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Weekend June 23rd , 2013
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50 Minutes, 46 Slides What Are Tipping Poinits? |
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"BEST OF THE WEEK " |
Posting Date |
Labels & Tags | TIPPING POINT or 2013 THESIS THEME |
HOTTEST TIPPING POINTS |
Theme Groupings |
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We post throughout the day as we do our Investment Research for: LONGWave - UnderTheLens - Macro Analytics |
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MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - June 16th - June 23rd | |||
BOND BUBBLE | 3 | ||
BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand Is This The Chart That Scared Bernanke Straight? 06-21-13 NY Fed via ZH With the confusion over Bernanke's comments - "have no fear as the economy is bad enough that the Taper will never come" confused with "the economy is picking-up and that's great so we don't need the Fed anymore" - one has to ask, as we have numerous times, is there another reason for the Fed to start the ball rolling on the Taper talk? In the last few weeks, the Treasury market's yields have risen notably but much more critically, the fails-to-deliver has surged. This critical indicator of both collateral shortages and technical carry trade unwinds is a little-discussed indicator of just how broken the market is thanks to the overwhelming ownership of the Fed. It's getting worse - as Barclays warns the weakness in bonds is feeding on itself as more people want to short and so the need to borrow from the Fed (as dealer inventory is so low) increases and raises the cost (special-ness) of that short. Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!! Source: NY Fed |
06-22-13 | STUDY
MACRO MONETARY |
3- Bond Bubble |
BOND SCARE - Long Term Support Trendline Achieved The Illustrated History Of High Yield 06-21-13 Zero Hedge Buybacks, dividends, and M&A all depend on firms' abilities to borrow cheap. With leverage ratios rising (and micro fundamentals weakening) as we noted here, macro fundamentals deteriorating, and the visible hand of the Fed now lifting off the repressed neck of risk managers, we have a simple question - What Happens Next? Simply put, your glowing stocks cannot rally in a world of surging debt finance costs. Remember - and it's important - there is no rotation that drives high-yield credit spreads wider without punishing equities. They are liabilities on the same capital structure and rise and fall in a highly correlated (well non-linear co-dependence) manner as the underlying business risk rises and falls. Do not, repeat do not, see high yield credit weakness as a sign of rotation to stocks - if the credit cycle has turned then stocks are set to fall. And bear in mind that while HY yields are at all-time lows, spreads are not and in fact being short stocks relative to credit makes more sense if you are you are a bear on the credit cycle here. The only problem being that the epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry. gordongtlong.com mark-up
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06-22-13 | STUDY
MACRO MONETARY |
3- Bond Bubble |
BONDS - Retail Investors Running for the Exit Mom-And-Pop Investors Are Dumping Bond Funds Like Crazy 06-21-13 Dr Ed's Blog via BI In his press conference, Bernanke also specified, for the first time, that 7% is the jobless rate threshold that would mark a substantial improvement in the labor market. The Fed will start reducing its bond purchases later this year if this rate continues to fall toward 7% by the middle of next year, as anticipated by most of the members of the FOMC, according to Bernanke. So the good news is that the economic outlook looks a bit better, with fewer downside risks, according to the FOMC. The bad news is that the 10-year Treasury yield is now up 69bps from a low of 1.66% on May 2 to 2.35% yesterday. The 30-year mortgage yield is up 62bps over this period to 4.18%. The most immediate impact has been a sharp drop in mortgage refinancing activity. Another immediate impact is that retail bond investors are running for the exit doors as the Fed publicly lays out its exit strategy from ultra-easy monetary policy. The ICI reported huge estimated weekly net cash outflows from bond mutual funds of $13.5 billion during the week of June 12, following a $10.9 billion outflow the prior week. Unfortunately, those funds weren’t rotated into equity mutual funds, which had small net outflows totaling $2.0 billion those same two weeks. |
06-21-13 | US MONETARY | 3- Bond Bubble |
EMERGING MARKETS - Bond Outflows Accelerating Is This The Emerging Market Debt Blowup? The Race For The Exits Accelerates Again 06-20-13 BI Emerging markets assets have had a rough go of it for several weeks now as U.S. Treasury bond yields have shot higher, but the past week especially was not kind to funds invested in EM. In the week ended June 19, EM funds recorded a massive $2.6 billion in outflows, or 1.0% of assets under management. That marks an acceleration of outflows from the previous week, when investors redeemed $2.5 billion from EM funds. The big question is whether this is the start of a big blow-up in EM debt markets, which have seen massive inflows over the past several years as depressed bond yields in developed markets have sent investment capital into riskier credits in the emerging world in search of higher yields. Deutsche Bank macro strategist Alan Ruskin reflects on this in a note to clients this morning:
The chart below from Morgan Stanley shows the damage from fund outflows this week. |
06-21-13 | EMERGING MARKETS
MATA DRIVERS |
3- Bond Bubble |
