Jan 13/Dow drops 364 points/Nasdaq drops 160 points/Tensions between Poland and the EU intensify/Crude Oil crashes below 30.00 dollars on both Brent and WTI/First it was Baltic Dry Index at record lows and now rail index at record lows/the huge USA mining giant, Freeport McMoran sees its debt at junk!!/JPMorgan’s quant specialist gives dire warning to markets/So does Jeff Gundlach/GE firing 6,500 workers from Europe/

Gold:  $1087.50 up $1.90    (comex closing time)

Silver $14.14 up 44 cents

In the access market 5:15 pm

Gold $1093.50

Silver:  $14.16

At the gold comex today,  we had a poor delivery day, registering 0 notices for nil ounces.Silver saw 0 notices for nil oz.

Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 199.63 tonnes for a loss of 103 tonnes over that period.

In silver, the open interest fell by 268 contracts down to 166,172. In ounces, the OI is still represented by .831 billion oz or 118% 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 fell by another monstrous 9979 contracts to 397,565 contracts as gold was down $11.60  in yesterday’s trading.


Today both the gold comex and the silver comex are in severe stress.

We had another addition into inventory at the GLD ( a deposit of 2.38 tonnes, / thus the inventory rests tonight at 654.06 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,/we had no changes to inventory/Inventory rests at 316.368 million oz.

First, here is an outline of what will be discussed tonight:

1. Today, we had the open interest in silver fall  by 268 contracts down to 166,172 as silver was down by  12 cents with respect to yesterday’s trading.   The total OI for gold fell by another monstrous 9,979 contracts to 397,565 contracts as  gold was down $11.60 in price yesterday

(report Harvey)

2 a) Gold trading overnight, Goldcore

(Mark OByrne)


i)Early last night

Last night, TUESDAY night, WEDNESDAY morning: Shanghai down over 2% / Hang Sang rises. The Nikkei closed strongly in the green. Chinese yuan up a bit but still they desire further  devaluation throughout this year.   Oil is up,. Stocks in Europe all  in the green. Offshore yuan trades at 6.61 yuan to the dollar vs 6.57400 for onshore yuan.  The POBC soaks up considerably off shore yuan in Hong Kong causing shortages of yuan. China reports good exports numbers which buoyed all markets.  The problem here is that the data is phony!

ii) China again is using phony data in their trade figures as exporters over invoice to show better results as well as receiving tax refunds on non existent exports:

(zero hedge)

iii) Deposit rates in Hong for yuan fall to 8% as POBC supplies badly needed liquidity.

( London`s Financial Times)


i)Tensions are mounting between the EU and the new government in Poland.  The new government wants to control the media something that the EU is totally against.  Then comes a war of words between the two.  Poland is stating that the EU wants to “occupy“ it and they bring out the NAZI card.

( zero hedge)

ii) The suicide bomber that killed many people this week in Istanbul is a Saudi born Syrian refugee:

 ( zero hedge)


i) The following commentary by William Engdahl comments on the news that Russia will now price its oil in roubles and not dollars.  He explains that this is the death of the USA petrodollar

( William Engdahl)

ii) Can ISIS gain additional power by taking control over Libya’s oil?  In a nutshell; yes!)

( Julianne Geiger/OilPrice.com)

iii) USA bombs the big Mosul bank which funded the ISIS terrorist activities:

( zero hedge)


Albert Edwards, of Soc Gen states that we are now at peak pessimism.  The devaluation of the Chinese yuan will send deflation westwards causing bourses to fall badly with their nadir at maybe P:E at 7.  This would wipe out all of Wall Street and many of Main Street.

a must read….

( Albert Edwards.Soc Generale:  zero hedge)




i) Although remote, a war between Saudi Arabia and Iran could send oil prices to 250 dollars and above especially when attacks would knock out their loading facilities:

(courtesy  James Stafford: Oil Price.com)

ii) Crude crashes again due to huge 2 week gasoline inventory build up

(zero hedge)

iii) Both Brent and WTI crash below 30.00 dollars per barrel

(courtesy zero hedge)



i)Hugo Salinas Price:

USA reserves on all central banks books have fallen in 17 weeks by 1 trillion USA dollars.  Somebody bought these bonds.

On whose balance sheet is this purchase

a great commentary

(Hugo Salinas Price:GATA)

ii) Bill Holter’s commentary tonight is entitled:

“the Chinese Silver Fox”



i) a This does not look good for the USA rails as cargo rates falter badly similar to what is going on with the Baltic Dry Index

( zero hedge)


And on the same subject as above; CSX is trouble!!

( zero hedge)

ii)  My goodness:  the giant Freeport McMoRan sees its bond rating fall to junk  A default here will cause huge problems everywhere

(zero hedge)

iii) Bellwether GE is basically stating that the global economy is in shatters: it is eliminating 6,500 jobs in Europe

( zero hedge)

iv) Last week, it was Kyle Bass that sounded the alarm bell as to what to expect in the first quarter.  Today it is Jeff Gundlach uttering his most bearish scenario as he echoes Bass:

( zero hedge:Jeff Gundlach/Doubleline)

v) The rate hike was suppose to start bringing things back to normal in the USA.  It seems the opposite is happening as the 5y5y forward interest rate swaps are plummeting signifying no inflation.  As you will recall, the Feds are desperate to create inflation so that they can survive.  Thus another policy error!!

( zero hedge)

vi) JPMorgan’s quant specialist is baaack!!!  He gives a startling warning:

( zero hedge)

vi) It now starts:  the regional bank BOK Financial a big lender to oil men in the Oklahoma area plummets today after admitting to under reserving energy losses:

( zero hedge)

vii) David Stockman and Dave Kranzler tackle the high flying Amazon:( David Stockman and Dave Kranzler)

Let us head over to the comex:

The total gold comex open interest fell to 397,565 for a loss of 9979 contracts as gold was down by $11.60 in price with respect to yesterday’s trading.   For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest:  1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month.   Today, both scenarios held. We are now in the non active January contract which saw it’s OI fall by 21 contracts to 232.  We had 0 notices filed on yesterday, so we lost 21 contracts or an additional 2100 oz will not stand for delivery in this non active delivery month of January.   The next big active delivery month is February and here the OI fell by 12,588 contracts down to 227,953. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 145,279 which is very good. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also fair at 194,287 contracts. The comex is not in backwardation in gold.

Today we had 0 notices filed for nil oz.
And now for the wild silver comex results. Silver OI fell by 268 contracts from 166440 down to 166,172 as the price of silver was down 12 cents with respect to yesterday’s trading. We are near multi year lows in silver price and yet extremely high OI which makes no sense at all.  We are now in the non active month of January saw it’s OI rise by 3 contracts up to 85. We had 0 notices filed yesterday so we gained 3 contracts or an additional 15,000 oz will stand for delivery.  The next big active contract month is March and here the OI fell by 465 contracts down to 125,739. The volume on the comex today (just comex) came in at 30,815 , which is fair. The confirmed volume yesterday (comex + globex) was also very good at 42,328. Silver is not in backwardation at the comex but is in backwardation in London. 
We had 0 notices filed for 5,000 oz.


December contract month:

INITIAL standings for January

Jan 13/2016

Withdrawals from Dealers Inventory in oz   nil
Withdrawals from Customer Inventory in oz  nil 32,150.000 oz


Deposits to the Dealer Inventory in oz  nil
Deposits to the Customer Inventory, in oz  1286.000 oz



40 kilobars

No of oz served (contracts) today 0 contract nil oz
No of oz to be served (notices) 232 contracts(23,200) oz)
Total monthly oz gold served (contracts) so far this month 1 contract (100 oz)
Total accumulative withdrawals  of gold from the Dealers inventory this month   nil
Total accumulative withdrawal of gold from the Customer inventory this month 45,356.2 oz
 Today, we had 0 dealer transactions
We had 0  customer withdrawals
Total customer withdrawals:  another of those famous kilobar withdrawals
i) From Scotia:  32150.000 oz  1000 kilobars
total customer withdrawals;  32,150.000 oz
We had 1 customer deposits:
 i) Into Delaware:  1286.000 oz  (40 kilobars)

Total customer deposits  1286.000 oz

we had no adjustments.

Here are the number of oz held by JPMorgan:

 JPMorgan has a total of 7975.14 oz or 0.2480 tonnes in its dealer or registered account.
***JPMorgan now has 401,421.339 or 12.48 tonnes in its customer account.
Today, 0 notices was issued from JPMorgan dealer account and 0 notices were issued from their client or customer account. The total of all issuance by all participants equates to 0 contracts of which 0 notices was stopped (received) by JPMorgan dealer and 0 notices were stopped (received)  by JPMorgan customer account.
To calculate the final total number of gold ounces standing for the Jan contract month, we take the total number of notices filed so far for the month (1) x 100 oz  or nil oz , to which we  add the difference between the open interest for the front month of January (232 contracts) minus the number of notices served upon today (0) x 100 oz   x 100 oz per contract equals the number of ounces standing.
Thus the initial standings for gold for the January. contract month:
No of notices served so far (1) x 100 oz  or ounces + {OI for the front month(232) minus the number of  notices served upon today (0) x 100 oz which equals 23,300 oz standing in this active delivery month of January (0.7247 TONNES)
we lost 21 contracts or 2100 oz will not stand for delivery in this non active delivery month of January.
We thus have 0.7247 tonnes of gold standing and 8.58 tonnes of registered gold for sale, waiting to serve upon those standing
Last month, at the conclusion of the December contract month, we had 6.445 tonnes of gold standing and the same 8.58 tonnes of registered (dealer) gold for sale.
No evidence of any movement out of the registered gold to settle upon longs.
Total dealer inventory 275,914.939 or 8.5820 tonnes
Total gold inventory (dealer and customer) =6,408,180.543 or 199.63 tonnes 
Several months ago the comex had 303 tonnes of total gold. Today the total inventory rests at 200.28 tonnes for a loss of 103 tonnes over that period. 
JPmorgan has only 12.73 tonnes of gold total (both dealer and customer)
And now for silver

January INITIAL standings/

Jan 13/2016:

Withdrawals from Dealers Inventory nil
Withdrawals from Customer Inventory 3,185,399.919 oz, Brinks, Delaware,CNT,Scotia
Deposits to the Dealer Inventory nil
Deposits to the Customer Inventory 23,008.27 oz


No of oz served today (contracts) 0 contracts

nil oz

No of oz to be served (notices) 85 contracts (425,000 oz)
Total monthly oz silver served (contracts) 14 contracts (70,000 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 1,981,055.3 oz

Today, we had 0 deposits into the dealer account: 

total dealer deposit;nil  oz


we had 0 dealer withdrawals:

total dealer withdrawals:  nil


we had 1 customer deposits:

i) Into Delaware: 23,008.27 oz

total customer deposits: 23,008.27 oz

We had 4 customer withdrawals:
i) Out of Brinks;  1,923,284.571 oz
ii) Out of CNT  626,227.535 oz
iii) Out of Delaware;  4944.973 oz
iv) Out of Scotia: 630,942.840 oz

total withdrawals from customer account: 3,185,399.919   oz 

 we had 0 adjustments:



The total number of notices filed today for the January contract month is represented by 1 contract for 5,000 oz. To calculate the number of silver ounces that will stand for delivery in January., we take the total number of notices filed for the month so far at (14) x 5,000 oz  = 70,000 oz to which we add the difference between the open interest for the front month of January (85) and the number of notices served upon today (0) x 5000 oz equals the number of ounces standing
Thus the initial standings for silver for the December. contract month:
13 (notices served so far)x 5000 oz +(85) { OI for front month of January ) -number of notices served upon today (0)x 5000 oz or 495,000  of silver standing for the January. contract month.
We gained 3 silver contracts or an additional 15,000 ounces will stand in this non active month of January.
Total dealer silver:  35.764 million
Total number of dealer and customer silver:   160.015 million oz
The two ETF’s that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.There is now evidence that the GLD and SLV are paper settling on the comex.***I do not think that the GLD will head to zero as we still have some GLD shareholders who think that gold is the right vehicle to be in even though they do not understand the difference between paper gold and physical gold. I can visualize demand coming to the buyers side:i) demand from paper gold shareholders ii) demand from the bankers who then redeem for gold to send this gold onto China

And now the Gold inventory at the GLD:

JAN 13.2016/another huge deposit of 2.38 tonnes in gold inventory at the GLD/Inventory rests at 654.06 tonnes

*no doubt that this would be a paper addition and not real metal.

JAN 12/no change in inventory at the GLD/Inventory rests at 651.68 tonnes

JAN  11./another 2.09 tonnes of gold addition (deposit) to the GLD/Inventory rests at 651.68 tonnes.

again, I doubt that the gold added was physical.

jan 8/another huge addition of 4.46 tonnes of gold into GLD/Inventory rests at 649.59 tonnes

  • I highly doubt that the gold added was physical. Gold is severely in backwardation in London and thus almost impossible to source in two days almost 9 tonnes of gold.

Jan 7/a huge addition of 4.16 tonnes of gold into GLD/Inventory rests at 645.13 tonnes

Jan 6/2016/we had a withdrawal of 1.6 tonnes of gold from the GLD/Inventory rests at 640.97 tonnes/

Jan 5/2016: since my last report we had a total of 3.57 tonnes of gold withdrawal from the GLD/Inventory rests at 642.37 tonnes

Jan 13.2015:  inventory rests at 654.06 tonnes

Now the SLV:
JAN 13.2016:/no change in inventory at the SLV/Inventory rests at 316.368 million oz
Jan 12.2016: no change in inventory at the SLV/Inventory rests at 316.368 million oz
JAN 11/no change in inventory at the SLV/Inventory rests at 316.368 million oz/
Jan 8/we had a huge withdrawal of 1.429 million oz of silver from the SLV/Inventory rests at 316.368 million oz
someone was in urgent need of silver tonight.
jan 7 no change in inventory/rests tonight at 317.797 million oz
Jan 6/no change in inventory/rests tonight at 317.797 million oz
Jan 5/2016: we had huge withdrawals of 4.282 million oz/Inventory rests at 317.797 million oz
Jan 13.2016: Inventory 316.368 million oz.
1. Central Fund of Canada: traded at Negative 9.3 percent to NAV usa funds and Negative 9.0% to NAV for Cdn funds!!!!!!!
Percentage of fund in gold 63.4%
Percentage of fund in silver:36.5%
cash .1%( Jan 13.2016).
2. Sprott silver fund (PSLV): Premium to NAV falls to  -0.74%!!!! NAV (Jan 13.2016) 
3. Sprott gold fund (PHYS): premium to NAV rises to- 0.44% to NAV Jan 13/2016)
Note: Sprott silver trust back  into negative territory at -.74%/Sprott physical gold trust is back into negative territory at -0.44%/Central fund of Canada’s is still in jail.

And now your overnight trading in gold and also physical stories that may interest you:

Trading in gold and silver overnight in Asia and Europe

Paper Gold: Utopia for Alchemists

John Hathaway, respected authority on the gold market and senior portfolio manager with Tocqueville Asset Management has written an excellent research paper on the fundamentals driving the gold market today.


