0.2% qoq) after increases in the first two quarters this year and as result have adjusted their Q3 GDP forecast from +0.4% qoq to +0.3%. There was a softer than expected IP report out of the UK too where production fell -0.2% mom during September (vs. -0.1% expected). Manufacturing production data was a bit better than expected however at +0.8% mom (vs. +0.6% expected). There was better industrial data out in Spain however where IP rose a robust +1.2% mom in September (vs. +0.4% expected).
Global Trade, Demand Continues To Dry Up As China’s Exports Miss For Fourth Straight Month
(courtesy zero hedge)
A Fifth Of Spain’s GDP Just Voted To Secede – What Now?
Everywhere you look there are signs that Europe is coming apart at the seams. Just a month after the crisis in Greece abated, the influx of refugees fleeing the war-torn Mid-East finally overwhelmed the Balkans leading directly to border closures and precipitating a spat in Brussels regarding how best to handle the people flows.
In short, not everyone agrees with Angela Merkel’s open door policy and indeed, Hungary’s Viktor Orban has led the push for the preservation of what he calls Europe’s “Christian heritage” by keeping asylum seekers out. Now, there’s a serious rift developing and further efforts to force recalcitrant countries to accept migrants they don’t want could well spell the end of the Schengen project.
Meanwhile, Portugal is on the brink of a political crisis as Costa’s Socialists move to align with the Communists and the Left Bloc in an effort to overthrow the government and roll back austerity, presaging a debt showdown with Brussels and Berlin.
As if all of this weren’t enough – and we didn’t even mention the potential for “Brexit” – the Catalan black swan is back on the heels of what amounted to an independence referendum in September (see here).
On Monday, Catalonia’s parliament approved a “democratic disconnection” resolution which will see the region push to separate from Spain and establish an independent republic. Here’s WSJ with some color:
Catalonia’s parliament approved a resolution Monday to take steps to establish an independent republic, vowing it would begin ignoring Spanish institutions and setting up a potential standoff with the government in Madrid.
The proposal to commence a “democratic disconnection” passed by a vote of 72 to 63, after a two-hour debate. Prime Minister Mariano Rajoy, who has said the separatist push represents Spain’s major challenge ahead of Dec. 20 national elections, pledged Monday to use all of the authority of his office to halt the secession bid.
Mr. Rajoy said his government would petition the Constitutional Court this week to have the resolution declared void.
Legal experts say the court will almost certainly bar Catalonia from taking any steps to put the resolution into effect, paving the way for a test of wills. The resolution singles out the Constitutional Court as being “delegitimized and without authority.”
The nine-point resolution calls on Catalonia’s parliament to start within 30 days to prepare laws to create independent social security and tax authorities. Pro-independence parties have said they hope to complete the separation process within 18 months.
And a bit more from The Guardian:
In September Rajoy’s government boosted the powers of the constitutional court to allow it to quickly suspend leaders who disobey its orders, in a move aimed directly at Catalonia.
The government has also raised the possibility of invoking article 155 of the Spanish constitution, which allows Madrid to supersede the authority of a regional government that is acting outside the law or to cut off its funding.
So yes, Catalonia is looking to officially secede from Spain in just a year and six months and the push comes less than two months ahead of national elections which very well could end up creating precisely the same type of political dynamic as that which is currently unfolding in Portugal. Back to WSJ:
For Mr. Rajoy, his response to the Catalan gambit could play a key role in determining whether he is able to stave off challenges from the rival Socialist Party, as well as two upstart parties, and win re-election.
“It’s a very delicate situation that requires a deft balance,” said Carlos Flores Juberías, a constitutional law professor and political analyst at the University of Valencia “He has to show firmness, but any action he takes must be surgically targeted” to avoid more people rallying around the separatist camp.
Worse still, if Catalonia were indeed to break away, it could very well end up costing Spain in the debt-to-GDP department. As DB noted before September’s parliamentary elections, “the impact would be significant on the Spanish economy, [as] without an agreement to share the stock of debt with Catalonia, Spain’s’ projected public debt for 2015 would move from just above 100% of GDP to about 125% of GDP. And this accounts only for the mechanical impact. On 21 September Mas stated that if the central government refuses to negotiate, Catatonia might not pay back its liabilities to the central government.”
In other words, it’s possible that we could end up with a situation wherein the left gains more influence politically just as Catalan independence meaningfully increases Spain’s debt-to-GDP ratio (don’t forget, Catalonia accounts for nearly a fifth of Spanish output). Clearly, that’s a recipe for a standoff with the troika which means that soon, Brussels could end up facing an austerity revolt not only Portugal, but from Spain as well. Underscoring the above is the fact that Podemos supports a referendum on Catalan independence. Here’s The Guardian again:
Spain’s prime minister, Mariano Rajoy, who is preparing for a general election on 20 December, has the backing of the main opposition Socialists and the new centre-right party Ciudadanos.
Of Spain’s main parties at the national level, only the far-left Podemos has resisted Rajoy’s effort to forge a united front on the issue. While Podemos wants Catalonia to stay within Spain, it has also said it would support a referendum on the matter.
Here’s Open Europe with three key question to consider as we enter “uncharted territory”:
- First, the pro-independence front in the Catalan parliament is a very diverse one. Incumbent Catalan President Artur Mas and his moderate nationalist CDC party want Catalonia to become “a new nation in Europe”. That means leaving Spain, while remaining a member of the Eurozone and the EU. The radical left-wing CUP party – whose backing is key for the secessionist camp to hold an absolute majority in the regional parliament – wants Catalonia to leave Spain, the euro and the EU. Incidentally, the CUP is also opposed to Mas staying on as Catalan President. Doubts over the longevity of such an alliance are legitimate, and could become crystallised as the parties discuss issues such as the currency and institutions of a new Catalan state.
- Second, assuming that Catalonia unilaterally declares its independence (still a very big ‘if’ at this stage), other EU countries would be unlikely to recognise it as a state. The European Commission would likely also voice objections to Catalonia remaining in the euro and the EU, similar to its intervention in the Scottish referendum campaign. That would be the final nail in the coffin of the “new nation in Europe” project. Is Artur Mas really prepared for such a scenario? I doubt it – hence why I believe he still sees this ‘roadmap’ as a way to put pressure on the Spanish government to negotiate. Indeed, he needs to be careful heading down this path – as the situation could well spiral beyond his control (some might say it already has).
- Third, in the 27 September Catalan elections the pro-independence parties secured an absolute majority of seats in the regional parliament – but not an absolute majority of votes. This raises questions over the democratic legitimacy of this independence process. The reality is Artur Mas and his allies were looking for a ‘plebiscite’ in favour of secession – but this failed to materialise. Together, the three pro-independence parties won less than 48% of the vote. Is this enough to embark on a path to a unilateral independence declaration? Most certainly not. One has to wonder whether there will be a response from the 52% of the electorate who did not back such an approach.
In short, this is a big deal. You’re talking about a scenario that would ultimately involve booting part of Spain from the common currency in the event of secession, leading to who only knows what kind of headaches for Catalans, but perhaps more importantly, there’s the very real potential for social unrest here depending on how Rajoy handles the Catalonia “problem,” and on that note, we’ll close with a quote from Rajoy himself:
“Catalonia isn’t separating from anywhere.”