TAPER - The Fed is Unlikely to Taper Don’t Fear the Taper 06-16-13 Read the full newsletter here. Featured articles include: My Deere, Market Shadows added agricultural machinery manufacturer Deere (DE) to our Virtual Value Portfolio. And When Tear-Gas Flies, It’s Time to Buy (buying EMF). Chart by Lee Adler of the Wall Street Examiner. Quantitative easing (QE) programs, courtesy of the Federal Reserve, have pushed cash into Primary Dealer accounts at the fastest rate in history. This has been massively bullish for equities over the past four years, as the Primary Dealers used some of that cash to bid up equity prices. This will likely continue until the Fed significantly curtails or discontinues its QE operations. US stock indices have been marking time during the past four weeks gauging “talk” about whether Chairman Ben Bernanke will slow down his printing presses. Notwithstanding the rumors, we doubt that QE tapering is on the horizon. In our view, unless the Fed stops funneling money to the Primary Dealers, which we deem doubtful, pullbacks in stock prices are likely temporary pauses along an upward path. Therefore, in both of our Virtual Portfolios (Value and Put Selling), we are remaining long and unhedged. The Fed is Unlikely to Taper America’s national debt now runs approximately $16.5 trillion. President Obama use his power to hold rates down because the cost of higher debt service would devastate his political agenda. Bernanke does Washington’s bidding so he is probably just ‘talking down’ market enthusiasm by leaking news of a coming ‘taper.’ In this fashion, he uses fear of reduced QE to contain equity prices without actually changing the Fed’s policy. During the fiscal cliff debate in December 2012, people assumed tax rates would be much higher in following years. That precipitated an enormous amount of accelerated income and dividend payments that would have been made in 2013. Because of the higher income booked in Q4 2012, estimated tax payments due January 15, 2013, soared. This reduced the size of the expected Q1 deficit. Bernanke’s primary mission is to monetize the debt created by federal budgets that far exceed revenues. We see no way for the Fed to reverse course on QE regardless of the whispers to the contrary. The Fed has painted itself into a corner and there is no way to unwind the QE trade without debt service costs eating everyone alive. Unwinding would cause interest rates on U.S. sovereign debt to soar, because no one would buy debt at interest rates the government could manage. For every one percent rise in interest rates, there would be an estimated $80Bn in increased annual debt service costs at the federal level. The payment of interest would overwhelm all other spending. In Love with TINA explains why stocks are attractive. There are no viable competing investments if you seek to protect your life saving’s long-term buying power. Absent a major change in policy, a full allocation to equities seems reasonable, as does avoiding fixed income. Bonds today are in a bubble, and a pop of the fixed income bubble is apt to be louder and more astonishing than anything we will see in the equity markets. |
06-17-13 | US MONETARY |
3- Bond Bubble |
TAPER - Fed Trapped in a Box Why the Fed Cannot "Exit" Successfully... Without a Market Crash 06-15-13 www.gainspainscapital.com Graham SummersBernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature. One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs. After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this. In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up. And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be. Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared: The Fed cannot exit. It will claim that it can, but market reactions to any real exit will be disastrous. We’ve passed the point of no return. Bernanke’s best home is to retire before the music stops. |
06-17-13 | US MONETARY |
3- Bond Bubble |
CHINA BUBBLE | 6 | ||
CHINA - Housing Bubble Restricting PBOC Actions Is This Why The PBOC Is Not Coming To The Rescue? 06-20-13 BofAML via ZH We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus). Via BofAML:
and from Credit Suisse:
As we noted here, while the PBOC may prefer to be more selective (option 1 above) with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold (which we suspect they will) and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities). |
06-22-13 | CHINA HOUSING
MACRO MONETARY |
6 - China Hard Landing |
CHINA - PBOC Squeezing Banks towards Reducing Speculative Risk The Mechanism That Holds Chinese Banks Together Is Falling Apart 06-19-13 BI China's seven day repo rose to a record high of 10.77% in Shanghai, the highest since March 2003, according to Bloomberg*. Meanwhile, the one-day rate hit a record 12.85%. And Zerohedge reported that overnight repo hit 25%. The liquidity squeeze in China first began ahead of the Dragon Boat festival earlier this month. Spikes in interbank rates are common right before holidays. But Diana Choyleva at Lombard Street Research said this is symptomatic of a bigger problem. She said "Capital flows had become a more important driver of domestic liquidity conditions in China's managed exchange rate system." In a new note to clients Bank of America's Ting Lu wrote: "There are many factors behind the interbank liquidity squeeze that might be cited, but we believe that the ultimate reason is the central bank’s tough stance as the PBOC can practically provide unlimited liquidity to ease every squeeze if it wishes to." Banks have been clamoring for a reserve requirement ratio cut. So why isn't the Chinese central bank stepping in? As we previously explained the People's Bank of China seems to be in no mood to support banks' constant demand for liquidity. "It seems that the PBoC and some other regulators could be taking the opportunity of the tight funding conditions to ‘punish’ some small banks which had previously taken advantage of the stable interbank rates to finance their purchase of higher-yield bonds," wrote Lu. Lu expects tight interbank liquidity conditions to last till July. This also comes at a time when banks are required to meet their loan-to-deposit ratio requirement in filings to both the central bank and the China Banking Regulatory Commission (CBRC). Earlier this week Fitch's Charlene Chu warned that China's credit bubble is unlike anything in modern history. |
06-20-13 | CHINA MONETARY | 6 - China Hard Landing |
CHINA - Overnight Repo at 25% China Interbank Market Freezes As Overnight Repo Explodes To 25% 06-19-13 Zero Hedge It seems liquidity (or counterparty mistrust) is beginning to reach extreme levels in China as the nation's banking system is now quoting overnight repo transactions at 25%. The explosion in funding costs echoes the collapse in trust (and surge in TED spread) among US banks in the run-up to the Lehman bankruptcy. MSCI Asia-Pac stocks are down over 3% with China's Shanghai Composite -2.5% at seven-month lows.
