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Weekend September 8th , 2013
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THE SECRET US GEO-ECONOMIC STRATEGY
Part I: The Petro$$ Imperative Part II: The Social Engineering of US Complacency w/F. WILLIAM ENDAHL, Author and Freelance Researcher and JOHN RUBINO What Are Tipping Poinits?
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THESIS & THEMES | MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - September 1st - September 7th | ||||||||||||||||||||||||
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SEPTEMBER 2013 - A Mother of a Macro Month Mapping The 7 "Risk" Horsemen Of The Sept-ocalypse 09-04-13 Deutsche Bank via ZH Ahead of September, historically the worst month for stocks, Deutsche Bank notes that volatility has picked up and corporate bond issuance has slowed. There are several possible risks over the next few weeks that could trigger a further escalation in market volatility...
Via Deutsche Bank, 1. Emerging markets could become more vulnerable as the Fed tapers QE and capital outflows from EM intensify 2. Central banks forward guidance may fail to keep rates low for an extended period 3. US consumers could come under pressure from higher energy costs and rising mortgage rates 4. Political deadlock amid US budget talks and the mid-October debt ceiling could rattle markets 5. The next Fed chair will soon be nominated and the main candidates differ in style and policy. The markets may take note 6. While Chancellor Merkel is on track for re-election on September 22, the governing coalition may change 7. The crisis in the Middle East may escalate, impacting oil prices, inflation and growth But Deutsche's Base Case is that none of these risks pose a systemic threat... and yields will 'normalize' higher gradually... Or so they hope... Source: Deutsche Bank |
09-05-13 | MATA STUDY
GMTP GROUP SEPTEMBER |
1 - Risk Reversal | ||||||||||||||||||||||
SEPTEMBER 2013 - A Mother Month "Explosive" September Straight Ahead 09-02-13 Zero Hedge If you thought August had more than enough events to crush the best laid vacation plans of Wall Streeters and men, you ain't seen nothing yet. Presenting "explosive" September. Here is a compendium recap, courtesy of Bloomberg, of the key events that may shake global markets in the next 30 days: Global event risks this month including
Natixis
Goldman Sachs
Credit Suisse
Societe Generale
Barclays
UBS
A summary calendar via RanSquawk: And as a reminder, from Bespoke... |
09-03-13 | MATA STUDY | 1 - Risk Reversal | ||||||||||||||||||||||
CANARIES - Mauldin a Cassandra How Do I Hate Thee? Let Me Count the Ways… The market is down about 3½% since early August, with trading rooms short-staffed the last few weeks. Will the senior traders come back from vacation rested and looking for value? Or will they survey the gains they have banked so far this year and decide to lock them in to assure their year-end bonuses? Finding value these days is tough. It won’t be hard for them to find reasons to head for the sidelines.
I was writing at the time that there was a recession coming, so I was saying pretty much the opposite. Perhaps the more appropriate lesson is to not fight the Fed unless there is a recession coming. Here is a graph from a webinar (see below) that I will be doing in a few days. The last two times the Fed has ended a period of quantitative easing, the air has come out of the market balloon. Has this coming move been so telegraphed that the reaction will be different than in the past, or will we see the same result? Want to bet your bonus on it? Or your retirement?
This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst. Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July. Back in 1998 the developed world was twice as big as the developing world. Today that ratio is about even. We all know what a crisis for the markets 1998 was. And now, more than a few emerging markets have clear debt problems denominated in currencies other than their own. Evans-Pritchard goes on to say:
The price of oil in Indian rupees has gone from 1100 to 7800 in the space of 10 years. Think about what a move like that would do to the US economy. (Chart courtesy of Dennis Gartman) The next chart shows the recent price spike in the Chinese SHIBOR (their short-term interbank rate, more or less equivalent to LIBOR). It is difficult to trust any of the economic data (positive or negative) coming out of China, so we really do not know whether China’s growth story is simply moderating or whether we are seeing a hard landing in progress; but the sudden shock in interbank lending rates is an important sign that all is not well in the Middle Kingdom. The big question: is the recent SHIBOR spike a harbinger of a banking crisis, or does it presage an RMB devaluation? Interbank rates do not spike from 3% to 13% (in about 2.5 weeks) in a healthy economy, and a big event along these lines in China would have enormous implications for global growth. And while we are on the subject of emerging markets, I have to give you the lead paragraph of the latest note from my good friend and uber-bear Albert Edwards of Societe Generale. It is just too delicious.
The table below shows the revision of second-quarter GDP released Thursday. We should all be happy that growth was revised upward by 85 basis points — 2.5% annualized growth is about as good as we could expect. In fact, this result would argue that tapering should begin sooner rather than later and should proceed faster than most market observers expect. If the economy has recovered that much, it is time to take the foot off the gas pedal. The problem I want to point out is highlighted in bold, and that is the implicit inflation deflator used by the Fed. Notice that it did not move at all with the revision, even though the economy was seen to grow almost 50% faster. That’s a tad unusual though certainly within the realm of possibility. But if after the massive quantitative easing we have seen, all you can get is 0.7% inflation, that simply illustrates one of my main contentions: we are in an overall deflationary environment. What happens if you then suck the juice from the markets? Will we see a further fall in inflation?
Just for fun, the next table gives us the numbers on CPI inflation for the last eight years. Notice that the number moves around a lot.
