Saturday, April 30, 2016

Dead in the Water

he Cult Of Central Banking Is Dead In The Water

by David Stockman • April 30, 2016

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The Fed has been sitting on the funds rate like some monetary mother hen since December 2008. Once it punts again at the June meeting owing to Brexit worries it will have effectively pegged money market rates at the zero bound for 90 straight months.

There has never been a time in financial history when anything close to this happened, including the 1930s. Nor was interest-free money for eight years running ever even imagined in the entire history of monetary thought.

So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression?

Alas, there is none. And that’s as in nichts, nada, nope, nothing!

There is a structural growth problem, of course. But it has absolutely nothing to do with monetary policy; and it can’t be fixed with cheap money and more debt, anyway.

By contrast, there is no inflation deficiency—–even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics.

The following two graphs dramatize the cargo cult essence of today’s Keynesian central banking regime. Since the year 2000 when monetary repression began in earnest, the balance sheet of the Fed has risen by 800%, while the amount of labor hours used in the US economy has increased by2%.

At a ratio of 400:1 you can’t even try to argue the counterfactual. That is, there is no amount of money printing that could have ameliorated the “no growth” economy symbolized by flat-lining labor hours.

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude.

In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same.

In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy.

No it wasn’t!

What it was actually doing was not stimulating the main street economy, but falsifying and inflating the price of financial assets. That happened directly in the Treasury and GSE (i.e. Fannie Mae and Freddie Mac) markets where the Fed made its massive debt purchases, but that Big Fat Bid obviously cascaded through the pricing mechanism of the entire financial system via the linkage of credit spreads, cap rates and carry trades, including the PE on equities.

By contrast, the mainstream Keynesian delusion that the Fed has been stimulating GDP growth rather than speculator windfalls is rooted in the hoary concept of “aggregate demand” deficiency. That is, the proposition that the macroeconomy has a natural growth rate based on potential output at full employment, and that when actual growth falls short of that benchmark, it is the job of the state—–and in recent times, especially its central banking branch——to stimulate sufficient aggregate demand to close the gap.

This is claimed to be the essence of the welfare enhancing function of the state. To wit, pushing a continuously lapsing and faltering private capitalism toward its inherent full employment potential, thereby generating jobs, income and wealth that would otherwise not happen.

Alas, that’s complete self-serving clap-trap. At the end of the day, the full employment myth has conferred opportunities for employment and power on economists who would otherwise not have much more social function than astrologists; and it has provided an all-purpose blanket of rationalization for politicians bent on using the tools of state intervention and subvention to do good, do favors and do re-election.

The truth is, there can never by an honest shortage of “aggregate demand” because the latter is nothing more than spending for consumer and capital goods that is financed from the flow of income and production. As “Say’s Law” famously and correctly insists, “supply creates its own demand”.

And even more to the point, it is “supply” that is the hard part of the economic equation. It stems from work, exertion, sweat, discipline, enterprise, innovation, invention, sacrifice and savings.

Spending from what has already been produced is the easier part. And given human nature,  there is virtually no prospect of a shortage of aggregate demand——and most certainly not one which is chronic and continuous, as is implicit in the 24/7 stimulus policies of modern central banking.

Indeed, the idea that the state can create “aggregate demand” ex nihilo stems from a one-time parlor trick that was operative in the second half of the 20th century. Central banks discovered that they could stimulate credit expansion by supplying plentiful reserves to the fractional reserve banking system, thereby causing credit growth that was not funded from current savings.

That did permit a temporary breach of Say’s Law because spending derived from freshly minted banking system credit was additive to spending for consumer and capital goods financed out of current income and production. But there was a catch. Namely, continuous credit expansion resulted in the steady leveraging-up of household and business balance sheets.

Eventually, balance sheets became saturated and a condition of Peak Debt was achieved. In the case of the household sector, leverage ratios against wage and salary income rose from a stable historic level of about 75% prior to 1980 to a peak of 220% in 2007.  Then the parlor trick was over and done because in the aggregate there was no credit-worthy headroom left on balance sheets.

In fact, as shown in the chart below, the household sector has been slowly deleveraging its wage and salary income since the Great Financial Crisis.What that means is that with respect to the largest slice of the income pie by far—–the wage and salary earnings of households——Say’s Law has been re-instated. Household consumption is now constrained to the growth of production and income.

