Tuesday, July 28, 2015

For those counting on the FED

John Hussman, Hussman Funds

The Other Side Of The Mountain

Jul. 27, 2015 1:51 PM ET 

The financial markets are at a transition that reflects tension between two realities. The first is that the Federal Reserve’s policy of quantitative easing has driven the stock market to valuations associated with the most extreme speculative peaks on record, coupled with a fresh boom in initial public offerings – with companies having zero or negative earnings accounting for three-quarters of new issuance – and record issuance of “covenant lite” leveraged loans (loans to already highly indebted borrowers, lacking normal protections that mitigate losses in the event of default). The other reality is that unconventional monetary policy has done little to push real economic activity or employment past the border that has historically distinguished expansions from recessions (about 1.8% year-over-year growth in both real final sales and non-farm payroll employment).

There is no question that quantitative easing has supported the mortgage market, and was almost wholly responsible for that role in late-2008 and 2009. But QE is not what ended the financial crisis (the March 2009 change in accounting rule FAS 157 is what removed the risk of widespread bank failures). Any economist familiar with the work of Nobel laureates like Milton Friedman or Franco Modigliani, or simply with decades of economic data, could have predicted even in 2010 that Bernanke’s efforts at creating a “wealth effect” would have weak effects on consumption, job creation and economic activity. In order to get any meaningful overall effect, it was clear that the Fed would have to create enormous but ultimately temporary distortions, inviting risk of longer-term financial instability. The Fed has now done exactly that.

The good news is that despite the long-term cost of diverting hundreds of billions to speculative pursuits instead of productive investment, a substantial retreat in the stock market and accompanying losses in illusory “wealth” is likely to compound this damage only weakly and temporarily – provided that the Fed is diligent in its oversight responsibilities and actively looks to minimize any systemic fallout from the portion of margin debt and leveraged loans that will inevitably go bad.

The best course for the Fed is to continue a gradual move toward a less discretionary, more rules-based policy. To the extent it feels the need to intervene, the FOMC should engage those policy tools where it actually has clear and measurable historical evidence of a cause-effect link between policy changes and intended outcomes. Unfortunately, it’s difficult to find such tools.

As Former Fed Chairman Paul Volcker observed last year, “I know that it is fashionable to talk about a ‘dual mandate’ – that policy should be directed toward the two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory: operationally confusing in breeding incessant debate in the Fed and the markets about which way should policy lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic; illusory in the sense it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel prize winners but by experience.”

Though a substantial normalization in equity valuations and interest rates would certainly have short-run economic impacts, that sort of normalization would be the best way to ensure that scarce savings are allocated toward productive ends rather than repeated bouts of speculation. We don't believe that monetary policy should be used to deflate bubbles, but it should not be used to create or encourage them either, and that damage is already done. Moreover, the Fed also has a regulatory role in the financial markets, and in that role, it has a very real responsibility to provide oversight to reduce the likelihood and assess the potential consequences of reckless misallocation of capital, speculation, and practices that create systemic risk. This is a role that was clearly abdicated in the years prior to 2008, and is essential in the face of record margin debt and low grade leveraged loan issuance today.

Meanwhile, like any policy that creates risk and distortions without reliable effects, more QE isn’t the answer to anything – not even if economic growth were to weaken, not even if inflation was to slow further, and not even if the equity markets were to decline substantially. Among the many problems with quantitative easing, an important feature is that monetary velocity falls in almost exact inverse proportion as the monetary base expands. In other words, regardless of the quantity, the new monetary base simply sits idle. Regardless of effects on financial speculation, there is almost precisely zero effect on economic activity – not on prices, not on real GDP, not on nominal GDP.

In order to increase monetary velocity without proportionally reducing the monetary base, we would have to observe exogenous upward pressure on interest rates. That’s likely to emerge in the back-half of this decade, though probably after an intervening economic slowdown. At that point, fairly early into the next expansion, the Fed is likely to stop hoping for higher inflation and discover it instead to be the last thing it wants. Until then, the Fed would provide the greatest benefit to long-run economic prosperity simply by ceasing its insistence on harming it by promoting speculation in efforts to offset short-run cyclical fluctuations.

The tortured narrative of these efforts should be obvious. As Fred Hickey of the High Tech Strategist observed last week, “After the tech bubble broke, the Fed jumped in to save the markets and economy with a period of extraordinarily low interest rates, which then led to the gross malinvestment in the housing sector (another bubble) and the misallocation of capital in the credit markets. The housing bubble imploded first, and the credit markets followed, leading to one of the worst financial crises in US history in 2008. Once again, the Fed stepped in to save the markets and the economy, this time with really free money (0% short-term interest rates for almost six years and counting) as well as trillions of dollars in outright money printing. Every time the Fed steps in… money gets misallocated and trouble follows.”

Some of the misallocations noted by Hickey include the Fed-enabled runup in the national debt to $17.57 trillion, the surge in global debt issuance to $100 trillion, up from $70 trillion at the mid-2007 peak, the suspension of any need to address unfunded entitlement liabilities, a doubling of the student loan burden, record highs in subprime auto lending, soaring corporate borrowing – partly to buy back stock at inflated valuations (notes Hickey, “as they always tend to do at market tops”) and partly to prop up sagging per-share earnings, a record $465.7 billion in margin debt, more initial public offerings in Q1 than at any point since the 2000 bubble peak, and a litany of other speculative outcomes.

Having witnessed the glorious advancing portion of the uncompleted market cycle since 2009, investors might, perhaps, want to consider how this cycle might end. After long diagonal advances to overvalued speculative peaks, the other side of the mountain is typically not a permanently high plateau. I captured a screenshot on Friday morning, in order to put a timestamp on what may prove – in hindsight – to be a point in history worth remembering.

That said, I should also reiterate that market peaks are not a moment but a process. The bars on the chart above are monthly. If you look carefully, it should be clear that the 2000 and 2007 peaks involved an extended period of volatility that included sharp sell-offs, thrilling recoveries, marginal new highs, fresh breakdowns, and sideways movement. All of that day-to-day and week-to-week emotion and uncertainty is absent from a long-term chart where investors know, in hindsight, how utterly insignificant all of it was in the context of what followed.

In 2000 and 2007, we regularly encountered two arguments, which boil down to a) there’s no catalyst, and b) this time is different. In 2000, it was a New Economy. In 2007 and 2008, Ben Bernanke assured investors that the risks were “contained” and Janet Yellen confidently dismissed concerns about speculative risk with the words “No, No, and No.” History suggests a straightforward response: following speculative peaks, market losses are typically in full swing well before any catalyst is widely recognized, and b) the specifics of every cycle may be different, but broadly speaking, speculative episodes end the same way.

Adieu Quantitative Easing

Notably, these now inexorable risks are clearly evident to several members of the FOMC itself. In particular, Dallas Fed President and FOMC voting member Richard Fisher gave an informed, thoughtful speech in Hong Kong on Friday that is essential reading. While I have a very strong bias toward rules-based, historically informed economic policy having reliable cause-effect relationships, my sense is that if the Fed is going to be flexible, Fisher’s comments about forward guidance are probably the most straightforward guide to understanding the direction of Fed policy that investors are likely to get. A few excerpts:

“Adieu Quantitative Easing… Thus far, much of the money we have pushed out into the economy has been stored away rather than expended to the desired degree. For example, we have seen a huge buildup in the reserves of the depository institutions of the United States. Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.