The Fed prefers to use Personal Consumer Expenditures (PCE) as its measure of inflation. For the last 12 months, inflation has been only 1.2% as measured by PCE. Even if you use core CPI, inflation is still rather tame. Couple tame inflation with the velocity of money’s continuing to fall and you get a deflationary environment. What will happen when the Fed removes QE?
The Silver Lining Yesterday after the markets closed I was invited to a local watering hole here in Dallas to meet with some younger but generally successful hedge fund managers (although younger for me is becoming a relative term). They were all interested in the macro environment, and they were all nervous. What interested me most, though, was not what they wanted to sell; it was what they wanted to buy. They were starting to find value in Saudi Arabia and Turkey and India and Indonesia — stocks of serious companies in those countries had fallen to very low levels. Some were getting on planes to go check things out. And here and there some of the longer-term investors were teasing out opportunities in the US market. For these young Turks, market corrections were not a problem but simply an opportunity to find value. And I picked up one other key thought from them. You would think, given their view of the world (which I generally share), that they were short a great deal of their book. That is not the case. Today’s environment is a very, very difficult short, because the carry costs are so high. (Definition: Costs incurred as a result of an investment position. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts, interest on loans used to purchase a security, and economic costs, such as the opportunity costs associated with taking the initial position.) The Fed has distorted the interest-rate environments both in the US and internationally, and it is simply too costly to put on a short position for very long and be wrong. If you short something, you need to be right fairly quickly, or you will watch your portfolio begin to bleed. For young managers, their track record is critical, so they become quite sensitive to making longer-term macro calls that can go against them for a period of time. They have even more ways to hate the market than I do. Investing in a Market to Hate In my August 3rd newsletter (“Can It Get Any Better Than This?“) I shared research supporting our forward-looking prospects for the markets. There was no way to sugar-coat our conclusions: if history is any indication, we are looking at the potential for a significant peak-to-trough drawdown and negative annual returns in equity markets for an extended period of time. We pointed out that where there is danger, there is also opportunity. Investors have a lot to gain from diversifying as broadly as possible and reducing their |
09-03-13 | CANARIIES
GMTP MACRO CHARTS GROWTH
EM CHART INDIA CHINA CHART SHIBOR
MATA VAL PE
US MONETARY CHARTS DEFLATOR VELOCITY OF MONEY
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JAPAN - DEBT DEFLATION | 2 | ||||||||||||||||||||||||
BOND BUBBLE | 3 | ||||||||||||||||||||||||
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] | 5 | ||||||||||||||||||||||||
CHINA BUBBLE | 6 | ||||||||||||||||||||||||
SYRIA - This has the Earmarks of the Kennedy Ear "Cuban Missile" Crisis RUSSIA
CHINA
The Syrian War: What You're Not Being Told 09-04-13
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09-06-13 | GLOBAL RISK SYRIA |
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BRICS RESERVES - Insufficent Levels Prompt Russian-Chinese Support Currency reserve to assist liquidity 09-06-13 ChinaDaily China will contribute the lion's share to a foreign currency reserve set up by major emerging economies to mitigate liquidity strains as the US pulls back from its monetary stimulus. Leaders of Brazil, Russia, India, China and South Africa, better known as BRICS, agreed on Thursday to create a $100 billion pool of currency reserves as they met on the sidelines of the G20 summit in St. Petersburg, Russia. Analysts said the reserve fund will help ease short-term liquidity pressure and safeguard the financial stability of major emerging economies.
"Consensus has been achieved on many key aspects and operational details" regarding the establishment of the fund, said a statement issued after the meeting. Zhang Monan, an economist at the State Information Center under the National Development and Reform Commission, said a mutual reserve will be a "financial firewall" for BRICS countries. "The US tapering off its quantitative easing later this year will have a profound impact on the global financial market, especially emerging economies," Zhang said, explaining that such an impact will involve capital outflow and depreciation of domestic currency and assets. The US Federal Reserve is widely expected to take its first steps this month to reduce the extraordinary monetary stimulus, which observers said will bring turmoil and substantial spillover effects to a global financial system where the US dollar accounts for 62 percent of reserve assets.