There is no more central bank “stimulus” through the household credit channel of monetary transmission.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

Likewise, total US business borrowings have increased from $11 trillion to $13 trillion since the fall of 2007, but it has not lead to additional investment spending. Instead, the Fed fueled inflation of financial assets has induced businesses to cycle virtually 100% of their incremental borrowings into financial engineering. That is, stock repurchases and M&A deals.

But financial engineering does not add to GDP or increase primary spending; it results in the re-pricing of existing financial assets. That is, it gooses stock prices higher, makes executive stock options more valuable and confers endless windfalls on the fast money speculators who work the financial casinos.

Indeed, as we demonstrated in a post earlier this week—–precisely 100% of the entire increase in corporate borrowing since the turn of the century has been pumped back into the casino in the form of stock repurchases. Accordingly, the business investment channel of monetary transmission is over and done, as well.

The world is drowning in excess production capacity owing to the massive worldwide credit inflation and repression of capital costs during the last two decades. That was the effect of total global credit growth from $40 trillion in the mid-1990s to upwards of $225 trillion today—-an $185 trillion expansion that exceeded the growth of global GDP by nearly 4X during the same period.

Under this condition the diversion of corporate borrowing to financial engineering and stock buybacks is a no-brainer. Prospective returns on real productive assets are jeopardized by the immense overhang of excess capacity and the unfolding contraction of profit margins and CapEx, whereas stock buybacks and M&A deals bring immediate excitement and financial rewards to the C-suite.

So we go back to the beginning. The Fed and central banks in general are pushing on a fiat credit string because Peak Debt has arrived. All of today’s massive central bank intrusion is ending up in the secondary markets where it is causing the falsification of financial asset prices and massive, unearned and ultimately destructive windfall gains to speculators.

Here’s the essence of the Keynesian full employment/potential GDP myth. The learned economic doctors have simply pulled a fancy version of the old story about the professor of economics who fell into a 30-foot hole with a colleague. At length, the latter inquired about the professor’s plan to get out. “Assume we have a ladder”, said he.

There is absolutely nothing more to potential GDP and the so-called output gap than an assumed ladder. In the context of an $80 trillion global GDP enabled by today’s massive trade, capital and financial flows and current information technology, “potential output” is impossible to measure and is constantly changing.

There is no way to know whether an auto plant is at 95% utilization or 65%; it all depends on ever-changing costs of labor, the number of scheduled shifts, the complexity of the vehicles being assembled at any moment in time and the line speed, which. in turn, is a function of equipment, automation and technology variations over time.

Likewise, when on the margin labor is deployed by the gig in the DM economies and when the rice paddies have not yet been fully drained in the EM economies, there is no reasonable, accurate or meaningful way to measure labor utilization, either.

So there is no grand Keynesian economic bathtub whose full employment dimensions can be measured; and there is no way for the Fed or other central banks to fill it right to the brim with extra demand stimulus, anyway. Peak Debt has blocked the monetary policy transmission channels.

In fact, tepid growth of labor hours, productivity and output is a supply side problem. In that respect, replacing the current burdensome 16% payroll tax on America’s high cost labor with a consumption tax on the nation’s heavily imported goods would do more for supply side growth than central bankers could ever accomplish in a month of Sundays.

Likewise, there is no want of inflation, and the 2% target is simply a central banker’s con job. By selecting the most flawed and under-stated measure possible—-the PCE deflator less food and energy—–our monetary central planners rationalize their massive usurpation of power.

But there isn’t an iota of proof that 2.0% goods and service inflation is any more conduce to real growth of output and wealth than is 1.4% or even (0.2%). In any event, there is plenty of evidence that we are and always have been at 2.0% CPI inflation or better.

When an array of the inherently flawed inflation indices are considered as shown below, there is no meaningful shortfall from 2.0% since 2010 or during the entire period when the Fed has claimed to be struggling against lowflation. And that’s especially so when the BLS’ preposterous owners’ equivalent rent (OER) is replaced with empirical gauges of housing rent inflation.

So what is to be done, as Lenin once queried?

In a word it is this. Fire the Fed. Attend to supply side policy. Let market capitalism do the rest.

The cult of central banking is dead in the water.

Friday, April 29, 2016


The U.S. Economy Officially Joins The Global Economic Slowdown – 1st Quarter GDP Comes In At 0.5%

By Michael Snyder, on April 28th, 2016

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Slow Down - Public DomainEven the government is admitting that the U.S. economy is slowing down.  On Thursday, we learned that U.S. GDP grew at just a 0.5 percent annual rate during the first quarter of 2016.  This was lower than analysts were anticipating, and it marksthe third time in a row that the GDP number has declined compared to the previous quarter.  In other words, GDP growth has been declining for close to a year now, and this lines up perfectly with what I have been saying about how the second half of last year was a turning point that plunged us into the early chapters of a brand new economic crisis.  And as you will see below, the official GDP number is highly manipulated, and the way that it is calculated has been changed numerous times over the years.  So the bad number that is being reported by the government is actually the best case scenario.