“Through financial engineering, we have helped bolster a roaring bull market for equities… Alongside these signs of rebound have been some developments that give rise to caution. I have spoken of these in recent speeches, echoing concerns I have raised in FOMC discussions: The [cyclically adjusted] price-to-earnings (NYSE:PE) ratio of stocks is among the highest decile of reported values since 1881. .. the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent—the highest reading since the record was set in March 2000… Margin debt has been setting historic highs for several months running and, according to data released by the New York Stock Exchange on Monday, now stands at $466 billion… Junk-bond yields have declined below 5.5 percent, nearing record lows… Covenant-lite lending is becoming more widespread. In my Federal Reserve District, 96 percent of which is the booming economy of Texas, bankers are reporting that money center banks are lending on terms that are increasingly imprudent. The former funds manager in me sees these as yellow lights. The central banker in me is reminded of the mandate to safeguard financial stability.

“At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.

“Enter Forward Guidance: My own view is that commitments aren’t always credible, especially if they purport to extend far into the future. It’s hard to bind future policymakers, and it’s difficult to anticipate all the various economic circumstances that might arise down the road. As a general rule, then, the further into the future a commitment extends, the vaguer it tends to be. Along these lines, the FOMC periodically reiterates its commitment to do what it is legally mandated to do: pursue full employment, price stability and a stable financial system.

“We’ll see. That about sums it up. The FOMC is seeking to make sure that we have a sustained recovery without giving rise to inflation or market instability. We will conduct monetary policy accordingly. Regardless of the way we may finally agree at the FOMC to write it out or have Chair Yellen explain it at a press conference, we really cannot say more than that. As Deng Xiaoping would have phrased it: “We will cross the river by feeling the stones.”

As a bonus, the chart below may help to demonstrate why Fisher is rightly concerned about the extreme ratio of market capitalization to GDP. This measure actually has a stronger correlation (about 90%) with subsequent 10-year returns in the S&P 500 than the Shiller P/E and a wide variety of other measures. Notice that the chart shows market capitalization / GDP on an inverted log scale. Actual subsequent S&P 500 annual total returns over the following decade are plotted on the right scale. Investors learned the hard way how the 2000 and 2007 extremes in this measure turned out. Though we don’t have a 10-year figure for actual returns since 2009, investors should also notice that the improved valuations evident in 2009 will indeed have been followed by a decade of 10% S&P 500 total returns even if the total returns for the market over the coming 5 years are somewhat negative (which we view as likely).

(click to enlarge)

Presently, on the basis of market capitalization to GDP, investors can expect negative total returns (nominal and including dividends) on the S&P 500, not only for the next 5 years, but for the coming decade. Using a broader range of historically reliable valuation measures, we actually estimate a somewhat higher annual total return for the S&P 500 of about 2.3% annually, though still with negative returns on horizons shorter than about 7 years. In any event, history suggests that it is a rather large speculative leap to believe that present extremes will not be amply corrected over the completion of this market cycle.

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Fund Notes section relate specifically to the Hussman Funds and the investment positions of the Funds.

Europe Next? sent by aaajoker

The Economic And Financial Problems In Europe Are Only Just Beginning…

By Michael Snyder, on July 27th, 2015

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Euro Gears - Public DomainRight now, the financial world is focused on the breathtaking stock market crash in China, but don’t forget to keep an eye on what is happening in Europe.  Collectively, the European Union has a larger population than the United States, a larger economy than either the U.S. or China, and the banking system in Europe is the biggest on the planet by far.  So what happens in Europe really matters, and at this point the European economy is absolutely primed for a meltdown.  European debt levels have never been higher, European banks are absolutely loaded with non-performing loans and high-risk derivatives, and the unemployment rate in the eurozone is currently more than double the unemployment rate in the United States.  In all the euphoria surrounding the “deal” that temporarily kept Greece in the eurozone, I think that people have forgotten that the economic and financial fundamentals in Europe have continued to deteriorate.  Whether Greece ultimately leaves the eurozone or not, a great financial crisis is inevitably coming to Europe.  It is just a matter of time.

In many ways, the economy of Europe is in significantly worse shape than the U.S. economy.  Just recently, the IMF issued a report which warned that the eurozone is “susceptible to negative shocks” and could be facing very tough economic times in the near future.  The following comes from the Guardian

The International Monetary Fund has warned the eurozone faces a gloomy economic outlook thanks to lingering worries over Greece, high unemployment and a banking sector still battling to shake off the financial crisis.

The IMF’s latest healthcheck on the eurozone found it was “susceptible to negative shocks” as growth continues to falter and monetary policymakers run out of ways to help. It called for an urgent “collective push” from the currency union to speed up reforms or else risk years of lost growth.

A moderate shock to confidence – whether from lower expected future growth or heightened geopolitical tensions – could tip the bloc into prolonged stagnation,” said Mahmood Pradhan, the IMF’s mission chief for the eurozone.

But even if there are no “shocks” to the European economy in the months ahead, the truth is that it is already in terrible shape and much of the continent is already mired in an ongoing economic depression.

Today, the official unemployment rate in the United States is just 5.3 percent, but the unemployment rate for the eurozone as a whole is sitting at 11.1 percent.  That is an absolutely terrible number, but most Europeans have come to accept it as “the new normal”.  The following are some of the prominent nations in Europe that currently have an unemployment rate of above 10 percent…

France: 10.3 percent

Italy: 12.4 percent

Portugal: 13.7 percent

Spain: 22.37 percent

Greece: 25.6 percent

And remember, these unemployment numbers often greatly understate the true scope of the problem.

For instance, in Italy the number of people “willing to work but not actively searching” is much higher than the number of Italians that are officially unemployed

For every 100 working Italians, there are 15 people seeking a job and another 20 willing to work but not actively searching, the highest level among the 28 EU countries, according to statistics agency Eurostat.

So would the true rate of unemployment in Italy be greater than 30 percent if honest numbers were being used?

That is something to think about.

Meanwhile, debt levels in virtually all European nations have shot up substantially since the last financial crisis.  Just consider the staggering debt to GDP ratios in the following nations…

France: 95.0 percent

Spain: 97.7 percent

Belgium: 106.5 percent

Ireland: 109.7 percent

Portugal: 130.2 percent

Italy: 132.1 percent

Greece: 177.1 percent

Greece is not the only debt crisis that Europe is facing by a long shot.  All of the other nations on that list are going down the exact same path that Greece has gone down.

So whether or not a “permanent solution” can be found for Greece, the reality of the matter is that Europe’s debt problems are only just beginning.