"We see the temporary difficulties of some BRICS countries mainly as difficulties in terms of international balance of payments," Vice-Minister of Finance Zhu Guangyao said on Thursday. "The policy options in response to such difficulties include
"We hope the US will carefully consider its decision to exit its quantitative easing policy to make more contribution to the global economy," he said. Zhang suggested that BRICS countries should enhance financial ties by
The emerging economies are mostly net creditors to developed nations, as they accounted for 75 percent of the world's total currency reserves, among which China contributed one-third of the world's total. "The gravity of the global economy has moved from the West to the East, but the power of wealth distribution is still in the hands of Western countries," Zhang said. Yang Baorong, a researcher of West Asian and African studies at the Chinese Academy of Social Sciences, said setting up mutual currency reserves is vital to challenging the global financial order dominated by developed economies. The fund can help guarantee the safety of internal trade among these countries and significantly lower trade costs. However, Yang said, the reserve is just a framework at the moment, and there will be uncertainty and adjustment to go through when it is put into practice. Chinese officials defended the resilience of emerging economies. Qin Gang, spokesman for the Chinese delegation at the G20, denied the pessimistic views on the prospects of emerging economies, saying that BRICS countries will continue to make their contribution to the world's economy. Vice-Minister of Finance Zhu said China is confident of achieving its goal of 7.5 percent growth this year, which will contribute 28 percent of global GDP growth, compared with about 12 percent by the US. But, Zhu said, BRICS countries have reached a consensus that they will not consider extra stimulus to combat the temporary economic slowdown. BRICS-led New Development Bank: Progress was also made on Thursday on the BRICS-led New Development Bank in negotiating its capital structure, membership, shareholding and governance. The bank will have an initial subscribed capital of $50 billion from the BRICS countries. The money will mainly finance infrastructure projects, and other developing economies may also benefit from the initiative, Zhu said. |
09-07-13 | MATA BONDS
GMTP GLOBAL RISK REGIONAL EM CRISIS |
39 - Financial Crisis Programs Expiration | ||||||||||||||||||||||
TAPER - Global Bond Yields React Together Still Think Rates Are Rising Due To Growth (Not Taper)? 09-05-13 Zero Hedge In a desperate need to keep the spice flowing into the commission-takers' pockets, any and every excuse is being pulled out of the hat for why interest-rates are rising and why Emerging Markets are collapsing; apart from the most obvious - that the market is terrified of the end of the 'flow' of Fed liquidity. The following chart suggests otherwise. While correlation is not causation (but it suggests you're close), the relationship between "Taper" fears and global bond yields is clear as the global Fed carry trade unwind accelerates. And for those who look at the equity market with some sense that "it knows better" - what did the equity market know in the run-up to the fiscal-cliff (before dumping), the US downgrade (before dumping), Lehman (before collapsing), the dot-com bust (before dumping), and of course 1987...? Chart via @M_McDonough |
09-07-13 | MATA BONDS
GMTP GLOBAL RISK REGIONAL EM CRISIS |
39 - Financial Crisis Programs Expiration | ||||||||||||||||||||||
HERE IS WHY - Negative Current Accounts + Weak(ening) International Investment Positioning
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09-05-13 | GMTP GLOBAL RISK REGIONAL EM CRISIS |
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BRAZILThree Years After Warning Of "Currency War", Brazil Goes All In 08-25-13 Zero Hedge In September 2010, Guido Mantega coined the phrase "currency war" as he proclaimed the world's central bank's FX interventions were dangerous for citizens' purchasing power and would lead to a vicious circle of competitive devaluations. In March, Mantega unleashed a mini-war by taxing foreign borrowings and threatening capital controls. But this week, after the BRL devalued over 26% since March as Fed Taper talk and EM capital flight takes hold around the world, Brazil has waded into the world's currency war with the largest currency intervention the nation has ever planned. Following a dismal current account deficit print, as The FT reports, "Brazil will launch a currency intervention program worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market" - offering USD500 million per day in currency swaps to support the Real. But, as Citi warns, it does not fix any of Brzail's problems.
However, Citi's FX team has a word of warning...
Even though they do think in the short-term it will help...
So Brazil is getting a bit lucky on this front. But how long with that last?
200,000 Take To Brazil's Streets In Largest Protest In Two Decades
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09-05-13 | GMTP GLOBAL RISK REGIONAL EM CRISIS |
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INDIAPanics in India September 2013,Sunanda Sen is a former professor at Jawaharlal Nehru University, New Delhi - See more at: http://triplecrisis.com/panics-in-india/#sthash.reOY7BcA.dpuf A panic of unprecedented order has struck the crisis-ridden Indian economy. It brings to the fore what led to this massive downturn, especially when the country was touted, not long back, as one of the high growth emerging economies of Asia. Volte-faces, from scenes of apparent stability marked by high GDP growth and a booming financial sector to a state of flux in the economy, can completely change the expectations of those who operate in the market, facing situations with an uncertain future. Possible transformations as above, were identified by Kindleberger in 1978 as a passage from manias, which generate positive expectations, to panics, which head toward a crisis. While manias help continue a boom in asset markets, they are sustained by using finance to hedge and even speculate in the asset market, as Minsky pointed out in 1986. However, asset-markets bubbles generated in the process eventually turn out to be on shaky ground, especially when the financial deals rely on short-run speculation rather than on the prospects of long-term investments in real terms. With asset-price bubbles continuing for some time under the influence of what Shiller described in 2009 as irrational exuberance, and also with access to liquidity in liberalised credit markets, unrealistic expectations of the future under uncertainty sow the seeds for an unstable order. The above leads to Ponzi deals, argues Minsky, with the rising liabilities on outstanding debt no longer met, even with new borrowing, since borrowers are nearing insolvency. Situations as above trigger panics for the private agents in the market, who fear possible crisis situations. These are orchestrated with herd instincts or animal spirits in the market as held by Keynes in 1936. In the absence of actions to counter the market forces, a possible crisis finally pulls