Of course many of the “experts” being quoted by the mainstream media are saying that this is just a temporary blip and that good times for the U.S. economy are right around the corner.  For instance, check out this quote from Reuters

“The economy essentially stalled in the first quarter, but that doesn’t mean it is faltering,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “Some of the restraints to growth are dissipating. Growth is likely to accelerate going forward.”

We have been told this same story for years, but the “acceleration” has never materialized.  In fact, Barack Obama is poised to become the only president in U.S. history to never have a single year when the economy grew by more than 3 percent during his presidency.

That is a statistic that is hard to believe, but it is true.

In addition, Louis Woodhill has pointed out that the average rate of U.S. economic growth during the Obama years will be the fourth worst in recorded history…

Assuming 2.67% RGDP growth for 2016, Obama will leave office having produced an average of 1.55% growth. This would place his presidency fourth from the bottom of the list of 39*, above only those of Herbert Hoover (-5.65%), Andrew Johnson (-0.70%) and Theodore Roosevelt (1.41%)

So does anyone out there still believe that there has been an “Obama recovery”?

We also need to add another layer to our analysis.  By now, everyone should realize that the official GDP number is highly manipulated, and the way that GDP is calculated has been changed many, many times over the years.

For example, here is Peter Schiff commenting on changes that were made in 2013

The latest example of this was revealed earlier this week when the Bureau of Economic Analysis (BEA) announced new methods of calculating Gross Domestic Product (GDP) that will immediately make the economy “bigger’ than it used to be. The changes focus heavily on how money spent on research and development (R&D) and the production of “intangible” assets like movies, music, and television programs will be accounted for. Declaring such expenditures to be “investments” will immediately increase U.S. GDP by about three percent. Such an upgrade would immediately increase the theoretic size of the U.S economy and may well lead to the perception of faster growth. In reality these smoke and mirror alterations are no different from changes made to the inflation and unemployment yardsticks that for years have convinced Americans that the economy is better than it actually is.

And the following originally comes from a Bloomberg article which discussed changes that were made in 2015

The way some parts of U.S. gross domestic product are calculated are about to change in the wake of the debate over persistently depressed first-quarter growth.

In a blog post published Friday, the Bureau of Economic Analysis listed a series of alterations it will make in seasonally adjusting data used to calculate economic growth. The changes will be implemented with the release of the initial second-quarter GDP estimate on July 30, the BEA said.

One of the changes that was made last year was intended to artificially boost GDP growth numbers for the first quarter of each year.

So without that artificial boost, what would the real number for the first quarter of 2016 look like?

John Williams of tracks what the official government numbers would be if honest numbers were actually being used, and according to him U.S. GDP growth has been continuously negative since 2005.

But we certainly can’t have the press report those sorts of things.  If that were the case, then everyone would be talking about the “economic depression” that never seems to end.

Unfortunately, the truth is that we are in the midst of a long-term economic decline, and we can see evidence of this all around us.  For example, on Thursday we also learned that the rate of homeownership in the United States has fallen once again, and it is now hovering just 0.1 percent above the lowest level ever recorded in American history…

After gains in the second half of 2015, the homeownership rate fell to just 63.6 percent, seasonally adjusted, in the first quarter of this year, according to the U.S. Census Bureau. Homeownership hit a high of 69.4 percent in 2004, during one of the biggest housing booms in history. That was also when mortgage lending was arguably at its loosest level in history. The homeownership rate is now just one-tenth of 1 basis point higher than its all-time low in the second quarter of 2015.

For many more numbers that show that the U.S. economy has continued to decline, please see the following articles that I authored earlier this month…

#1 “Economy In Decline: Apple Reports Massive Revenue Decline As iPhone Sales Plummet Dramatically

#2 “In 1 Out Of Every 5 American Families, Nobody Has A Job

#3 “Stories Of Despair From The Forgotten People That The U.S. Economy Has Left Behind

#4 “47 Percent Of Americans Cannot Even Come Up With $400 To Cover An Emergency Room Visit

#5 “Corporations Are Defaulting On Their Debts Like It’s 2008 All Over Again

Now that U.S. GDP growth has been steadily dropping for three quarters in a row, hopefully people will wake up and begin to realize what is happening.