Meanwhile, the economic crisis in Greece continues to become even more dire.  At this point, nearly half of all loans in the country are non-performing, authorities are warning that bank account holders may be forced to take 30 percent haircuts when the banks are finally “bailed in”, and it is being reported that Greek banks may keep current restrictions on cash “in place for months”

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

Rehabilitating the country’s banks poses a difficult question. Should the eurozone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece’s debt mountain?

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks.

The longer it takes, the more critical the banks’ condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers’ ability to repay loans.

Nothing has been “solved” in Greece.  The only thing that has been accomplished so far is that Greece has been kept in the euro (at least for the moment).  But for the average person on the street things continue to go from bad to worse.

How soon will it be until we see similar scenarios play out in Italy, Spain, Portugal and France?

As things in the eurozone continue to deteriorate, nations that were planning to join the euro are suddenly not so eager to do so

Poland will not join the euro while the bloc remains in danger of “burning”, its central bank governor said. Marek Belka, who has also served as the country’s prime minister, said the turmoil in Greece had weakened confidence in the single currency. “You shouldn’t rush when there is still smoke coming from a house that was burning. It is simply not safe to do so. As long as the eurozone has problems with some of its own members, don’t expect us to be enthusiastic about joining,” he said.

Yes, definitely keep an eye on what is happening in China.  Without a doubt, it is very big news.

But I believe that what is going on in Europe will ultimately prove to be an even bigger story.

The greatest financial crisis that Europe has ever seen is coming, and it is going to shake up the entire planet.

Monday, July 27, 2015

Spreads Widen


FRED Series BAMLH0A0HYM2EY: BofA Merrill Lynch US High Yield Master II Effective Yield©, %, D, NSA

The following Federal Reserve Economic Data (FRED) series has been updated:

BofA Merrill Lynch US High Yield Master II Effective Yield©
Frequency: Daily
Units: Percent
Seasonal Adjustment: Not Seasonally Adjusted
Updated: 2015-07-27 7:31 AM CDT

Why Central Banks shouldn’t Play the Market

When Authorities “Own” the Market, The System Breaks Down: Here’s Why

by IWB · July 27, 2015

by Charles Hugh-Smith

Central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors.

Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role ofbuyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.

The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios–it’s all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.

When this restoration of confidence has been accomplished, private buyers will happily buy the central banks’ stocks, bonds and mortgages. The central banks’ portfolios of assets will shrink and the central banks will once again have “dry powder” to buy assets the next time markets falter.

This sounds reasonable in the abstract, but it doesn’t work in the New Normal economy central banks have created. Let’s consider a simple example to see why.

Let’s start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparables appraisers use to establish the fair market value of all the nearby properties.

As the risk-on investment mindset switches to risk-off, house prices start declining. If the last home sold for $400,000, the next seller will expect at least $400,000. But since the mood has changed and risk has re-emerged, buyers are suddenly scarce. Homes listed for $400,000 don’t sell. Eventually a house sells for $350,000 because the seller just needed to get out.

Suddenly, the value of the other 99 homes is in question. Home prices are sticky, meaning sellers refuse to believe the value of their home has declined. So listings of homes asking $399,000 pile up while potential buyers are wondering if $350,000 is a bit rich and perhaps $340,000 is the “real value.”

Then two houses sell for $325,000. Maybe it was a divorce, or a transfer to another state. For whatever reason, the sellers needed out.

As few as 5 home sales revalues the entire neighborhood. Price is set on the margin.

As prices plummet, authorities decide to prop up valuations by directly buying homes. The next five homes are bought by authorities at full asking price.

The authorities expect new private buyers to come in and buy the next batch of homes, but the bubble-mindset of prices are only going up has switched to the fear-mindset oflet’s wait, prices are falling–and one of us might lose our jobs.

Now the authorities are trapped by their policy of central planning distortion of price discovery: since sellers sense prices are being manipulated (or the news that authorities are buying houses to prop up the market leaked out), they don’t trust the price accurately reflects market valuations.

Pretty soon, authorities own 20 houses. Private buyers have vanished, and sellers are realizing it might be their last best chance to sell for $325,000, because if authorities stop buying homes, the price could revert to pre-bubble valuations–at $250,000 or even less.

At $325,000, the homes are poor investments for investors. With property taxes and junk fees soaring while rents are stagnating as layoffs increase, there is no way to make money buying a house for $325,000 once appreciation is no longer a sure thing.

The moment authorities stop buying, the price of the next house sold will be substantially lower as prices re-set to historical norms. This repricing to $250,000 saddles the authorities with immense losses, as they now own 25% of all the homes bought at $325,000 each.

By propping up the price, the authorities have injected false information into the market, and as a result, nobody can trust that current prices are real. If the price of the home might drop $50,000 next year when authorities finally stop buying, why buy now?

With prices distorted and trust lost, where can private investors put their money? Certainly not into houses that might drop in value once authorities cease beingbuyers of last resort.

In effect, central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors. With authorities buying assets, investors have no place to put their money that isn’t exposed to sudden policy changes by authorities.

With investment information and feedback now distorted, private investment dries up, leaving productivity and growth stagnant.

In system language, the markets are now tightly bound to central planning policies: any change in policy has an immediate and potentially disastrous effect on the values of assets.

This is why buying assets to prop up prices is a one-way street: once you distort markets to prop up prices, you destroy information, independent price discovery and trust– all the essentials of a market.

What authorities have created is a facsimile of a market. It looks like a market on the surface, but only gamblers and fools risk capital in markets based on false information.

Read more at http://investmentwatchblog.com/when-authorities-own-the-market-the-system-breaks-down-heres-why/#dSb7ixhLSuIokO8K.99

The sky is falling?

The Stock Market Will Start To Fall In July? The Dow Plummeted More Than 500 Points Last Week

By Michael Snyder, on July 26th, 2015

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Falling - Public DomainWas last week a preview of things to come? There are quite a few people out there that believe that the stock market would begin to decline in July, and that appears to be precisely what is happening. Last week, the Dow Jones Industrial Average fell by more than 530 points. It was the biggest one week decline that we have seen so far in 2015, and some are suggesting that this could only be just the beginning. By just about any measurement that you might want to use, the stock market is overvalued. But we have been in this bubble for so long that many people have come to believe that this is “the new normal”. In fact, earlier today someone that I know dropped me a line and suggested that our financial overlords may be able to use the tools at their disposal to get this current bubble to persist indefinitely. Unfortunately, the truth is that no financial bubble ever lasts forever, and right now some very alarming things are starting to happen behind the scenes. Over the past couple of weeks, the smart money has been dumping stocks like crazy, and the lack of liquidity in the bond markets is beginning to become acute.  Could it be possible that another great financial crisis is just around the corner?

Last week took a lot of investors by surprise. The following is how Zero Hedge summarized the carnage…

-Russell 2000 -3.1% – worst week since Oct 2014 (Bullard)
-Dow -2.8% – worst week since Dec 2014
-S&P -2.1% – worst week since Jan 2015
-Trannies -2.8% – worst week since Mar 2015
-Nasdaq -2.2% – worst week since Mar 2015

The talking heads on television were not quite sure what to make of this sudden downturn. On CNBC, analysts mainly blamed the usual suspects…

“I think the market’s very much concerned about the commodity (decline),” said John Lonski, chief economist at Moody’s. “The contraction in China manufacturing activity is gaining momentum and the credit market has yet to signal that rates are not about to go higher.”