“An acute shortage of readily marketable physical gold is developing that we believe will deepen in years to come. This possibility seems to be unrecognized by those who are short the gold market through paper contracts. The relentless dumping of synthetic or paper gold contracts since 2011 by speculators in Western financial markets has caused the shortage. The steady selling has driven down the price of physical gold, hobbled the gold-mining industry, and drained the stores of gold held in the vaults of Western financial centers …”

Veteran gold market analyst and CFA, Hathaway concludes that:

“Much of what passes for financial wealth is in our opinion imprisoned in a matrix from which there is no easy exit. The return migration of capital to real assets promises to be disruptive. The misdirection of capital could well cause losses for many but opportunity for a few. The list of opportunities is short, limited in capacity, possibly complex, and difficult to access. Among the possible opportunities, gold is accessible and straightforward. Gold has a history of responding inversely to the direction of confidence.

The pool of liquid gold to meet that need has been severely depleted.

We believe that the stage has been set for a significant repricing of gold in all currencies, including the US dollar. Ownership of physical gold outside of the financial system seems to make more sense than ever. Gold-mining equities, which have been severely depressed by the four-year decline in the gold price, should also participate. We believe that a trend reversal could prove explosive for the entire precious metals complex.”

Hathaway’s comprehensive piece is well worth taking the time to read and can be accessed here

Precious Metal Prices

13 Jan LBMA Gold Prices: USD 1,081.80, EUR 1,000.00 and GBP 749.04 per ounce
12 Jan LBMA Gold Prices: USD 1,094.95, EUR 1,008.76 and GBP 756.92 per ounce
11 Jan LBMA Gold Prices: USD 1,104.70, EUR 1,014.08 and GBP 758.18 per ounce
8 Jan LBMA Gold Prices: USD 1,097.45, EUR 1,009.86 and GBP 750.67 per ounce
7 Jan LBMA Gold Prices: USD 1,096.00, EUR 1,009.45 and GBP 752.51 per ounce

Mark O’Byrne
Very important!!
(courtesy Hugo Salinas Price)

Hugo Salinas Price: Central bank international reserves fall 8% in 17 months


9:07p ET Tuesday, January 12, 2016

Dear Friend of GATA and Gold:

Hugo Salinas Price, president of the Mexican Civic Association for Silver, reports tonight that international reserves held by central banks have fallen by $1 trillion, more than 8 percent, in 17 months, “a clear indicator of a worldwide economic slump, which will become a severe depression.”

Salinas Price asks: “What discount on the value of the bonds did the purchaser or purchasers of the bonds apply? If there was no discount, why so? One trillion dollars’ worth of government bonds has disappeared from the books of the world’s central banks, sold by them for cash. Who did the buying?

Salinas Price’s commentary is headlined “One Trillion Dollars’ Worth of Bonds Magically Turns into Cash” and it’s posted at the association’s Internet site, Plata.com, here:


CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.



a great commentary by Bill as he tries to put the pieces together on the silver mystery as to where the silver is coming from!!

(courtesy Bill Holter/Holter Sinclair collaberation)


The Chinese Silver Fox …

I recently had a long and very interesting conversation with John Embry of Sprott Resources.  It is always good to speak with him as I consider him one of the five sharpest economic/precious metals minds I know of and certainly value his opinion.  John’s name came up a couple of days ago when someone asked “where is all this silver coming from” to meet the outsized physical demand?  I said “this is the number one question John Embry and Eric Sprott have been asking for about a year now”.
  Our conversation was quite broad but let’s zero in on the “silver supply” aspect because I believe it is more important than anything else in our world today.  That is a very big statement but stay with me as you will see toward the end why I believe this.  John asked where IS all the silver coming from?   Let me first say what follows was my best educated “guess” and I know of no one who has the firm and hard answer;  I told him during the 80’s and early 90’s the amount of “scrap” could be a very logical explanation.  Then during the 90’s and early 2000’s the silver deficit could be explained by the huge amount of silver recovered from the “Manhattan Project” estimated to be nearly 1 billion ounces.  I also believe the Chinese lent somewhere around 300 million ounces of silver to the U.S. back in 2003 for a 10 year term which expired in that “magical year” 2013.  If this was true, it would explain the massive paper takedown in May of 2013 because the lease was “up”.  I believe silver had to be taken down as the price was getting away and threatening $50.  A collapsing price would allow the U.S. to say “don’t worry, you will get your silver back as we have the price under control”. 
Here is where I believe the silver to meet delivery has come from, CHINA!  But why?  First and foremost, China was a “silver nation” and had used silver as money for longer and in greater quantity than any other nation.  In other words, the silver has come from the only place it could have because China had it.  OK, but even if China was the only large stockpile, why would they “throw good money after bad” if they were already defaulted on?  I believe they wanted the crowned jewel of the West, Gold!  They had silver but the West had the gold accumulated during the 1900’s and especially after WWII.  Yes the U.S. dishoarded in the 50’s and 60’s but we did still have 8,000 plus tons left and are (were?) custodian for other Western gold holdings.  It is my contention a deal was made where silver has been supplied by China to prevent the Achilles heel (silver) from defaulting and blowing up everything.  In other words, keeping the game going for longer would allow China to accumulate gold and drain what is left, had the game blown up in 2013, China would not have had the ability to accumulate what they have since then.  Call this “dropping pennies to pick up dollars”.
  Getting back to what I said at the beginning where I said “silver is more important than anything else in the world”, please follow this through.  Silver is a very small market, some would say unimportant except for its various technological, medical, etc. uses.  However, in no way could silver’s price get away to the upside without dragging gold with it.  Were the price of gold to get away to the upside, demand would explode (particularly in China where they are known as speculators and “chasers”).  Were this to happen, the existing supply would be chewed up and the uncomfortable request “please deliver my gold” would become prevalent.  At this point the game would be over as the scam of fractional reserve gold (and silver …and everything else) would be public knowledge. 
You see, “trust” is at the heart of it all.  Our entire financial system is based on trust.  Trust in government, trust in fiat currency, trust in cross trading partners, trust in your bank or your broker… it is ALL TRUST!  What would happen to this trust if it turned out that a Ponzi scheme turned up somewhere?  Not just any Ponzi scheme like Madoff but one where the exchange itself was running a fractional reserve fraud and could not deliver?  Trust …IN EVERYTHING would fail! 
  As usual I am sure I will be trolled for the above and called an idiot but I must ask you this- If global gold supply has not met demand for 20 years or more, where can the metal have come from to meet the deficit?  The same goes for silver and even more so because the supply/demand deficit has been even more severe and longer in duration?  The answer is most obvious, the metal had to come from the only place available, above ground supplies.  For gold, that can only mean “official” stockpiles (vaults).  For silver, I believe the only large above ground stockpile left was legacy silver in China.
  Please do not point at the price and say “see, there are no shortages” as we have seen shortages, rationing and backwardation in both silver and gold over the last two years.  If you gave me 100 billion counterfeit shares of IBM I could sell whenever I wanted, I am pretty sure I could make IBM look like a falling down drunk whenever I wanted and the price would certainly be depressed!  Herein lies the fault, gold nor silver can be “printed” and when all is said and done investors holding receipts for same will be in for a very big and very bad surprise!
  To finish, if I am correct about the silver for delivery coming from the most likely of all places, China, then I believe this will be looked back on by historians as “the Chinese silver fox in the West’s golden hen house!  Am I correct?  I don’t know but we will soon see as the global paper financial edifice is quaking on its own.  John Embry told me, “of all the many theories I have heard so far, yours makes the most sense and is the most logical”.  I mentioned this topic to Jim yesterday and he told me when we first talked about it six months back he was skeptical but the more he has thought about it …the silver can ONLY be coming from where it exists…Chinese legacy silver! 
  I think China has done some very intelligent maneuvering particularly since the 2008 crisis.  They figured out our fractional reserve scheme was toast but they played along anyway.  They even levered up as much or more than we did since then.  However, with this increase in credit they have built infrastructure in the form of roads, bridges, cities, plant and equipment …all for and with future uses.  The West on the other hand has thrown a “standard of living party” and neglected infrastructure to the point of dilapidation.  Yes China’s financial system will implode with all the rest, they may even lead it!  But, they will be left with new infrastructure and “money” (our gold) to get started again.  President Xi has even said this to his people and to the world.  He said the short term would be difficult but the long term beneficial.  I think he is telling the truth!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
Comments welcome!  bholter@hotmail.com

And now your overnight WEDNESDAY morning trading in bourses, currencies, and interest rates from Europe and Asia”


1 Chinese yuan vs USA dollar/yuan rises a bit in value , this  time to  6.5740/ Shanghai bourse: in the red  , hang sang: green

2 Nikkei closed up 496.67  or 2.88% 

3. Europe stocks up on Yen rise /USA dollar index up to 99.23/Euro down to 1.0826

3b Japan 10 year bond yield: falls to .212   !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 118.18

3c Nikkei now just above 18,000

3d USA/Yen rate now well below the important 120 barrier this morning

3e WTI: 31.12  and Brent:   31.50 

3f Gold down  /Yen down

3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.

Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.

3h Oil down for WTI and up for Brent this morning

3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund rises  to  .596%   German bunds in negative yields from 5 years out

 Greece  sees its 2 year rate fall to 8.40%/:  still expect continual bank runs on Greek banks 

3j Greek 10 year bond yield falls to  : 8.36%  (yield curve flat to inverted)

3k Gold at $1082.90/silver $13.82 (7:45 am est)

3l USA vs Russian rouble; (Russian rouble up 61/100 in  roubles/dollar) 76.35

3m oil into the 31 dollar handle for WTI and 31 handle for Brent/

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 1.0075 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0903 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/arrests 10 traders for Euribor manipulation

3r the 5 year German bund now  in negative territory with the 10 year rises to  + .596%/German 6 year rate negative%!!!

3s The ELA at  75.8 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 2.13% early this morning. Thirty year rate  at 2.90% /POLICY ERROR

Overnight rate: 0.19%  (policy error)

5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.

(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)

Global Stocks Rebound As Fears Of Chinese Hard-Landing Pushed Back On Strong Trade Data

After two months of sharp currency devaluation, the market was carefully watching last night’s China trade data to see if the Yuan debasement had led to a positive trade outcome to the world’s second largest economy, and as reported last night, it was not disappointed when China reported a December trade surplus of $60.09 billion from $54.1 billion in November, as a result of exports beating expectations and rising 2.3%, the first increase since June, while imports declined by just 4%, the smallest drop since 2014 despite China importing a record amount of oil, or 33.2 million tons, ostensibly to take advantage of low oil prices and fill up its strategic petroleum reserves.

“The market was pricing a hard-landing in China and with the latest trade data and the central bank’s effort to prop up the currency, those fears seem to have been overblown,” Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen, told Bloomberg. “Now we’re probably going to see the market go the other way. Stocks that have taken the biggest hit are those related to energy. It makes sense that they rebound the most.”

Naturally, this being China, one can be confident that the true data has been dramatically “massaged”, something promptly suggested by Guosen Securities which said the December trade balance improvement came with big drop in FX reserves, indicating some “fake trades” for arbitrage purposes.

However, for now the market is happy that not only has China managed to fully dominate the offshore Yuan market where it can now control liquidity, and thus pricing, at will, but also released a favorable trade report, and as a result risk assets across the globe, as well as commodities, are solidly bid as seen below.

Market Wrap

  • S&P 500 futures up 0.6% to 1937
  • FTSE 100 up 1.1% to 5995
  • DAX up 1.3% to 10112
  • German 10Yr yield up 6bps to 0.59%
  • Italian 10Yr yield down 2bps to 1.59%
  • Spanish 10Yr yield down 3bps to 1.8%
  • MSCI Asia Pacific up 1.9% to 123
  • Nikkei 225 up 2.9% to 17716
  • Hang Seng up 1.1% to 19935
  • Shanghai Composite down 2.4% to 2950
  • US 10-yr yield up 3bps to 2.14%
  • Dollar Index up 0.26% to 99.23
  • WTI Crude futures up 2.4% to $31.18
  • Brent Futures up 2.5% to $31.63
  • Gold spot down 0.5% to $1,081
  • Silver spot up 0.3% to $13.82

European shares advanced for a second day and Asian stocks rebounded from a three-year low, while Emerging-market equities rose the most in three following a sharp selloff to start the year which erased more than $5 trillion from global equity values.

Asian stocks rose for the first time in 2016, ending a 7-day stretch of declines, the longest since August. The MSCI Asia Pacific Index jumped as much as 2.1 percent while Japan’s the Nikkei, after wiping out all of its gains for 2015, was up 2.9% overnight its best gain in 4 months, although curiously it was China’s own Shanghai Composite which after rising 1.2% before closing down 2.4%, below 3,000 for the first time since mid-2015, as hopes of an aggressive market stimulus fade.

Elsewhere, the Bloomberg Commodity Index, a gauge of returns on raw materials that touched its lowest level on record on Tuesday, rose as U.S. oil futures halted the longest run of losses in 18 months: crude oil’s bounce from below $30 has helped the gauge. Yesterday it fell as low as $29.93, a level not seen since November 2003. Citigroup says the world is now “confronting $20 oil.” The Bloomberg Commodities Index has sunk 5 percent in 2016, heading for a sixth year of declines, a record losing streak. The gain buoyed the ruble, which climbed for the first time in five days, and the rand. Bonds fell amid sales in the U.S. and Europe.

Looking at regional markets, starting with Asia stocks here traded higher following the positive close on Wall St. as stock markets rebounded from the recent slump, with sentiment supported by better than expected Chinese trade data, whilst the CNH overnight interbank rate fell to 8.3%. ASX 200 (+1.3%) was lifted by the energy sector amid bargain buying as crude prices recovered having briefly declined below USD 30/bbl for the 1st time since 2003, while the Nikkei 225 (+2.9%) outperformed with broad based gains as exporters were underpinned by a weaker JPY. Hang Seng (+2.3%) led by gains in casino names, while the Shanghai Comp (-2.4%) initially benefited following encouraging trade figures where Chinese exports posted an unexpected increase, but then sold off towards the end of session. 10yr JGBs gained despite increased demand for riskier assets, with support seen following a well-received 10yr inflation-linked bond auction which saw an increase in b/c and with only 21 % of the issuance allocated at the lowest prices vs. Prev. 97%.

Top Asian News

  • China Trade Surplus Swells as Exports Rise in Boost for Yuan: Nation’s Dec. trade surplus $60.09b vs est. $51.3b surplus
  • Offshore Yuan Set for Record Five-Day Gain as China Curbs Supply: Regulator said to ask onshore lenders to limit outflows
  • Hong Kong’s Leung to Lift Public Housing as Prices too High: Govt 5-yr target raised to 97,100 new homes
  • Sumitomo Withdraws Forecasts After 77 Billion Yen Charge: Warns that further impairments are possible after slump
  • Rajan to Staff: Read, Get Tough, Send Press Releases Earlier: Calls for debate on “protectionist attitudes”

Commodities appear to be guiding much of the European equity sentiment once again today with equities residing in a sea of green today (Euro Stoxx: +1.6%) as energy and material names lead the way higher. This comes amid a rebound, albeit a relatively modest one, in the commodity complex, whereby WTI resides in positive territory bouncing back above USD 30/bbl after a brief break overnight.

In line with the upside seen in equities, Bunds did see initial weakness today, however it is worth noting that Bunds have come off their worst levels heading into the North American crossover and trade relatively flat on the day, despite a technically uncovered Bund auction. Whilst also of note, 2s/10s have been in a fairly tight range all week however the Bund swap spread has tightened today alongside the supply due out today, including the Belgian 10Y syndication as well as supply out of Italy.