China's bond market is also collapsing:
China this week... US in the run-up to Lehman... Charts: Bloomberg |
06-20-13 | CHINA MONETARY | 6 - China Hard Landing |
CHINA - Red Flags China's Red Flags 06-19-13 Zero Hedge China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011. Via Market News International:
The Macro data is almost as bad as it has ever been... |
06-20-13 | CHINA INDICATORS GRWOTH RISK |
6 - China Hard Landing |
The Chinese Credit Bubble In Four Charts 06-17-13 BI China's credit bubble is unlike anything in modern history, according to Fitch. Ambrose Evans-Pritchard of The Daily Telegraph reported that Fitch thinks the scale of Chinese credit is so massive that it can no longer grow out of its excesses. And the statistics are scary:
In light of this, we put together four charts on China's credit bubble that you need to see. FIRST up, the main bear argument on China: It is taking more and more credit growth to deliver less economic growth. SECOND, the estimated outstanding Wealth Management Products. In China, wealth management products are popular, interest-bearing retail products that are backed by a hodge-podge of risky assets. They function as a replacement for normal investment/savings accounts, but are not guaranteed. A crackdown on Wealth Management Products (WMPs) has seen WMP issuance slow in 2013. But Charlene Chu at Fitch writes that this continues to pose a risk to the banking sector because it accounts for a "sizable amount of funding." "In Fitch's view, the primary risk centers on:
THIRD the rise in gross issuance which is close to 115 products a day. FOURTH, the recent spike in SHIBOR, or the Shanghai interbank offered rate, which is an interest rate used among banks showed signs of liquidity stress in China. SHIBOR is considered a useful proxy for liquidity in the Chinese credit markets, more specifically, the recent spike in Shibor showed a liquidity squeeze. In a new note, Morgan Stanley's Richard Xu writes that "SHIBOR and repo two-week rates did not ease significantly after the three-day holiday, and one-month rates even spiked by ~80bps, implying that the recent liquidity tightness is likely more associated with recent intense regulatory actions than holiday effect." These four charts show the rise in China's credit bubble and the recent liquidity squeeze.
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CHINA MONETARY
MACRO OUTLOOK
UTL |
6 - China Hard Landing | |
CHINA - Shadow Banking System Showing Signs of Implosion Fitch says China credit bubble unprecedented in modern world history 06-16-13 Ambrose Evans-Pritchard, The Telegraph China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead. "The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing. "There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph. While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said. Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said. Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses. This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze. Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a "massive savings account that can be drawn down" in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom. Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said. The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said. The agency downgraded China's long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. "The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk," said Mrs Chu. "There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can't grow out of that." The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years. However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion. Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises -- and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a "Minsky Moment", when the debt pyramid collapses under its own weight. "The debt snowball is getting bigger and bigger, without contributing to real activity," she said. The latest twist is sudden stress in the overnight lending markets. "We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy," said Zhiwei Zhang from Nomura. "There is room to cut interest rates and the reserve ratio in the second half," wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks. The journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said. It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. "China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens," it wrote. The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade. |
06-17-13 | CHINA MONETARY
MACRO OUTLOOK |
6 - China Hard Landing |
CHINA - PBOC Wants to Hold the Line on Explosive Credit Expansion through A Liquidity Squeeze China Banks Request Cash-Crunch Relief 06-17-13 WSJ BEIJING—China's big banks are pressuring the central bank to free up funds to ease an unusual cash squeeze in the world's No. 2 economy, according to people familiar with the matter, illustrating a stark choice facing Beijing as it grapples with weaknesses in its financial system: add money to its system to help its lenders, or stay the course to rein in a rapid expansion of credit.