down what in hindsight looks like a house of cards! Indeed, when markets have the freedom to choose the path of reckless short-run financial investments, with high risks and high returns, the individual’s profit calculus eventually proves wrong in the aggregate, leading to a path of downturn, not just for the financial market but for the economy as a whole. This is how manias lead to panics and then to crisis in an economy. Characterisations such as above help to explain the slippages in the Indian economy’s GDP growth, which has decelerated from annual averages around 9% between 2005-6 and 2010-11to the current rate of less than 5%. The changing scene also witnesses a sharp decline in the growth of industrial production, to less than 1% in 2012-13. The stock of official exchange reserves, which was above $300 billion until 2010-11, is today down by $30 billion. There has also been a worsening in both the current account deficit and fiscal deficit as proportions of GDP. The two are today at respective levels of 4.8% and 5.1%, considered to be too large for financial stability. The changing scene in the Indian economy also has witnessed a classic bursting of bubbles in asset prices over the decade. With rising capitalisations in the stock market, which doubled between 2009-10 and 2011-12, and the rising price/earnings ratios, which reduced the costs of new investments in financial assets, the expansionary spate in India’s financial-asset market continued as long as the main agents in the market continued to invest. Turnover in India’s secondary market of stocks was considerably facilitated by Foreign Institutional Investor (FII) entry, fully liberalised since 1999, and by transactions in exchange-traded derivatives, treated at par with equities since 1999. Inflows of short-term capital also entered markets for real estate and commodities including gold, thus inflating transactions as well as prices. Liberalisation of futures trading in commodities worked to initiate use of derivatives in the commodity market, often with spiralling prices. Market expectations in India, which have turned adverse over the last two years, rest on the sharp depreciation of the rupee (hitting a record low of near Rs69 per dollar in August 2013, followed by a moderate recovery). Also, outflows of FII-led short-term funds, steady declines in the stock of official reserves, rising current-account deficit and fiscal deficits, stock-market volatility with a drop in turnovers as well as prices, a rise in external debt (at near 21% of GDP and, short term debt at 31% of official reserves), and finally, a state of stagflation which is ineptly handled by the state machinery—are all aspects which similarly affect such expectations. Facts as above have created concerns of an impending insolvency with further downgrading of credit ratings, even below the current rating, at the lowest investment grade of “Baa3″ by Moodys. With volatile FII flows, the lifeline of all short-lived booms in asset markets, expectations have further worsened. One can notice here the sharp drop in net FII flows to the equity and bond markets, from $708.9 billion to a negative total of (-)$188.4 billion between2012-13 Q4 and 2013-14 Q2. This worsening of the financial scene gets reflected in the sharp declines in the financial balance in India’s international accounts. The balance nearly halved between Q3 and Q4 of 2012-13. Much of that was due to the declines in portfolio investments driven by the FIIs. Rise in pre-payment of short-term trade credits abroad and bank lending from India, both to avert further decline in the rupee rate, were also there, as reflected in the drop in ‘other investments’ on a net basis. Net capital flows fell miserably short of what was needed to meet the rising current account deficit, fed by unrestricted imports. Concerns over the sagging financial market in India reinforces itself as one witnesses the slump in the real sector. Not much is forthcoming in the near future from fiscal expansion, given the stringent clauses of the Fiscal Responsibility and Budget Management Act, which seems to have been already violated by the current fiscal deficit. Nor is much respite offered by the Reserve Bank of India (RBI), India’s central bank, which continues to be bothered about its prior goals of inflation and exchange-rate management in the face of free capital flows (or even the whims of U.S. monetary authorities in their quantitative easing programme). None of above permits much autonomy to the bank in setting monetary policy in the interest of domestic growth. The recent use of stop-go policies by the RBI have so far been incapable of reversing the current slide in the economy. Looking back, the current scene of a discredited Indian economy, which has lost its past glory as a major investment destination in terms of stability and growth can be traced back to the process of formation of a bubble economy, which originated from both the welcome signals provided by the state to speculation and short-term finance and the irrational exuberance on the part of agents in the market to make a fortune while the sun shone. The run on the system was avoidable with timely interventions to stop the build-up of the bubble economy, supplemented by policies to direct finance toward long-term investments for growth. Sunanda Sen is a former professor at Jawaharlal Nehru University, New Delhi. Her research includes issues in development, global finance, labour, and economic history. |
09-05-13 |
GMTP GLOBAL RISK REGIONAL EM CRISIS |
39 - Financial Crisis Programs Expiration | ||||||||||||||||||||||
SOUTH AFRICA
South Africa Finance Minister: Rand's Fall 'Gone Too Far' 08-30-13 WSJ Comments Open Door to Follow Emerging-Market Peers Moving to Prop Up Currencies The South African rand's plunge against the U.S. dollar "has gone too far," Finance Minister Pravin Gordhan said, undercutting a feeble economy and opening the door for the government to follow emerging-market peers moving to prop up their currencies. The rand's fall to a four-year low of 10.52 to the dollar this week "is going to, as it is in other countries, make an impact on inflation and start triggering a set of events that could be negative for growth and job creation," Mr. Gordhan said on Friday in an interview with The Wall Street Journal. "We'll have to watch the situation on a day-by-day basis and see what lessons we can learn from others and what defensive measures we can develop on our own side." Currencies in larger emerging markets, such as India's rupee and Turkey's lira, also touched record lows this week. One reason: Investors anticipating an end to the U.S. Federal Reserve's aggressive bond-buying program are pulling back from relatively risky emerging-market assets, betting U.S. Treasurys might soon yield similar but safer returns. Developing-world central bankers and finance officials have fought back with measures to discourage capital flight. Indonesia raised interest rates on Thursday. Brazil did likewise on Wednesday, after pledging to spend $60 billion to bolster the value of its currency through the end of 2013. India has moved to curb gold imports and the amount of money that can be sent abroad. South African officials say they are