Top European News

  • Telefonica to Pay $2.61b for Spanish Soccer Rights: Provides co.’s pay-TV service sports telecasts its competitors already have
  • Aegon Plans $432m Share Buyback, Cost Cutting in U.S.: Seeks return on equity of 10%
  • CGG to Sell New Shares at 72% Discount to Fund Turnaround Plan: Oil surveyor seeks EU350m in sale ending Jan. 27
  • Shire Will Continue Seeking M&A, Business Development Opportunities: Shire’s next transactions likely to be smaller
  • Sainsbury Holiday Sales Meet Estimates on Non-Food Revenue: Forecasts improvement in second-half results

In FX, the yuan strengthened in Hong Kong’s offshore market, headed for the biggest five-day advance on record after China intervened to support the currency. In Shanghai, it was little changed. The central bank kept its yuan reference rate almost unchanged for the fourth day in a row, helping calm investor nerves after an eight-day run of weaker fixings through Jan. 7 heightened concern about the severity of a slowdown in the world’s second-biggest economy.

Japan’s currency, which has benefited from demand for haven assets this year, dropped 0.6 percent to 118.30 per dollar. High-yielding currencies gained, with the Australian and New Zealand dollars strengthening at least 0.4 percent. The rand, which tumbled to a record low at the beginning of the week, rallied 1.1 percent.

Higher crude prices supported the ringgit, which gained 0.6 percent. Malaysia is Asia’s only major net oil exporter.

“We’ve seen some stability in the U.S. and other markets but sentiment will really depend on what’s happening in China with regard to the direction of their currency and economic data,” James Lindsay, an Auckland-based fund manager at Nikko Asset
Management Co., which manages $160 billion globally, said by phone. “If we see
continued weakness in the yuan, that will have a huge flow-on effect for the
rest of the world.”

In Commodities, the Bloomberg Commodity Index rose 0.4 percent, recovering after falling to the lowest since at least 1991 on Tuesday on a glut in raw materials including natural gas and nickel.

Oil bounced back after tumbling below $30 a barrel for the first time in 12 years. West Texas Intermediate was on course to end the longest run of declines since July 2014, climbing 2 percent to $31.06 a barrel. It fell as low as $29.93 a barrel on Tuesday. U.S. inventories probably rose by 2 million barrels through Jan. 8, according to a Bloomberg survey before an Energy Information Administration report.

Copper led industrial metals higher on China’s trade data. The metal, used in power cables, rose 0.8 percent to $4,386 a metric ton on the London Metal Exchange. Gold for immediate delivery dipped 0.4 percent to $1,081.83 an ounce.

“Prices were boosted by Chinese exports that were better than expected,” said Jia Zheng, a senior analyst with East China Futures Co. in Shanghai. The rebound will probably prove short-lived as demand remains weak in China, forcing some fabricators to suspend production before the Lunar New Year holiday in February, she said.

Top Global News

  • MetLife Weighs IPO of U.S. Retail as CEO Seeks to Cut Oversight: New company will have $240b in assets
  • GE Plans to Cut 6,500 Jobs in Europe After Alstom Purchase: Cuts include 765 positions in France, 1,700 in Germany
  • Ford Shares Slump on Profit Forecast Despite Special Dividend: Automaker declares supplemental payout of $1b
  • Obama’s State of the Union Optimism at Odds With Voter Anxiety: Draws stark contrast with Republican frontrunners
  • CSX Says Profit May Drop in 2016 as Cargo Decline Continues: Railroad says weakness in freight shipping to continue in 2016
  • Google Seeks Multiple Auto Partners for Self-Driving Car Unit: Wants to begin announcing some joint efforts this year
  • Volkswagen Fix Rejected by California Regulator as Setbacks Grow: Automaker turned down by state before CEO meets with EPA
  • Anthem Wants $3 Billion of Drug Savings From Express Scripts: Most pharmaceutical savings will go to clients, CEO says
  • Global PC Shipments Fall to Lowest Since 2008, Gartner Says: Researchers forecast smaller decline in 2016 shipments
  • KKR Holds Most Cash Since 2011 as Risks in Stocks Increases: Recommends clients hold 7% of their assets in cash
  • Buffett’s Clayton Should Be Probed Over Lending, Lawmakers Say: Newspaper article alleged higher loan rates for minorities
  • Fed Needs to Tread Carefully to Avoid Rate Reversal, HSBC Says: Says global economy still suffering from “intense” deflationary problems
  • Iran Guards Say Will Question U.S. Sailors Before Release: U.S. sailors were detained in the Persian Gulf Tuesday

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Commodities are guiding much of the sentiment once again today with equities residing in a sea of green (Euro Stoxx: +1.6%) as energy and material names lead the way higher
  • Despite ongoing concerns over China and global growth in general, all markets are enjoying a period of stability at the present time, though we would not quite call it risk on!
  • Looking ahead, highlights include US DOE Crude Oil Inventories and US Federal Reserve Releases Beige Book
  • Treasuries decline amid rally in global stocks and commodities. Week’s auctions continue with $21b 10Y, WI yield 2.13% vs 2.233% in Dec.; AB InBev jumbo offering could come today, size seen around $25b.
  • AB InBev and MillerCoor have watched their popularity slowly erode over the last decade. Their plans to stem the tide include marketing to a generation notoriously resistant to efforts at being won over
  • The best-performing U.S. stocks right now are ones that usually do well when the economy isn’t, makers of everything from household cleaning products to food. It’s yet another black cloud for investors fretting over a growth slowdown.
  • Obama’s final State of the Union speech, with its echoes of the optimistic tone and unifying vision of his 2004 convention speech, served as a stark reminder of how his promises of unity have fallen short
  • Iran’s detention of 10 U.S. sailors hours before the speech — which Obama didn’t mention — provided a disquieting note and a reminder of public anxiety over terrorism and threats abroad; the sailors have since been released
  • Merkel is being drawn deeper into the Middle East’s turmoil with the suspected suicide bombing that killed at least eight Germans in Istanbul, her country’s biggest death toll in a terror attack in almost 14 years
  • China’s trade balance widened to $60b, taking the full-year tally to $594.5b, helping offset capital outflows that have pressured the yuan
  • Brazil’s retail sales unexpectedly rose in November by the most in a year, as shoppers shrugged off accelerating inflation and took advantage of holiday discounts
  • Sovereign bond yields lower. Asian stocks higher with the exception of China, European stocks gain, equity-index futures higher. Crude oil, copper and gold rise


DB’s Jim Reid completes the overnight wrap


Markets this year are certainly not levitating calmly above the ground in a state of suspended animation. Yesterday saw a momentous fall below $30/bbl for WTI Oil for the first time since December 2003 which makes it -17% YTD.

Prices did recover slightly at the close but WTI still finished the session with a -3.09% decline to settle at $30.44/bbl. Reports of a bombing in Istanbul and comments from Nigeria’s Oil Minister suggesting that a few OPEC member countries wanted to request an emergency meeting actually saw the price go above $32 in the early afternoon before the comments were quickly downplayed by his counterpart in the UAE who said that the cartel will not change its policy despite the latest price collapse. Yesterday saw more evidence of pain at a micro level however after BP announced that it plans to cut 4,000 jobs, while Petrobras announced that it will slash its five-year investment plan by over $30bn. With much of the chatter suggesting that Oil could fall closer to the $20 level, it was noted in the WSJ that some heavier grade Oils from Canada and Iraq are already trading in the teens.

Risk assets trended lower with those moves in Oil, although a strong start for equities in particular helped softened the blow. European equities closed well off their highs but the Stoxx 600 (+0.88%) closed in positive territory for just the second time this year. It was a more roundabout session across the pond where the S&P 500 initially rallied over a percent in early trading, before the leg lower in Oil saw the index fall to -0.5%, only to then once again stage a late rally into the close and finish up +0.78% by the closing bell. US HY Energy spreads leaked +26bps wider by the end of play and at 1,446bps are now at record wides. That’s 67bps wider than where we closed 2015 and 25bps wider than the wides we made last month. Meanwhile the rout in Oil did weigh on metals markets although the moves were less severe. Copper, Zinc and Aluminium closed -0.80%, -0.94% and -0.68% respectively. Treasury yields plunged lower with the 10y yield in particularly finishing -7.2bps lower at 2.103% which is now the lowest since late October.

Oil is now down 50% from its peak in June last year, or over 70% from the highs of June 2014. The other major plunging market is Chinese equities with the Shanghai Comp down 42% since its highs in June last year. Given the recent renewed weakness we thought we’d update the graph we first published back in June comparing the NASDAQ around 2000 with Chinese equities today. The similarities continue. Both saw an initial sharp 2-3 month fall from their peaks followed by a quarter or so of stability . The NASDAQ  then started to fall sharply again and Chinese equities seem to have started a similar trend on a similar timeline. While it’s hard to read too much into such a chart’s predictive power, it’s a reminder that when bubbles pop they can pop hard and carry on falling for some time. Both Oil and Chinese equities are currently victims of such a trend.

Speaking of China, this morning has seen the latest trade numbers released with the data making for surprisingly better than expected reading. In Yuan terms, exports were up +2.3% yoy in December (vs. -4.1% expected) from – 3.7% in November. It was the first positive reading since June last year. Imports printed at -4.0% yoy (vs. -7.9% expected) from -5.6% the prior month. It was a similar story in USD terms with exports rising to -1.4% yoy (vs. -8.0% expected) from -6.8%, while imports (-7.6% yoy vs. -11.0% expected) were down less than expected. With the currency front and centre at the moment, that data will likely provide a lift to the PBoC. Speaking of which, the CNY fix was again set unchanged this morning, with moves in the onshore and offshore currencies a lot more subdued relative to recent days (the overnight CNH HIBOR is back down to 8% after two days of massive moves higher).

Chinese bourses are little changed at the break after initially opening firmer with the Shanghai Comp and CSI 300 -0.01% and +0.17% respectively. Elsewhere, that late rebound in Wall Street appears to be setting the tone for a better session this morning. The Nikkei (+2.47%), Hang Seng (+2.38%), Kospi (+1.23%) and ASX (+1.10%) all posting decent gains. A rebound for WTI (+1.45%) is also helping sentiment, while credit indices are 2-3bps tighter.

Aside from the focus on the rout in commodities and events in China, there wasn’t too much else to report yesterday. The largely secondary economic data out of the US did little to move the dial. The December NFIB small business optimism reading rose 0.4pts to 95.2 (vs. 95.0 expected) but still remains well below the post recession peak of 100.4 made back in December 2014. More encouraging perhaps, the details revealed that the net percent of firms planning to raise worker compensation remained elevated at 20% for the second consecutive month which is the highest since November 2006. The January IBD/TIPP economic optimism index edged up 0.1pts to 47.3 (vs. 47.5). Meanwhile the JOLTS job opening report for November revealed an 82k increase in the number of openings from the prior month to 5.43m (vs. 5.45m expected). In the details both the quits and hiring rates held steady at 2% and 3.6% respectively, the latter steady for the fifth consecutive month.

Here in the UK we saw the Pound fall to the lowest level versus the US Dollar since June 2010 yesterday following some soft industrial and manufacturing production numbers. Industrial production fell -0.7% mom in November (vs. 0.0% expected), dragging the YoY reading down eight-tenths to +0.9%. Manufacturing production also missed (-0.4% mom vs. +0.1% expected) during the month with the YoY rate now standing at -1.2%.

In terms of the day ahead, the early data release this morning is out of France where we will get the December inflation numbers. This will be followed by the November industrial production reading for the Euro area where the recent country reports are pointing towards a negative monthly reading. Over in the US this afternoon the only data of note is the December Monthly Budget Statement while in the evening we’ll get the Fed’s Beige Book. Elsewhere we’ll hear from the Fed’s Rosengren (due at 1.20pm GMT) who is due to give his economic outlook, while the Fed’s Evans (due at 5.30pm GMT) will shortly follow this when he is due to provide his own comments around the economic outlook.


let us begin:


Last night, TUESDAY night, WEDNESDAY morning: Shanghai down over 2% / Hang Sang rises. The Nikkei closed strongly in the green. Chinese yuan up a bit but still they desire further  devaluation throughout this year.   Oil is up,. Stocks in Europe all  in the green. Offshore yuan trades at 6.5749 yuan to the dollar vs 6.57400 for onshore yuan.  The POBC soaks up considerably off shore yuan in Hong Kong causing shortages of yuan. China reports good exports numbers which buoyed all markets



(courtesy Reuters)

Markets | Wed Jan 13, 2016 7:40am EST

China trade surprise brings relief; oil jumps



China again is using phony data in their trade figures as exporters over invoice to show better results as well as receiving tax refunds on non existent exports:


(zero hedge)



About That “Surging” Chinese Trade Data, There Is Just One Thing…

While Chinese New Year seasonals are undoubtedly one factor in last night’s “surprisingly good” Chinese trade data, the following chart shows the level of “bullshit factor” was extreme by anyone’s measure.Three years ago we first brought China’s ‘fake’ trade data and abundant discrepancies to the public’s attention and despite an apparent crackdown by regulators, the gaping difference between imports from Hong Kong and exports to Hong Kong is downright embarrassing for China’s SAFE as it is clear that capital outflows are being disguised as exports with “over-invoicing” back in play.

Last night, China unveiled the following double-rainbow of better-than-expected trade data with Exports shockingly positive YoY (smashing expectations of a furtther collapse)…

Chinese New Year seasonals (export-boosting into year-end) and despite China importing a record amount of oil, or 33.2 million tons, the trade surplus apparently surged and everything is proved awesome in China.

But, as we initially explained in 2013, one reason for the “surge” in recent data may be the demand of the new Politburo to telegraph that all is well following the recent turmoil since the magnitude of the surprise beat  could indicate exporters’ rush to finish year-end orders and government pressure to report exports before the end of the year to reach the government’s growth target.

However, possible explanation for how Chinese companies are cooking their export books comes from none other than Goldman:

“It is possible that local governments may have tried to boost exports data by either making round trips in special trade zones” or by exporting “earlier than otherwise in an attempt to improve the annual exports data,” Goldman Sachs’ Beijing- based economists Yu Song and Yin Zhang wrote the same day.


Rushed shipments and even faked exports to secure tax refunds may have contributed to the stronger growth data, according to Alistair Thornton and Ren Xianfang, Beijing-based analysts at IHS Inc.


Some trading companies are turning to transportation providers like Shenzhen Global Express Logistics Ltd. for help in shipping goods through so-called bonded zones to claim export tax rebates or charge higher import prices for goods without them physically leaving the country. Shenzhen Global offers customs clearing and other freight services including a “one-day tour,” Lin Yongtai, a manager with the company in the city bordering Hong Kong, said in a telephone interview.


For a fee of 1,000 yuan ($161) per vehicle per day, the company will drive trucks into warehouses in bonded zones, where cargo must clear customs, so that businesses can obtain a refund of value-added tax on the “export” of their products or boost sale prices for goods that carry the cachet of being imported.


“A poor villager can boast he has thousands of yuan of turnover every day, but people later discover he only has one bull — he takes the bull out every morning and brings it back every evening,” Lin said. “The same applies to some parts of China’s foreign trade.

Of course, there is also the simple test of matching one country’s exports to another one’s imports (after all, it is a closed loop).

To wit… The massive over-invoicing “Exports” to HK relative to the smooth HK “Imports” from China…


Once more, it appears that China is literally pulling numbers out of thin air:

UBS economists led by Hong Kong-based Wang Tao pointed to a “quite obvious discrepancy” in the growth of China’s exports to Taiwan and South Korea and those economies’ reported imports from China in recent months, even as historically they have tracked each other well.