Putin’s Multi-Millionaire Media Mogul Dies Of Mysterious “Heart Attack” In Luxury DC Hotel
Dear Sergei Lavrov and Maria Zakharova: you may want to avoid staying at The Dupont Circle in DC for the foreseeable future even though the following images may seem quite inviting…
Yesterday evening, a variety of mainstream wires reported that Mikhail Lesin, a close ally of The Kremlin and the man credited with “inspiring” the creation of Russia Today, was found dead on an “upper floor” in the hotel. Lesin was Russia’s Minister of Press, Television and Radio from 1999 to 2004 and also served as Putin’s media adviser. In 2013 he assumed a role as an executive at Gazprom-Media.
Apparently, no one knows why Lesin was in Washington, and as of Friday evening, authorities weren’t ready to reveal the identity of the 57-year old Russian national they found dead at the Dupont. But officials in Washington and Moscow confirmed that the deceased was indeed Lesin and Vladimir Putin “expressed his sincerest condolences”, RT says. From The Kremlin:
“The president has a high appreciation for Mikhail Lesin’s massive contribution to the creation of modern Russian mass media.
In the West, Lesin is most widely known for his role in conceiving Russia Today (now RT), a state-run English-language television network which offers an alternative, non-Western view of global events by encouraging viewers to ‘Question More’. Since its launch in 2005, RT has expanded across continents, broadcasting in multiple languages, and successfully presenting the Russian point of view on world events, something even its harshest critics have admitted. Lesin’s role in RT’s creation is arguably his greatest accomplishment.”
As of now, Lesin’s death has been written off to the ubiquitious unexplained “heart attack.” Here’s WaPo:
Lesin was the former executive of Gazprom-Media, the state-run holding company that controls much of the Russian press. RIA Novosti, a state news agency, quoted a family member confirming the death and saying it was from a heart attack.
Russia Today, without providing a source, suggested that Lesin had been suffering from a prolonged illness.
We’re no doctors, and we’re also not trying to suggest that Lesin wasn’t sick, but what’s particularly odd about the mainstream media’s coverage of this story (and by the way, this applies to the Russian media as well), is that no one seems to think it’s strange that a Russian media mogul died in a DC hotel room from an apparent “heart attack” just as relations between Washington and Moscow have deteriorated to a post-Cold War low and just as sites like RT and Sputnik are becoming increasingly prominent among Western readers amid The Kremlin’s air campaign in Syria. And to top it all off, no one knows why Lesin was in the city in the first place. Nope, nothing strange about any of that.
It’s also worth noting that US lawmakers have called for an investigation into Lesin’s fortune. Via ABC:
Sen. Roger Wicker (R-Miss.), called on the Justice Department to launch an investigation into Lesin over allegations of corruption and money laundering.
In a letter to then-Attorney General Eric Holder, Wicker said Lesin had “acquired multi-million dollar assets” in Europe and the United States “during his tenure as a civil servant,” including multiple residences in Los Angeles worth $28 million.
“That a Russian public servant could have amassed the considerable funds required to acquire and maintain these assets in Europe and the United States raises serious questions,” Wicker wrote.
Here’s the actual letter:
Consider that, and then consider the following comments from John Kerry with regard to RT (note that America’s top diplomat hilariously accuses foreign media of “distorting what is happening or not happening”):
Here’s how RT’s Editor-in-Chief Margarita Simonyan responded at the time:
Translation: “Surprisingly, Secretary Kerry at this difficult and humiliating [time] for his homeland no longer worr[ies] about anything except our television channel.”
And further: “We are planning to write an official request to the State Department for concrete examples of when RT has distorted facts. It’s unfortunate that the head of the State Department knows so little about what’s going on in Ukraine at the moment.”
Here’s Simonyan on Lesin (from Friday):
So in any event, Lesin was not a man that was particularly popular inside the Beltway where he inexplicably was staying last week.
Still, there are all kinds of questions here and determining what actually “is or is not happening” (to quote John Kerry) is difficult. Consider the follwoing from Sputnik:
Between 2004 and 2009, Lesin served as an advisor to the Russian president, charged with overseeing the development of media and information technology, including the creation of Russia Today. Lesin’s resignation in 2009 was unexpected, and widely rumored to have been the result of a perceived conflict of interest between his activities in business and his work as a civil servant.
Lesin first came to prominence in the media industry in the early 1990s. He created the advertising agency ‘Video International’, which would go on to become a multi-billion dollar firm, and the largest player in the Russian advertising field by the end of the 1990s, a position it has maintained to this day. Coming onto the scene of the Russian media market during Russia’s difficult post-Soviet transition, Lesin and his partners effectively had to figure out from scratch how the advertising field, which never existed in the Soviet Union, actually worked.
Before becoming press minister in 1999, Lesin briefly headed the Kremlin’s public relations office (1996-1997), and serve as vice-president of the All-Russia State Television and Radio Broadcasting Company (1997-1999) as it transformed into a major media holding. He was believed to have been given the position for his loyalty to president Yeltsin during the 1996 re-election campaign, during which he created the iconic ‘Vote with your heart’ and ‘I believe, I love, I hope’ campaign advertising commercials.
During his tenure as press minister, Lesin would participate in one of the loudest media scandals of the early 2000s –the transfer of oligarch Vladimir Gusinsky’s media holding company Media Most’s assets to state energy giant Gazprom.
To be sure, Lesin was not without his sins, and was involved in the dirty media games of late 90s Russia. As RIA Novosti recalled, the media guru was rumored to have played a key role in the creation of a secret tape compromising former Prosecutor General Yuri Skuratov. Hidden camera video of the prosecutor general, who was known as a bitter adversary of Yeltsin, and who was conducting an aggressive investigation into several large cases of government corruption, was broadcast on federal television, featuring Skuratov rolling around in bed with two young women, who turned out to be prostitutes. Ultimately, the scandal resulted in the prosecutor general’s resignation.
And then there’s this, from last December (again, via Sputnik):
The head of Russia’s Gazprom-Media holding, Mikhail Lesin, has officially turned in his application to resign, Gazprom’s press service said Friday.
“Mikhail Lesin has turned in a request to remove him from the post of Gazprom-Media chairman citing family issues. This request will be considered at the next Gazprom-Media board meeting,” the press service said.
At the time, Forbes Russia said “individuals” claimed thatthe decision was made personally by President Vladimir Putin. For the sake of brevity we won’t go into the entire story, but we encourage readers to do their own research on Ekho Moskvy and Lesin.
The takeaway here is that Lesin was most assuredly a “somebody”, and when a “somebody” dies in a DC hotel room of a mysterious “heart attack” and no one knows what that “somebody” was doing in DC in the first place, you may want to start asking questions with regard to the official narrative regardless of where that narrative originates.
Of course we could be wrong.
But in honor of RT, we’ll simply close by saying that it never hurts to “question more.”
Officials Are “90% Sure” There Was A Bomb On Doomed Russian Passenger Plane
It’s now been more than a week since a Russian passenger jet plummeted to the Earth at 300 miles per hour in the Sinai Peninsula and to be sure, we’ve made no secret of our suspicions that an explosion was the likely culprit.
Of course you needn’t be an Egyptian forensics expert or some kind of flight safety guru to come to the conclusion that a “technical failure” probably wasn’t responsible for the what happened. Sadly, the fact that body parts were littered in an 8 kilometer radius supports the contention that the aircraft did indeed explode and over the course of the last several days, both Washington and London both said that intercepted “chatter” points to ISIS.
And then there’s the fact that IS Sinai insists they “destroyed” the plane.