committed to a market-determined exchange rate. And analysts say the central bank likely won't raise interest rates at its September meeting because the economy is struggling to grow at 2% annually, far below the 7% rate officials say they need to cut into a 25.6% unemployment rate. But Mr. Gordhan said South Africa might emulate emerging markets adopting less-orthodox policies, although he declined to discuss what steps he was considering. Given South Africa's relatively modest foreign-exchange reserves of $47 billion and a strained federal budget, its range of options to support the rand is limited. "We have to see what the rest of the world is experimenting with and see what works and what doesn't work," Mr. Gordhan said. "But I wouldn't like to at this stage say I have a menu...and which ones we're going to exercise just yet." He also urged leaders from the Group of 20 industrial and developing nations meeting next week in St. Petersburg, Russia, to find ways to cushion vulnerable nations from the "negative spillover" of developed-world monetary policy and volatile capital flows. "Global cooperation has once again in a sense failed all of us," Mr. Gordhan said. "We as a global community...haven't put together any mechanism to buffer the side effects of these sorts of decisions." Meanwhile, Mr. Gordhan urged South Africa's manufacturers and mining companies to take advantage of the competitive boost a weaker rand gives their goods abroad. At Anglo American PLC, one of the world's largest mining companies, the weaker rand has helped soften the blow of softer commodity prices. Because Anglo American sells the platinum it mines in South Africa on the international market for U.S. dollars, the price it got in rand terms was 11% higher than last year. "It does make us more competitive," Anglo American chief executive Mark Cutifani said. "But it does worry me because it speaks about the state of the country." Next month, Anglo American will begin cutting around 3,300 employees at its platinum mines, while another 3,000 will take early retirement—or move to new units as the company seeks to boost profitability. Mr. Cutifani estimates that high costs mean about half of South Africa's gold and platinum mines, which employ 2% of the workforce and drive 6% of gross domestic product, are operating at a loss. Gold miners on Friday said they would strike next week to demand a 50% raise for entry-level employees, potentially adding pressure on South Africa's 6.3% annual inflation rate. Construction workers, auto plant employees and some airport technicians are already striking to demand double-digit salary increases. Labor turmoil has simmered since police shot and killed dozens of miners outside Johannesburg in August 2012. But Mr. Gordhan said companies and unions are making progress bridging their differences, although he acknowledged hard work ahead. "We've come a long way since August last year," he said. "We need to walk the next mile—and walk it fairly fast." |
09-05-13 | GMTP GLOBAL RISK REGIONAL EM CRISIS |
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TURKEYThe Turkish Lira Is Getting Shredded 09-05-13 BI It's no surprise that one of the ugliest charts of the day would belong to an Emerging Market. The Turkish lira is getting slammed, falling more than 1% a record low. Turkey is one of a handful of Emerging Market's whose massive current account deficits have currency traders running for the exits. Here's the WSJ's Yeliz Candemir on new Bank of Turkey comments:
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09-05-13 | GMTP GLOBAL RISK REGIONAL EM CRISIS |
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ASIAN CRISIS II - "TAPER" Shock Waves Across Asia Are Emerging Markets Submerging? 09-02-13 Prof Kenneth Rogoff, Project Syndicate
A Bumpy Ride for Emerging Markets 08-31-13 Lauara Tyson, Project Syndicate
Emerging-Market Party 08-30-13 Ricardo Hausmann, Project Syndicate
The three phenomena that boost nominal GDP – increases in real output, a rise in the relative price of exports, and real exchange-rate appreciation – do not operate independently of one another. Countries that grow faster tend to experience real exchange-rate appreciation, a phenomenon known as the Balassa-Samuelson effect. Countries whose terms of trade improve also tend to grow faster and undergo real exchange-rate appreciation as domestic spending of their increased export earnings expands the economy and makes dollars relatively more abundant (and thus cheaper). Real exchange rates may also appreciate because of increases in capital inflows, which reflect foreign investors’ enthusiasm for the prospects of the country in question. For example, from 2003 to 2011, Turkey’s inflows increased by almost 8% of GDP, which partly explains the 70% increase in prices measured in dollars. Real appreciation could also be caused by inconsistent macroeconomic policies that put the country in a perilous position, as in Argentina and Venezuela. Distinguishing between these disparate and inter-related phenomena is important, because some are clearly unsustainable. In general, terms-of-trade improvements and capital inflows do not continue permanently: they either stabilize or eventually reverse direction. Indeed, terms of trade do not have much of a long-term trend and show very pronounced reversion to the mean. While prices of oil, metals, and food rose very significantly after 2003, reaching historic highs sometime between 2008 and 2011, nobody expects similar price increases in the future. The debate is whether prices will remain more or less where they are or decline, as food, metals, and coal prices have already done. The same can be said of capital inflows and the upward pressure that they place on the real exchange rate. After all, foreign investors are putting their money in the country because they expect to be able to take even more money out in the future; when this occurs, growth tends to slow, if not collapse, as happened in Spain, Portugal, Greece, and Ireland. Atlas of Economic Complexity, these economies began producing more complex products, a harbinger of sustainable growth. Angola, Ethiopia, Ghana, and Nigeria also had very significant real growth, but nominal GDP was boosted by very large terms-of-trade effects and real appreciation. In some countries, such as China, Thailand, South Korea, and Vietnam, nominal GDP growth was driven to a large extent by real growth. Moreover, according to the soon-to-be-publishedFor most emerging-market countries, however, nominal GDP growth in the 2003-2011 period was caused by terms-of-trade improvements, capital inflows, and real appreciation. These mean-reverting processes are, well, reverting, implying that the buoyant performance of the recent past is unlikely to return any time soon. In most countries, the US dollar value of GDP growth handsomely exceeded what would be expected from real growth and a reasonable allowance for the accompanying Balassa-Samuelson effect. The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over. During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. But the BRICS, as well as many other emerging-market economies – have recently experienced a sharp economic slowdown. So, is the honeymoon over?