Finally, that China is openly making up numbers is no surprise: it will continue doing that until, like everywhere else, the discrepancy between perception and reality (usually manifested in the case of China by a lot of angry people breaking something or simply rioting) becomes too glaring for even the most optimistically inclined to ignore.

As Sean Corrigan noted…As Sean Corrigan noted…

Simply put, in a market that hangs on to every piece of good news like a drowning meth addict clutching at the tiniest of straws, the “over-invoicing” will continue until morale improves and optimism becomes self-fulfilling… except that has never, ever worked.

Deposit rates in Hong for yuan fall to 8% as POBC supplies badly needed liquidity.
(courtesy London`s Financial Times)

January 13, 2016 12:03 pm

(courtesy Jennifer Hughes/Patrick McGee/Hong Kong)

Renminbi borrowing rate plunges in Hong Kong


China eased its purchases of offshore renminbi on Wednesday after succeeding in eliminating

the gap between onshore and offshore exchange rates:


The spread between the tightly controlled onshore USA dollar rate for the renminbi and the rate offshore

widened to a record of more than 2 percent last week, as international investors bet the renminbi would weaken far more sharply than he People’s Bank of China would like>


The offshore renminbi strengthened on Wednesday, pushing the dollar back to Rmb6.5749. Onshore the currency traded at Rmb6.5775 to the dollar after the PBoC fixed the midpoint around which it allows the onshore rate to trade at a steady rate for the fourth consecutive day.

A byproduct of the PBoC’s attempts to stem the speculation by intervention was a spike this week to a record high of 66.8 per cent for the overnight CNH Hong Kong Interbank Offer Rate (Hibor), the cost of borrowing the currency in the territory.

On Wednesday, Hibor plummeted to 8.3 per cent as liquidity returned to the market when the PBoC stepped back and the Hong Kong Monetary Authority, the de facto central bank, continued injecting support to banks.

Wild swings in Hibor show how volatility in China’s currency — once a highly domestic sideshow for global investors — is fanning out across the globe through renminbi internationalisation. Hong Kong, the biggest offshore market, bears the brunt.

Markets globally have suffered one of the worst starts to the year, largely triggered by fears over the speed of China’s economic slowdown — reflected in a weaker currency — which has depressed prices from oil to US stocks.

Traders said the Hibor spike succeeded in rattling hedge funds and others betting on a weaker renminbi by sharply raising the risk of the trades, since closing positions involves buying back the currency.

“We believe China is sending a strong message to speculators and trying to stabilise renminbi depreciation expectations,” said Joey Chew, Asian currency strategist at HSBC.

The Hong Kong Monetary Authority said that banks had made greater use of its renminbi liquidity facilities in recent days as demand for the currency rose. The HKMA has also encouraged banks to “make better use of available [offshore renminbi] positions and deploy them in the market”, it said.

The relative forex stability failed to translate to China’s stock markets, however, with a late sell-off erasing gains and taking the Shanghai Composite down 2.4 per cent by the close. The Shenzhen Composite fell 3.5 per cent.

The recent spike in short-term borrowing rates also highlighted to investors the somewhat limited liquidity in the offshore renminbi market — which means that although the PBoC does not have the direct control that it does onshore, it is relatively easy to move prices sharply.

Renminbi-denominated deposit rates in Hong Kong have been rising for some time, suggesting liquidity was already tightening in the currency’s biggest offshore market even before the PBoC’s apparent intervention.

Hong Kong banks have offered an average rate just above 3.5 per cent so far this year, compared with an average 3.25 per cent in December, according to analysis by Nomura.




Tensions are mounting between the EU and the new government in Poland.  The new government wants to control the media something that the EU is totally against.  Then comes a war of words between the two.  Poland is stating that the EU wants to “occupy“ it and they bring out the NAZI card.


(courtesy zero hedge)


After Poland Compares EU To Nazis, Brussels Launches “Unprecedented” Review Of Polish Media Laws

Relations between Poland the EU are deteriorating rapidly on the heels of President Andrzej Duda’s move to approve new laws that allow the conservative (and eurosceptic) Law and Justice (PiS) government to name the chiefs of public TV and radio, and select judges for Poland’s constitutional court.

Over the weekend, we highlighted a letter from Polish minister Zbigniew Ziobro to EU commissioner Gunther Oettinger in which Ziobro dismissed criticism of the new laws as “silly.” He went on to suggest that perhaps the Germans should focus on their own domestic issues.

Such words, said by a German politician, cause the worst of connotations among Poles. Also in me. I’m a grandson of a Polish officer, who during World War II fought in the underground National Army with ‘German supervision’,” Ziobro wrote, before saying he has come “to a sad conclusion that it is easier for you to talk about fictitious threats to media freedom in other countries than to condemn censorship in your homeland.” That’s an apparent reference to the coverup of the sexual assaults that occurred in Cologne on New Year’s Eve.

Finally, assuring that diplomacy between the two nations will remain impaired for the foreseeable future, the front page of the Polish Wprost weekly, one of the more popular media outlets in the country, showed the following picture of Merkel, and the EU Commission cronies Juncker, Oettinger and Schultz, with the title “They want to supervise Poland again.” Which, as Reuters explains, means “occupy.”

Now that the Nazi card has been played it’s time for the EU to hit back. “Poland’s legal maneuvers have prompted escalating warnings from the EC that it could intervene. The EC’s vice president, Frans Timmermans, sent two letters asking Polish authorities for information,” Deutsche Welle wrote on Tuesday noting that “the queries infuriated Poland’s Justice Minister Zbigniew Ziobro, who said Tuesday he was ‘astonished’ by Timmermans’ request, slamming it as ‘an attempt to exert pressure upon the democratically elected’ parliament and government of a sovereign state.”

“You had the possibility to receive from me the competent information regarding this issue … using routine working contacts … I deplore the fact that you decided not to do so. Thus, I first found out about your unjustified accusations and unfair conclusions from the media,” Ziobro seethed.

Well if Ziobro was angry before, he’s furious now because Brussels has taken it a step further. “The European Commission has opened an unprecedented inquiry into whether new Polish laws break EU democracy rules,” BBC reports. Under the so-called “rule of law” mechanism the Commission can force a member state to change any measure that poses a “systemic threat” to fundamental EU values.

Polish PM Beata Szydlo is having none of it. “Democracy is alive and well in Poland,” she told the Polish parliament on Wednesday.

“The Commission has no right to evaluate changles to Poland’s public media law,” Foreign minister Witold Waszczykowski told Reuters.

Here are the bullet points on the procedure courtesy of BBC:

  • EU introduced mechanism in 2014 to protect fundamental values
  • Activated by “systemic breakdown” affecting proper functioning of state’s institutions and mechanisms
  • Three-stage process: Commission assessment and opinion, recommendation of action with time limit and then potential resort to Article 7 of Lisbon Treaty
  • Article 7 can mean suspension of state’s voting rights in EU Council, where ministers from 28 states shape EU policy

And here’s a bit more color:

The Polish prime minister told MPs she would defend Poland in a European Parliament debate next week and represent the whole of parliament and society.


Four channel directors at broadcaster TVP resigned earlier this month in protest at the government’s media laws, which place public radio and TV under a new national media council. That change gives the treasury minister the right to hire and fire management.


Most Poles watch or listen to the public TVP channels and one minister has accused news channel TVP Info of broadcasting propaganda for years.


Shortly before the measures came into effect, another law was signed off requiring most rulings by Poland’s 15-member Constitutional Court to have a two-thirds majority with at least 13 members present. The ruling party put forward five names to the court, which then appointed two as judges.


Thousands of Poles have protested against the changes in recent weeks in Warsaw, Poznan, Wroclaw and Krakow.


What’s next you ask? Well, here’s the EU Commission itself to explain:

A reply to the letter of First Vice-President Timmermans on the media law was received on 7 January and on 11 January on the Constitutional Tribunal reform. On the Constitutional Court reform, the Commission is cooperating with the Council of Europe Venice Commission, which is preparing an Opinion on the matter.


Under the Rule of Law Framework, the Commission enters into a structured and cooperative exchange with the Polish authorities in order to collect and examine all relevant information to assess whether there are clear indications of a systemic threat to the rule of law.


Following today’s orientation debate, the College mandated First Vice-President Timmermans to send a letter to the Polish government in order to start the structured dialogue under the Rule of Law Framework. The College agreed to come back to the matter by mid-March, in close cooperation with the Venice Commission.

Ultimately the question is whether Poland’s new laws represent an illegitimate an intolerable attempt to bring the media under state control or whether the inquiry is just another example of Berlin and Brussels attempting to impose their will by decree.

One thing is certain: this will do nothing to ease tensions in the bloc where the worsening migrant crisis and subsquent attempt to address it with a controversial quota system has already created quite a bit of animosity and suspicion towards the German government and the eurocrats tin Brussels.


The suicide bomber that killed many people this week in Istanbul is a Saudi born Syrian refugee:
(courtesy zero hedge)

Turkey Suicide Bomber Identified As Saudi-Born, Syrian Refugee

On Tuesday, a suicide bomber detonated in Istanbul’s Sultanahmet Square outside the city’s Blue Mosque killing ten German citizens and injuring dozens.

Graphic images began to surface immediately on social media including the following two visuals which depict the moment of the explosion and the immediate aftermath:

There was little question that ISIS would be blamed. The PKK has largely eschewed civilian attacks of late, preferring instead to fight the army directly in the southeast.

Sure enough, just a little over an hour after the blast, security authorities said an Islamic State-linked suicide bomber was behind the explosion. Just 45 minutes later, Erdogan said the attacker was “of Syrian origin.”

On Wednesday we learn that the attacker was one Nabil Fadli, a Syrian national born in (surprise!) Saudi Arabia in 1988. Fadli was fingerprinted in Turkey just last week while registering as a refugee.

“Mr. Fadli’s apparent ability to enter Turkey, register with immigration officials and carry out the attack without triggering any international terror alerts is likely to fuel concerns that Islamic State extremists are exploiting the migrant crisis to sneak across borders to stage attacks,” WSJ writes. “When he was fingerprinted, Mr. Fadli said he had been smuggled into Turkey from Syria five days earlier [while] Adnan Alhussen, a Syrian opposition activist, said Mr. Fadli had been part of a rebel group near Aleppo that joined Islamic State in 2014, when it took over his town.”

Here are images which purport to show Fadli at the registration center:

Clearly, this will do nothing to calm Europe’s increasingly frayed nerves vis-a-vis Syrian asylum seekers.

Meanwhile, Ankara has arrested multiple suspected “terrorists” in the wake of the attack and in a hilarious “coincidence”, some of the detainees are Russians.

“Since the attack, police have detained a total of 65 people including 16 foreign nationals in six Turkish cities, the Dogan news agency reported,” Reuters reported, earlier today. “The Russian foreign ministry confirmed three of those detained were Russian nationals, but it was not immediately clear whether there was any connection to the Istanbul attack, for which there has been no claim of responsibility.”

The question now is this: is Erdogan set to engineer a connection between Russia and the Istanbul attack in a desperate attempt to turn the tables on Moscow and tie Russian nationals to ISIS? If so, one wonders if Ankara knew the attack was imminent. Some have suggested that last year’s blasts in Ankara and Suruc were false flags designed to give Erdogan the PR cover he needed to launch his own “war” on “terror” and restore AKP’s supremacy in a redo election. Could there be a similar dynamic at play here?

On that note, we close with a quote from Deutsche Welle:

Turkey’s intelligence services had warned security forces twice of the possibility of attacks on foreign tourists in the last few weeks, Turkish newspaper Hürriyet said on Wednesday.



The following commentary by William Engdahl comments on the news that Russia will now price its oil in roubles and not dollars.  He explains that this is the death of the USA petrodollar


(courtesy William Engdahl)

The Demise Of Dollar Hegemony: Russia Breaks Wall St’s Oil-Price Monopoly

Submitted by William Engdahl via New Eastern Outlook,

Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.

Later in November the Russian Energy Ministry has announced that it will begin test-trading of a new Russian oil benchmark. While this might sound like small beer to many, it’s huge. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars. It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun.

The setting of an oil benchmark price is at the heart of the method used by major Wall Street banks to control world oil prices. Oil is the world’s largest commodity in dollar terms. Today, the price of Russian crude oil is referenced to what is called the Brent price. The problem is that the Brent field, along with other major North Sea oil fields is in major decline, meaning that Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. The other problem is that the Brent contract is controlled essentially by Wall Street and the derivatives manipulations of banks like Goldman Sachs, Morgan Stanley, JP MorganChase and Citibank.

The ‘Petrodollar’ demise

The sale of oil denominated in dollars is essential for the support of the US dollar.In turn, maintaining demand for dollars by world central banks for their currency reserves to back foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II. The second pillar is world military supremacy.

US wars financed with others’ dollars

Because all other nations need to acquire dollars to buy imports of oil and most other commodities, a country such as Russia or China typically invests the trade surplus dollars its companies earn in the form of US government bonds or similar US government securities. The only other candidate large enough, the Euro, since the 2010 Greek crisis, is seen as more risky.

That leading reserve role of the US dollar, since August 1971 when the dollar broke from gold-backing, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about rising interest rates, like having a permanent overdraft credit at your bank.

That in effect has allowed Washington to create a record $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” as the assumption is that the world—Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.

In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets.

It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables.

In the aftermath of the 1973 rise in the price of OPEC oil by some 400% in a matter of months following the October, 1973 Yom Kippur war, the US Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia to secure an agreement with the monarchy that Saudi and all OPEC oil will only be traded in US dollars, not Japanese Yen or German Marks or any other. Bennett then went to take a high job at Exxon. The Saudis got major military guarantees and equipment in return and from that point, despite major efforts of oil importing countries, oil to this day is sold on world markets in dollars and the price is set by Wall Street via control of the derivatives or futures exchanges such as Intercontinental Exchange or ICE in London, the NYMEX commodity exchange in New York, or the Dubai Mercantile Exchange which sets the benchmark for Arab crude prices. All are owned by a tight-knit group of Wall Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the time Secretary of State Henry Kissinger reportedly stated, “If you control the oil, you control entire nations.” Oil has been at the heart of the Dollar System since 1945.

Russian benchmark importance

Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia’s benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX).

The Brent benchmark contract are used presently to price not only Russian crude oil. It’s used to set the price for over two-thirds of all internationally traded oil. The problem is that the North Sea production of the Brent blend is declining to the point today only 1 million barrels Brent blend production sets the price for 67% of all international oil traded. The Russian ruble contract could make a major dent in the demand for oil dollars once it is accepted.

Russia is the world’s largest oil producer, so creation of a Russian oil benchmark independent from the dollar is significant, to put it mildly. In 2013 Russia produced 10.5 million barrels per day, slightly more than Saudi Arabia. Because natural gas is mainly used in Russia, fully 75% of their oil can be exported. Europe is by far Russia’s main oil customer, buying 3.5 million barrels a day or 80% of total Russian oil exports. The Urals Blend, a mixture of Russian oil varieties, is Russia’s main exported oil grade. The main European customers are Germany, the Netherlands and Poland. To put Russia’s benchmark move into perspective, the other large suppliers of crude oil to Europe – Saudi Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd) and Libya (560,000 bpd) – lag far behind Russia. As well, domestic production of crude oil in Europe is declining quickly. Oil output from Europe fell just below 3 Mb/d in 2013, following steady declines in the North Sea which is the basis of the Brent benchmark.