We are entering very hard times, so now is not the time to go out and buy fancy new toys or to go into lots of debt.

Rather, this is a time to tighten our belts, batten down the hatches and prepare for rough seas ahead.

Sadly, most people continue to have blind faith that our politicians and the central bankers will be able to perform some kind of miracle to save us from what is coming.

*About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael’s controversial new book about Bible prophecy entitled “The Rapture Verdict” is available in paperback and for the Kindle on*

Wednesday, April 27, 2016

Recession Dead Ahead

Consumers, Small-Business Owners Souring on This Economy

Submitted by IWB, on April 27th, 2016

Wolf Richter,

“Flashing a recession signal.”

Consumer optimism about the economy is waning, and small-business-owner sentiment is giving off recession vibes. That’s how different surveys are now mucking up the rosy scenario.

Gallup’s Economic Confidence Index, released today, added another dimension. It dropped four points in the week ending April 24, to -16, the lowest since August 2015, and down from positive territory in January 2015.

It left Gallup groping for answers:

Pessimism has increased despite a strong stock market in recent weeks and a persistent low unemployment rate. However, there have been reports of weak retail sales and expectations of low first quarter economic growth. Gas prices have also started to rise, although they remain well below where they were for most of the past decade.

The report also blamed the rhetoric emanating from the presidential primary. Candidates, still unconstraint by the dictum affecting US Presidents to always hype the economy, have unabashedly pointed at some ugly spots in the rosy scenario and have suggested “how they would fix the US economy if elected.” This, Gallup says, rattled some nerves.

In January 2015, the index was at +5. It wasn’t exactly wallowing in exuberance, given its theoretical range of +100 to -100 (it hit -65 during the Financial Crisis). But that was the high point. And it has been zigzagging south ever since.

Consumers don’t live in the Wall-Street economy. They struggle with their daily challenges in the real economy. For them, it’s tough out there. Study after study confirms that about half of them, even those considered middle class, are living from paycheck to paycheck and can’t come up with $500 for emergency purchases.

But the most troubling aspects in the Gallup data simmer beneath the overall index, which is a composite of how Americans see current and futureeconomic conditions.

The current economic conditions index has been trending down gradually. Today’s reading, at  -7, is the lowest since November last year, with 23% of Americans saying the current economy is “excellent” or “good,” while 30% said it’s “poor.”

What’s coming down the pike looks even worse, according to Americans in the real economy. The index for future economic conditions plunged 6 points to -25, from an already crummy -19 last week, the lowest since August last year – a time “when the stock market plummeted over concerns about the Chinese economy,” as Gallup reasoned. Only 35% of Americans said the economy is “getting better,” while 60% said it is “getting worse.”

Both measures were positive in January and February 2015!

Also today, the Conference Board released its Consumer Confidence Index for April which, to the great disappointment of economists, fell 1.9 points to 94.2. While the Present Situation Index rose 1.5 points to 116.4, the Expectations Index plunged 4.3 points to 79.3 — confirming the Gallup poll: they’re seeing trouble balling up in the future!

Small businesses have been feeling the blues in a big way for a while. TheSmall Business Optimism Index for March, released by the National Federation of Independent Business earlier this month, fell to 92.6. As the report put it, the index “has turned decidedly ‘south’ over the last 15 months,” from its recent peak of 100.3 in December 2014:

A “chartist” looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal.

These small business owners were “very pessimistic about the economy.” Only 8% thought now was the right time to expand, while 51% thought now was a bad time to expand, citing as the top two culprits “weak sales” and a “poor economy.”

There’s a strong correlation between small business sentiment and consumer sentiment. But small business owners see troubles much sooner than consumers, and hence their sentiment dives much sooner. This chart byAdvisor Perspectives shows how the early dive of small-business sentiment (red line) opens up a gap to consumer sentiment (blue line) during the period shortly before recessions:


Small businesses fight it out on a daily basis in the trenches of this economy. They see the first little squiggles in their orders, sales, or customer traffic, or they’re suddenly not getting a contract they expected to get. They’re the first ones to express their doubts when things tighten up, ahead of consumers.

Consumer and small business sentiment peaked at about the same time, near the end of 2014. As the above chart shows, while consumer sentiment has waned since then, small business sentiment has plunged. And this opened up the gap between the two. Last time this happened, with small business sentiment plunging way ahead of consumer sentiment, was just before the Great Recession!