On Sunday, we got still more evidence that an explosive device may have been planted on the flight. Reuters, citing sources familiar with the black box investigation,now says officials are “90% sure” that a bomb was responsible. Here’s more:
Investigators of the Russian plane crash in Egypt are “90 percent sure” the noise heard in the final second of a cockpit recording was an explosion caused by a bomb, a member of the investigation team told Reuters on Sunday.
His comments reflect a higher degree of certainty about the cause of the crash than the investigation committee has so far declared in public.
Lead investigator Ayman al-Muqaddam announced on Saturday that the plane appeared to have broken up in mid-air while it was being flown on auto-pilot, and that a noise had been heard in the last second of the cockpit recording. But he said it was too soon to draw conclusions about why the plane crashed.
Asked to explain the remaining 10 percent margin of doubt, the investigator declined to elaborate, but Muqaddam cited other possibilities on Saturday including a fuel explosion, metal fatigue in the plane or lithium batteries overheating.
So, it’s either the metal “expired” (so to speak), some batteries overheated, or the plane was blown up by terrorists. You can draw your own conclusions there.
If you, like David Cameron and US intelligence officials, do indeed believe that an “explosive device” was on board, then the next question to ask is how it got there. According to Sharm El Sheikh workers who spoke with WSJ, there’s speculation this was an inside job:
Airport workers here say they have faced intensive questioning in recent days from Egypt’s internal security agency, a sign the government is now exploring the prospect that airport insiders might have facilitated a terror attack that brought down the Russian plane that crashed last weekend.
The workers say officials from Egypt’s Ministry of Interior, the internal security agency, have questioned them about their actions and whereabouts on Oct. 31, the day the plane crashed in the Sinai Peninsula, killing all 224 people on board.
At the same time, Egypt’s military has assigned guards for airplanes staying overnight on the tarmac of Sharm El Sheikh International Airport, according to workers, as international carriers resumed flights this weekend to ferry stranded vacationers back home.
“Normally, policemen are not allowed on the tarmac,” said a person familiar with the security arrangements. “Recently, they’re being asked to spend nights beneath jets.”
In the Egyptian civil aviation ministry’s first public briefing since last weekend’s crash, agency chief Ayman Al Moqadem confirmed that there had been a mysterious sound heard on the final second of the cockpit recorder, but shed no light on what the pilots discussed during the 23 minutes after takeoff and before Metrojet Flight 9268 went silent.
To be sure, none of this is particularly surprising given everything we’ve learned over the past several days and at a certain point, one has to ask how many officials need to come out and confirm that this was indeed a bomb before someone finally delivers definitive proof, but regardless of whether the story is starting to get repetitive, it still has far-reaching implications – and not just for Russia’s campaign against Islamic extremists. Here’s Bloomberg:
“If this turns out to be a device planted by an ISIL operative or by somebody inspired by ISIL, then clearly we will have to look again at the level of security we expect to see in airports in areas where ISIL is active,” U.K. Foreign Secretary Philip Hammond told BBC Television’s Andrew Marr show on Sunday.
Emirates airline, ranked world No. 1 by international traffic, is already looking at its security procedures in anticipation of tighter rules, President Tim Clark told reporters in Dubai on Sunday.
“As we speak, we’re reviewing our procedures in terms of security and ramp handling and access to our aircraft,” Clark said. “We have 22 cities in Africa, multiple cities in west Asia — India, Pakistan, et cetera — all of these will have to be reviewed to make sure we’re as safe as we can be.”
Britain banned commercial flights to and from Sharm el-Sheikh on the Red Sea in the wake of the crash, leaving thousands of vacationers stranded. Other countries, including Russia, followed and travel warnings ensued with Norway, Finland and Denmark all advising against all non-essential trips. Hammond said those trying to get home on unscheduled flights face delays of two to three days at most.
Egypt’s benchmark EGX 30 Index of stocks slumped 2.6 percent at the close in Cairo, the most in two months.
In short, this is likely to cause a global rethink of airline security and importantly, this is a veritable disaster for an Egyptian tourism industry which was still stinging from a September “incident” that saw the military accidentally engage a group of Mexicans having a barbecue after mistaking them for ISIS.
It will be interesting to watch the Egyptian economy over next six or so months because frankly, the above suggests Cairo could be in for a bumpy ride.
Finally, note that the al-Sisi government recently signed new legislation widening Cairo’s surveillance authority and the President isn’t exactly known for having a sterling record on human rights (he’s a Mubarak disciple after all). If this ends up hobbling the economy, expect al-Sisi to crack down, setting the stage for more of the same in terms of social unrest, coups, and counter-coups.
The financial system of the world has been turned into a doomsday machine by central bankers stranded in an intellectual puzzle palace. That is, they are marching financial markets straight into another giant bubble implosion owing to their embrace of a fundamental error about why there is an apparent lack of consumer inflation in the official indices.
For example, the chief economist of the IMF, Maurice Obstfeld, recently trotted out the chart below to prove that “lowflation” is a deadly threat everywhere on the planet to growth, jobs, living standards, public finances, and even capitalist viability.
The ill of lowflation can only be remedied, he averred, by resort to “out of the box” central bank expedients designed to compensate for the purported drastic shortfall of that Keynesian ether called “aggregate demand”.
What he had in mind, of course, was negative interest rates and further massive monetization of the public debt and other existing assets in the name of QE.
Mr. Obstfeld is talking central banker jabberwocky. The above graph is actually welcome evidence that wage workers and other middle class households are finally getting some respite from the relentless upward creep of consumer prices.
Moreover, the above graph represents no problem whatsoever because better retention of the purchasing power of wages and salaries is surely not something that needs fixing. And most especially not by the very same central bankers whose misguided policies gave rise to the deflationary tides now gathering in the world economy.
In a nearby post today, Pater Tenebrarum called out exactly what these “moar inflation” seeking central bankers are really up to:
What are the basic requirements for becoming the chief economist of the IMF? Judging from what we have seen so far, the person concerned has to be a died-in-the-wool statist and fully agree with the (neo-) Keynesian faith, i.e., he or she has to support more of the same hoary inflationism that has never worked in recorded history anywhere. In other words, to qualify for that fat 100% tax-free salary (ironically paid for by assorted tax serfs), one has to be in favor of central economic planning and support policies fully in line with today’s economically illiterate orthodoxy. Meet Maurice Obstfeld, who has just taken the mantle.
New IMF chief economist Maurice Obstfeld (left) and fellow monetary crank Haruhiko “Peter Pan” Kuroda, governor of the BoJ
So trapped in their illiterate orthodoxy, Obstfeld, Kuroda, Yellen, Draghi and the rest the central bankers cartel resort to desperate monetary expedients that would have been considered crackpot economics even 15 years ago. The idea of ZIRP for 82 months running would have been considered borderline lunacy; the notion that the collective central bank balance sheets of the world could explode by 10X in two decades would have been viewed as incendiary radicalism.
But it is exactly these crackpot doctrines which have now become embedded in a relentlessly tedious central banker groupthink. Indeed, the core notion of “lowflation” and deficient “aggregate demand” is so superficial, contradictory and refutable that it amounts to little more than jabberwocky.
The fact is, the massive growth of central bank balance sheets since 1994 is the driving force that fueled, shaped and deformed today’s global economy and financial system. The chart below is utterly new under the sun and thereby nullifies the relevance of pre-1995 history and contradicts all of its rules and patterns:
When the central banks created $19 trillion of new balance sheet out of thin air they fueled a worldwide credit bubble of epic proportions. After two decades of maniacal central bank money printing, the world’s credit outstanding has grown from $40 trillion to $225 trillion or nearly 4X more than the interim expansion of global GDP.