In a further sign of tighter conditions, Agricultural Development Bank of China, a state-controlled policy bank, on Monday reduced by a third the size of its planned 26 billion yuan ($4.2 billion) bond offering. The Ministry of Finance, in a rare failure on Friday, was unable to sell all of the debt it offered at an auction. The tight liquidity situation is leading to some calls from Chinese banks for the People's Bank of China to inject more cash into the market by lowering the share of deposits banks are required to set aside against financial trouble. The measure is known as the reserve-requirement ratio, or RRR. "Internally, we're hoping for an RRR cut by the end of Wednesday," said a senior executive at one of China's top four state-owned banks. The central bank didn't respond to a request for comment. Some analysts, including Xu Gao at Everbright Securities Co. in Beijing, expect the PBOC to take measures to ease the liquidity crunch in the coming weeks. The central bank last cut its reserve-requirement ratio in May 2012. The concern about a credit crunch comes at a time when Chinese officials are also trying to combat the opposite: a credit binge that dates from the stimulus spending of 2009. The two are linked, analysts say. By trying to rein in the long-term credit surge, the PBOC may have produced a short-term credit crunch. But any big intervention by the PBOC—which, unlike the central banks in the West, isn't independent of the nation's political leaders—would risk sending a signal that China's top leaders would rather sacrifice their goal of keeping on credit growth in favor of pumping up domestic economic growth. That would run counter to the remarks made by Chinese leaders in recent months. Premier Li Keqiang, for instance, has indicated that Beijing is reluctant to change its monetary- and fiscal-policy stance to counter a slowdown while pledging to press ahead with changes that could make the country's growth more sustainable. "Right now, an RRR cut would be very controversial because that would signal a change in macroeconomic policy," said Li Wei, an economist with Standard Chartered in Shanghai. Traders and economists cite a sudden reduction in foreign capital inflows— the result of China's recent crackdown on speculative money flows and of a slowing economy—as one of the main reasons for the ongoing cash squeeze. That is because
On Monday, China's benchmark seven-day bond repurchase rate reached 6.85% on a weighted-average basis, near its highest level since China started compiling the rate in 2006. The highest level, at 6.9%, was reached Friday. So far, China's central bank has appeared to be more willing to keep what it calls a "prudent" monetary-policy stance than to carry out operations aimed at easing banks' funding constraints. As part of the prudent monetary stance, the PBOC has been trying to stem a surge in credit that could produce a wave of bad debts and financial failures. Total social financing, China's widest measure of credit that includes both bank loans and credit created outside formal banking channels, fell by about one-third to 1.19 trillion yuan in May from April, the second month of substantial decline. But the central bank still has a way to go to curb overall lending: In the first five months of 2013, total social financing was up 52% from 2012. A commentary published on Monday by China's Financial Times, a newspaper backed by the PBOC, dismissed the prospect of a liquidity crisis in China's money market but said some individual banks suffered funding problems because they had relied heavily on borrowing short-term funds in the interbank market and exceeded regulatory limits on lending. The article also said banks should sort out the funding problems on their own and shouldn't count on the PBOC to step in to provide liquidity. After the market close on Monday, the PBOC announced that it would sell two billion yuan worth of 91-day bills the next day. The bill sale means that the central bank would drain two billion yuan of liquidity from the money market, a negligible amount that would hardly sway the market but a signal that China's policy makers aren't yet ready to loosen the grip on money supply. Last week, the PBOC injected a net 92 billion yuan into the market, a small amount relative to Chinese banks' funding needs. Only 32 billion yuan in central-bank bills and other notes are due to mature this week, meaning the PBOC would have to inject extra liquidity if it wants to improve the funding situation significantly. "Through the events over the past week, we think the PBOC has made it clear that overly rapid credit expansion would not be accommodated, and that the PBOC still focuses more on the quantity of credit and money supply rather than on short-term interest rates," said Wang Tao, an economist at UBS AG. "In other words," Ms. Wang said, "if banks let credit growth go too fast, the PBOC doesn't mind the spike in interbank rates in order to rein them in." The recent cash crunch may lead to banks trimming their credit exposure and manage liquidity more prudently, she added, even though "there is a small risk that this could lead to a credit crunch in the short run." |
06-17-13 | CHINA MONETARY
MACRO OUTLOOK |
6 - China Hard Landing |
HEADLINES - The Financial Times Headlines Tell An Interesting Story THERE IS A GLOBAL CREDIT SHOCK OCCURRING
THE EU BANKS ARE ON THE PRECIPOUS!
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17 - Credit Contraction II | ||
CREDIT CYCLE - HY Leading the Way What A Correction Could Look Like 06-18-13 Morgan Stanley via ZH While disappointment from the FOMC's comments tomorrow may not be enough to create 'the big one', it is perhaps worth a look at the more meaningful corrections over the last 10 years in equity and credit markets for some sense of context for what is possible. So far, it is clear, especially given today's equity rally (and ongoing credit weakness) that the consensus of the equity herd are not expecting disappointment tomorrow - while credit markets are preparing for the 'flow' to slow. Credit markets are well on their way to a 'normal' correction... But stocks remain notably confident relative to previous corrections... and the divergence is becoming clearer... and continues today...