He also noted a surprising decline in new home sales and continued lack of revenue growth in earnings. Nearly all the commodities are in a bear market and gold and crude settled at lows Friday.

“You’ve got some major growth concerns and that is what’s weighing on investors minds,” said Peter Boockvar, chief market strategist at The Lindsey Group.

And without a doubt, there are some new numbers that are deeply troubling for Wall Street. For example, it is being projected that S&P 500 companies will collectively report a 2.2 percent decline in earnings for the second quarter of 2015. If this comes to pass, it will be the first drop that we have seen since the third quarter of 2012.

The biggest reason for this decline in earnings is the implosion of U.S. energy companies due to the crash in oil prices. The following comes from CNBC

Thanks to a collapse in the price of oil, the energy sector is slated to report a monster 54 percent drop in earnings and 28 percent swoon in revenue, compared to the second quarter in the year prior.

Hmm – unlike what so many others were saying initially, it turns out that the oil crash is bad for the U.S. economy after all.

But just like at this time of the year in 2008, most people fully expect that everything is going to be just fine. So many of the exact same patterns that we witnessed the last time around are playing out once again, and yet most of the “experts” refuse to see what is happening right in front of their eyes.

When things crash this time, it won’t just be stocks that collapse. As I have been writing about so frequently, we are also headed for an implosion of the bond markets as well. The following comes from Dr. David Eifrig

In the U.S. Treasury securities market, financial-services giant JPMorgan Chase estimates that five years ago, you could move about $280 million worth of Treasury securities before your trades moved the market’s price. Now, that’s down to $80 million… a decline of more than 70%.

When a panic sets in, reduced liquidity can cause big swings in market prices.

There is that word “liquidity” again. This is something that I have repeatedly been taking about. Just check out this article from a little over a month ago. A bond is only worth what someone else is willing to pay for it, and if the market runs out of buyers that can cause seismic shifts in price very rapidly. Here is more from Eifrig

In a run-of-the-mill bear market, you just have a downward trend… When enough investors are selling bonds, it drives down prices. Falling prices lead more investors to start selling. We see that all the time.

A liquidity crisis goes even further. It’s like a classic run on a bank… Without sufficient liquidity, the sellers don’t just see lower prices… they see no prices. Since no one wants to buy bonds at this particular time, the price for them effectively becomes zero.

There has been a lot of speculation about what will happen in the second half of 2015.

We only have a little over five months to go in the year, so it won’t be too long before we see who was right and who was wrong.

Our perceptions of the future are very much shaped by our worldviews. All the time, I get “Obamabots” that come to my website and leave comments on my articles telling me how Barack Obama has “turned the economy around” and has set the stage for a new era of prosperity in America.

Despite all the evidence to the contrary, they choose to believe that things are in great shape because that is what they want to believe. Just check out the results from one recent survey

While 55 percent of Democrats reported feeling positive about the economy, for example, just 25 percent of Republicans felt the same from March 25 to May 27.

When asked if they thought the economy would improve over the next 12 months, 53 percent of Democrats said yes. Only 23 percent of the Republicans in the survey agreed.

The same perception gap extends to the far future, with 41 percent of Democrats believing that the next generation will be better off than their parents, and just 24 percent of Republicans saying the same.

To me, those numbers are quite striking.

Bail-in coming to Greeks

Greek Capital Controls To Remain For Months As Germany Pushes For Bail-In Of Large Greek Depositors

Tyler Durden's picture

Submitted by Tyler Durden on 07/26/2015 10:24 -0400

Two weeks ago we explained why Greek banks, which Greece no longer has any direct control over having handed over the keys to their operations to the ECB as part of Bailout #3's terms, are a "strong sell" at any price: due to the collapse of the local economy as a result of the velocity of money plunging to zero thanks to capital controls which just had their 1 month anniversary, bank Non-Performing Loans, already at €100 billion (out of a total of €210 billion in loans), are rising at a pace as high as €1 billion per day (this was confirmed when the IMF boosted Greece's liquidity needs by €25 billion in just two weeks), are rising at a pace unseen at any time in modern history.

Which means that any substantial attempt to bailout Greek banks would require a massive, new capital injection to restore confidence; however as we reported, a recapitalization of the Greek banks will hit at least shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year. And since Greek banks are woefully undercapitalized and there is already a danger of depositor bail-ins, all securities that are below the depositor claim in the cap structure will have to be impaired, as in wiped out. 

Now, Europe and the ECB are both well aware just how insolvent Greek banks are, and realize that a new recap would need as little as €25 billion and as much as €50 billion to be credible (an amount that would immediately wipe out all existing stakeholders), and would also result in a dramatic push back from local taxpayers. This explains why Europe is no rush to recapitalize Greece - doing so would reveal just how massive the funding hole is.

However, with every passing day that Greece maintains its capital controls, the already dire funding situations is getting even worse, as Greek bank NPLs are rising with every day in which there is no normal flow of credit within the economy.

This has led to a massive bank funding catch-22: the longer capital controls persist, the less confidence in local banks there is, the longer the bank run (capped by the ECB's weekly ELA allotment), the greater the ultimate bail out cost, and the greater the haircut of not only equity and debt stakeholders but also depositors.

To be sure, we have explained this dynamic consistently over the past several months. Now it is Reuters' turn, which reports this morning that, far from an imminent end to capital controls, Greeks will be unable to access their full funds for months, if not years:

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

But as explained previously, new money will only arrive if and when the same banks suffer a confidence crushing stakeholder and/or a depositor bail in:

Rehabilitating the country's banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece's debt mountain?

And here is Reuters' realization of how our readers have known for months is a huge feedback loop dynamic:

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks. The longer it takes, the more critical the banks' condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers' ability to repay loans.

"The banks are in deep freeze but the economy is getting weaker," said one official, pointing to a steady rise in loans that are not being repaid.

Also last week Fitch calculated a Greek NPL number which we first suggested was accurate to much disagreement by the mainstream: it is now accepeted that more than half of all Greek loans are likely to be non-performing.

Fitch noted that the total amount proposed of 25 billion euros for the Greek bank recap is sufficient unless deferred tax assets stop being considered as core capital. According to Fitch, 45 percent of the four systemic lenders’ core capital consists of deferred tax assets. The agency estimated the capital requirements at 11.2 billion euros on the condition that nonperforming loans amount to 52 percent of loan portfolios, while the adverse scenario seeing bad loans at 60 percent would entail capital needs of 15.9 billion euros.

A 60% NPLs on €210 billion in loans would mean that up to 30% of Greek deposits of about €120 billion currently would be wiped out, or "bailed-in."

And that is the optimistic scenario. The likelihood is that the Greek economy has collapsed to a level where nobody is paying their loan interest or maturity. As such as an even greater NPL percentage is now quite probable. But one thing is certain: with every passing day in which Greece does not have a viable resolution of its banks, the NPLs will keep rising, and the ultimate deposit haircut will be that much greater.