And even that latter figure is exaggerated because it includes massive amounts of malinvestment and economic waste that will eventually be written off and abandoned; it does not comprise a permanent component of the world’s productive economy.
This massive expansion of cheap debt, in turn, fueled a runaway capital investment boom that has left the global economy drowning in excess capacity and malinvestment. This occurred in the form of a central bank enabled doubly whammy over the last two decades.
First, excess DM world household demand lead to an investment boom in China and its EM supply base prior to the 2008 “peak debt” crisis; and then the post-crisis infrastructure and investment binge staged by the red suzerains of Beijing fueled a second wave of capital spending for energy, metals, processing plants, shipping, warehousing, manufacturing and consumer product distribution that dwarfed all prior history.
As shown below, the publicly listed companies of the world actually increased CapEx by 5X or upwards of $2 trillion annually during the run-up to peak capital spending in 2012-2013:
The official inflation indices, therefore, are tepid because prices of commodities and goods are being crushed by excess supply. That’s why oil prices have plunged into the $40s and why iron ore is heading into the $30s (per ton) and copper back toward one dollar (per pound).
Moreover, the excess capacity is by no means limited to the mining sector and oil patch. Its rippling downstream at a ferocious pace. This week, for instance, we posted a piece on Alcoa’s intention to shutdown most of its US aluminum smelter capacity and the likelihood that in a few years the entire US industry will disappear.
Needless to say, that’s not owing to a labor arbitrage because today’s high tech, capital intensive power-guzzling aluminum smelters are not about underpaid peasant girls living a dozen to a dorm room; they are about return on capital, which has been driven to nearly zero by the China’s insane rates of cheap credit fueled investment over the past two decades.
The same is true for steel and all its downstream customers. In 1995 China had 70 million tons of steel capacity and no modern auto plants. In the interim, its steel production capacity grew by 16X to 1.1 billion tons and auto industry capacity to 26 million units or well more than either North America or Europe. The excess supply from these malinvestments will be deflating world prices for years to come.
And the same is true of containerships, bulk carriers, refineries, chemical plants, solar power, heavy machinery and much more.
The collateral effect will be collapsing profits, asset write-offs and a long spell of weak capital spending. Indeed, the developing depression in commodities and capital spending is what is driving the global deflationary cycle, and the collapse of profits and incomes in the impacted sectors.
Stated differently, the credit fueled commodity and CapEx boom of 1995-2014 did not generate a miracle of global growth and prosperity as the Wall Street Keynesians would have you believe; it simply stole demand from the future and wasted massive amounts of real labor, capital and energy resources in the process.
Accordingly, the world does not suffer from a lack of “aggregate demand”. Sustainable demand everywhere and always is derived from production and income, and the latter are now falling due to the wasteful capacity excesses overhanging the global economy.
And there is no short-cut way out via credit based spending. That’s because the world is now saturated with “peak debt” in the household and business sector, as well as the official institutions of the state. More central bank enabled credit will only fuel speculation in financial assets.
By the same token, the “lowflation” story is just self-evident drivel. On a worldwide basis, the price of commodities are falling due to excess supply. Likewise, prices of goods are being flattened by cheaper raw materials and the excess supply of labor that was drafted into the world’s tradeable goods economy from the rice paddies of Asia during the credit and CapEx boom of the last two decades.
By contrast, domestic services prices have continued to inflate at a 2.4% annual rate since commodity and goods prices began to peak in 2011. In fact, the roll-over of the green line (all commodities) and the red line (finished goods) is the cause of “lowflation” in the aggregate consumer price index. Only the central banker PhDs lost in a self-serving groupthink of jabberwocky can’t see the implications of the graph below.
In a word, the graph says to the central bankers: You are out of business!
The developing deflationary cycle stunting the world economy has arisen from the monumental harm that central bankers have already done, not from lack of sufficient vigor and boldness in attempting to contravene its consequences.
And these guys should know!!
(courtesy Maersk/zero hedge)
CEO Of World’s Largest Shipping Company: “Global Growth Is Worse Than Official Reports”
Last week we reported that, as measured by its three primary means of transportation, global trade is in nothing short of freefall: to wit – “China Container Freight At Record Low; Rail Traffic Tumbles, Trucking Slows Down.” The slowdown in this most important metric of global growth (or lack thereof), one which unlike asset prices can not be manipulated by central banks through “printing” was confirmed when Maersk, the world’s biggest container shipping company, reported it would cut shore-side headcount by about 4,000, a reduction of about 17%.
As reader Joe points out, they also declined to execute options for additional 19,000 TEU mega ship new-builds and a couple of smaller 3,600 TEU feeder vessels, and will postpone a decision on building some large 14,000 TEU vessels. He adds that industry analysts have been critical of Maersk’s counter-intuitive expansion over the past few years in a recessionary climate, during which the container carriage capacity that Maersk brought on line is credited with driving ocean transport rates down.
It is unclear whether Maersk was able to capture additional market share with their larger and likely more efficient mega-ships by driving less efficient operators out of business, or if the recession killed off their competitors. What is certain is that Maersk’s pricing strategy merely accelerated the “deflationary” climate experienced across the globe over the past several years, as companies have rushed to cut prices in an attempt to put competitors (who have survived this far thanks to global ZIRP policies which have pushed debt to unprecedented levels around the globe) out of business.
What is also clear is that Maersk is not just making it up. In fact, according to Maersk CEO, Nils Smedegaard Andersen, the reason why companies that are reliant on global trade, such as his, are flailing is simple: global growth is substantially worse than the official numbers and forecasts. To wit: “The world’s economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting.”
Quoted by Bloomberg, Andersen says that “we believe that global growth is slowing down,” he said in a phone interview. “Trade is currently significantly weaker than it normally would be under the growth forecasts we see.”
Impossible, you say, the IMF would never lie or be overly optimistic in a transparent attempt to boost consumer optimism, and thus spending. Actually, it would.
As Reuters recently pointed out, “the International Monetary Fund, World Bank and Organization for Economic Cooperation and Development have not just been wrong; for years they have all been wrong in the same direction, persistently forced to revise down predictions that proved too rosy. “There’s an inbuilt ‘optimism bias’,” said Stephen King, senior advisor to HSBC and a former economic adviser at the British treasury. “But facts have to dominate a forecast eventually.”
It’s worse than that, because after 7 years of screaming “recovery” nobody believes it anymore, and meanwhile for CEOs such as Andersen, the world is on the verge of a global recession.
The IMF on Oct. 6 lowered its 2015 global gross domestic product forecast to 3.1 percent from 3.3 percent previously, citing a slowdown in emerging markets driven by weak commodity prices. The Washington-based group also cut its 2016 forecast to 3.6 percent from 3.8 percent. But even the revised forecasts may be too optimistic, according to Andersen.
The punchline: “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe — than other people expect in 2015,” Andersen said. Also for 2016, “we’re a little bit more pessimistic than most forecasters.”
A little as in 0.2% or as in 2%, which would mean that the world GDP is currently, as we have long claimed, in a recession and not just in dollar terms.
On second thought no need to wait for the answer: as noted above, Maersk’s on Friday reported a 61 percent slump in third-quarter profit as demand for ships to transport goods across the world hardly grew from a year earlier. The low growth rates are proving particularly painful for an industry that’s already struggling with excess capacity.