End to dollar hegemony good for US

The Russian move to price in rubles its large oil exports to world markets, especially Western Europe, and increasingly to China and Asia via the ESPO pipeline and other routes, on the new Russian oil benchmark in the St. Petersburg International Mercantile Exchange is by no means the only move to lessen dependence of countries on the dollar for oil. Sometime early next year China, the world’s second-largest oil importer, plans to launch its own oil benchmark contract. Like the Russian, China’s benchmark will be denominated not in dollars but in Chinese Yuan. It will be traded on the Shanghai International Energy Exchange.

Step-by-step, Russia, China and other emerging economies are taking measures to lessen their dependency on the US dollar, to “de-dollarize.” Oil is the world’s largest traded commodity and it is almost entirely priced in dollars. Were that to end, the ability of the US military industrial complex to wage wars without end would be in deep trouble.

Perhaps that would open some doors to more peaceful ideas such as spending US taxpayer dollars on rebuilding the horrendous deterioration of basic USA economic infrastructure. The American Society of Civil Engineers in 2013 estimated $3.6 trillion of basic infrastructure investment is needed in the United States over the next five years. They report that one out of every 9 bridges in America, more than 70,000 across the country, are deficient. Almost one-third of the major roads in the US are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States.

That kind of basic infrastructure spending would be a far more economically beneficial source of real jobs and real tax revenue for the United States than more of John McCain’s endless wars. Investment in infrastructure, as I have noted in previous articles, has a multiplier effect in creating new markets. Infrastructure creates economic efficiencies and tax revenues of some 11 to 1 for every one dollar invested as the economy becomes more efficient.

A dramatic decline for the role of the dollar as world reserve currency, if coupled with a Russia-styled domestic refocus on rebuilding America’s domestic economy, rather than out-sourcing everything, could go a major way to rebalance a world gone mad with war. Paradoxically, the de-dollarization, by denying Washington the ability to finance future wars by the investment in US Treasury debt from Chinese, Russian and other foreign bond buyers, could be a valuable contribution to genuine world peace. Wouldn’t that be nice for a change?





Can ISIS gain additional power by taking control over Libya’s oil.  In a nutshell; yes!)


(courtesy Julianne Geiger/OilPrice.com)


Can ISIS Actually Gain Power Over Libya’s Oil?




USA bombs the big Mosul bank which funded the ISIS terrorist activities:


(courtesy zero hedge)


US Vaporizes “Millions” In Cash, Kills 7 Civilians In “Unusual” Strike On ISIS “Bank”

Back in June of 2014, ISIS – which at the time hadn’t yet rampaged its way into the world’s collective consciousness – took over Mosul, Iraq’s second largest city and home to more than 2 million people.

When the city fell, it became immediately apparent that the group was quite serious about its stated goal of creating a medieval caliphate and bringing Sharia Law to the entire region.

The victory wasn’t purely symbolic. ISIS fighters captured 2,300 Humvees parked in the city and looted more than $400 million from Mosul’s central bank.

Just like that, the brainchild of Abu-Mus’ab al-Zarqawi that grew in post-invasion Iraq and garnered support from regional Sunni benefactors once it began to operate in Syria, was the richest, most well-armed terror group on the planet.

So in the short space of a decade, the US managed to take a largely stable (if autocratic) state and turn it into a smoldering wasteland partially occupied by a brazen group of terrorist desert bandits who Washington and its regional allies were simultaneously using to destabilize neighboring Syria.

Now, two years since the fall of Mosul and five years since the start of Syria’s bloody conflict, the US has come full circle. Washington allowed an al-Qaeda offshoot to grow and prosper in hopes of destabilizing the government in Damascus only to end up fighting the very same group years later in the most hilariously absurd example of blowback the world has ever witnessed.

In the latest boondoggle being pitched by the media as a “win” in the fight against ISIS, a US airstrike destroyed an Islamic State “money center” in Mosul this week.

“We hit a cash storage facility. We have hit one or two previously,” an unnamed official told Newsweek. “Not sure how much dollars but estimate in the millions,” he added.

“The bulk cash distribution site was used by [ISIS] to distribute money to fund terrorist activities,” Lieutenant Commander Ben Tisdale, said in a statement.

We estimate in the millions of dollars … from all their illicit stuff: oil, looting, extortion,” Tisdale said.

CNN called the strike “extremely unusual” for the apparent blatant disregard shown for civilians. Two 2,000-pound bombs were dropped on the building in central Mosul. “US commanders had been willing to consider up to 50 civilian casualties from the airstrike due to the importance of the target,” CNN said. “But the initial post-attack assessment indicated that perhaps five to seven people were killed.”

“Only” five to seven innocent Iraqis killed. No big deal apparently. It could have been 50.

Here’s a video of the aftermath:

So let’s just recount the ridiculous chain of events that led directly to this strike and countless others.

During the Soviet-Afghan war, the US armed and funded the fighters who would eventually grow into al-Qaeda. Years later, al-Qaeda attacked the US and so the US went to the same country where Washington used to support the fighters to kill them. The US then invaded Iraq, creating the conditions for al-Qaeda to thrive there. Al-Qaeda in Iraq became ISIS and thanks to the fact that the US decimated the Iraqi military, the group was able to take Mosul and steal $400 million. Two years later, the US bombs Mosul and destroys the money.

There you have it America: your taxpayer dollars hard at work in a never-ending cycle of foreign policy blunders.





Albert Edwards, of Soc Gen states that we are now at peak pessimism.  The devaluation of the Chinese yuan will send deflation westwards causing bourses to fall badly with their nadir at maybe P:E at 7.  This would wipe out all of Wall Street and many of Main Street.


a must read….



(courtesy Albert Edwards.Soc Generale:  zero hedge)



Albert Edwards Hits Peak Pessimism: “S&P Will Fall 75%”, Global Recession Looms

2016 has thus far been a year characterized by remarkable bouts of harrowing volatility as the ongoing devaluation of the yuan, plunging crude prices, and geopolitical uncertainty wreak havoc on fragile, inflated markets.

With asset prices still sitting near nosebleed levels after seven years of bubble blowing by a global cabal of overzealous central planners with delusions of Keynesian grandeur, some fear a dramatic unwind is in the cards and that this one will be the big one, so to speak.

December’s Fed liftoff may well go down as the most ill-timed rate hike in history Marc Faber recently opined, underscoring the fact that the Fed probably missed its window and is now set to embark on a tightening cycle just as the US slips back into recession amid a wave of imported deflation and the reverberations from an EM crisis precipitated by the soaring dollar.

One person who is particularly bearish is the incomparable Albert Edwards. SocGen’s “uber bear” (or, more appropriately, “realist”) is out with a particularly alarming assessment of the situation facing markets in the new year.

“Investors are coming to terms with what a Chinese renminbi devaluation means for Western markets,” Edwards begins, in a note dated Wednesday. “It means global deflation and recession,” he adds, matter-of-factly.

First, Edwards bemoans the lunacy of going “full-Krugman” (which regular readers know you never, everdo):

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now ?and it is not! The Fed?s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad). One of the main problems has been the overconfidence with which the Fed pursues their objective. Yet in the run-up to the 2008 Global Financial Crisis they demonstrated their lack of understanding of the disastrous impact of excessively low Fed Funds. Even in retrospect they remain in denial – as evidenced by Bernanke?s recent book. Why can?t these incompetents understand that they are, once again, the midwife to yet another global unfolding economic crisis? But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation.

Next, after reiterating that the “impossible trinity” is called “impossible” for a reason, Edwards talks the RMB and exported deflation:

I have always thought that in order to revive a spluttering Chinese economy, the authorities would have to devalue, but not just because an overvalued exchange rate was squeezing their manufacturing sector (e.g. sector nominal GDP growth of zero in Q3 2015). Instead I felt that an overvalued exchange rate had steadily undermined competitiveness to the point that it had undermined the balance of payments. This was compounded last year by an accelerated capital outflow as anti-corruption measures intensified, and an unprecedented unwinding of dollar-denominated borrowings by Chinese corporates. All these factors have combined to take the Chinese balance of payments into deep deficit.

The BIS and IMF have both shown that rapid growth of EM dollar-denominated debt over the past few years was mainly concentrated in the Chinese corporate sector (unsurprising after years of steady, carry-trade inducing, renminbi appreciation). Hence despite the Chinese economy being sucked into a deflationary quagmire ? best illustrated by a declining GDP deflator ? many dismissed the possibility of devaluation because of the likelihood that this dollar debt would cause substantial corporate bankruptcies.

That risk to the Chinese corporate sector was substantially reduced by the end of last year. The Institute of International Finance (IIF) recently reported a huge unwind of this debt.

This prescient action means that many Chinese corporates have taken the signal from the initial August devaluation seriously and readied themselves for further renminbi fall. Hence China is now in a better position to transmit a massive deflationary shock to the West without damaging its own corporate sector. Indeed we can already see US import price deflation intensifying as the decline in the dollar prices of goods from China accelerates.

What comes next? The collapse of the US manufacturing “renaissance” (and we put that term in quotes for a reason):

The western manufacturing sector will choke under this imported deflationary tourniquet. Indeed US manufacturing seems to be suffering particularly badly already.


“Where will it all end?”, Edwards asks, before noting that in previous bottoms, the Shiller PE touched 7X or below, a far cry from the 13.3X seen at the supposed “bottom” in March of 2009.

I believe the Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. I believe the events we now see unfolding will drive us back into global recession.

Valuation booms are followed inevitably by busts. But the key point is that these valuation bear markets take the Shiller PE back down to 7x or below.

Since valuations peaked at the most obscene level ever in 2000, we have only seen two recessions and at the nadir of the last one, in March 2009, the Shiller PE bottomed at 13.3x, way above the typical sub-7x bottom. In valuation terms the bear market was not completed in 2009 and indeed after only two recessions there was no reason to expect it to have been completed.

If I am right and we have just seen a cyclical bull market within a secular bear market, then the next recession will spell real trouble for investors ill-prepared for equity valuations to fall to new lows. To bottom on a Shiller PE of 7x would see the S&P falling to around 550. I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak.

Needless to say, a rout of that magnitude would wipe out virtually everyone from Wall Street to Main Street and the malaise would invariably be exacerbated by bouts of flash crashing madness in broken yet increasing correlated markets where “all weather”, risk parity strategies are no longer reliable umbrellas when the storm hits.

With rock bottom rates and a still bloated balance sheet, the Fed would be working with exactly zero counter-cyclical slack, which means there would be no way for Yellen to avoid an all-out unwind of the much ballyhooed wealth effect that’s served to restore the 401ks for any Americans still foolish enough to retain a seat at a casino run by crazed PhD economists, vacuum tubes, and modern day robber barons.



none today


your early morning currency/gold and silver pricing/Asian and European bourse movements/ and interest rate settings/WEDNESDAY morning 7:00 am

Euro/USA 1.0826 down .0017

USA/JAPAN YEN 118.18 up 0.350

GBP/USA 1.4399 down .0031

USA/CAN 1.4224 down .0031

Early this morning in Europe, the Euro fell by 17 basis points, trading now just above the important 1.08 level falling to 1.0826; 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, Nysmark and the Ukraine, along with rising peripheral bond yield further stimulation as the EU is moving more into NIRP and the USA tightening by raising their interest rate / Last  night the Chinese yuan was up in value (onshore). The USA/CNY up in rate at closing last night: 6.574 / (yuan down and still undergoing massive devaluation/ which will cause deflation to spread throughout the globe)

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 below  that all important 120 level to 118.18 yen to the dollar.

The pound was down this morning by 34 basis points as it now trades just below the 1.44 level at 1.4399.

The Canadian dollar is now trading up 31 in basis points to 1.4224 to the dollar.(as oil prices rebounded higher today)

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 and the yen carry trade also 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 WEDNESDAY morning: closed up 496.67  or 2.88%

Trading from Europe and Asia:
1. Europe stocks all in the green

2/ Asian bourses mixed/ Chinese bourses: Hang Sang green (massive bubble forming) ,Shanghai  deeply in the red (massive bubble bursting), Australia in the green: /Nikkei (Japan) green/India’s Sensex in the green /

Gold very early morning trading: $1083.00


Early WEDNESDAY morning USA 10 year bond yield: 2.13% !!! up 3 in basis points from TUESDAY night and it is trading BELOW resistance at 2.27-2.32%. The 30 yr bond yield rises to 2.90  up 1 in basis points.  ( still policy error)

USA dollar index early WEDNESDAY morning: 99.23 up 21 cents from TUESDAY’s close. ( Now below resistance at a DXY of 100)

This ends early morning numbers WEDNESDAY MORNING




Crude crashes again due to huge 2 week gasoline inventory build up


(zero hedge)

Crude Crashes On Biggest 2-Week Gasoline Inventory Build On Record

Confirming API data overnight, DOE reports that while total inventories of crude rose less than expected (+234k vs +2.1mm exp.) Gasoline and Distillates saw a massive build once again. Gasoline invenrtories rose 8.44mm barrels (following last week’s 10.6mm record build) is the biggest 2-week inventory build in history. Crude has crashed back from overenight “China is buying oil” demand hopes.


This is the biggest 2-week gasoline inventory build in history


And crude is reacting how it should…



Although remote, a war between Saudi Arabia and Iran could send oil prices to 250 dollars and above especially when attacks would knock out their loading facilities:



(courtesy  James Stafford: Oil Price.com)

War Between Saudi Arabia And Iran Could Send Oil Prices To $250

Submitted by James Stafford via OilPrice.com,

The rift between Saudi Arabia and Iran has quickly ballooned into the worst conflict in decades between the two countries.

The back-and-forth escalation quickly turned the simmering tension into an overt struggle for power in the Middle East. First, the execution of a prominent Shiite cleric prompted protestors to set fire to the Saudi embassy in Tehran. Saudi Arabia cut off diplomatic relations and kicked out Iranian diplomatic personnel. Tehran banned Saudi goods from entering Iran. Worst of all, Iran blames Saudi Arabia for an airstrike that landed near its embassy in Yemen.

Saudi Arabia’s Sunni allies in the Arabian Peninsula largely followed suit by downgrading diplomatic ties with Iran. However, recognizing the dire implications of a major conflict in the region, most of Saudi Arabia’s Gulf State allies did not go as far as to entirely sever diplomatic relations, as Saudi Arabia did. Bahrain, the one nation most closely allied with Riyadh, was the only one to take such a step.

Many of them are concerned about a descent to further instability. Nations like Kuwait and Qatar have trade links with Iran, plus Shiite populations of their own. Crucially, Qatar also shares a maritime border with Iran as well as access to massive natural gas reserves in the Persian Gulf. These countries are trying to split the difference between the two belligerent nations in the Middle East. “The Saudis are on the phone lobbying countries very hard to break off ties with Iran but most Gulf states are trying to find some common ground,” a diplomat from an Arab country told Reuters.“The problem is, common ground between everyone in this region is shrinking.”

The effect from the brewing conflict on oil is murky, but for now it is not having a bullish impact. In the past, geopolitical tension in the Middle East, especially involving large oil producers, would add a few dollars to the price of oil. This risk premium captured the possibility of a supply disruption into the price of a barrel of crude. However, recent events barely registered in oil trading. That is because the global glut in oil supplies loom larger than any potential for a supply disruption. Oil dropped to nearly $30 per barrel on January 12 and oil speculators are not paying any attention to the tension in the Middle East.

Also, the conflict could simply manifest itself in an intensified battle for oil market share. Iran has put forth aggressive goals to ramp up oil production in the near-term. And Saudi Arabia continues to produce well in excess of 10 million barrels per day while discounting its crude in several key markets, particularly in Europe in order to box out Iran.