As a result Germany is already demaning a bail-in of large depositors, those holding over the "insured" threshold of €100,000 with Greek banks, in a repeat of the Cyprus depositor bail-in template.

"We want, if possible, an initial amount to be ready for the first needs of the banks," said one official at the Greek finance ministry, who spoke on condition of anonymity. "That should be about 10 billion euros."

Others, including Germany, however, are lukewarm and could push for losses for large depositors with more than 100,000 euros on their accounts, or bondholders.

The amount of large depositors in Greece is about €20 billion according to Reuters calculations (far greater than the €3 billion in bonds issues which will certainly be wiped out in any major recap), which suggests that if a bail-in takes place, then some depositors with savings of less than €100,000 will also have to be impaired.

Furthermore, as we also explained a month ago, unlike in Cyprus where the biggest depositors were Russian billionaire oligarchs, who had zero leverage and even less sympathy with Europe's depositors, in Greece the situation could not be more different especially since the local shipping magnates keep the bulk of their cash overseas:

Imposing a loss, something the Greek government has repeatedly denied any planning for, would be controversial, not least because much of this money is held by small Greek companies rather than wealthy individuals.

"This is not like Cyprus where you can say these are just Russian oligarchs," said an insolvency lawyer familiar with Greece. "It's the very community everyone is hoping will resuscitate Greece, namely the corporates. You'll end up depriving them of their cash."

None of this should be a surprise either: recall in June 2013 we explained that "Europe Make Cyprus "Bail-In" Regime Continental Template." But while the French member of the ECB, Christian Noyer, is against depositor bail-ins, Germany is all for it:

The tone in Berlin is different, where some advocate not only that bank creditors foot the bill but also that the ESM steer clear of any direct stake, lumbering Athens with the banks' clean-up.

"The recapitalization will have to be done by the Greek government so that means more money in the third program," said Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research. "It's a loan they have to repay but there is no risk-sharing on the European side. They will have to bail in the private creditors. I can't see how this could not happen."

The most likely outcome for the Greek banks is a wholesale bailout by the ESM. That, however, comes with major strings attached:

One option, according to euro zone officials, is the direct recapitalization of Greece's banks by the euro zone's rescue fund, the European Stability Mechanism (ESM).

This could grant the Luxembourg-based authority a direct stake in the banks and greater control over their future.

That, however, would take Greece closer to the Cyprus model. Any such direct ESM aid requires that losses first be imposed on some of the banks' bondholders and even large depositors.

So Greece is damned if it does, and damned if it doesn't.

And here is why we made such a big deal of Greece handing over controls of its banks to the ECB as we reported in mid July:

To avoid such orders, Athens is battling to keep autonomy in deciding the fate of its banks. Ceding further control could cost it dearly. Bondholders are nervous.

Alas, Greece already ceded control, remember: that was one of the main conditions for the Third Greek bailout, all of which we explained on July 13 in "Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent."

At this point the only leverage Greece may have, having squandered all of its true leverage when it decided not to pursue a "parallel-currency" system after the Referendum, is mere empathy with the rest of Europe's population; however with its ruling socialists backtracking on all their promises and in fact pushing Greece into an austerity program harsher than anything seen yet, not even the leftist parties in Europe care any more if Tsipras' government survives.

Indeed, Reuters summarizes the situation quite well when it says that "with its economy starved of cash and the threat of its departure from the euro zone hanging over talks, Athens' room for maneuver is limited. One euro zone official summarized the mood: "Whatever sympathy there was for Greece has evaporated."

Which is indeed the truth, and this time, Greece only has itself to blame.

Panic Coming

Central Banks Ready To Panic - Again

Tyler Durden's picture

Submitted by Tyler Durden on 07/26/2015 15:00 -0400

Submitted by John Rubino via DollarCollapse.com,

Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. Raw materials are tanking as capital pours out of the most heavily-impacted countries and into anything that looks like a reasonable hiding place. So the dollar is up, Swiss and German bond yields are negative, and fine art is through the roof.

Now emerging-market turmoil is spreading to the developed world and the conventional wisdom is shifting from a future of gradual interest rate normalization amid a return to steady growth, to zero or negative rates as far as the eye can see. Here’s a representative take from Bloomberg:

Cheap Money Is Here to Stay

The Fed’s Countdown

Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.”

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6 percent) and Australia (2.3 percent), it’s hard not to conclude that ultralow rates will be the global norm for a long, long time.

Indeed, the major monetary powers that are easing — Europe, Japan, Australia and New Zealand — have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile — the Federal Reserve and Bank of England — are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus.

“As interest rates continue to fall across most of the globe, central banks are also united in their main message: Once rates have come down, they’re likely to stay down,” says Simon Grose-Hodge of LGT Bank. “And when they finally do tighten, the ‘normal’ rate is going to be a lot lower than it used to be.”

Could the People’s Bank of China be next? “With underlying GDP growth still looking weak, more monetary policy moves are likely,” says Adam Slater of Oxford Economics. “And China may even face the prospect of short-term rates dropping towards the zero lower bound.”

This is not how the Fed, ECB or Bank of Japan envisioned the year playing out. They see ultra-low rates as an emergency measure, temporary in nature and to be dispensed with asap. From MarketWatch:

Here’s the real reason the Fed wants to raise rates

Federal Reserve policy makers are hoping, even praying, that no unexpected domestic development or international crisis intervenes to prevent them from taking the first baby step to normalize interest rates at the Sept.16-17 meeting.

Why? Fed officials point to a number of reasons: the unnatural state of a near-zero benchmark rate; the potential risk of financial instability; an improving labor market; diminishing headwinds; and yes, expectations of 3% growth just over the horizon.

Fed Chairman Janet Yellen, usually considered a member of the Fed’s dovish faction, sounded determined to act when she testified to Congress last week.

“We are close to where we want to be, and we now think that the economy cannot only tolerate but needs higher interest rates,” Yellen said during the Q&A. “Needs,” as in the patient needs his medicine.

What’s the urgency with an economy chugging along at 2-something percent and low inflation? I suspect Fed officials are terrified of being caught with their pants down, in a manner of speaking. Should some unforeseen event come along to upend the economy, the Fed’s arsenal would be dry. They’d like to put some space between their policy rate and zero.

That “unforeseen event” has arrived, leaving most central banks with a stark choice:

  1. Let the deflationary crash run its course at the risk of blowing up the quadrillion or so dollars of interest rate, credit, and currency derivatives hidden on bank and hedge fund balance sheets.
  2. Or push interest rates into negative territory pretty much across the developed world.

Since option number one carries a statistically-significant chance of ending the modern financial era it is absolutely unacceptable to Goldman et al, and is thus a non-starter. Which leaves only option two: more of the same but bigger and badder.

So…the central banks will panic. Again. Countries that retain some control over their monetary systems will see their interest rates fall to zero and beyond, while those that don’t will be thrown into some kind of new age hyperinflationary depression. Not 2008 all over again; this is something much stranger.