Here is the damage, as we showed last Thursday in a chart of China’s containerized freight index. As of the latest data point, it just hit an all time low!
Trade from Asia to Europe has so far suffered most as a weaker euro makes it tougher for exporters like China to stay competitive, Andersen said. Still, there are no signs yet that the global economy is heading for a slump similar to one that followed the financial crisis of 2008, he said.
Still, despite the historic collapse in profit, the Maersk CEO remains optimistic:
“We’re seeing some distortions amid this redistribution that’s taking place between commodity exporting countries and commodity importing countries,” he said. “But this shouldn’t lead to an outright crisis. At this point in time, there are no grounds for seeing that happening.”
We are confident that Mr. Andersen will be the first to advice when said distortions do lead to an “outright crisis.”
Take a close look at the following. That should give you a good idea as to devastation in the capital equipment field!!
What An Industrial Depression Looks Like: Photos From An Australian Heavy-Machinery Auction
Two weeks ago, when looking at the latest Caterpillar retail sales data…
… we said that “If Caterpillar’s Data Is Right, This Is A Global Industrial Depression.”
Today we get visual evidence of this, courtesy of an Australian heavy industrial equipment auction where machines such as a Caterpillar 992C wheel loader, which normally costs $2.9 million, can now be bought for just $15,000, a 95% discount!
As Australia’s ABC reports, now that the commodity bubble has burst for good, auctioneers are hard at work selling tens of millions of dollars of suddenly useless coal mining machinery for just a fraction of its original market value.
The reason is known: the severe downturn in the Australian resources sector (courtesy of China’s whose commodity imports are declining with every passing month) has led to a massive oversupply of equipment, and much of it is unsuitable for use in any other industry. This means unwanted excavators, trucks and sundry heavy machinery will end up as scrap, if not sold at auction.
ABC’s reporter visited just one such auction in New South Wales, which was owned by Big Rim, a mining services contractor which also collapsed after the miners it serviced also closed.
What he saw was stunning:
“At the moment we’ve probably got the worst downturn I’ve seen in 25 years,” said Chris Hassall, whose company is conducting the auction.
Peter Turner’s Gold Coast company Turner Engineering used to compete for contracts with Big Rim. “I’d be interested in at least 50 per cent of what’s here, and there are at least 100 machines here,” he said.
One of those machines was a large water tanker which Peter Turner was running the ruler over. “It’s not worth a lot. It’s worth $75,000 or something, but you can’t build the tank for that.”
Worse, when the auction began the owners of a once-thriving business were hoping this fire sale would at the very least cover their debts. No such luck as the photos of the epic discounts on the equipment show.
“Some of the old equipment that was working in the last two years is now redundant, won’t go back to work,” said auctioneer Chris Hassall.
“We had 20 trucks in the Hunter Valley recently that 18 months ago were probably worth $600,000 each.We’ve just cut ’em up, returned about $40,000.”
It’s prices like these which help explain why shares of the Kerry Stokes-controlled Seven Group are less than half what they were two-and-a-half years ago. Seven holds the largest Caterpillar franchises in both Australia and China.
Coupled with the mining downturn, with good second hand machinery so cheap, it is little wonder new sales have been hit hard.
For the sellers it was a bloobath; however at least some of the buyers were happy. “Contractor Peter Turner had been hoping to pay $75,000 for a water tanker, and in the end paid a little more at $77,500.”
As ABC concludes, “it was a day which displayed the stark reality of a coal mining industry which has gone from boom to bust in a very short space of time.”
Unless China ravenous appetite for all possible commodities returns, the industrial depression, already the worst Australia has seen in 25 years, will only get worse.
And this is what an industrial depression looks like in numbers:
Was: $2.9m | Now: $15,000: Caterpillar 992C wheel loader
Was: $1.4m | Now: $50,000: Hitachi EX1200 hydraulic excavator
Was: $2.7m | Now: $46,000: Caterpillar D11N crawler tractor
Was: $900,000 | Now: $47,500: Caterpillar 775D rear dump truck
Was: $200,000 | Now: $2,000: Large workshop with water tank
Euro/USA 1.0777 up .0039
USA/JAPAN YEN 123.46 up .348
GBP/USA 1.5105 up .0064
USA/CAN 1.3263 down .0038
Early this morning in Europe, the Euro rose by 39 basis points, trading now well above the 1.07 level rising to 1.0777; Europe is still reacting to deflation, announcements of massive stimulation (QE), a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece, Glencore,and now Nysmark and the Ukraine, along with rising peripheral bond yield. Last night the Chinese yuan down in value (onshore). The USA/CNY up in rate at closing last night: 6.3619 / (yuan down)
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31/2014. The yen now trades in a southbound trajectory as settled down again in Japan by 35 basis points and trading now well above the all important 120 level to 123.46 yen to the dollar.
The pound was up this morning by 64 basis points as it now trades just above the 1.51 level at 1.5105.
The Canadian dollar is now trading up 38 basis points to 1.3263 to the dollar.
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 MONDAY morning:closed up 377.14 or 1.96%
Trading from Europe and Asia:
1. Europe stocks all in the red
2/ Asian bourses mostly in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai in the green (massive bubble ready to burst), Australia in the red: /Nikkei (Japan) in the green/India’s Sensex in the red/
Gold very early morning trading: $1093.30
Early Monday morning USA 10 year bond yield: 2.35% !!! up 2 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 3.10 up 2 in basis point.
USA dollar index early Monday morning: 98.89 cents down 35 cents from Friday’s close. (Resistance will be at a DXY of 100)
This ends early morning numbers Monday morning
WTI Crude Crushed To $43 Handle “Flash-Crash” Lows After Genscape Data
Oil was already weak this morning but the release of Genscape estimates of yet another sizable inventory build (1.8 million barrels) appears to have kicked the down-leg a notch lower. The overnight flash-crash lows are now in sight at WTI Crude trades with a $43 handle once again (and Dow Transports converge lower).
USA/Chinese Yuan: 6.3619 up .0091 on the day (yuan down)
New York equity performances for today:
‘Rate-Hike-Loving’ Investors Suddenly Dump Stocks, Commodities As Growth Reality Sinks In
They would not be raising rates unless everything is awesome, right? Right?!”
Since the dismal payrolls print in October (for September), stocks are comofrtably numb and higher as everything else is red…
Since the ‘awesome’ payrolls print on Friday, everything is red again… as exuberantly bouncing stocks give it all back…
It appears, once again, JPM’s Kolanovic was right that “the rally drivers are gone, downside risks ahead”… As all major equity indices are red post-Payrolls…
Even though Trannies surged in the middle of the day on CP-NSC news…
Again we saw a panic VXX selling, S&P buying algo run wild in the last 30 minutes of the day… what a joke!!
Ramping S&P Futs to VWAP – to enable institutional-selling…
Wondering why we ramped? Wonder no more – someone wanted out in Financials at breakeven from Payrolls…
As Financials give it all back…
Once again stocks catch down to credit…
Treasury yields flip-flopped all day – major selling pressure hit early in the US day, then as stocks tanked so bonds rallied into the EU close and then yields drifted back higher on equity stability…
The US Dollar drifted lower (on JPY strength) after some early strength (EUR 1.07 handle) on ECB jawboning…
Commodities all drifted lower on the day except gold which flatlined…
Silver extended its losing streak to 8 days as Gold broke its 8-day losing streak (longest since March)…
Bonus Chart: Monetary Policy…
U.S. Monetary Policy vs. the MSCI World Index: pic.twitter.com/wYAUF8ub7v
— Michael McDonough (@M_McDonough)November 9, 2015
The entire yield curve rises, especially the 5 year bond yield. With the USA expected interest rate rise in December one would expect the long end of the the curve to drop in yield. The fact that it is rising, means that the expected hike in yield is a failure in policy.