Already, brick-and-mortar retailers are slithering into an existential crisis. And there’s no respite in sight. Read… Retailer Bankruptcies Are Hailing Down on the US Economy

Tuesday, April 26, 2016

Check out this chart from for $WLSH:$NDX

Another chart of just how we've come on pure desire--it's impressive--and delusional.  This is what makes markets scary.  GL

Visit to see more great charts.

Check out this chart from for $WLSH:$INDU

When you divide the Wilshire 5000 by Dow 30, it looks like the broad market topped last September.  Give the massive vulnerabilities in Asia, Europe, South America, and here, it shouldn't be too long before reality catches up with those ever hopeful bulls.  GL

Visit to see more great charts.

Here Comes the Fed

Time Bomb Ticking In The Global Bond Market—-$17 Trillion Of Governments Yield Less Than 1%, Duration Risk Soaring

by Bloomberg Business • April 26, 2016

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By Anchalee Worrachate & Anooja Debnath

Bond investors are taking bigger risks than ever before.

Yields on $7.8 trillion of government bonds have been driven below zero by worries over global growth, meaning money managers looking for income are pouring into debt with maturities of as long as 100 years. Central banks’ policy is exacerbating matters, as the unprecedented debt purchases to spur their economies have soaked up supply and left would-be buyers with few options.

While demand has shown few signs of abating, investors are setting themselves up for damaging losses if average yields rise even a little from their rock-bottom levels. Based on a metric called duration, a half-percentage point increase would result in a loss of about $1.6 trillion in the global bond market, according to calculations based on data compiled by Bank of America Corp.

This year alone, the danger of owning debt has surged by the most since 2010, raising concerns from heavyweights such as Bill Gross. It’s also left some of the world’s biggest bond funds, including BlackRock Inc. and Allianz Global Investors, at odds over the benefits of buying longer-dated bonds.

“It takes a fairly small move out in rates on the long-end to wipe out your annual return,” said Thomas Wacker, the head of credit of the Chief Investment Office at UBS Wealth Management, which oversees $2 trillion in assets. Longer-maturity debt is “not something we are particularly keen on,” he said.

Investors continuing to buy bonds even when they pay next to nothing suggests deep concern over the state of the global economy. This month, the International Monetary Fund warned the threat of worldwide stagnation was rising because economic expansion has been so tepid for so long. It also chopped its 2016 growth forecast to 3.2 percent from 3.4 percent in January.


That gloom, combined with more aggressive stimulus measures by the Bank of Japan and the European Central Bank, pushed average yields on $48 trillion of debt securities in the BofA Merrill Lynch Global Broad Market Index to a record-low 1.29 percent this month, compared with 1.38 percent currently.

It won’t take much of a backup to inflict outsize losses.

The effective duration of the global bond market, which is measured in years and determines how much prices are likely to change when interest rates move, surged to an all-time high of 6.84 years in April. That translates into a 6.84 percent decline in price for every percentage-point increase in yields.

Economists suggest the bond market is underestimating the potential for yields to rise, especially as the Federal Reserve considers raising rates. The median estimate in a Bloomberg survey calls for the Fed to boost rates twice in 2016, while traders see the chances of any increase this year at about 60 percent.

‘Complacent’ Investors?

“People are complacent,” Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA, which oversees more than $17 billion, said from Milan. “Time is against the long end of the bond market. Even if an increase in bond yields may not be so strong, the positions are so huge that the damage can be massive.”

While the implied risk of holding bonds has been building for some time, it surged by the most in more than five years in the first quarter. A big reason for the jump has been increasing demand for long-dated issuance, which has proved a boon for governments that have locked-in borrowing costs for generations. In April, France issued a new 50-year security for the first time since 2010, while Ireland sold its first ever century bond in March.

Last week, Argentina had little problem finding buyers for its first debt sale since its record $95 billion default in 2001, which included a 30-year maturity.

“We are happy to feed the market with the product they want,” said Anthony Requin, the chief executive at Agence France Tresor, which raises money from bond sales for the French government.

Century Bonds

Although longer-maturity issues have provided investors the opportunity to reap bigger returns, their yields are still rather low by historical standards. Ireland’s 100 million euros ($113 million) of bonds due in 2116 were issued to yield 2.35 percent — similar to yields that benchmark 10-year German bunds offered as recently as 2011.

The yield on German 10-year bunds has now slipped to about 0.26 percent, dragged lower by the ECB’s program of bond-buying, which was expanded to 80 billion euros a month in March. Meanwhile, in Japan, all of the nation’s sovereign bonds yielded less than 0.4 percent last week, a result of the surge in the securities since the BOJ introduced a negative interest rate earlier this year.