Trouble in Emerging-Market Paradise 07-22-13 Nouriel Roubini, Project Syndicate Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China’s economy grew by 10% per year for the last three decades, but slowed to 7.8% last year and risks a hard landing. And South Africa grew by only 2.5% last year and may not grow faster than 2% this year. Many other previously fast-growing emerging-market economies – for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe – are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets?
These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realized from these economies’ financial assets (currencies, equities, bonds, and commodities). Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating
The Global Implications of Falling Commodity Prices José Antonio Ocampo, former United Nations Under-Secretary-General, Project Syndicate The decade-long commodity-price boom has come to an end, with serious implications for global GDP growth. And, although economic patterns do not reproduce themselves exactly, the end of the upward phase of the commodity super-cycle that the world has experienced since the early 2000’s dims developing countries’ prospects for continued rapid catch-up to advanced-country income levels. Over the year ending in July, The Economist’s commodity-price index fell by 16.5% in dollar terms (22.4% in euros) with metal prices falling for more than two years since peaking in early 2011. While food prices initially showed greater resilience, they have fallen more sharply than those of other commodities over the past year. Only oil prices remain high (though volatile), no doubt influenced by the complex political events in the Middle East. our research into commodity super-cycles shows. Since the late nineteenth century, commodity prices have undergone three long-term cycles and the upward phase of a fourth, driven primarily by changes in global demand. The first two cycles were relatively long (almost four decades), but the third was shorter (28 years). In historical terms, this is not surprising, asThe upward phases of all four super-cycles were led by major increases in demand, each from a different source. During the current cycle, China’s rapid economic growth provided this impetus, exemplified by the country’s rising share of global metals consumption. While these cycles reached similar peaks, the downswings’ intensity has varied according to global economic growth. The downswings following World War I and in the 1980’s and 1990’s were strong; in contrast, the dip after the Korean War, when the world economy was booming, was relatively weak. After World War II, the super-cycles of different commodity groups became more closely synchronized (including oil, which had previously shown a different pattern). Just as China’s economic boom drove commodity-price growth in the current cycle, so the recent weakening of prices has largely been a result of its decelerating GDP growth, from double-digit annual rates in 2003-2007, and again in 2010, to roughly 7.5% this year. While projections of China’s future growth vary, all predict weaker economic performance in the short term – and even lower growth rates in the long term. The fundamental short-term issue is the limited policy space to repeat the massive economic stimulus adopted after the collapse of Lehman Brothers in 2008. China’s investment-led strategy to counter the crisis left a legacy of debt, and the continued deterioration of the demand structure – now characterized by an extremely high share of investment (close to half of GDP) and a low share of private consumption (about 35%) – further constrains policymakers’ options. There is a consensus that these abnormal demand patterns must change in the long term, as China moves to a consumption-led growth model. But, to accomplish this transition, China’s leaders must implement deep and comprehensive structural reforms that reverse a policy approach that continues to encourage investment and exports while explicitly and implicitly taxing consumption. Michael Pettis, for example, regards 3-4% growth as consistent with continuous rapid consumption growth and the targeted increase in consumption’s share of GDP. The uncertainty surrounding China’s impending economic transformation muddies the growth outlook somewhat. Some forecasters predict a soft landing, but differ on the growth rate. Official estimates put annual GDP growth at 6.5% in 2018-2022, while Peking University’sWhile hard-landing scenarios, associated with a potential debt crisis, are also possible, the authorities have enough policy space to manage them. In any case, downside risks are high, and room on the upside is essentially non-existent. The main engine of the post-crisis global economy is therefore slowing, which has serious implications for one of the last decade’s most positive economic trends: the convergence of developed and developing countries’ per capita income levels. Just as China’s economic boom benefited commodity-dependent economies, primarily in the developing world, its slowdown is reflected in these economies’ declining growth rates. (In fact, while several South American countries have been among the hardest hit, even developed countries like Australia have not been immune.) If weak global demand causes the current commodity super-cycle’s downswing to be as sharp as those of the post-1918 period and the late twentieth century, the world should be prepared for sluggish economic growth and a significant slowdown – or even the end – of income convergence worldwide |
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EARNINGS - Buybacks Disguising Overvaluation "Overly Optimistic" Earnings Expectations Are In Jeopardy 09-06-13 Lance Roberts of Street Talk Live blog via ZH Analyzing Earninsg As Of Q2 2013 With 99% of the S&P 500 earnings reported (as of Aug.30, 2013) we can now take a closer look at the results for the first half of the year. Operating earnings rose from $25.77 per share to $26.36. While operating earnings are widely discussed by the media there are many problems with the way in which these earnings are derived. Therefore, from a historical valuation perspective, reported earnings are much more relevant in determining market over/under valuation levels. In this regard reported earnings increased from $24.22 to $24.95 per share in the second quarter. Trailing twelve month earnings per share rose from $98.35 to $99.28 for operating earnings and from $87.70 to $91.03 for reported earnings. However, while the headline reports were certainly encouraging - digging into the details revealed a bit more troubling picture. Always Optimistic There is one commodity that Wall Street always has in abundance and that is "optimism." When it comes to expectations for corporate earnings the estimates are always higher regardless of the trends of economic data. The problem is that the difference between expectations and reality have been quite dramatic. In a recent missive entitled the "4 Tools Of Corporate Profitability" I stated:
The chart below shows the consistently sliding revisions as of late in corporate profitability. At the beginning of 2012 it was estimated that by Q4 of 2013 reported earnings would be $106.16. In March of 2013 the Q4 estimate had been dropped to $99.75 even as stock prices were boosted by continued injections from the Federal Reserve. Currently, as the end of the year rapidly approaches, estimates have been knocked down to just $97.30 as slower economic growth has weighed on profitability. This is the primary problem of using "forward" estimates as a valuation tool. The always overly optimistic assumptions leads to faulty analysis as sliding earnings leads to sharp valuation increases. The chart below shows the progression of forward P/E estimates since the beginning of 2012. Currently, with the S&P 500 valued at 19x reported earnings it is hard to justify that the market is undervalued. Accounting Magic What has also been stunning is the surge in corporate profitability despite a lack of revenue growth. Since 2009 the reported earnings per share of corporations, the bottom line of the income statement, have increased by a total of 222% which is the sharpest, post-recession, increase in reported EPS in history. However, at the same time, reported sales per share, which is what happens at the top line of the income statement, has only increased by a marginal 22% during the same period. This is shown in the chart below. In order for profitability to surge, despite rather weak revenue growth, corporations have resorted to four primary weapons:
The problem is that each of these tools create a mirage of corporate profitability. The problem, however, is that each of these not only have a negative economic consequence but also suffer from diminishing rates of return over time. One of the primary tools used by businesses to increase profitability has been through the heavy use of stock buy backs. The chart below shows outstanding shares as compared to the difference between operating earnings on a per/share basis before and after buy backs. The problem with this, of course, is that stock buy backs create an illusion of profitability. If a company earns $0.90 per share and has one million shares outstanding - reducing those shares to 900,000 will increase earnings per share to $1.00. No additional revenue was created, no more product was sold, it is simply accounting magic. Such activities do not spur economic growth or generate real wealth for shareholders. However, it does provide the basis for with which to keep Wall Street satisfied and stock option compensated executives happy. As I discussed at length in my recent report on "Evaluating 3 Bullish Arguments:"
The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a "restocking" cycle. The sustainability of the uptick is crucially important if the economy is indeed truly turning a corner toward stronger economic growth. However, with interest rates rising, oil prices surging and the Affordable Care Act about to levy higher taxes on individuals, it is likely that a continuation of a "struggle" through economy is the most likely outcome. This puts overly optimistic earnings estimates in jeopardy of be lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting continues to become less effective. |
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FALSE FLAGS - A US History These False Flags Were Used To Start A War 09-05-13 Zero Hedge Just in case one's history textbook had a few extra pages ripped out, this may be a good time to recall just how far one's government is willing to go to start a war under false pretenses. Below is a partial list of some of the documented "false flag" events that were intended and/or served to start a war in recent and not so recent history. Franco-Prussian War Otto von Bismarck waved a "red flag" in front of the "gallic bull" by re-editing a telegram from the Prussian King so that it appeared as though the King had insulted a French ambassador during a time of extremely tense French-German international relations. The telegram is known as the Ems Dispatch. It helped encourage the states to go to war. Russo-Swedish War In 1788, a head tailor of the Royal Swedish Opera received an order to sew a number of Russian military uniforms that later were used in an exchange of gunfire at Puumala, a Swedish outpost on the Russo-Swedish border, on June 27, 1788. The staged attack, which caused an outrage in Stockholm, was to convince the Riksdag of the Estates and to provide the Swedish king Gustav III with an excuse to declare a "defensive" war on Russia. This was important since the king did not have constitutional right to start offensive war without agreement of the estates who had already made clear that their acceptance would not be forthcoming. Spanish–American War, i.e, the Sinking of the USS Maine The sinking of the USS Maine on 15 February 2021 in Havana harbor was initially thought to be caused by an external mine exploded under the ship. This belief roused anti-Spanish sentiment in the United States and helped catalyze the Spanish–American War later that same year. In 1911 an extensive study was made of the wreck, and again an external mine was believed to be the cause. In 1976 a team of naval explosive experts re?examined the earlier evidence and concluded that the likeliest cause of the sinking was an internal explosion caused by spontaneous combustion of fuel coal stored in a bunker next to a magazine holding more than 5 short tons (4.5 t) of powder charges for the guns. Despite this analysis, some observers believe that the explosion was caused by a U.S. agent for the purpose of angering the U.S. populace and initiating the war which followed. Cuban politician and former director of the national library Eliades Acosta claims that "powerful economic interests" in the United States were probably responsible not