Charts: Morgan Stanley |
06-19-13 | MACRO OUTLOOK
UTL-A07
ANALYTICS RISK |
17 - Credit Contraction II |
CREDIT CYCLE - Reversal Ahead Is The Credit Cycle Over? 06-18-13 Zero Hedge No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over. Leverage is rising... and pretty much every other credit metric is deteriorating... and the credit cycle is getting long in the tooth...
It seems the only factor driving credit from not being wider based on these leverage and cycle indications is the 'flow' from the Fed. We suspect that is what has created the weakness in bonds recently (even though we note that cash bond markets have not weakened as much as CDS since managers are preferring to hedge than cover for now - since, quite bluntly, they know that if they all collaborate and don't sell then everything is fine but once one manager decides to cover instead of hedge, the small doors and large crowds will see major liquidity gaps appear in HY credit). |
06-19-13 | MACRO OUTLOOK
UTL-A07 |
17 - Credit Contraction II |
TO TOP | |||
MACRO News Items of Importance - This Week | |||
GLOBAL MACRO REPORTS & ANALYSIS |
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GLOBAL ABENOMICS - A Reversing Wealth Effect May Force OPMF The Wealth Effect Shifts Into Reverse 06-20-13 John Rubino Dollar Collapse blog Stripped of all the acronyms and economist-speak, government policy of the past few years has been simple: lower interest rates to push people out of cash (which yields nothing) and into stocks and houses. And then, when those assets go up enough to make their owners feel rich, hope that this paper wealth translates into a willingness to max out credit cards and take out car loans. This propensity to borrow and spend more when your investments are rising is called the wealth effect, and by early 2013 it seemed to many that America’s “normal” debt-driven consumer society was reviving and that we might, after all, be able to maintain our military empire, welfare state, big houses, SUVs, massive banker year-end bonuses, easy incumbent reelections, etc, etc, without any prioritization or hard choices. Nope. It turns out that the laws of economics can be bent but not broken. You can’t have a vibrant, growing economy AND interest rates near zero AND a stable currency at the same time. One of these has to give. And in the past month interest rates have started moving back towards historically normal levels. Rising interest rates are incompatible with housing and equity bubbles, and the air is now leaking from both. As this is written on the morning of June 20, global stock markets are down big. And US housing, which in some markets was approaching 2007-esque levels of speculation, has hit a wall, at least based on mortgage applications:
And so the wealth effect shifts into reverse. Fewer people can afford mortgages, so home prices stop rising, making homeowners feel less rich. Stock prices stop rising (or, like today, start going down) and the record number of people who have been buying on margin see their exciting gains melt away. They feel both less rich and suddenly very stupid. Most of them will spend less, and the recovery will stop in its tracks. Which means it’s time to think about the next big government plan to save us. Will it be a massive public works program? Expanded QE? Maybe a major war? Whatever, it will have to be commensurate with the size of the now-global crisis. So, just a guess, but this time around it won’t be surprising to see a coordinated attack on deflation from Europe, the US and China. In other words, global Abenomics. |
06-21-13 | MACRO MONETARY | GLOBAL MACRO |
Emerging markets displace Europe as fulcrum of world risk 06-05-13 Telegrpah, Ambrose Evans-Pritchard There is a wicked double edge to the emerging-market boom that has so enthralled us for the past decade. The economies of these rising powers are by now big enough to shake the entire world if they come off the rails. Some feared this might happen in 1998 when Russia defaulted and East Asia’s currency crisis span out of control, a drama precipitated by a rising dollar. Contagion spread to western Europe, causing the pre-euro “convergence play” to snap back violently. The US hedge fund Long Term Capital Management was caught $100bn (£65bn) short as bond spreads surged in Club Med, and equities plunged. The threat of a chain reaction was serious enough to force emergency rate cuts by the Fed. The crisis abated. Asia’s economy is a much bigger beast today, and so is the emerging market (EM) universe.