Such low yields are unnerving some of the most famous names in the bond market.

Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund, said in a recent tweet that a tiny move in Japanese 30-year government bonds could wipe “out an entire year’s income.”

When gains last year pushed benchmark German 10-year yields close to zero, Gross described them as a “short of a lifetime.” That was in the early stages of a selloff which pushed yields up by more than a percentage point in less than two months.

Richard Turnill, the global chief investment strategist at BlackRock, the $4.7 trillion money manager, also said the firm expects losses for long-dated U.S. Treasuries and euro-area debt over five years, while Japan’s biggest life insurers are looking for higher returns in corporate bonds and infrastructure lending in the year ahead, as central bank stimulus clouds the outlook for sovereign debt at home.

Opposing Views

Some investors like Allianz Global Investors see it differently. They expect yields of ultra-long bonds to keep declining as weak growth spurs more monetary easing in Europe and Japan and keeps the Fed from raising rates.

“The price of these bonds increase at an accelerating rate,” said Brian Tomlinson, Frankfurt-based global fixed-income manager at Allianz, which oversees about $500 billion, referring to the market’s longest-term issues. “Economic growth continues to disappoint globally.”

Tomlinson said Allianz snapped up the French 50-year bond when it was offered and then bought more once it started trading. The firm is also “overweight” 30-year Treasuries and U.K. gilts. Prudential Financial Inc. predicts yields on the U.S. 10-year note will fall to a record 1.25 percent. If that comes to pass in three month’s time, investors will reap an annualized return of 26 percent, according to Bloomberg calculations. The yield was at 1.90 percent as of 2:30 p.m. in New York Monday.

Even so, some remain reluctant to buy securities which offer such meager returns.

“There isn’t a lot of value in the long-term debt,” Jim Leaviss, a London-based manager at M&G Investments, which oversees about $374 billion.

Source: It’s Dangerous Out There in the Bond Market – Bloomberg


SHOCK: “This Is The Longest Uninterrupted Selling Streak In History” – Smart Money Sells Stocks For Record 13 Consecutive Weeks

Submitted by IWB, on April 26th, 2016

One week ago we were surprised to learn that no matter what the market was doing, whether it was going up, down or sideways, Bank of America’s “smart money” (institutional, private and hedge funds) clients, simply refused to buy anything, and in fact had continued to sell stocks for a near-record 12 consecutive weeks.  In fact, the selling continued despite what we said, namely that “at this point it was about time for the selling to stock, if purely statistically, otherwise said “smart money” would be sending the clearest signal yet that the market rally from the February lows is nothing but a huge gift to sell into.”

One week later we were absolutely convinced that finally the selling would end. It has not.

As BofA reported overnight when looking at the latest trading activity by its smart money clients, “BofAML clients were net sellers of US stocks for the thirteenth consecutive week last week—making it the longest uninterrupted selling streak in our data history (since 2008) as clients continued to doubt the market rally.”

According to BofA, “net sales were $3.8bn, the biggest in three weeks but the sixth-largest in our data history (since ’08), with sales from hedge funds, private clients and institutional clients alike. This follows a week of net buying by hedge funds the prior week; institutional and private clients have both been consistent net sellers since February. Clients sold stocks in all three size segments, and year-to-date only small caps have seen cumulative inflows.”


Monday, April 25, 2016

Is Global Reflation Really Coming Back?

Another Gary Cooper Rebound—–It Isn’t On The Level

by ZeroHedge • April 25, 2016

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Gary Cooper famously told a Congressional committee investigating communist infiltration of Hollywood in the 1950s that “from what I have heard about it, it isn’t on the level.”

I was put in mind of that observation this morning. First, I heard Jim Cramer saying that the bottom is in for Caterpillar and then I read that Goldman Sachs had upgraded its rating on CAT and Joy Global on the grounds that,

“…… the signs of a China recovery now appear to be broadening.”

By the lights of Wall Street and its media megaphones, therefore, global demand for commodities and oil is purportedly rebounding and a reflationary cycle of growth is again underway. Apparently, its time to buy the dip again because the world economy has gotten back into its growth groove.

No it hasn’t. What we have here is a Gary Cooper rebound. That is, another unsustainable upward blip of the fundamentally false global credit bubble. It’s no more on the level than was Joseph Stalin’s new Soviet paradise.

This time, of course, capitalism is being supplanted by printing-press happy central bankers rather than tonnage toting commissars reinforced by firing squads. But the end game is much the same. To wit, when the state tries to over-ride the laws of the market and sound money, the experiment will eventually end in tears.