only for the sinking of the Maine but for the assassination of three 19th-century U.S. presidents, beginning with Abraham Lincoln. The Mukden incident in September 1931 involved Japanese officers fabricating a pretext for annexing Manchuria by blowing up a section of railway. In fact the explosion was so weak that the line was unaffected. Six years later in 1937 they falsely claimed the kidnapping of one of their soldiers in the Marco Polo Bridge Incident as an excuse to invade China proper. Reichstag fire The Reichstag fire was an arson attack on the Reichstag building in Berlin on 27 February 1933. The fire started in the Session Chamber, and, by the time the police and firemen arrived, the main Chamber of Deputies was engulfed in flames. Police searched the building and found Marinus van der Lubbe, a young, Dutch council communist and unemployed bricklayer who had recently arrived in Germany, ostensibly to carry out political activities. The fire was used as evidence by the Nazis that the Communists were beginning a plot against the German government. Van der Lubbe and four Communist leaders were subsequently arrested. Adolf Hitler, who was sworn in as Chancellor of Germany four weeks before, on 30 January, urged President Paul von Hindenburg to pass an emergency decree to counter the "ruthless confrontation of the Communist Party of Germany". With civil liberties suspended, the government instituted mass arrests of Communists, including all of the Communist parliamentary delegates. With their bitter rival Communists gone and their seats empty, the National Socialist German Workers Party went from being a plurality party to the majority; subsequent elections confirmed this position and thus allowed Hitler to consolidate his power. Historians disagree as to whether Van der Lubbe acted alone, as he said, to protest the condition of the German working class, or whether the arson was planned and ordered by the Nazis, then dominant in the government themselves, as a false flag operation. The responsibility for the Reichstag fire remains an ongoing topic of debate and research. The Gleiwitz Incident The Gleiwitz incident in 1939 involved Reinhard Heydrich fabricating evidence of a Polish attack against Germany to mobilize German public opinion for war, to establish casus belli, and to justify the war with Poland. Alfred Naujocks was a key organiser of the operation under orders from Heydrich. It led to the deaths of innocent Nazi concentration camp victims who were dressed as German soldiers and then shot by the Gestapo to make it seem that they had been shot by Polish soldiers. This, along with other false flag operations in Operation Himmler, would be used to mobilize support from the German population for the start of World War II in Europe. Winter War In 1939 the Red Army shelled Mainila, a Russian town near the Finnish border. Soviet authorities blamed Finland for the attack and used the incident as a pretext to start the Winter War four days later. Kassa attack The Kassa attack in 1941 involved the city of Kassa, today Košice (Slovakia), which was then part of Hungary, being bombed by three unidentified planes of apparently Soviet origin. This attack became the pretext for the government of Hungary to declare war on the Soviet Union. Operation Ajax The replacement of Iran's Anglo-Persian Oil Company with five American oil companies and the 1953 Iranian coup d'état was the consequence of the U.S. and British-orchestrated false flag operation, Operation Ajax. Operation Ajax used political intrigue, propaganda, and agreements with Qashqai tribal leaders to depose the democratically elected leader of Iran, Mohammed Mosaddeq. Information regarding the CIA-sponsored coup d'etat has been largely declassified and is available in the CIA archives. Operation Northwoods The planned, but never executed, 1962 Operation Northwoods plot by the U.S. Department of Defense for a war with Cuba involved scenarios such as fabricating the hijacking or shooting down of passenger and military planes, sinking a U.S. ship in the vicinity of Cuba, burning crops, sinking a boat filled with Cuban refugees, attacks by alleged Cuban infiltrators inside the United States, and harassment of U.S. aircraft and shipping and the destruction of aerial drones by aircraft disguised as Cuban MiGs. These actions would be blamed on Cuba, and would be a pretext for an invasion of Cuba and the overthrow of Fidel Castro's communist government. It was authored by the Joint Chiefs of Staff, but then rejected by President John F. Kennedy. The surprise discovery of the documents relating to Operation Northwoods was a result of the comprehensive search for records related to the assassination of President John F. Kennedy by the Assassination Records Review Board in the mid-1990s. Information about Operation Northwoods was later publicized by James Bamford. Gulf of Tonkin incident The Gulf of Tonkin incident (or the USS Maddox incident) is the name given to two separate confrontations involving North Vietnam and the United States in the waters of the Gulf of Tonkin. The first event occurred on August 2, 1964, between the destroyer USS Maddox and three North Vietnamese Navy torpedo boats of the 135th Torpedo Squadron. The second was originally claimed by the U.S. National Security Agency to have occurred on August 4, 1964, as another sea battle, but instead may have involved "Tonkin Ghosts" (false radar images) and not actual NVN torpedo boat attacks. The outcome of these two incidents was the passage by Congress of the Gulf of Tonkin Resolution, which granted President Lyndon B. Johnson the authority to assist any Southeast Asian country whose government was considered to be jeopardized by "communist aggression." The resolution served as Johnson's legal justification for deploying U.S. conventional forces and the commencement of open warfare against North Vietnam. In 2005, an internal National Security Agency historical study was declassified; it concluded that the Maddox had engaged the North Vietnamese Navy on August 2, but that there were no North Vietnamese Naval vessels present during the incident of August 4. The Gulf of Tonkin incident has long been accused of being a false flag operation, but this judgment remains in dispute.
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2012 - FINANCIAL REPRESSION |
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
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