The Chinese figure will surprise nobody who has seen the forest of high-construction cranes in Chengdu or Chongqing, deep in the interior, or passed through railway stations of “Tier III” cities that reduce Waterloo to Lilliputian size. “It is the emerging world that is driving global expansion, so we have to watch very carefully for signs of a turn in the cycle,” Julian Callow from Barclays. Indeed we do. My fear is that a China-led BRICS shock will transmit a wave of deflation across the planet, pushing the West over the edge into another downward leg of trade depression. EU:
US:
Whether or not the EM slowdown is an inflexion point, or just a refreshing pause, is now a neuralgic issue. What we know is that manufacturing PMI indices are flirting with contraction across much of Asia, with Latin America and Africa not far behind. CHINA:
EMERGING MARKETS :
FED POLICY: What has set the retreat in motion is fear that the Fed will turn off the credit spigot, draining the dollar liquidity that fuelled the booms. This is what happened under the Volcker Fed in the early 1980s, triggering the Latin American crisis. You might well ask why the Fed’s Ben Bernanke would “taper” monthly bond purchases (QE) if there is such a risk of global deflation. But the Fed can be insular at times and is clearly having to pick between poisons. The latest minutes of its Federal Advisory Council warn of an “unsustainable bubble” if QE continues, and suggest the policy is doing more harm than good in any case. The criticisms are getting under the skin of Fed insiders. Even the Boston Fed’s ultra-dove Eric Rosengren now talks of tapering soon. Mr Bernanke will not be deterred by a shake-out on Wall Street, for that is what he wants –
The rest of the world can only pray that he does not push his point too far. |
06-18-13 | MACRO OUTLOOK
REGIONAL EM
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MACRO ECONOMICS |
GLOBAL DELEVERAGING ACCELERATION - Developing Nations Feeling the Pain Developing Crisis In The Developing World 06-15-13 John Rubino via The Dollar Collapse blog, via ZH Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis. But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. As Prudent Bear’s Doug Noland explains in his most recent Credit Bubble Bulletin:
So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash. Which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond. If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on. Can the Fed stop this? Not unless it wants to buy up not just the newly-issued Treasuries as it does now, but the trillions of dollars of bonds that might be dumped once things really get going. It’s important to understand that we’re here because for years the developed world in general and the US in particular have been exporting their problems to the developing world via monetary policy. We fund our overspending by creating a bunch of new dollars, many of which flow beyond our borders looking for higher yields. They land in, say, Brazil, pushing up both local asset prices and the exchange rate of the real. So individual Brazilians see their cost of living rise while Brazilian exporters are priced out of global markets. This is the currency war that Brazil’s government has been complaining about. Then the hot money flows back out, causing a different set of problems for a country that has spent the past decade trying to adjust to excessive capital inflows. The result: some seriously fragile banks and over-leveraged companies and investors, any of which could trigger a nationwide crisis. The same general process is at work in other major emerging markets, with each in its own way now posing a threat to the global financial system — at the pinnacle of which sit the S&P 500 and the Treasury market, looking an awful lot like Southern California real estate circa 2007. |
06-17-13 | MACRO OUTLOOK
REGIONAL EM |
MACRO ECONOMICS |
US ECONOMIC REPORTS & ANALYSIS |
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CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES | |||
CENTRAL BANKS - They are the Market If Bernanke really shakes the tree, half the world may fall out 06-18-13 Ambrose Evans-Pritchard, The Telegraph We no longer have a free market. The world’s financial asset prices have become a plaything of central banks and the sovereign wealth funds of a few emerging powers. Julian Callow from Barclays says: they are buying $1.8 trillion worth of AAA or safe-haven bonds each year from an available pool of $2 trillion. Nothing like this has been seen before in modern times, if ever.
Investors seem to think Bernanke will indeed blink, or at least blink enough to put off the day of reckoning for another three month investment cycle, which is what hedge funds care about - DONE
Jan Loeys from JP Morgan in a note last week:
Brazil, South Africa, and Turkey, are already falling out. Any other candidates? gordontlong.com article support addendum - reference Rate Hikes being priced increasingly soon...
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06-20-13 | MACRO MONETARY | CENTRAL BANKS |
MINSKY TRAP - The longer QE persists, the greater the magnitude of the ‘left-tail’ event "A Classic Minsky Trap Appears To Have Developed" 06-19-13 Guy Haselmann of ScotiaBank via ZH Data show quantitative easing (QE) is having ever-diminishing economic benefits while the risks to financial stability accumulate the longer the program endures. Inevitably, there is a point in time when the costs outweigh the benefits. Determining that point is critical, and some believe it may have already passed. When the Federal Reserve’s current asset purchase program was initiated, both the necessity and scope of it were questionable. Inflation was stable and near the Fed’s target. The unemployment rate had already fallen steadily to 8.1 percent in the second half of 2012 from a high of more than 10 percent in 2009. The program’s $1 trillion per year in asset purchases equates to the annual GDP of Belgium and Norway combined. The FOMC justified the open-ended program by pointing to the unacceptably slow pace of the recovery, thereby tying its lifespan and magnitude to making “sufficient progress” toward economic targets. Focus was purposely directed toward economic benefits, rather than risks, because benefits are easier to explain and ‘guesstimate’ using econometric models. However, large errors can occur in those models, due to the vast complexities of interconnected markets and economies. Unfortunately, unquantifiable and unintended consequences from the enormous ballooning