We can’t be too far away. The BOJ has gotten so desperate, for example, that it is apparently fixing to double down on its leap into negative interest rates on central bank deposits by extending NIRP to its commercial bank funding facility. That is, its going to pay commercial banks to make loans to private sector firms and households which are already buried in debt. At more than 450% of GDP,  in fact, Japan’s total credit outstanding towers well above the rest of the world.

No matter. The madcap money printers at the BOJ have already bought up every Japanese government bond that can be pried loose and owns nearly 50% of Japanese issued ETFs. And now comes word that the BOJ has bought so much stock through ETFs and directly that it is now a top holder of most of the stocks in the Nikkei 225.

Needless to say, the Japanese bond and stock markets are not even slightly on the level. They are incendiary artifacts of a central bank that has gone berserk and getting more desperate by the day.

Yet the BOJ is hardly an aberration. The affliction is nearly universal as Draghi demonstrated last week and as the Fed will reaffirm this week when it effectively perpetuates ZIRP into its 88th month.

So rather than discounting the unmistakable signs of economic weakness and swooning profits everywhere, the casino gamblers keep repairing to any sign that one or another of these rogue central banks will goose the financial markets with one more round of stimulus—-or delay in the inexorable path toward normalization.

The flavor of the moment this week is that the BOJ will soon embark on the form of helicopter money referenced above. But that has been mightily reinforced by this morning’s Cramer/Goldman proposition that the global economy is in a renewed upswing because the red suzerains of Beijing have now injected a massive new round of stimulus into China’s faltering growth machine.

Well, that they did. It now appears that total social financing in Q1 hits 7.5 trillion yuan with a “T”. In plain USD’s that implies a $4.5 trillion annualized rate of credit expansion.

It also settles the case. Beijing has completely lost control of the Red Ponzi and in contradiction of every one of its public pronouncements about pro-market reforms and a smooth transition to a consumption and services based economy, it has unleashed the printing presses like never before.

But with $30 trillion of debt already smothering the Chinese economy, generating new credit at a rate of nearly 40% of GDP is tantamount to a death wish. It is simply inflating financial bubbles faster than can be tracked, and eliciting yet another borrowing and construction surge in an economy swamped in excess capacity and white elephants. Accordingly, during March Chinese steel production set an all-time record, cement production soared and the “iron rooster” was temporarily back in business.

To be sure, the short-term reflationary impulse has been explosive. As the venerable Ambrose Pritchard-Evans observed yesterday regarding China’s first quarter boomlet:

New home sales jumped 64pc in March from a year earlier. House prices have risen 28pc in Beijing, 30pc in Shanghai, and 63pc in the commercial hub of Shenzhen. The rush to buy has spread to the Tier 2 cities such as Hefei – up 9pc in a single month.

“The housing market is on fire,” said Wei Yao, from Societe Generale. “In the first quarter, increases in total credit exploded to 7.5 trilion yuan, up 58pc year-on-year. There is no bigger policy lever than this kind of credit injection.”

“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the“four trillion stimulus” package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity. We still think that this recovery will not last very long,” she said…..

The signs of excess are visible everywhere as the Communist Party once again throws caution to the wind . Cement production jumped 24pc in March and infrastructure investment rose 19pc.

Yang Zhao from Nomura said the edifice is becoming more dangerously unstable with each of these stop-go mini-booms. “Structural problems and financial imbalances are worsening. We believe this debt-fueled growth is not sustainable,” he said.

Nomura said the law of diminishing returns is setting in as the economy nears credit exhaustion. The ‘incremental credit-output ratio” has deteriorated to 5.0 from 2.3 in 2008. Loans are losing traction and the quality of investment is falling.

That’s right. China’s precisely calibrated GDP grew by $180 billion during Q1, even as its outstanding debt soared by upwards of $1.055 trillion. So it took $6 of new borrowing to coax another dollar of dubious GDP—-that is, more empty roads, train stations and apartments—–out of the Red Ponzi.

But what it actually did was trigger another round of speculation in commodity stocks, industrial inventories, real estate and other assets. That impulse, in turn, cascaded through global commodity markets reinforcing the Wall Street meme that global reflation is underway.

(To be continued)

Financial Stress

Chart of the Day: With Stocks Near All-Time Highs, Financial Stress Turns Negative

Submitted by IWB, on April 22nd, 2016

by financialsense

financial stress spx 2016

The financial markets are stressed out, though you wouldn’t know it with stocks reaching near record all-time highs.