But what if the current “Cold War” between Saudi Arabia and Iran turned hot?

Saudi Arabia has a variety of reasons to not back down, not the least of which is the very real sense of being besieged on multiple fronts. An article in The New Statesman by former British Ambassador to Saudi Arabia, John Jenkins, clearly laid out the threats that Saudi Arabia sees around every corner: extremists at home; a growing Iran; toppled allies from the Arab Spring; low oil prices; and a fractured relationship with the United States. The nuclear deal between Iran and the West was confirmation on the feeling in Riyadh that it is becoming increasingly insecure.

Already the two rivals have engaged in proxy battles in Yemen and Syria, supporting opposite sides in those wars. A full on direct military confrontation would be something entirely different, however. It would have catastrophic consequences for oil markets, even when taking into account the current supply overhang. Dr. Hossein Askari, a professor at The George Washington University, told Oil & Gas 360 that a war between the two countries could lead to supply disruptions, with predictable impacts on prices.

“If there is a war confronting Iran and Saudi Arabia, oil could overnight go to above $250, but decline [back] down to the $100 level,” said Askari. “If they attack each other’s loading facilities, then we could see oil spike to over $500 and stay around there for some time depending on the extent of the damage.”

While not impossible, war is speculative at this point. Also, $250 and $500 per barrel are numbers pulled out of thin air, and may seem a bit sensationalist. But despite the glut in global oil production – somewhere around 1 mb/d – the margin from excess to shortage is thinner than most people think. OPEC is producing flat out and spare capacity is actually remarkably low right now. The EIA estimated that OPEC spare capacity stood at just 1.25 mb/d in the third quarter of 2015, the lowest level since 2008.

As a result, even though it remains a remote possibility, direct military confrontation between Saudi Arabia and Iran could well put oil back into triple-digit territory in short order.


Both Brent and WTI crash below 30.00 dollars per barrel


(courtesy zero hedge)

Brent Follows WTI, Crashes Below $30 For First Time Since April 2004

Well that escalated quickly…



Portuguese 10 year bond yield:  2.67% down 1 in basis points from TUESDAY

Japanese 10 year bond yield: .200% !! down  2 in basis points from TUESDAY and extremely low ****unbelievable
Your closing Spanish 10 year government bond, WEDNESDAY down 5 in basis points
Spanish 10 year bond yield: 1.78%  !!!!!!
Your WEDNESDAY closing Italian 10 year bond yield: 1.56% down 5 in basis points on the day:
Italian 10 year bond trading 22 points lower than Spain.
Closing currency crosses for WEDNESDAY night/USA dollar index/USA 10 yr bond:  2:30 pm
 Euro/USA: 1.0877 up .0034(Euro up 34 basis points)
USA/Japan: 117.81 up .006 (Yen down .1 basis points)
Great Britain/USA: 1.4448 up .0013 (Pound up 13 basis points)
USA/Canada: 1.4356 up 0.0109 (Canadian dollar down 109 basis points)
This afternoon, the Euro rose by 34 basis points to trade at 1.0877.
The Yen fell to 117.81 for a gain of .1 basis points.
The pound was up 13 basis points, trading at 1.4448.
The Canadian dollar fell by 109 basis points to 1.4356 (as the price of  oil price fell again to around $30.46 per barrel).
The USA/Yuan closed at 6.5740
Your closing 10 yr USA bond yield: down 5 basis points from TUESDAY at 2.05%// policy error
(trading well below the resistance level of 2.27-2.32%)  (policy error)
USA 30 yr bond yield: 2.82 down 7  in basis points on the day and will be worrisome as China/Emerging countries  continues to liquidate USA treasuries  (policy error)
 Your closing USA dollar index: 98.93 down 9 cents on the day  at 2:30 pm

Markets In Freefall: Stocks Extend Worst Ever Start To Year

Today’s business media summarized…


Today’s actual market summarized…


Let’s start with this – The market has now reduced March rate-hike odds back to pre-December rate-hike levels (at just 35%)…


Two words – Policy… Error…


This remains the worst start to a year… ever…


Across the major US equity markets, it’s a bloodbath…


With the Nasdaq about to be the lasty major index to give up its post-QE3 gains…


Year to Date – it’s just as ugly…


And since The Fed hiked rates…


There is at least some rationality resuming as weak balance sheet stocks underperform strong balance sheet firms…


With selling out of the gate and only a small bounce in the last hour, equity markets carnaged…


FANGs entered a correction…


And FANTAsy stocks were smashed today…


Lots of head-scratching at how this is possible… except for anyone who pays attention to credit markets…


As HYG plunges to its lowest close since July 2009… Today was worst day in 4 weeks


US Energy credit risk is soaring back to near 2008 crisis highs…

h/t @JavierBlas2


While High yield bonds were crashing, Treasuries were aggressively bid (despite the Inbev issuance), on the verge of flash-crashing a few times after a stronmg 10Y auction…


The USDollar Index ended the day unchanged as early strength was sold – but it remains up on the week… CAD was smashed to new 12 yeasr lows


Gold ansd Silver rallied as Crude and Copper crumbled…


As stocks plunged at the US open so PMs ripped…


As if by magic, WTI’s NYMEX close was adjusted very slightly higher to enable a tiny green print… but the trend was clear…


Charts: Bloomberg




This does not look good for the USA rails:


(courtesy zero hedge)

Sorry Warren Buffett: Things Just Went From Bad To Worse For U.S. Railroads

Back in November 2009, knowing he had both the inside track and the final decision on US energy policy under his crony president Obama, Warren Buffett acquired the 77% of the Burlington Northern (aka BNSF) Railroad he did not own for one simple reason: realizing he could pressure the “progressive president” Obama to curb all pipeline progress, confirmed recently with the terminal failure of TransCanada’s Keystone XL pipeline, Buffett would be ahead of everyone by controlling one of the key actors among “the New US Petroleum Pipelines.” The “pipelines” in question were shown in the following chart from our March 2013 post.


And while Buffett’s strategy worked great for many years, certainly as long as oil was rising and above $100, over the past year, things went downhill fast. Nowhere, was this more visible than in a one year chart of transports, which have crashed over the past several months entering their first bear market since 2008 in late December.


While all transportation components contributed to this plunge, rails were the biggest culprit. To be sure slumping railroad traffic was something we have covered extensively in the past year – together with ocean freight, together with trucks – and most recently covered it on January 3 in “What Rail Traffic Tells Us About The U.S. Economy.” The short answer: bad things.

But while we were quite concerned about the implications of plunging railroad traffic, others ignored it, claiming as they always do, that “it is only coal, or only oil, or only [insert commodity related factor]”.

However, a Bank of America report issued on January 6 revealed that the decline in rails was much more widespread than just “it’s only X.” This is what BofA’s Ken Hoexter said in a report titled “Carloads flashing a warning signal; lower 4Q estimates again

Longest and deepest carload decline since 2009


We believe rail data may be signaling a warning for the broader economy. Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1% decline, has not occurred since 2009. In looking at carload data going back nearly 30 years, similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009. We exclude the period in 1996 from our analysis, as we consider it anomalous given that it overlapped with harsh winter conditions and was limited to January and early February of that year. Of the remaining instances, all either overlapped with a recession, or preceded a recession by a few quarters. The current period starting in October and continuing through the present has been accompanied by weak ISM results, with the purchasing managers index recently falling to 48.2 in December from 48.6 in November (a reading below 50 suggests contraction), and our proprietary BofAML Truck Shipper Indicator recently falling to its lowest level since 2012.

Here is a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into “other, more consumer-oriented segments.” In other words, the service recession is imminent.

Weakness no longer limited to industrials or coal


For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes,we are increasingly concerned with the breadth of the weakness.


All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies, but isn’t necessarily bad for Warren Buffett’s major gamble on the “new pipelines.”

This is.

According to a report in the FT, “the amount of oil hauled on US railways has declined steeply in the past year as refineries swallow more foreign supplies in the face of falling domestic crude output.”

From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth, the latest data from the US energy department show. Genscape, a research group, said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill”.


Once seen as a 19th century relic, moving crude oil by train re-emerged as a hot technology five years ago as surging output from long-neglected shale oil regions overwhelmed pipeline capacity. Investors from oil companies to Wall Street banks clamoured for tank cars, while fiery accidents prompted federal regulators to impose more stringent standards on rolling stock.

And Buffett was there to provide the needed cars, for a generous fee of course, while doing everything in his power (it’s a lot) to delay implementations of stringent, or even any standards, on “rolling stock.” Here are some highlights of the outcome:

And so on. However, the following brief blurb in the FT article reveals that the time to pay the Piper has finally arrived.

Tank cars, once feverishly ordered during the US shale boom, are sitting on sidings. Lessors are obtaining car rents 20-30 per cent below early 2015 — “if you’re lucky enough to keep your car in service”, said James Husband of RailSolutions, a consultancy.

This means that the rail industry is about to be slammed with a dramatic repricing, one which is only the start and the longer oil prices remain at these depressed levels, the lower the rents will drop (think Baltic Dry but on land), until soon most rails will lose money on every trip and will follow the shale companies into a race to the bottom, where “they make up for its with volume.” After all, those billions in debt interest payments won’t pay themselves, meaning doughnuts for equity holders like folksy uncle Warren.

Then again, we are confident that in the end, the Avuncular Octogenarian of Omaha will find a way to avoid being on the receiving end of yet another bad decision, courtesy of two things: this…

… and this.



And on the same subject as above;

(courtesy zero hedge)

CSX CEO Admits “This Hasn’t Happened Outside Of A Recession”

One of our favorite hypocritical CEOs spoke this morning to try and explain why his rail freight transportation company’s stock is plunging. 11 months ago Michael Ward was adamant on CNBC that he has “not seen any changes,” suggesting everything’s fine down to $30-35 oil and “expected no impact on crude shipments.” Today, he exclaims, the volume drop can be seen as “freight recession,” warning that “there is pressure on markets not seen outside of a recession.” He is right, of course, as we noted previously, the weakness in rails is entirely recessionary and is no longer limited to industrials or coal.

Here is CSX CEO Michael Ward a year ago, completely unphased by the decline in crude oil prices and unable to see how that would affect his business…

Rail freight transportation company CSX’s CEO Michael Ward stated ‘unequivocally’ that as far as the movement of crude by rail he has “not seen any changes,” suggesting everything’s fine down to $30-35 oil and “expected no impact on crude shipments.”

CSX CEO giving the all-clear a year ago…

Visit NBCNews.com for breaking news, world news, and news about the economy


And his share price performance since…


And then today, from the disastrous earnings call…

Question – Bascome Majors, Susquehanna Financial Group: I understand you guys are railroaders. You’re not economists here, but just looking at the volume declines you’re seeing today, both the depth of them and the breadth, I mean, have you ever seen an environment like this in your business or careers outside of a recession?


Answer – Michael J. Ward, CEO CSX Corp: This is Michael, and I’ll answer that although Clarence is here. So, if you take out the recession, no, we’ve not seen these kind of pressures in so many different markets because you have multiple aspects working against you, the low gas prices, low commodity prices, the strength of the dollar.


All three of those together are really pushing, and in some ways I think you can almost think of it as a spring recession.


Except for say markets like automotive and housing related, you’re seeing pressure on most of the markets. So clearly outside of a recession, this is where we’re seeing lots of pressure on lots of different markets.

He is correct of course, as we reported here, confirming a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into “other, more consumer-oriented segments.” In other words, the service recession is imminent.

Weakness no longer limited to industrials or coal


For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes,we are increasingly concerned with the breadth of the weakness.


All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies.

Bellwether GE is basically stating that the global economy is in shatters:
(courtesy zero hedge)

GE To Cut 6,500 European Jobs

Last April, the financial markets cheered the biggest restructuring in GE’s history when the oligopoly announced the dramatic shrinkage of GE Capital but more importantly, GE  announced the largest, at the time, stock buyback in history, repurchasing some $50B in shares. 

As we said at the time, “the main reason for this near record buyback announcement is two-fold: GE’s belief that there is no incremental value left in GE Capital, the bulk of whose assets it is selling, a division which nearly bankrupted the conglomerate back in 2008 when as a result of its massive leverage, anywhere between 9x and 10x” and added that the other, less pleasant consequence for GE employees would be the massive layoffs to be announced in due course.

A few hours ago, “due course” arrived when the company announced plans to cut 6,500 jobs in Europe over the next two years, including 765 in France, a spokesman for the company in France said on Wednesday. The spokesman added that GE was sticking to its pledge to create 1,000 net jobs in France in the next three years as part of its recent acquisition of Alstom’s energy business.

So definitely firing 6,500, but tentatively promising to add 1,000.

The spokesman added that unions had been informed on Tuesday and that talks would start on Wednesday. “This is a plan, which could change following discussion with employee representatives,” he said.

We doubt the local unions will be delighted by the news, although we are confident they will not be surprised.

Furthermore, this is only the beginning, because as we showed late in December, as a result of last year’s record $5 trillion global M&A spree, just the Top 10 M&A deal accounted for over 1.1 million workers: if one assumes a 10% “synergy rate” this means that over 100,000 workers will be quietly “cost-cutted” in the coming months.

It also means that the US “waiter and bartender” jobs recovery will not only soon be the strongest in history, but will promptly spill over to the rest of the world.


My goodness:  the giant Freeport McMoRan sees its bond rating fall to junk  A default here will cause huge problems everywhere

(zero hedge)

Icahn’s Freeport McMoran Is Not Buying The Bounce

With Freeport McMoran at the top of the list of entities due to be downgraded to junk (in fact trading in credit markets with a 79% chance of default), it is perhaps not entirely surprising that yesterday’s dead-cat-bounce is fading fast this morning as Carl Icahn’s big bet turns sour-er.



it seems FCX stockholders are getting the joke…

Freeport-McMoRan Inc

(1739bps; Av BBB; Imp CCC)

The US copper and gold producer has seen its 5-yr CDS spread trading
at implied junk levels for the last six months. Troubles have
intensified over the past month and credit spreads now imply a 79% chance of default within the next five years. Moody’s placed the $6bn company on review for a possible downgrade just last week.

Last week, it was Kyle Bass that sounded the alarm bell as to what to expect in the first quarter.  Today it is Jeff Gundlach uttering his most bearish scenario as he echoes Bass:
(courtesy zero hedge:Jeff Gundlach)

“We Could Be Looking At A Really Ugly First Quarter” – Jeff Gundlach At His Most Bearish Yet

Back on December 8, in a post laying out what we then thought was Jeff Gundlach’s Most Bearish presentation yet” titled, appropriately enough, “Tick, Tick, Tick”, the DoubleLine founder was at a loss for words trying to explain just why Yellen is hell bent to hike rates in one week, just when the global economy is not only clearly not in the required shape, but warning that the outcome from a Fed rate hike will lead to a dramatic repricing (lower) across all asset classes.

The presentation capped a year in which Gundlach (whose $52.3 billion DoubleLine Total Return Bond Fund beat 94% of its Bloomberg peers last year) predicted not only the blow out in junk bonds but the collapse of oil even as most other experts predicted time and again a solid rebound into the year end, one which never materialized.

However, in his follow up, and inaugural for 2016, presentation from last night Gundlach may have been even more bearish, and as Bloomberg summarized it “one of the market’s biggest bears says there’s more bad news ahead.”

In light of the recent global financial turmoil, his core focus was understandable: China, the same wildcard as Kyle Bass is so intently focused on, and where Gundlach likewise expects more devaluation despite the PBOC’s recurring promises to the contrary.