of the Fed balance sheet may be on the horizon. Recent market volatility might be a warning sign to the FOMC about the extent of risk-taking (which QE policies encourage), and how the market will react when its exit strategy finally materializes. Even with the present sub-optimal economic growth, the Federal Reserve may decide to announce tapering of asset purchases as soon as today. After all, the FOMC can claim success at having ‘made progress’ toward their stated goals. At last September’s FOMC meeting, their central forecast for the unemployment rate for the end of 2013 was 7.75 percent. The May rate has already fallen to 7.6 percent. For the past several years, a firmly entrenched psyche of ‘win-win’ for risk-taking behavior has dominated. The thinking has been that the Fed would either help achieve a sustained recovery (allowing distorted prices to be validated by economic fundamentals), or the FOMC would provide more price-boosting liquidity. Now, faith in this proposition is slowly being eroded. Global central banks have collectively provided $11 trillion in liquidity over the past several years. The initial moves were taken to spark domestic demand, but some recent external actions have been retaliatory in nature, implemented as a means to influence currency levels. These new forms of hostilities are indications that the external ramifications of QE policies may no longer be passively tolerated. While offsetting actions by non-U.S. entities may not influence the FOMC, they are aware that currency disputes lead to trade disputes, and that protectionist pressures are a great risk to a highly globalized economy. Invoking the motto, “Don’t fight the Fed,” has rewarded investors. They have ‘reached for yield’ and ‘chased risk’ to take full advantage of the implicit ‘Fed put’. FOMC speeches have hinted at speculative excesses. It has not gone unnoticed that NYSE Margin Debt has risen to all-time high levels. The problem is that as asset prices have veered far from economic fundamentals investors, enjoying ‘right-tail’ benefits, have been lulled into complacency. A classic Minsky Trap appears to have developed. When market participants sense the Fed’s unwind is beginning, they (and the central bank) may be surprised by the extent of the reversal. Regulatory constraints may compromise market liquidity during ‘fed-piggybacking trade’ unwinds, leading to a harsh ‘left-tail’ overshoot. ‘Tapering’ earlier might be better for markets in the long run. An early ‘taper’ would allow officials to regain a unified voice and control the market message. They could then emphasize the extraordinary amount of accommodation that they are still providing in an effort to calm markets. Moreover, a slower pace of asset purchases of, say, $60 billion would allow the FOMC to increase it back to $85 billion should the economy slow over the next few months. Without a slower pace now, the FOMC may run into credibility issues about the program’s efficacy at the same time an increase in purchases might be expected. This would further exacerbate funding stresses and fears of financial instability. The longer QE persists, the greater the magnitude of the ‘left-tail’ event that is growing in probability. Continuing to provide massive stimulus for a growing economy will turbo-charge the ‘reach for yield’ and ‘chasing of risk’, leading to financial instability. |
06-20-13 | MACRO MONETARY | CENTRAL BANKS |
RISK - We May Have Reached a Risk-Off Leverage Pivot More To Come Mark J. Grant, author of Out of the Box via ZH I have long held the opinion that the markets, all of them, have been buoyed by what the Fed and the other central banks have done which was to pump a massive amount of money into the system. There are various ways to count this but about $16 trillion is my estimation. The economy in America has been flat-lining while the economies in Europe have been red-lining and while China has claimed growth their numbers did not add up and could not be believed. Cry if I want to, cry if I want to You would cry too if it happened to you" |
06-20-13 | MACRO MONETARY | CENTRAL BANKS |
TAPER - Why is the Fed Talking TAPER? What The Fed Is Looking At 06-17-13 Bloomberg via ZH A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets. Bloomberg's Rich Yamarone: "if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession." Given all of this 'weakness' (or missing of Fed benchmarks - that the Fed is well aware of,) why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions. Via Bloomberg,
So once again we ask - given all of this 'weakness' or missing of Fed benchmarks- that the Fed is well aware of, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions. We fear an equity market positioned far too enthusiastically given the risks of a disappointing Fed. |
06-19-13 | US MONETARY | CENTRAL BANKS |
Market Analytics | |||
TECHNICALS & MARKET ANALYTICS |
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PATTERNS - The Three Legged Stool The Macro-Market Three-Legged Stool 06-21-13 Zero Hedge Until the great-and-powerful Ben pronounced the Taper, US Treasury bonds had tracked the deteriorating macro fundamentals of this 'recovery' rather well. In the few weeks since, the squeeze has hit and yields have played catch up to equity's exuberance. However, now that the two asset classes have recoupled in the less-supported world, the question is, which of the three legs of reality - equities, bonds, or fundamentals - will move next? Charts: Bloomberg |
06-22-13 | PATTERNS | ANALYTICS |
COMMODITY CORNER - HARD ASSETS | PORTFOLIO | ||
GOLD - Margins Significantly Increased - Coincidence?? CME raises initial margins on gold futures by 25% 06-20-13 MarketWatch The CME Group Inc. on Thursday raised the initial margins on trading in gold futures by as much as 25%, according to reports. The initial margin required to trade Comex 100 gold futures now stands at $8,800 per contract, compared with $7,040 earlier, according to Reuters. The CME's decision came after August gold futures GCQ3 +0.89% plunged $87.80, or more than 6%, to end at $1,286.20 an ounce on Thursday, the futures' lowest closing level since September 2010. Former US Treasury Official - Fed Orchestrated Gold Plunge 06-21-13 King World A former US Treasury Official told King World News that the U.S. Federal Reserve orchestrated Thursday’s massive gold plunge which shocked market participants. Dr. Paul Craig Roberts also warned that we are on a path which will send the U.S. into “total chaos.” Below is what Dr. Roberts had to say in this powerful interview.