Our chart of the day, shown above, is the S&P 500 next to a composite of widely-followed financial stress indicators available in Bloomberg. The composite is directionally shaded to illustrate when financial conditions have gone from positive to negative and vice-versa.

As you can see, financial conditions were favorable for the stock market, confirming their upward trend, until around 2014. Since then, financial conditions have become increasingly less favorable, diverging from the stock market’s higher highs, and finally went negative in 2016.

If this divergence continues and financial conditions deteriorate further, this will certainly raise a red flag that we are at or near a major market peak. As seen below, we saw a similar divergence in 2007 as financial conditions weakened and eventually went negative, just as unsuspecting investors were celebrating new record highs in the S&P 500.

financial stress spx 2007 top

To construct the Financial Stress Composite, we aggregated five major financial stress indices, four of which are created by various Federal Reserve regional banks. Here is a chart of the five components (2008-2009 recession denoted by vertical red bar), with a description provided by the Cleveland Fed on their own particular index:

The CFSI is designed to track distress in the U.S. financial system on a continuous basis. Continuous monitoring gives financial-system supervisors the ability to monitor stressful episodes as they are building. Such early detection is important because financial stress can quickly be amplified when stress is occurring in more than one market.

financial stress components

Since the five indices use a similar calculation methodology, a composite is easily created by averaging the data. We’ve added a red dotted line to indicate values above or below zero, i.e. more or less financial market stress than average.

financial stress composite

We then invert the data and show above average levels of financial stress in red and below average levels in green.

financial stress negative

Next, we overlay it with the S&P 500 to show how financial stress and the stock market move over time. We’ve highlighted the sections shown by the first two charts where a divergence is seen.

financial stress spx

Since negative financial conditions do not always correspond with a major market top (as we saw in 2010, 2011, and, briefly, in 2012), it will be important to monitor whether financial conditions and stock prices are giving the same message going forward.

Bottom line: If this divergence continues and financial conditions deteriorate further, this will certainly raise a red flag that we are at or near a major market peak.

Thursday, April 21, 2016

Bull Trap?

Beware The Bull Trap—-Breadth Is Breaking Down

by ZeroHedge • April 21, 2016

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By Tyler Durden at ZeroHedge

In January and in early February UBS’ technical analysts said that while they do not believe in a 2008 event, 2016 should be a highly volatile and a trading oriented year for equities… and so far it has. But now Michael Riesner and Marc Muller see a high likelihood to move into our suggested early Q2 cycle top this week.

With last week’s higher low at 2033, we have a new pivotal support in place in the SPX, which makes 2033 to a tactical key support.

On the upside the market has still strong resistance at 2080/2100. A re-break below last week’s breakout level at 2075 would be initially negative. A break of 2033 would imply that a more important tactical top is in place with support/initial targets at 2022, 1980 and 1950.

Again, from a cyclical aspect we think that a potential April top will be important and the basis for a significant correction  into initially early May before starting a rebound, which should hit a lower high, and ultimately down into July, where we expect the next bigger tactical buying opportunity.

We reiterate our last week’s call and would not chase the new breakout in the SPX!

Deteriorating Breadth and Toppish Seasonality

Particularly in February and into mid-March the breadth of the rebound/bear market rally in global equities was quite strong, which is not a big surprise given that several markets were on multi-year oversold levels, where normally we see significant and longer lasting mean reversion rallies, which was our call in early February.

However, since late March, the momentum in global equities has been clearly deteriorating. In Europe and Japan we have seen initial and significant pullbacks into early April, whereas the US markets continued to outperform. Also in the US, the selectivity has been increasing over the recent 3 to 4 weeks. The new reaction high in the SPX has not been confirmed by transport, which creates a classic divergence in the Dow Theory.

Since late March, the number of SPX stocks trading above their 20-day moving average has been deteriorating…

And even the new reaction high in the Russell-2000 last week (which is actually good news) has produced a smallerdivergence in the new 52-week highs in the broader market, which is tactically toppish.

Together with a divergence forming in the VIX index, and with the seasonality getting toppish we continue to see the risk of a significant and longer lasting tactical correction leg in the US and global equities into summer.

After the strong rebound in global equities, the MSCI World has broken its 2015 downtrend and its 200-day moving average largely on the back of the US outperformance.

With forming a divergence in our daily trend work, we see the risk that this breakout finally represents a bull trap, where a re-break below 396 would be bearish.

Source: UBS Warns “Beware the Bull Trap” as Breadth Breaks Down – ZeroHedge