“Falling commodity prices are signs of China’s weakening economy, which will lead to more destabilizing devaluations of the yuan, Jeffrey Gundlach said Tuesday during a market outlook webcast. Moves by the Federal Reserve to raise interest rates are fighting non-existent inflation and hurting gross domestic product growth, he said, adding that stocks are going to follow high-yield bonds down and low oil prices may lead to political instability.”

His comprehensive warning about the year ahead is that “this is a capital-preservation market, not a money-making environment”, adding that “I think we’re going to take out the September low of the S&P500.”

Gundlach also said he is not yet buying junk bonds at current prices and that for economic growth, “2016 is not looking all that great.”

Among his other notable warnings was that global growth might slow to 1.9% this year with U.S. manufacturing already in a recession, putting the odds of a recession at about 50 percent if the services sector falls more.

Echoing JPM’s caution that there has been a major shift in market dynamics and that rallies are to be sold, Gundlach said that the market is likely to keep struggling early in 2016 before a “buying opportunity” arises later in the year, Gundlach said. High-yield bonds also probably will fall more in the first part of this year as redemptions increase at hedge funds that used leverage to invest in them.

We could be looking at a really ugly situation during the first quarter of 2016,” he said. “It’s particularly more likely to happen if the Fed keeps banging this drum of raising interest rates against falling inflation.”

However, while Gundlach was clearly not excited by the S&P’s prospects, not even he has a firm grip on Treasurys: “rather than try to get out in front of the market for long-term debt, Gundlach said Tuesday that he plans to wait and see whether the 10-year Treasury rate goes up or down. “You don’t have to try to call a direction right now,” he said. “If it’s going to move, it’s going to move big and we’re going to play a go-with-it strategy.”

In light of ongoing liquidation by offshore reserve managers (who seem to be selling US paper in the secondary market as they bid up Treasurys at auction), this is understandable, although according to several sellside rates strategists, should the 10Y dip below 2.00% it will only accelerate buying as calls for a deflationary recession will become deafening.

But while Gundlach’s opinion on equity and rates is always important, his most notable call yesterday was his sense that oil may have bottomed “for the short-term” although even a 50% bounce from $30 would hardly be enough to save the most indebted shale producers:

Oil prices, which fell to 12-year lows in the last week, seemed to hit a floor Tuesday and may climb back to $45 a barrel, Gundlach said. Such a price rebound still wouldn’t be enough to save highly leveraged energy firms, which will lead to more credit defaults, according to Gundlach.

But while defaults may spike, a bigger consequence from low oil prices will be even greater geopolitical uncertainty as Petrodollars become Petro Pennies (to borrow a term coined by RBS’ Alberto Gallo).

Low oil prices are likely to lead to more political instability in regions such as the Middle East, Gundlach said on Tuesday’s call. “Oil goes below $40, it’s frightening for geopolitical behavior,” he said. “Guess what, folks? It’s below $40 and this frightening political behavior is upon us. And, also, compounding the problem is that we have a lame-duck president, who I think will do absolutely nothing in response to military activity or other bad actors out there.

Yes, but does “improve his golf handicap” constitute as absolutely nothing?

To summarize, here is Gundlach’s 2015 track record – in January of last year, Gundlach accurately predicted that oil prices would fall, Treasuries would be little changed, inflation wouldn’t materialize and high-yield debt would face headwinds from lower commodity and energy prices. His only incorrect prediction one year ago was that gold would jump. Perhaps it is time for Gundlach to be correct on the yellow commodity forecast as well: yesterday, Gundlach said he expects gold to reach $1,400 an ounce.

Gundlach’s full January 12 presentation below:


The rate hike was suppose to start bringing things back to normal in the USA.  It seems the opposite is happening as the 5y5y forward interest rate swaps are plummeting signifying no inflation.  As you will recall, the Feds are desperate to create inflation so that they can survive.  Thus another policy error!!
(courtesy zero hedge)

Inflation Expectations Collapse Post-Rate-Hike, Near Record Lows

Since The Fed hiked rates in December, the market’s inflation expectations have collapsed in yet another clear indication of “policy error.” 5Y5Y Forward inflation swaps have crashed below 2.00% for only the 3rd time in history (Lehman 2008 and September’s Fed Fold were the other two) as despite central banker promises of transitory low-flation, the money is being bet against them as the regime-shift from full-faith to no-faith in Fed support continues.

But a rate-hike was supposed to stimulate inflation?


This is near record low levels for forward inflation

JPMorgan’s quant specialist is baaack!!!  He gives a startling warning:
(courtesy zero hedge)

JPM’s “Gandalf” Quant Is Back With A Startling Warning

Two days ago we reported that one half of JPM’s Croatian “Duo of Doom”, namely equity strategist Dubravko Lakos-Bujas, became every BTFDer’s worst enemy when he said that the time of BTFDing is over, and a regime change has arrived one in which rallies are to be sold. To wit:

Our view is that the risk-reward for equities has worsened materially. In contrast to the past 7 years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally. Yes, stocks had a rough time most recently, and some of the tactical indicators, such as Bull-Bear at -16 which is at the bottom of its trading range, argue for a short-term respite. Clearly, equities are unlikely to keep falling in a straight line, with periodic rebounds likely. However, we believe that one should be using any bounces as selling opportunities.


We fear that the incoming Q4 reporting season won’t be able to provide much reassurance for stocks. As was the case for a while now, consensus expectations have been managed aggressively into the results. The hurdle rate for Q4 S&P500 EPS has fallen from +5%yoy a few months back to -4%yoy currently. If this were to materialise, it would be the weakest quarter for EPS delivery so far in  the upcycle.

Today, the other half of the infamous Croatian duo…


… the legendary “Gandalf” (as dubbed first by Bloomberg) quant Marko Kolanovic, who needs no introduction on this website, and whose every prediction starting in late August turned out just as predicted…

… is out with a new note which will hardly make him any more popular with the permabullish crowd, asks whether “negative  performance in 2015 and January, turmoil in China, and continuing decline in Oil prices make investors wonder if this could be the end of the nearly 7-year bull market.

His short answer:

“The fact that market volatility is on the rise and the Fed is raising interest rates further increases the probability of a Bear Market. The current option-implied probability of a bear market (i.e. ~20% decline this year) is about 25%. While there is no way to predict a bear market, below we look at various scenarios, and estimate that the probability of a bear market may be nearly twice as large.

So according to the man whose every market forecast has been so far impeccable, the probability of a bear market: or a 20% or more drop in the S&P500 – is roughly 50%.

Not good.

And what will make the permabulls even angrier is his proposed allocation to avoid the bear market:

In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities).

* * *

This is what else he says:

from Systematic Strategy Flows, Oil Prices and the Risk of an Equity Bear Market

First, let’s look at relationship between Oil prices and S&P 500. Oil prices recently posted some of the fastest declines on record. Over extended periods of time, Oil and S&P 500 were positively correlated. Figure 4 shows the out/underperformance of Oil relative to the S&P 500 over the past 30 years (trailing 12M relative performance). One can see that that in each of the 10 episodes of large Oil-S&P 500 price divergences, the gap was always closed in a relatively short time period. Significant underperformance of Oil (e.g. >30%) in 8 out of 10 instances resulted in either a decline in the S&P 500 or large Oil rally. In 2 instances, namely shortly after the start of the Gulf Wars in 1991 and 2003, the decline in Oil was a result of overbought conditions immediately prior to these events. One of the largest swings in Oil-S&P 500 performance (comparable to the one over the past year) occurred during the Asia and Russia crisis of 1997/98. The current underperformance of Oil to the S&P 500 is not just one of the largest on the record, but is by far the longest one. Given that divergences of this size closed in 10 out of 10 historical instances, we believe a closing of this gap is very likely.


This can occur either by the S&P 500 falling (e.g. Oil is a predictor of a recession, as in 2008), or by Oil rising (e.g. a reduction of speculative positions, reduction of supply, geopolitical escalation). In any case, we believe that a long Oil and short S&P 500 trade is likely to deliver positive performance in 2016.


A sharp rise in Oil prices could also trigger ‘stagflation’ and lead to an equity bear market. While markets currently estimate the probability of this scenario at less than ~3% (option-implied probability of, for example, Oil doubling and the S&P 500 declining), we think the risk of that scenario is much higher. What could cause a sharp increase in Oil prices? For one, we note that current levels of OPEC production are likely not economically rational or sustainable. For example, to justify an increase in production at a time when prices have declined from $100 to $30, one would need to place triple the production level without further impacting the price.


As geopolitics is likely playing a large role in the Oil price decline, we think it can equally lead to a sharp price reversal. In addition to an agreed production cut, production disruptions are an increasing risk in our view. Recent increases of tension between Saudi Arabia and Iran add to that risk. Parties to a conflict that could independently lead to such disruption include: extremist elements from Saudi Arabia or abroad (e.g. for recent attempt see here), Yemen (for recent attempt see here), Iran, and others. Moreover, high marginal cost producers may drop offline, reducing supply. A doubling of Oil prices may not be a tail event after all (e.g. a significant increase in Oil prices would also be consistent with J.P. Morgan’s current Q4 forecast).


To further assess the likelihood of an equity bear market, we look at historical bull and bear S&P 500 cycles over the past 50 years. We have identified 19 such cycles that alternated in relatively regular periods of time. There were 10 bull markets, lasting on average 4.3 years and delivering ~90% average returns, and 9 bear markets lasting on average 1.1 years and resulting in an average decline of 33%. The current ~205% bull market started in 2009 and is now 6.5 years old. As such, it is one of the longest/largest bull markets. There was only one longer and larger cycle, namely from 1990 to 1998 (that coincidentally ended with the Asia/EM crisis and sharp decline in Oil prices).


The length and return of a bull market is closely related to the size and length of the bear market preceding it (and vice versa). This is shown in the figures below which relate the return during a bear market (horizontal axis) and length of subsequent bull market (Figure 5), and return of the subsequent bull market (Figure 6). In that regard, the current bull market is in-line given the size of the 2008/2009 bear market. In other words, if the bull market was to end now and we are entering a bear market – it would be in-line with historical trends. While this analysis is not proof of an impending bear market, it indicates to us that the chance of entering a bear market this year is probably higher than 25% (currently implied by option markets).



Finally, for the end of a bull market, one needs to have equity prices ahead of their fundamental valuations. While valuation of the overall market is not consistent with a stock market bubble, some pockets do show stretched valuation (e.g. the market capitalization of Internet/Software sectors as % of the S&P 500 is not far from tech bubble peaks).


Figure 7 shows the level of the S&P 500 as well as short-term interest rates (Fed funds). Between 1990 and 2010, the Fed was adjusting short-term rates largely in synch with the price performance of the S&P 500. Historically, the Fed increased rates during market rallies and reduced them during market selloffs, in pursuing its dual mandate of maintaining price stability and maximum employment. This trend broke in 2009. As the US equity market took off, the Fed kept rates at zero and added large monetary stimulus over the next 5 years. This coincided with one of the largest and longest bull markets in US history. During this bull market, stock and bond buybacks increased in pace, with the Fed buying ~15% of government bonds outstanding, and corporates buying back about ~10% of stock outstanding, which were a driver of the increased asset prices. A clear break of the trend between Fed Funds and the S&P 500 might imply that either the S&P 500 rallied too far given the weak growth and appropriate Fed stimulus, or that the Fed underestimated the strength of the economy, in which case the stimulus would have contributed to inflating a bubble. In any case,an increase of short-term rates could be a catalyst for a correction, or even the start of a bear market.


In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities). While bonds have historically been an efficient portfolio hedge, we think that bonds are increasingly at risk of becoming positively correlated to equities (e.g. selling of EM reserves, systematic strategies de-levering, or interest rates increasing).

It now starts:  the regional bank BOK Financial a big lender to oil men in the Oklahoma area plummets today after admitting to under reserving energy losses:
(courtesy zero hedge)

Is This The Start: Regional Bank Tumbles After Admitting To Previously Underreserved Energy Loss

While the energy carnage over the past year has impaired commodities, mostly oil, and increasingly the equity and bond prices of US energy companies, so far one industry has been left relatively unscathed: banks. The reason for this was that over the past year banks have, in filings, earnings calls and investor meetings, taken every possible opportunity to assure investors they all overly provisioned for any potential losses stemming from their exposure to impaired energy loans (despite not one but two consecutive quarters of Jefferies earnings fiascos).

All of this changed today when BOK financial, a $31 billion regional financial services company based in Tulsa, Oklahoma with a $3.4 billion market cap lender covering the West South Central States region of the United States, announced that not only was it overly optimistic with its “previously forecasted a provision for credit losses of $3.5 million to $8.5 million”, and as a result of a major loan impairment on just one energy producer it would have to take a dramatic $22.5 million in credit losses, but that things are slowly going from great to not so great when it also admitted that “we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”

BOK Financial is the first bank to admit its rose-colored glasses no longer fit: we expect many more banks with billions in energy exposure to admit they too have been overly optimistic and to send their credit loss reserves soaring even as they have no choice but to admit major charge offs on existing loan portfolios.

But it’s just a $22.5 million loss, what’s the big deal? That may be a good question for the shareholder, who have taken the axe to BOKF stock, which just today has wiped out $300 million in market cap.

Full 8-K below:

BOK Financial Corporation (NASDAQ:BOKF) today announced that its provision for credit losses for the fourth quarter of 2015 is expected to be $22.5 million. The company had previously forecasted a provision for credit losses of $3.5 million to $8.5 million for the quarter.


Stacy Kymes, executive vice president, Corporate Banking, commented, “A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”


Steven Nell, chief financial officer, added, “Aside from the increased loan loss provision, fourth quarter results were softer than expected, largely due to lower fee income and expenses that were slightly above our forecasted range. As a result, net income for the fourth quarter, including the impact of the increased provision, is expected to be $58 million to $61 million, or $0.87 to $0.91 per diluted share. We will provide additional details on fourth quarter results, and update our guidance for the 2016 loan loss provision, when we announce earnings at the end of the month.”

Dave Kranzler on the upcoming retail sales report:

December Retail Sales? Expect More Census Bureau Fairy Tales

The Government releases its retail sales report for December this Friday.   The Census Bureau is the front-man for this report, which means that we can expect something that conforms to the highest standards of statistical manipulation.

But the truth is, we already know based on data released by private-sector entities that retail sales in December, and for the entire fourth quarter, were a disaster.  Six days ago, Macy’s announced that its comp store sales dropped 4.7% in November and December vs. those two months in 2014.  Recall that the Government reported that retail sales actually fell nearly 1% in December 2014.  In addition, Macy’s slashed another 3,000 employees.

I just finished perusing the Cass Freight Index Report for December.  It showed that freight shipments in December dropped 5% vs. November and 3.7% vs. December 2014.  This would include goods transported by train, truck, ship or plane.   The reason freight shipments decline is because orders from retailers decline.  The reason orders from retailers decline is because consumer demand has declined and inventories are high.

We don’t need a bunch of Census Bureau flunkies to tell us how retail sales fared inUntitledDecember – this graph from the Fed based on data compiled by a non-Government organization sums it up – click to enlarge:

This graph shows the year over year change in the ISM backlog of orders index.  This graphic reflects a rather sharp decline in consumer spending since May 2015.

Finally, we know that auto sales dropped 5% in December and were way below consensus estimates.  As Bloomberg describes in reference to the auto sales report last week:  “an ominous indication for December retail sales…Vehicle sales make up about 1/5 of total retail sales and the weakness here will make it hard for December to show any lift.”