Is Japan just another bubble?

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


IMF warns Japan over its staggering national debt

Posted by aurelius77 on July 26, 2015

Please see the source for the video.

Japan’s debt will be three times the size of its economy by 2030 unless the government acts now to control spending, the International Monetary Fund has warned.

Japan’s debt is already at about 245% of its annual gross domestic product — or more than 1 quadrillion yen ($11 trillion).

“Japan’s public debt is unsustainable under current policies,” the IMF said in a report issued Thursday. “A credible medium-term fiscal consolidation plan is needed … [it] should aim to put debt on a downward path.”

The IMF has repeatedly urged Japan to control its gigantic debt. The country is still recovering from a decades-long deflationary period, during which Tokyo borrowed ambitiously to fund programs aimed at boosting growth.

Full article: IMF warns Japan over its staggering national debt (CNN Money)

Sunday, July 26, 2015

Poland on Eurozone: No

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Poland will never join a ‘burning’ eurozone, says central bank governor

Posted by aurelius77 on July 26, 2015

Marek Belka says country remains reluctant to join the euro, as he warns that world is running out of ammunition to fight the next financial crisis

Poland will not join the euro while the bloc remains in danger of “burning”, its central bank governor said.

Marek Belka, who has also served as the country’s prime minister, said the turmoil in Greece had weakened confidence in the single currency.

“You shouldn’t rush when there is still smoke coming from a house that was burning. It is simply not safe to do so. As long as the eurozone has problems with some of its own members, don’t expect us to be enthusiastic about joining,” he said.

In a stark warning, Mr Belka also said the world was running out of ammunition to fight the next financial crisis.

The governor suggested that Poland, which is obliged to join the euro as part of its EU membership, would not become a member for many years. He said interest would wane further if the political environment continued to shift to the Right.

Mr Belka, a former head of the International Monetary Fund’s European division, said the eurozone was at risk of becoming trapped in a “vicious circle” where closer fiscal integration became more difficult because of splits over structural reforms and austerity.

“As long as there is divergence or as long as we have problems in some countries, it’s more difficult to build up a solid foundation for the real fiscal union in the eurozone. So this is a little bit of a vicious circle,” he said.

He said closer union was needed within “a generation” to prevent the bloc from lurching from crisis to crisis.

The full interview

What is the biggest risk to the global economy?

The next crisis, because we have used so much of our war chest to fight the former crisis that it would be difficult to fight another one. We don’t have the option of decreasing interest rates. Much fewer countries have fiscal space to intervene so we are less prepared. If we get into a next crisis, we have less weaponry to fight it.

Full article: Poland will never join a ‘burning’ eurozone, says central bank governor (The Telegraph)

Is AMZN the last bubble?

Stockman's Corner

The Last Bubble Standing——Amazon’s Same Day Trip Through The Casino

by David Stockman • July 26, 2015

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Right. Amazon is the greatest thing since sliced bread. Like millions of others, I use it practically every day. And it was nice to see that it made a profit—-thin as it was at 0.4% of sales—–in the second quarter.

But the instantaneous re-rating of its market cap by $40 billion in the seconds after its earnings release had nothing to do with Amazon or the considerable entrepreneurial prowess of Jeff Bezos and his army of disrupters. It was more in the nature of financial rigor mortis——-the final spasm of the robo-traders and the fast money crowd chasing one of the greatest bubbles still standing in the casino.

And, yes, Amazon’s $250 billion market cap is an out and out bubble. Notwithstanding all the “good things it brings to life” daily, it is not the present day incarnation of General Electric of the 1950s, and for one blindingly obvious reason. It has never made a profit beyond occasional quarterly chump change. And, what’s more, Bezos—– arguably the most maniacal empire builder since Genghis Khan—–apparently has no plan to ever make one.

To be sure, in these waning days of the third great central bank enabled bubble of this century, GAAP net income is a decidedly quaint concept. In the casino it’s all about beanstalks which grow to the sky and sell-side gobbledygook. Here’s how one of Silicon Valley’s most unabashed circus barkers, Piper Jaffray’s Gene Munster, explains it:

Next Steps For AWS… SaaS Applications? We believe AWS has an opportunity to move up the cloud stack to applications and leverage its existing base of AWS IaaS/PaaS 1M + users. AWS dipped its toes into the SaaS pool earlier this year when it expanded its offerings to include an email management program and we believe it will continue to extend its expertise to other offerings. We do not believe that this optionality is baked into investors’ outlook for AWS.

Got that?

Instead, better try this. AMZN’s operating free cash flow in Q2 was $621 million—–representing an annualized run rate right in line with its LTM figure of $2.35 billion. So that means there was no cash flow acceleration this quarter, and that AMZN is being valued at, well, 109X free cash flow!

Moreover, neither its Q2 or LTM figure is some kind of downside aberration. The fact is, Amazon is one of the greatest cash burn machines ever invented. It’s not a start-up; it’s 25 years old. And it has never, ever generated any material free cash flow——notwithstanding its $96 billion of LTM sales.

During CY 2014, for example, free cash flow was just $1.8 billion and it clocked in at an equally thin $1.2 billion the year before that. In fact,  beginning with net revenues of just $8.5 billion in 2005 it has since ramped its sales by 12X, meaning that during the last ten and one-half years it has booked $431 billion in sales. But its cumulative operating free cash flow over that same period was just $6 billion or 1.4% of its turnover.

So, no, Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino. In an honest free market, real investors would never give a quarter trillion dollar valuation to a business that refuses to make a profit, never pays a dividend and is a one-percenter at best in the free cash flow department—–that is, in the very thing that capitalist enterprises are born to produce.

Indeed, the Wall Street brokers’ explanation for AMZN’s $250 billion of bottled air is actually proof positive that the casino has become unhinged. For more than two decades, Amazon has been promoted as the monster of the E-commerce midway, which it surely is.

But today’s $40 billion roll of the dice has absolutely nothing to do with same day delivery of healthy treats for your pooch. This 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 did not fail to get on air before the cash market open 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 $1.8 billion this quarter and revenues of $6 billion on an LTM basis. So that puts its value at 18X sales or 16X if you prefer to annualize the current quarter. 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 $140 billion. And by golly, said the UBS man, that’s just 1.4X 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 $391 million of operating income or 21% of sales. But consolidated operating income during the quarter was only $464 million, meaning that by the lights of subtraction, Jeff Bezos’ great empire of E-commerce earned the microscopic sum of $73 million in operating income.

By the same magic of subtraction we can see that AMZN’s E-commerce business generated $21.4 billion of sales. This means that its operating margin was exactly 34 basis points. That’s right—–after 25 years of crushing it on the E-commerce front, Amazon’s profit margin is truly a rounding error.

Except it’s probably worse.  Amazon’s helpful segment breakout shows that on a LTM basis, its E-commerce business generated $90 billion in sales—a number that is approaching Wal-Mart’s league, or at least the league it was in back in 1996. But AWS generated $975 million of operating income during the last 12 months compared to Amazon’s consolidated operating income of, um, $765 million.