(courtesy zero hedge)
Bond Blood-Bath Continues – 5Y Yield Nears Key Technical Resistance
The carnage in Treasuries continues as this morning’s chatter from ‘sources’ about moar NIRP in Europe has seemingly sparked a sudden exodus from US bonds (even with stocks lower). Across the curve yields are up 4-5bps very suddenly – all testing (if not already broken) 2015 highs. Perhaps most critically for now is the 5Y yield which is surging towards 1.80% – a crucial level of resistance over the past few years.
The entire Treasury Curve is now higher in yield than at the end of QE3…
With 5Y pushing towards a crucial level…
IBM tumbles to a new 5 year low/Buffet admits huge unrealized losses
(courtesy zero hedge)
IBM Tumbles To New 5 Year Lows After Buffett Admits Huge Loss
We’re gonna need a bigger buyback… As if “old tech” IBM was not in enough trouble, the worrying admission from Buffett’s Berkshire Hathaway’s earnings of around $2 billion (though careful to note he is not about to sell) has seemingly prompted further weakness. IBM is down another 1.5% to fresh May 2010 lows…
As Berkshire Hathaway detailked…
As of September 30, 2015 and December 31, 2014, we concluded that there were no unrealized losses that were other than temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of each of these issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that market prices will increase to and exceed our cost.
As of September 30, 2015 and December 31, 2014, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $204 million and $65 million, respectively. Unrealized losses at September 30, 2015 included approximately $2.0 billion related to our investment in IBM common stock, which represented 15% of our cost. IBM continues to be profitable and generate significant cash flows.
We currently have no intention of disposing of our investment in IBM common stock. We expect that the fair value of our investment in IBM common stock will recover and ultimately exceed our cost.
Fresh 5 year lows..
It seems someone is fishing fro Buffett’s pain point.
My goodness: The NY Fed itself just admitted that household income expectations are falling sharply. The Friday jobs report showed household income rose. Go figure!!
(NY Fed.zero hedge)
What Rising Wages: Fed Itself Just Admitted “Household Income Expectations Are Falling Sharply”
Having noted the plunge in consumer spending expectations to record lows last month, The Fed faces an even bigger problem this month. Despite the apparent wage growth in Friday’s magical BLS data, The New York Fed admits “public expectations of future income took a big hit,” as the index suffered its biggest one-month decline on record. But the news gets even worse, as 3-year-aheadinflation expectations plunged to record lows (confirming the record low inflation expectations from UMich’s) and entirely discounting Stan Fischer’s inflation excuses last week. Fianlly, as stocks have stagnated this year as wealth creator for The Fed, consumer expectations of housing price gains have tumbled to series lows. It appears a desperate-to-hike-rates fed is cornered by, as UMIch previously noted, “a disinflationary mindset is taking hold.”
Triple whammy… Income – Down; Inflation – Down; Housing – Down…
According to a Survey of Consumer Expectations report Monday by the Federal Reserve Bank of New York said, one-year ahead expected inflation ticked up to 2.82% from 2.73% the prior month. But three-year ahead expected inflation ticked down to 2.78% from 2.84% in September, with October’s reading resting at its lowest level in a survey that goes back to June 2013.
The bank also said the public’s expectations of future income took a big hit. Median household income expectations fell to a 2.3% rise, from September’s 2.8%. The New York Fed noted this was the biggest one-month drop in the history of the survey and that it was spread across demographic groups.
The findings on inflation expectations are unlikely to be welcomed by Fed officials as they contemplate raising short-term interest rates next month. Central bankers believe where the public believes inflation will be in the future strongly influences where actual price readings come in. The Fed has failed to meet its 2% price rise target for over three years, but officials have pointed to the relative stability of expectations to build confidence inflation will eventually rise back to desired levels.
Last week, New York Fed leader William Dudley noted that there is been a steady decline in inflation expectations in his bank’s survey, and he said if expectations “move lower from here, that would increase our level of concern” about successfully getting inflation back to desired levels.
And finally, the oddly un-spun truthiness of The New York Fed…
So the next time we hear from The Fed quoting “surely wages will grow soon,” it is clear this is not the view of the average American, who, is supposedly responsible for the aggregate demand after all.
Charles Biderman is one smart cookie. He states that the global recession has been created by central bankers: here is why!!
(courtesy Charles Biderman/Trimtabs/zero hedge)
Biderman: “Welcome To The First Global Recession Created By Central Bankers”
Tensions in the global stock markets appear to have calmed. In sharp contrast stands the real economic development. Even in the US there are more and more signs of an accentuated weakness (outlier jobs data aside). “Things are crazy,” says Charles Biderman summing up this bizarre situation. “We’re seeing the impact of the global slowdown on the US and that’s going to continue” adds the TrimTabs founder, and, in contrast to the mainstream view on Wall Street, he doesn’t think that the Fed is going to raise interest rates (and is more likely to start a new stimulus program).“Ultimately there will be a major correction,” he warns and any new stimulus will merely serve the drug-addicted market.
Mr. Biderman, the US economy is sending mixed signals. How concerning is this situation?
The global slump is impacting the US economy more significantly than people realize. Our real-time data on the economy is declining and wage growth is the lowest it’s been all year. The TrimTrabs Macroeconomic Index for the US peaked in January and has weakened recently. It was up every year since 2011 but now it’s down year to date.
Is it even thinkable that the US will fall into recession?
It’s obvious that we’re in a significant slowdown. According to the technical definition, a recession is two quarters with negative growth in a row. So will the economy grow below zero? Could be. But anyway: What’s the big difference between minus 0,1% or plus 0,1% growth given how lagged the data is from the quarterly GDP numbers?
What does this mean for the Federal Reserve and its intention to raise interest rates?
Very few people would even consider this possible. But what I really think is going to happen is that the next Fed move is not going to be a hike. The next Fed move will be another form of easing. They’re not going to call it Quantitative Easing or QE, since QE has a bad reputation by now. So they’ll call it something else. I don’t know what they are going to do exactly. But it’s not going to be a tightening. As the global economy goes into a recession and the US follows, the Fed is going to do something.
For more than a year, the Fed is trying to prepare the financial markets for a rate hike. What would that do to the credibility of the central bankers if they back off now and actually take a U-turn?
Who says they have any credibility? The real problem is that the people who run the central banks are either economists or bankers.
If you look at the record of global economists, they’ve been consistently wrong on the market and on the economy. At least in the United States, 95% of the economists surveyed have said at the start of each of the last five years that interest rates are going to end the year higher. Although they have been wrong each year, people keep listening to them. And when it comes to bankers, consider this: I went to Harvard Business school. The top students there went to firms like McKinsey, Boston Consulting or to the top Hedge Funds. So where did the graduates go who couldn’t get the top jobs? They went to the banks. So what you end up with is people just as greedy but not as smart.
The Fed already blinked at the September meeting. Why are they so hesitant to make a move?
]If the economy continues to slow down going into an election year, the Fed will be under tremendous pressure to do something. They will not let the economy and the stock market slump. That’s why I think there will be further easing.