Bloomberg was uncharacteristically candid in its assessment.  Typically Bloomberg will apply a heavy dose of “spin” when an economic report falls well short of expectations.   I do believe, however, after the steaming pile of smelly brown stuff that the Census Bureau threw at us with its non-farm payroll report, that we can expect an  encore performance of scatological proportions this Friday when the December retail sales report is released.

And that’s fine with me.  One of my short-sell ideas that will presented in Sunday’s Short Seller’s Journal weekly report is going to be a retailer.  It would be ideal if the retail stock sector experiences a nice bounce on Friday in order to improve the entry price for shorting this particular stock.   You can sign up here for this report:  Short Seller’s Journal. 



David Stockman and Dave Kranzler tackle the high flying Amazon:


(courtesy David Stockman and Dave Kranzler)



Amazon And The Fantastic FANGs——A Bubblicious Breakfast Of Unicorns And Slippery Accounting

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At year end I posted a rant about the “Brobdingnagian” bubble embedded in Amazon’s market cap. On December 29th it was valued at $325 billion and had gained $180 billion or 55% of that towering figure in just the previous 12 months.

Self-evidently this was a flashing red warning signal that the end of the third great central bank fueled financial bubble of his century was near. AMZN and its three other FANG amigos had accounted for a $530 billion gain in market cap while the other 496 stocks in the S&P 500 had declined by even larger amount.

That is, the apparently flat S&P 500 index of 2015 was hiding an incipient bear—–owing to a market narrowing action like none before. Compared to the Fabulous FANGs (Facebook, Amazon, Netflix and Google), the early 1970s Nifty Fifty of stock market lore paled into insignificance.

After the worst start to a year in history, some of the air has now been let out of the bubble. Amazon’s market cap is now down by $53 billion or 16% and the story has been roughly the same for the rest of the FANGS.

After Wednesday’s plunge, Goggle is now also down by $52 billion or 10%; Facebook is lower by $33 billion or 10%; and Netflix is off by $6 billion or 11%. In all, the FANGs have given back in eight trading days about $144 billion or 28% of their madcap gains during 2015.
AMZN Market Cap Chart

AMZN Market Cap data by YCharts


Call that a start, but in the great scheme of things it doesn’t amount to much. Consider the case of Amazon. Its PE multiple on LTM net income of $328 million has dropped from 985X all the way to…….well, 829X!

Likewise, it’s now valued at 97X its $2.8 billion of LTM free cash flow compared to 117X at year end.

In the same vein, Facebook’s LTM multiple on net income has dropped from108X to 96X.

So the reason to revisit the FANGs, and the Amazon bubble in particular, is not because their market caps have come down to earth; it’s because once you get inside, another characteristic of late stage bubbles comes lurking front and center.

Namely, the tendency for the accounting income of momo tech stocks at bubble tops to be bloated with non-sustainable revenues from Silicon Valley burn babies.

This time we call them Unicorns, and at last count there were upwards of 150 pre-IPO start-ups valued at $1 billion or more. I was reminded of this possibility by an excellent post by Dave Kranzler at Investment Research Dynamics called “Amazon dot Con”, which took me to task for being to kind to Jeff Bezos’s ponzi accounting.

Among other things, Kranzler went all the way back to the beginning and offered an even more dramatic juxtaposition of the bubble in the stock versus the reality on the ground:

Throughout its 25-year history as a public stock, AMZN has delivered a cumulative total of $1.9 billion in net income to shareholders. Jeff Bezos made $16 billion on AMZN stock in 2014.

That’s right. So if AMAZN gained $180 billion in market cap during 2015 alone—or 95 times its cumulative earnings during the last quarter century—–then either some dramatic acceleration of earnings capacity occurred in 2015 or, as Kranzler put it—-

The more time I spend researching and observing AMZN, the more I’m convinced that it’s the biggest Ponzi scheme in the history of the stock market.

And on that score Kranzler hit the nail on the head. The ostensible reason that AMZN’s stock price soared in 2015 was due to the purported “scorching” performance of its cloud services division called AWS. I thought I had done a pretty good job of debunking that, but this turns out to be a case of the later night TV ad man——but wait, there’s more!

It turns out that the surging revenues of AWS may be due to the fact that AMZN is having unicorns for breakfast. But to establish the context, here is what we said at year end:

But this year’s $180 billion market cap eruption has absolutely nothing to do with its newly developed capacity for same day delivery of healthy treats for your pooch. This most recent rip was all about the purportedly “scorching” performance of its AWS division——-that is, Amazon’s totally unrelated business as a vendor of cloud computing services.

Indeed, CNBC recently gave air time to one of the most rabid analyst on the block, and this particular stock peddler from UBS left nothing to the imagination. Never mind whether anything emanating from that serial swindler and confessed criminal organization can be taken seriously, here’s what the man said.

AWS is technology’s second coming and is worth $110 billion. We know that because AMZN has recently been thoughtful enough to break out its financials.

They show AWS had sales of $2.1 billion in the September quarter and revenues of $6.9 billion on an LTM basis. So that puts its cloud computing business’ value at 16X sales. No sweat!

Moreover, this means that the balance of the company—–that is, its core E-commerce business—– is “only” valued at an apparently much more reasonable $215 billion. And by golly, said the UBS man, that’s just 2.3X sales. So what’s not to like?

Well, hold it right there. Someone forgot to do the math in all the excitement about AWS. Yes, the company’s release did show that AWS posted $1.42 billion of operating income or about 20% of sales during the September LTM period.

But consolidated operating income during the quarter was only $1.72 billion, meaning that by the lights of subtraction, Jeff Bezos’ great empire of E-commerce earned the microscopic sum of $300 million in operating income during its most recent year.

By the same magic of subtraction we can see that AMZN’s E-commerce business generated $94 billion of sales. This means that its operating marginwas exactly 32 basis points.

That’s right—–after 25 years of crushing it on the E-commerce front, Amazon’s core business operating margin is truly a rounding error.

What now transpires is that upward of 50% of that $7 billion of AWS revenue my be coming from Silicon Valley unicorns. That is, from companies that are buying cloud services with the proceeds of VC funding, not out of actual earned revenue.

Needless to say, when the Fed’s serial financial bubbles go bust in the night, these burn babies tend to disappear lickity-split and with them the purchases of advertising, equipment and services that temporarily bloated the revenues and income of their momo suppliers.

On this point Kranzler quotes a Silicon Valley insider who likens AWS’s “scorching sales” to what the big telecom equipment suppliers chalked up via sales to the CLEC’s prior to the dotcom bust:

I would like to introduce a meme before the sell side or buy side catches on.  As you know AMZN was up 100% this year as Bezos revealed the AWS business to the world.  The meme is this: AWS growth is unsustainable.  Not only is it unsustainable I predict that the sell side forward revenue growth rate for AWS will  go to zero or negative by Christmas next year.   It has come to my attention that 50% of AWS growth comes from start ups and my guess is that the majority of those dollars are Unicorns.  AMZN has been an indirect beneficiary of QE largess.  The Fed’s easy money created a bubble in VC funded start ups.  That funding peaked this year and is now in decline as the Unicorn bubble is bursting.  I expect this bubble to unravel fast as we are in the part of the cycle where the capital markets shut down for companies burning cash.

This set up reminds me of the easy money days of 1998-2000.  Then the investment world thought it was a good idea to fund a multitude of new telephone companies (CLECs).  These companies all rushed out and bought telecom equipment and helped to propel the stocks of Cisco, Nortel and Lucent.  These arms merchants were the must own large cap stocks of 1999 and 2000.  About 50% of their revenues came from the CLECs towards the end of the cycle.  The CLECs went away when the capital markets shut down and with it the revenues for these arms merchants went the way of the Dodo bird.

The problem for Amazon is that the Fortune 500 are not putting large portions of their business on the cloud yet nor will they soon.  Therefore there will be a big growth chasm that AMZN needs to cross.  I suspect the $150 billion in market cap being assigned to AWS is not anticipating such a growth hiccup.  Additionally,  I question how profitable this whole business is in the first place but for now lets just focus on the fact that revenues in the AWS division will roll over this year.  I am not short the stock but I will be stalking this and I predict my meme will come true and that AMZN will be one of the worst performing large cap growth stocks next year.

That raises a larger question of course. Just how big is the pot of cash that the unicorns have been burning so prodigiously, and how much of it is being spent on tech service vendors like AWS, as well as equipment and advertising?  And who are the customers—–especially for advertising?

FANGS anyone?


By Dave Kranzler at Investment Research Dynamics

Jeff Bezos’ greatest business trick is his ability to spin the illusion that AMZN is a money-making machine.  In fact, AMZN is remarkable  sales-generating machine ,but it costs the Company more than a dollar to generate a dollar of sales.Bezos1

All of a sudden in 2015 AMZN had become a cloud computing services phenomenon.  The last two earnings report showed a rate of growth in its AWS business and the stock rocketed higher.  Of course no one seemed to care that outright the AWS business represents less than 10% of AMZN’s total revenues.  And of course nothing is ever mentioned about the quality of AMZN’s AWS-derived sales.

The truth is, and Bezos never discusses this, that the majority of AMZN’s AWS contract revenue comes from Silicon Valley unicorns.  Most, and maybe all, of them will not be around in a few years.  Here’s an accounting of this from someone besides me:

I would like to introduce a meme before the sell side or buy side catches on.  As you know AMZN was up 100% this year as Bezos revealed the AWS business to the world.  The meme is this: AWS growth is unsustainable.  Not only is it unsustainable I predict that the sell side forward revenue growth rate for AWS will  go to zero or negative by Christmas next year.   It has come to my attention that 50% of AWS growth comes from start ups and my guess is that the majority of those dollars are Unicorns.  AMZN has been an indirect beneficiary of QE largess.  The Fed’s easy money created a bubble in VC funded start ups.  That funding peaked this year and is now in decline as the Unicorn bubble is bursting.  I expect this bubble to unravel fast as we are in the part of the cycle where the capital markets shut down for companies burning cash.  –  AMZN:  The Ghost Of XMAS Yet To Come

My AMAZON dot CON report goes into further detail about the problems with Amazon’s AWS business modelAMZNnewand why, at some point, the market value being assigned to the part of AMZN’s business model will likely largely evaporate this year.

Any question about the role Amazon stock plays in helping the Fed/US Government prop up the S&P 500?Untitled2

The more time I spend researching and observing AMZN, the more I”m convinced that it’s the biggest Ponzi scheme in the history of the stock market.

Throughout its 25-year history as a public stock, AMZN has delivered a cumulative total of $1.9 billion in net income to shareholders. Jeff Bezos made $16 billion on AMZN stock in 2014. Here’s the details:  Bezos’ Ponzi Scheme

Here’s what’s behind Bezos’ drive to transfer as much money from the stock market to his bank account: Bezos Has Amassed A $59 Billion Fortune – And Wants More. If you read through that article you’ll get a sense of what drives Bezos and how he operates.

Amazon is a Ponzi scheme in the sense that its business model requires sales growth every quarter in order to generate enough cash flowing in to the Company to enable it to pay the cash expenses flowing out of the Company.  This is one of the reasons AMZN is constantly running Prime membership 1st-year fee deals.  It needs the cash it receives upfront in order to help it fund cash payment Untitledexpense obligations.   The graph to the right shows one of AMZN’s basic problems.  AMZN offers free two-day shipping to Prime members.   Its cost of shipping eats up an increasing percentage of its sales revenues.   AMZN hides a lot of its expenses by making liberal use of the increasingly “grey” areas of GAAP accounting rules.  But you would never know this unless you dig deeply into the murky abyss of the footnotes to its financials.

The genius of Bezos is his ability bamboozle big investors and retail chimps into piling into his stock every time he announces another “big” idea.  The current massive bubble embedded in the valuation of AMZN’s stock is the $150 billion of AMZN’s $297 billion attributed to AMZN’s cloud  computing services business, “AWS.”   This is a business that represents about 7% of AMZN’s revenues.  That $150 billion is  21-times AWS’ trailing twelve month revenues and about 150-times  AWS’ trailing twelve month operating income.  Insane valuation multiples.

David Stockman published a piece last week which discusses the degree to which AMZN is an epic stock bubble.  However, even he is bamboozled by AMZN’s numbers. He gives AMZN credit for spending $11.6 billion on R&D.  This is what Bezos wants the market to believe.  Tech companies get a lot of stock market “cred” for showing high R&D “investment.”   But the $11.6 billion AMZN spends is not R&D.   Market professionals like Stockman are getting this “R&D” number from an expense line item in AMZN’s income statement called “Technology and Content.”  They automatically assume that number is R&D’s expense.  But it’s not. I like to dig into the bowels of 10Q and 10K filings and kill the market with truth.   This is from the footnotes to AMZN’s SEC-filed financials:

Costs to operate our AWS segment are primarily classified as “Technology and content.” Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. During Q3 2015, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally.

What analysts like Stockman assume to be R&D spending are, in truth, mostly the expense of operating AMZN’s website and its AWS business operations.  I detail this in my AMAZON dot CON report. In other words, AMZN is getting $10’s of billions of stock market love based on the idea that it is pouring billions into R&D – R&D that is in reality nothing more than standard operating expenses.

David Stockman and everyone else also use in their analysis the number that AMZN reports as “free cash flow.”  But I show in detail, based on using information that is found by digging through the footnotes in AMZN’s SEC-filed financials and by applying a deep understanding of GAAP accounting, that AMZN’s true cash flow is not even remotely close to the number used and reported by analysts and critics in their reports.  Again, my report is available here:  AMAZON dot CON.

As for the quality of revenues and operating income at AMZN’s cloud business, most of AMZN’s contracts are with Silicon Valley start-ups, most of which will not be around very long.  Moreover, the pricing for cloud computing services has undergone extreme price compression from competitive pressures. Here’s an anecdote from a contact of mine who runs a technology-based healthcare company:

Here’s a funny fact on AWS [Amazon Web Services] that again everyone seems to ignore or miss. I have a company and our AWS bill is coming up for renewal and the prices have dropped 90%+ in 3 years. And yet, a hyper deflationary commodity, that is being sold in mass quantity to profit-less start-ups, is worth perhaps $150B or more of AMZN’s market cap.  Epic.

Cloud computing services is the contemporary version of fiber-optics.  Remember that business, which drove a large portion of the late 1990’s tech bubble?   Level-Three Communications (Warren Buffet), Qwest (Phil Anschutz), Global Crossing (A JP Morgan sponsored Ponzi business).   The cost of accessing fiber optic networks dropped like a rock as fiber-optic overcapacity and technological advances invaded the business model.  The same dynamic has invaded cloud computing.

Global Crossing went bankrupt and reorganized into Level Three; Qwest renamed CenturyLink is a quasi-utility phone/communications company and survived the fallout from the fiber-optic bubble but its then-CEO, Joe Nacchio, was prosecuted for insider trading and financial fraud and spent six years in prison;  Level Three still operates but it’s stock, on a split-adjusted basis, dropped from a peak of $1,769 on Jan 31, 2000 to a current price of $53.

These examples show the type of hype, fraud and malfeasance which belie extreme financial bubbles.  I am highly confident that the same type of activities are occurring behind the “curtain” at Amazon.

Clearly, from the graph above, the Fed uses AMZN as one of its props to hold up the S&P 500 in order to maintain the illusion that the economy is fine.  But at some point, just like with every bubble stock in history, the gravitational pull of fundamentals will engulf AMZN’s stock price and send it plummeting.  Perhaps this has already begun:



We will see you tomorrow night






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