Might we just dispense with the magic of subtraction and call it a $200 million loss on the operating line and dispense with corporate overhead, taxes and debt service?

And might we also ask why you would value at $140 billion the profitless sales of an E-commerce monster that just can’t stop spending every dime it takes-in on distribution centers, package handlers, hired delivery trucks and drone prototypes; and now, apparently, same hour delivery service by out-of-work actors and bank tellers who happen to own a Vespa!

Stated differently, the $40 billion spike at today’s open was not actually a re-rating; it was a instantaneous bait-and-switch operation by the high-rollers in the casino. Amazon is not the inventor and first-mover of E-commerce, after all.

Instead, it’s now suddenly held to be the monster of the midway in the totally unrelated business of cloud computing services.  So go right ahead. Take the Q2 operating income of AWS and annualize it—–notwithstanding that its Q1 margin came in at a much lower 17%——and throw on a standard tax rate. That computes out to $1 billion of pro forma net income.

So by the lights of the UBS man and Wall Street’s amen chorus, AWS is valued at 110X now, but will surely crush any competitor in the stretch ahead, and thereby grow its way into that outsized valuation.

Except don’t tell Google, Microsoft, Oracle or several others about the beanstalk thing. Indeed, today’s nattering about AWS was truly ridiculous. Why would anyone endowed with a modicum of sanity believe that these tech powerhouses are about to cede the cloud to Amazon merely because it comes first in the alphabet?

There is no other real reason for thinking so. Between them, the big three mentioned above have about $220 billion of cash and deep franchises in the world of computing and the internet. Sure, when technology moved from owned boxes, corporate computer centers and software licenses to a rent-a-server model,  Amazon got out of the gate first because it had no installed base of old technology to protect.

But there are no barriers to entry, no killer patents, no material brand equity, no irreproducible sales and service network etc. that will permit Amazon to ring-fence the cloud. So there will be viscous competition and prices will fall at a rate which will make Moore’s law look tepid. Indeed, Larry Ellison has promised to cut prices by 90%, and he has rarely failed to follow through on exactly that kind of competitive rampage.

Likewise, it would appear that the cloud is destined to be the future home of Microsoft’s entire franchise. Surely it is probable that AMZN’s Seattle neighbor can make the transition from selling computer software to renting cloud services.

In short, AMZN has disclosed almost nothing about AWS’s detailed business model, its fixed and variable cost structure or the investment requirements of its rentable clouds and the rates of return on the massive amounts of capital employed. Only the Wall Street boys, girls and robo-traders betting on red could come up with $110 billion valuation of a nascent business that is positioned in the cross-fire of the Big Tech battlefield.

So Amazon’s $250 billion valuation is just plain irrational exuberance having one more fling. Spasms like today’s $40 billion gain on the AMZN ticker or last week’s $66.9 billion on the GOOG account are absolutely reminiscent of final days before the tech wreck exactly 15 years ago.

In a recent post I demonstrated how the 12 Big Cap Techs of 2000—-led by Microsoft, Intel, Dell and Cisco——-saw their peak combined valuation of $3.8 trillion plunge to $875 billion a decade later, even as their sales and earnings continued to grow. What got purged was irrational exuberance in a casino high on the central bank’s monetary heroin.

As a reminder here is what happened to the market cap of two of these high flyers, Cisco and Juniper Networks:
CSCO Market Cap Chart
JNPR Market Cap Chart

JNPR Market Cap data by YCharts

Why don’t the gamblers see this? The answer is quite simple. They have been in the casino so long they wouldn’t know honest price discovery if it slapped them in the head.

Indeed, the nation’s and the world equity and other capital markets have been well and truly broken by the relentless, massive intrusion of the central banks and the resulting falsification of asset pricing everywhere on the planet.

Today’s same day delivery of an initial $40 billion in AMZN market cap was just one more proof.

Friday, July 24, 2015

Buy Gold Now

Sentiment on gold sours further

Jul 24 2015, 16:29 ET | By: Stephen Alpher, SA News Editor

  • For the first time since the data began being collected in 2006, hedge fund and other sizable speculator types went net short the yellow metal in the week ended July 21, according to the CFTC, reporting a cumulative net-short position of 11,345 futures contracts.
  • Gold put in another fresh five-year low today before bouncing to close modestly higher, but has been in the red nearly every day this month.
  • Earlier this week, Goldman's Jeffrey Currie says more pain is ahead for gold, and sees the price soon slipping below $1K per ounce (it closed today at $1,098).

World Trade Drops—Big Time

World Trade Drops Most Since Financial Crisis

by Wolf Richter • July 22, 2015

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Maybe we shouldn’t take our daily corporate samples too seriously. Maybe they don’t adequately represent the global economy. So IBM’s revenues last quarter plunged 13% from a year ago. It blamed China and the dollar, among other culprits. But IBM’s revenues have dropped for 13 quarters in a row. It’s a normal IBM condition and not a reflection of the global economy.

A whole slew of other tech companies chimed in with either disappointing revenues or disappointing outlooks, or both, each blaming a variety of issues, among them China and the dollar. Chip maker Qualcomm just reported a 14% plunge in its quarterly revenues. It’s having trouble in the smartphone market and will lay off a bunch of people. But maybe they’re just running into tougher competitors, rather than a lousy global economy. And the PC business, which is cratering, is dragging down all those involved. That’s structural and has little to do with the state of the global economy.

Then there’s industrial giant United Technology which reported that its revenues last quarter dropped 5%. Today Caterpillar reported that global machine sales plunged 15% in June compared to a year ago, after having dropped 12% in May and 11% in April, In Asia, machine sales plunged 19%, in Latin America 50%. And in booming North America? Down 5%, after having been up for the prior two months.

So CAT is facing Japanese, Chinese, and German competitors. It’s having to slug it out with them in China precisely when China is slowing. So it may be just CAT that’s having a hard time.

But don’t look at energy. Energy is getting clobbered….

So maybe we’re cherry-picking negative data. There are companies with actual revenue increases and positive outlooks, like Equifax, the credit bureau, which just reported a 10% jump in revenues (14% “in local currency,” as it says). Consumer borrowing is king, and Equifax expedites the process.

So what the heck is going on?

Turns out, global trade during the quarter and during the first five months of the year experienced the sharpest drop-off since the Financial Crisis.

The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released its latest Merchandise World Trade Monitor, which covers global import and export volumes. It was dreary.

World trade shrank 1.2% in May from the previous month. The index fell to 135.1, the lowest level since July 2014, having dropped nearly every month so far this year. It’s down 4.7 points from its peak in December, the sharpest and longest decline since the Financial Crisis.

This chart, going back to January 2012, shows the very crummy state of the global economy, expressed in global trade:


To smoothen out the volatility of these sorts of monthly numbers – though there hasn’t been much volatility this year, it’s been just down – the CPB offers a measure of trade volume “momentum,” which it defines as “the change in the three months average up to the report month relative to the average of the preceding three months.”

That trade momentum measure slumped 1.3% in May, after having dropped 1.2% in April. It now amounts to the most negative “momentum” since the Financial Crisis.