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06-22-13 | ANALYTICS GOLD |
PRECIOUS METALS |
GOLD - Bottom Still Not In Gold: Bottom-Pickers Beware 06-21-13 Decision Point, Carl Swenlin After the October 2012 top, gold has been in decline for nearly nine months, and this week it dropped to another low that has the radio/TV gold hucksters changing their tune from "buy gold because it's going higher" to "look how cheap gold is, buy on the dip". While it may be tempting to try to pick a bottom, we have observed that it is usually a suckers play. That, however, doesn't stop us from checking the charts to see where we might expect a bottom to form. The daily bar chart shows two previous support areas that looked promising. First was the bottom of the trading range at about 1530. That support had held three times since October 2011. When it failed in April, the technical picture changed from bullish to bearish. Next was a double bottom that formed in April and May, but instead of moving up smartly off the May bottom, the rally fizzled and price rolled over, decisively breaking the double bottom support line on Thursday.
We didn't hold much hope that the double bottom would have a bullish resolution because the picture was so negative. Major support was broken in April, and the moving averages are in a negative stack -- price is below the 20-EMA, which is below the 50-EMA, which is below the 200-EMA. It is not impossible for a bottom to form, but this is not an environment were we would go hunting for it. On the weekly chart the best looking area of support is just above 1000. We picked that because there is a lot of congestion on the left side of the chart that show it as a previous level of resistance and support.
Conclusion: Gold is in a bear market, so we don't expect bullish outcomes. Bottom-pick at your own risk. An important bottom may arrive at any time, but for now the best support level appears to be around 1000. |
06-22-13 | ANALYTICS GOLD |
PRECIOUS METALS |
THEMES | |||
CORPORATOCRACY - CRONY CAPITALSIM | |||
CORPORATOCRAY - Global Internet Control Being Taken Over First Congressman Allowed to Read Secret Treaty Says “This ... Hands The Sovereignty of Our Country Over to Corporate Interests” 06-19-13 Washingtonsblog via ZH We reported last year:
Indeed, the decision to keep the text of TPP secret was itself classified as secret: (I have also received a tip from a credible inside source that TPP contains provisions which would severely harm America’s national security. Specifically, like some previous, ill-conceived treaties, TPP would allow foreign companies to buy sensitive American assets which could subject us to terror attacks or economic blackmail.) Yesterday, Congressman Alan Grayson (who knows how to read legislation … he was a successful lawyer before he was elected to Congress, and has written and co-sponsored numerous bills himself including the bill to audit the Federal Reserve and – most recently – the “Mind Your Own Business Act” to stop NSA spying) announced that he had been allowed to read the text of TPP – and that it is an anti-American power grab by big corporations:
Grayson also noted:
Remember that one of the best definitions of fascism – the one used by Mussolini – is the “merger of state and corporate power”. Our nation has been moving in that direction for a number of years, where government and giant corporations are becoming more and more intertwined in a malignant, symbiotic relationship. TPP would be the nail in the coffin for free market economics and democracy. Note to progressives who support public banking: This is a key battle. Note to those who oppose to what they call “one world government” or a “new world order”: This is the big fight.
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GLOBAL FINANCIAL IMBALANCE | |||
SOCIAL UNREST |
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CENTRAL PLANNING |
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STANDARD OF LIVING |
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CORRUPTION & MALFEASANCE | |||
MANIPULATED MARKETS - A Rigged System Currency Markets Are RiggedBloomberg reports today:
Interest Rates Are ManipulatedUnless you live under a rock, you know about the Libor scandal. For those just now emerging from a coma, here’s a recap:
Derivatives Are ManipulatedThe big banks have long manipulated derivatives … a $1,200 Trillion Dollar market. Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting. Commodities Are ManipulatedThe big and and government agencies have been conspiring to manipulate commodities prices for decades. Gold and Silver Are ManipulatedThe Guardian and Telegraph report that gold and silver prices are “fixed” in the same way as interest rates and derivatives – in daily conference calls by the powers-that-be. Oil Prices Are ManipulatedOil prices are manipulated as well. Everything Can Be Manipulated through High-Frequency TradingTraders with high-tech computers can manipulate stocks, bonds, options, currencies and commodities. And see this. Manipulating Numerous Markets In Myriad WaysThe big banks and other giants manipulate numerous markets in myriad ways, for example:
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