Why are today’s stock markets so heavily focused on monetary policy?
A simple way to look at market valuations is earnings divided by interest rates or cash flow divided by interest rates. So even if you raise interest rates only a quarter of a point that lowers the value of stocks. Also, once the Fed starts raising, it keeps raising. That decreases the attractiveness of flow trades into the stock market because now you can earn some money on your other assets. Right now, if you’re a corporation, your cash earns nothing. So you might as well use some of it to reduce your share count or to do a takeover. Both have been essential drivers of the bull market.
When it comes to the real economy, cheap central bank money seems not to be that beneficial.
Governments are creating headwinds for growth. So the best thing central banks can do to promote growth is to cut interest rates to zero or even lower. That can work for a little while. But now it’s creating a global recession because of all the excess capacities. Even if it doesn’t cost to build a new plant or drill new wells, when demand dries up you’re not making a profit. So even if interest rates are at zero you’re still losing money and you have debt on top of it. That’s why I say: Welcome to the first global recession created by central banks.’
What should investors do in this environment?
All there is in a market is transactions: In the stock market, shares are sold for money. So if you track the number of shares outstanding and the amount of money available to buy shares, you should have a good sense of the market. And then you also have to understand that in every market the house has always an edge – or else the market wouldn’t exist.
What do you mean by that?
In the stock market, the house are the companies. They started markets to raise money. So they know more than investors by definition. And if companies are shrinking their share count with buybacks or cash-takeovers I want to be buying too. On the other hand, if companies are growing their share count, I want to be selling as well.
So what are you observing right now with respect to supply and demand?
Our data shows that buybacks are still growing. Recently they have slumped somewhat but they are still much higher than share sales.
And what’s going on with regard to cash-takeovers? It looks like that 2015 will set a new record for mergers & acquisitions.
A big cash takeover boom is typically what happens when companies cannot grow internally. So how do you keep growing if demand for your product is not growing? You buy a competitor, you cut costs and you add to profits. You can always cut overhead if you buy a competitor. And you have zero interest rates, so you can buy your competitors to keep growing. But that’s not real growth. Also, this is what happens on the top of the cycle when the economy is turning weak.
Why are you so pessimistic when it comes to the economic outlook?
It’s not rosy and the main problem why sustainable economic growth is not possible is all the headwinds to growth. From the United States to Europe and Japan: Everywhere you have hostile tax policies, regulations and a lot of anti-competitiveness from existing businesses. Ontologically speaking, growth occurs when something new happens. But in the United States for example, the ratio between companies dying and starting is now on the negative side for the first time ever.
So what does all that mean for the stock market outlook?
I don’t disagree at all with anybody who says the market’s overvalued and we’re way ahead of ourselves. So ultimately there will be a major correction. But that could be years from now. Even since the Fed ended QE, the market is still up a little bit. The reason for that is that the share count keeps going down. And as long as the share count keeps dropping, I expect the stock market to keep modestly rising. And when the Fed, instead of raising interest rates, announces some form of more easing next year that’s going to pop the market again.
Paul Craig Roberts also weighs in on the phony jobs report
(courtesy Paul Craig Roberts)
Paul Craig Roberts Rages At “Another Phony Jobs Number”
The Bureau of Labor Statistics announced Friday that the US economy created 271,000 jobs in October, a number substantially in excess of the expected 175,000 to 190,000 jobs. The unexpected job gain has dropped the unemployment rate to 5 percent. These two numbers will be the focus of the financial media presstitutes.
What is wrong with these numbers? Just about everything.
First of all, 145,000 of the jobs, or 54%, are jobs arbitrarily added to the number by the birth-death model. The birth-death model provides an estimate of the net amount of unreported jobs lost to business closings and the unreported jobs created by new business openings. The model is based on a normally functioning economy unlike the one of the past seven years and thus overestimates the number of jobs from new business and underestimates the losses from closures. If we eliminate the birth-death model’s contribution, new jobs were 126,000.
Next, consider who got the 271,000 reported jobs. According to the Bureau of Labor Statistics, all of the new jobs plus some—378,000—went to those 55 years of age and older. However, males in the prime working age, 25 to 54 years of age, lost 119,000 jobs. What seems to have happened is thatfull time jobs were replaced with part time jobs for retirees. Multiple job holders increased by 109,000 in October, an indication that people who lost full time jobs had to take two or more part time jobs in order to make ends meet.
Now assume the 271,000 reported jobs in October is the real number, and not 126,000 or less, where are those jobs? According to the BLS not a single one is in manufacturing. The jobs are in personal services, mainly lowly paid jobs such as retail clerks, ambulatory health care service jobs, temporary help, and waitresses and bartenders.
For example, the BLS reports 44,000 new retail trade jobs, a questionable number in light of sluggish real retail sales. Possibly what is happening is that stores are turning a smaller number of full time jobs into a larger number of part time jobs in order to avoid benefit costs associated with full time workers.
The new reported jobs are essentially Third World type of jobs that do not produce sufficient income to form a household and do not produce exportable goods and services to help to bring down the large US trade deficit resulting from jobs offshoring.
The problem with the 5% unemployment rate is that it does not include any discouraged workers. When discouraged workers—those who have ceased looking for a job because there are no jobs to be found—are included the unemployment rate is about 23%.
Another problem with the 5% number is that it suggests full employment. Yet the labor force participation rate remains at a low point. Normally during a real economic recovery, people enter the labor force and the participation rate rises.
The bullion banks acting as agents of the Federal Reserve used the phony jobs number to launch another attack on gold and silver bullion, dumping uncovered shorts into the futures market. The strong jobs number provides cover for the naked shorts, because it implies an interest rate hike and movement out of bullion into interest bearing assets.
If the US economy were actually in economic recovery, would half of the 25-year-old population be living with parents? The real job situation is so poor that young people are unable to form households.
The former comptroller of the uSA now states that the true USA debt is 65 trillion and not 18 trillion due to the massive unfunded liabilities.
“US Debt Is 3 Times More Than You Think” Warns Former Chief US Accountant
In a shocking admission for most of mainstream America, the former U.S. comptroller general says the real U.S. debt is closer to about $65 trillion than the oft-cited figure of $18 trillion, thanks to unfunded liabilities which simply cannot be ignored. As The Hill reports, unless economic growth accelerates, he warns, “you’re not going to be able to provide the kind of social safety net that we need in this country,” adding unequivocially that Americans have “lost touch with reality” when it comes to spending.
Dave Walker, who headed the Government Accountability Office (GAO) under Presidents Bill Clinton and George W. Bush, said when you add up all of the nation’s unfunded liabilities, the national debt is more than three times the number generally advertised.
“If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told host John Catsimatidis on “The Cats Roundtable” on New York’s AM-970 in an interview airing Sunday.
The former comptroller general, who is in charge of ensuring federal spending is fiscally responsible, said a burgeoning national debt hampers the ability of government to carry out both domestic and foreign policy initiatives.
“If you don’t keep your economy strong, and that means to be able to generate more jobs and opportunities, you’re not going to be strong internationally with regard to foreign policy, you’re not going to be able to invest what you need to invest in national defense and homeland security, and ultimately you’re not going to be able to provide the kind of social safety net that we need in this country,”he said.
He said Americans have “lost touch with reality” when it comes to spending.
Walker called for Democrats and Republicans to put aside partisan politics to come together to fix the problem.