The report explains: “Import and export momentum were close to zero in advanced economies, while both numbers were below 2% in emerging economies.” The chart from CBP, going back to 2010:


This isn’t stagnation or sluggish growth. This is the steepest and longest decline in world trade since the Financial Crisis. Unless a miracle happened in June, and miracles are becoming exceedingly scarce in this sector, world trade will have experienced its first back-to-back quarterly contraction since 2009.

Both of the measures above track import and export volumes. As volumes have been skidding, new shipping capacity has been bursting on the scene in what has become a brutal fight for market share [read… Container Carriers Wage Price War to Form Global Shipping Oligopoly].

Hence pricing per unit, in US dollars, has plunged 14% since May 2014, and nearly 20% since the peak in March 2011. For the months of March, April, and May, the unit price index has hit levels not seen since mid-2009.


World trade isn’t down for just one month, or just one region. It wasn’t bad weather or an election somewhere or whatever. The swoon has now lasted five months. In addition, the CPB decorated its report with sharp downward revisions of the prior months. And it isn’t limited to just one region. The report explains:

The decline was widespread, import and export volumes decreasing in most regions and countries, both advanced and emerging. Import and export growth turned heavily negative in Japan. Among emerging economies, Central and Eastern Europe was one of the worst performers.

Given these trends, the crummy performance of our heavily internationalized revenue-challenged corporate heroes is starting to make sense: it’s tough out there.

But not just in the rest of the world. At first we thought it might have been a blip, a short-term thing. Read… Americans’ Economic Confidence Gets Whacked

Capital Exits China

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Capital exodus from China reaches $800bn as crisis deepens

Posted by aurelius77 on July 24, 2015

Outright ignore the whitewashing within the article. China is in full-blown crisis mode.

The only reason this article made it to the front page here is because it was an $800 billion loss. Morever, the Chinese Communist Party (CCP) has been outright forcing people to stay in the markets by banning sell-offs and to take a hit, possibly losing it all. Otherwise, the economy would likely crash. The CCP is fully panicked and they’re running out of tricks to keep the can being kicked down the road.


China is reverting to credit stimulus after attempts to engineer a stock market boom failed horribly. The day of reckoning is delayed again

China is engineering yet another mini-boom. Credit is picking up again. The Communist Party has helpfully outlawed falling equity prices.

Economic growth will almost certainly accelerate over the next few months, giving global commodity markets a brief reprieve.

Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”.

The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.

Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money.

China’s bond sales automatically entail monetary tightening. What we are seeing is the mirror image of the boom years, when the PBOC was accumulating $4 trillion of reserves in order to hold down the yuan, adding extra stimulus to an economy that was already overheating.

The squeeze earlier this year came at the worst moment, just as the country was struggling to emerge from recession. I use the term recession advisedly. Looking back, we may conclude that the world economy came within a whisker of stalling in the first half of 2015.

Chinese industry ground to a halt earlier this year. Electricity use fell. Rail freight dropped at near double-digit rates. What had begun as a deliberate policy by Beijing to rein in excess credit escaped control, escalating into a vicious balance-sheet purge.

The Chinese authorities have tried to counter the slowdown by talking up an irresponsible stock market boom in the state-controlled media. This has been a fiasco of the first order.

The equity surge had no discernable effect on GDP growth, and probably diverted spending away from the real economy. The $4 trillion crash that followed has exposed the true reflexes of President Xi Jinping.

Half the shares traded in Shanghai and Shenzhen were suspended. New floats were halted. Some 300 corporate bosses were strong-armed into buying back their own shares. Police state tactics were used hunt down short sellers.

Full article: Capital exodus from China reaches $800bn as crisis deepens (The Telegraph)

Coal is Dying

Contra News and Views

Canary In The Coal Mine——-The US Industry Is Collapsing

by Oilprice.com • July 23, 2015

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The coal industry is in uncharted territory.

After decades of strong financial numbers and dominance in the electric power sector, coal producers are starting to fall apart faster than anyone could have anticipated. SNL Financial has produced some jaw dropping data on the quickly deteriorating coal industry, with a horrific performance in the second quarter.

The U.S. coal mining sector has exhibited an unprecedented wave of turmoil in just the last few weeks.

Walter Energy, an Alabama coal miner, announced on July 15 that it is filing for bankruptcy. Senior lenders will see their debt turned into equity, and if the company cannot turn the ship around, it will more or less sell off all of its assets. “In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry,” Walter Energy’s CEO Walt Scheller said in a press release.

Alpha Natural Resources, a top producer of metallurgical coal (used for steelmaking), was delisted from the New York Stock Exchange because its share price was “abnormally low.” The company is eyeing the possibility of declaring bankruptcy protection.

Arch Coal has seen its share price crater to similar depths that Alpha Natural Resources saw before it was delisted. Arch Coal pulled off a one-for-ten reverse stock split in an effort to avoid the same delisting fate as its peer. Essentially, the move to reduce the number of shares is intended to boost the share price, and it will take effect on July 27. But moves on paper won’t change the underlying fundamentals.

Coal prices are down 70 percent from four years ago. The U.S. is shifting towards natural gas in the electric power sector, and weak demand for coal is leading to mine closures. The Obama administration is also trying to reduce the country’s greenhouse gas emissions, and a litany of regulations intended to meet that objective are cutting down coal at the knees. As the dirtiest source of electricity, coal is in the crosshairs. The EPA is working hard to ensure that its Clean Power Plan, which puts limits on carbon emissions at the nation’s power plants, is finished before the end of Obama’s term.

A general view shows a coal-burning power station at night in Xiangfan, Hubei province September 15, 2009.  REUTERS/Stringer Thomson ReutersA general view shows a coal-burning power station at night in Xiangfan

But there are other regulations that are piling on the coal industry, deepening the crisis. The Interior Department proposed a new rule this month that would require surface mines to maintain a buffer zone from their operations and streams nearby. They would also be required to monitor water quality before, during, and after mining. Reactions were predictable – environmentalists said the rules didn’t go far enough and coal companies said the rules were unnecessary and draconian.

The combination of weak demand and rising costs is becoming too much for the sector to bear. As such, the coal industry could be facing structural and permanent decline. But the damage is happening quickly. According to SNL Financial, the combined market capitalization of the entire publicly-listed coal industry in the United States was less than $9.30 billion. And around 40 percent of that total can be attributed to just one company, Consol Energy. The coal sector’s market cap is more than 80 percent down from April 2011.

The only way out – exporting coal abroad to energy hungry countries like China – is also quickly closing off. Oversupply on international markets is depressing prices, and even China is showing less of an appetite for coal than many anticipated. For example, for the fiscal year ending in June 2015, China posted a 31 percent decline in imported thermal coal. China’s economic growth is slowing, but it is also implementing air pollution measures that are reducing its demand for coal. Moreover, China is propping up domestic producers to the detriment of coal miners abroad, such as those in the U.S.

So far 2015 has been a horrendous year for coal, but the ugly forecast keeps getting worse.

Read the original article on OilPrice.com. Copyright 2015.

Source: The death of US coal – Business Insider