“You can be a Democrat, you can be a Republican, you can be unaffiliated, you can be whatever you want, but your duty of loyalty needs to be to country rather than to party, and we need to solve some of the large, known, and growing problems that we have,” he said.
* * *
Of course, that is to say nothing of the other unfunded liability – America’s Pension Ponzi, as we detailed previously...
Just how big of a problem is this you ask? Well, pretty big, according to Moody’s which, as we noted last month, contends that the largest 25 public pensions are underfunded by some $2 trillion.
It’s against that backdrop that we present the following graphic and color from Goldman which together demonstrate the amount by which state and local governments would need to raise contributions to “bring plans into balance over time.”
Unfunded pension liabilities have grown substantially. There are several factors behind this, led by lower than expected investment returns and insufficient contributions from state and local governments to the plans. The two issues are related. The assumed investment return is used as a discount rate to determine the present value of liabilities. The higher the discount rate, the lower the estimated liability, and the lower the periodic payment into the fund a state or local employer is expected to make. There is, of course, no clear answer about what the discount rate ought to be, though the fact that the average assumption used by private plans has continuously declined for more than a decade suggests that the rates have probably been too high and that the current average assumption of 7.7% may come down further.
Contributions have also generally been lower than necessary to stabilize or reduce unfunded liabilities because of the rules around how those unfunded liabilities are amortized. Payments into pension plans are generally meant to account for the future cost of benefits accrued during the current year, as well as catch-up payments equal to some fraction of the unfunded liability left from prior years. Many plans target payment amounts that would work off this underfunding over 30 years, though some use shorter periods. However, the amounts of these payments are often backloaded, with the result that even if the “required” payment is made in full the unfunded liability often grows.
A separate but related issue is that some states have simply declined to make even the “required” contribution, which is probably lower than it should be in any case due to the factors just noted. For example, over the last few years New Jersey has made on average only around 40% of the expected payment. New accounting rules promulgated by the Government Accounting Standards Board (GASB) will penalize underfunded plans with a lower discount rate, but the change is fairly minor and, in any case, affects only the accounting; it will not impose any new legal requirements to make the contributions.
If state and local governments are ultimately forced to devote more resources to these obligations, the effect on state and local spending would be noticeable. Exhibit 8 shows the states’ pension contributions, as a share of gross state product, with two potential additions. The first is the level that would be required to simply meet the “actuarially required contribution.” To bring the plans back into balance over time, further contributions would be necessary. In aggregate this would raise government pension contributions by something like $100bn per year (0.6% of GDP), lowering spending in other areas (or raising taxes) by a similar amount. In theory, OPEB costs could push this adjustment a bit higher.
Financial Disaster Dead Ahead
Why won’t the American people listen to the warnings? David Stockman was a member of the U.S. House of Representatives from 1977 to 1981, and he served as the Director of the Office of Management and Budget under President Ronald Reagan from 1981 to 1985. These days, he is running a website called “Contra Corner” which I highly recommend that you check out. Stockman believes that a global “debt super-cycle” that has been building for decades is now bursting, and he is convinced that the consequences for the U.S. and for the rest of the planet will be absolutely catastrophic. His findings are very consistent with what I have been writing about on The Economic Collapse Blog, and if Stockman is correct the times ahead of us are going to be exceedingly painful.
But right now, most people don’t seem to be in the mood to listen to these types of warnings. Even though there is a mountain of evidence that the global economy has already plunged into recession, U.S. stocks had a great month in October, and so most Americans seem to think that the crisis has passed.
Of course the truth is that the stock market is not an accurate barometer of the economy and it never has been. Back in 2008, almost everything else started to go downhill before stocks did, and the same thing is happening once again. In a recent article, Stockman explained that stocks are surging to absolutely ridiculous levels even though corporate earnings are actually way down…
At this point, 75% of S&P 500 companies have reported Q3 results, and earnings are coming in at $93.80 per share on an LTM basis. That happens to be 7.4% below the peak $106 per share reported last September, and means that the market today is valuing these shrinking profits at a spritely 22.49X PE ratio.
And, yes, there is a reason for two-digit precision. It seems that in the 4th quarter of 2007 LTM earnings came in at 22.19X the S&P 500 index price. We know what happened next!
Why do so many refuse to see the parallels?
This crisis is unfolding so similarly to 2008, and yet most of the “experts” are willingly blind.
Much of the stock buying that has been happening in 2015 has been fueled by stock buybacks and by M&A (merger and acquisitions). Many firms have even been going into debt to buy back their own stocks, but now sources of financing are starting to dry up. This year we have already seen the most corporate debt downgrades since 2009, and big financial institutions are now becoming much more hesitant to loan giant stacks of cash to these large corporations at super low interest rates.
So it is very, very difficult to see how the equity markets are going to move much higher than they are right now.
Meanwhile, the global economy is starting to unravel right in front of our eyes. In his recent piece, Stockman discussed some of these data points…
In the last two days we posted the latest data on two crucial markers of global economic direction——-export shipments from Korea and export orders coming into the high performance machinery factories of Germany.
In a word, they were abysmal, and smoking gun evidence that the suzerains of Beijing have not stopped the implosion in China, and that their latest paddy wagon forays—–arresting the head of China’s third largest bank and hand-cuffing several hedge fund managers including the purported “Warren Buffett” of China—-are signs not of stabilization, but sheer desperation.
So it is not surprising that Korea’s October exports—–the first such data from anywhere in the world—were down by a whopping 16% from last year, and have now been down for 10 straight months. Needless to say, China is the number one destination for Korean exports.
Likewise, German export orders plummeted by 18% in September, and this was no one month blip.
For many more recent statistics just like these, please see my previous article entitled “18 Numbers That Scream That A Crippling Global Recession Has Arrived“.
If the global economy really was doing “just fine” as Barack Obama and others suggest, then why is the largest shipping line in the world eliminating jobs and scaling back capacity?…
A.P. Moeller-Maersk A/S is scaling back capacity and cutting jobs in the world’s largest shipping line to adapt to a drop in demand.
The Danish company, which last month lowered its profit forecast for 2015 citing a gloomier outlook for the global shipping market, will shed 4,000 jobs in its Maersk Line unit as part of a program to “simplify the organization,” it said in an e-mailed statement on Wednesday.
And why are some of the biggest banks in the western world laying off tens of thousands of workers?…
Standard Chartered Plc became the third European bank in less than two weeks to announce sweeping job cuts, bringing the total planned reductions to more than 30,000, or almost one in seven positions.
The London-based firm said Tuesday it will eliminate 15,000 jobs, or 17 percent of its workforce, as soaring bad loans in emerging markets hurt earnings. Deutsche Bank AG, based in Frankfurt, last week announced plans for 11,000 job cuts, while Credit Suisse Group AG said it would trim as many as 5,600 employees.
And if things are so great in the United States, why is Target suddenly closing stores?
We have entered a major global economic slowdown, and like usual, equity markets will be the last to get the memo.
But when they finally do react, that is likely going to greatly accelerate our problems. Just like we saw in 2008, when there is fear and panic in the financial markets that tends to cause the flow of credit to freeze up. And that is something that we simply cannot afford, because the flow of credit has become the lifeblood of the global economy.
So no, “the crisis” is not “over”.
Rather, the truth is that “the crisis” is just beginning, and it will soon be making front page headlines all over the planet.
Let us close with this offering from Greg Hunter interviewing Eric Sprott:
(courtesy Greg Hunter/USAWatchdog)
See you tomorrow night