Don't Catch The Liquidity-Impacted EM Falling Knife (Yet) 09-17-13 Societe General via ZH

The Euro area is no longer the centre of all the stress... EM countries are! Despite their significant correction in recent months, SocGen notes that valuations remain far more extreme (or cheap) and outflows are dominating (despite a 24% discount on a price-to-book basis across EM stocks, they reain rich historically). Significant structural issues like balance of payments, deficit or inflation may lead to further turmoil in emerging markets, potentially destabilising the underlying economies.

Via Societe Generale,

Epicentre of the crisis is moving towards EM Countries

We read history in a simple way.

In 2007/08, what was supposed to be a liquidity crisis at the beginning finally switched into a full blown financial and economic crisis centred in the US. Since 2008, the US has climbed a wall of worries, allowing US assets (both bonds and equities) to outperform.

In the period 2009/mid-2012, the epicentre of the crisis switched to the eurozone, where a mix of bad governance and structural weaknesses led to bailouts and recession. Eurozone assets (except in Germany) are today where the US assets were in 2009, ready to “climb their wall of worries”, with significantly improved governance and an improving growth outlook.

Since 2013, signs of weaknesses have appeared in the EM World, burdened by the prospect of a tighter US monetary policy (read: higher USD) and huge outflows. Significant structural issues like balance of payments, deficit or inflation may lead to further turmoil in emerging markets, potentially destabilising the underlying economies.

When the liquidity tide turns, EM assets are hurt

Recent outflows from EM assets: minor compared to previous inflows

EM assets (both bonds and equities) have suffered strong outflows this year. However, these outflows remain minor compared to cumulative inflows over the last 5 years. So potentially, much more outflows should be expected when the Fed effectively tightens its policy.

When the liquidity support falls, all EM assets (FX, bonds, equities) suffer

The average correlation between EM equities, EM bonds and EM FX has strongly increased since Bernanke first signalled he was considering the tapering of asset purchases.

EM: some structural issues around

The bull story has turned sour in some emerging markets as external balances have deteriorated

Quality first!

Countries with a deteriorating external balance have seen their currencies depreciated strongly since 22 May (e.g. India).

On the contrary, South Korea has been relatively resilient.

EM currencies now fully floating

Compared to historical crises in EM countries, fewer and fewer EM currencies are directly pegged to the USD. While this may be a source of vulnerability in times of market turmoil, it has helped EM countries absorb external shocks more easily.

As always, the market will concentrate on the weakest countries, putting their currency under strong pressure and drying up liquidity.

Elections in sight likely to paralyse decision making for some months ahead

On top of the economic imbalances highlighted above, some EM countries risk paralysis in the coming quarter due to political events. Governments that seek to be re-elected will want to avoid policy tightening, increasing the risk of a market attack.

EM asset valuations have further to fall

EM bonds: spread (versus US Tresuries) is far from extreme and could widen further 

Despite the strong correction of EM bonds (+44bp since May 2013), their valuation is far from extreme.

The EM bonds spread over US Treasuries has recently widened. Nevertheless, it remains far from last year’s level and could widen again.

EM equities: do not catch the falling knife yet!

EM equities started to correct in 2010, when they traded at a premium of around 20% relative to developed markets (as measured by the price to book value ratio).

We continue to stay away from EM equities (despite a 24% discount), as outflows are running at high levels.

EM equities and commodities: six versus half a dozen!

Commodity and EM equity cycles have been strongly synchronised over the last 15 years. They obviously have some common key drivers: Chinese demand, the liquidity factor and sensitivity to the USD.

Nevertheless, commodities have recently been more resilient, as many of them are getting close to their cost of production.

TAPER - The Fed Taper Playbook

The Fed Taper Playbook In 2 Simple Charts 09-17-13 Zero Hedge

As we previously noted, it would appear - unlike the exuberance in the market - the 'taper downside risk' is very much in equity markets rather than bonds. Today's aggressive equity and credit hedging and bond stability perhaps signal more apprehension than a rallying volumeless equity market might suggest but if the following 2 charts are anything to go by, a shift to removing the punchbowl (no matter how biased to longer, lower, forward rate guidance - of course stymied by 2016 economic projection dilemmas) has seen bonds surge and stocks purge...

Charts: DoubleLine

Perhaps - as we noted earlier - credit markets are on to something

FEDERAL RESERVE - The Fed's Double-Bind

The Fed's Double-Bind Charles Hugh-Smith of OfTwoMinds blog via ZH

The Fed will blow up the economy if it continues money-pumping, but it will choke off the fragile recovery if it cuts back its money-pumping.

The Federal Reserve is in a classic double-bind: as its policies to boost growth bear fruit, interest rates rise, threatening the very recovery the Fed has lavished trillions of dollars of quantitative easing (QE) to generate.

Higher growth naturally leads to higher interest rates, which then choke off growth.

The Fed's goal was a self-sustaining recovery, in which growth reaches "escape velocity," i.e. is strong enough to support higher interest rates.

But the pursuit of that goal via trillions of dollars of asset purchases has inflated asset bubbles in stocks and real estate. The Fed's goal was to push speculative and institutional money into risk assets such as stocks, generating a "wealth effect" that was supposed to spill over into the real economy via higher borrowing and spending.

The pursuit of "the wealth effect" via inflating asset bubbles has created another double-bind: now that markets have become dependent on Fed money and liquidity pumping, the Fed cannot reduce its QE money-pump (currently $1 trillion a year) without tipping the stock market into free-fall.

If the Fed continues its massive monetary easing programs, asset bubbles will only inflate to speculative extremes, to the point where violent bursting becomes a matter not of "if" but of "when." (This is also known as "the music stopping.")

If the Fed cuts back its money-pumping and asset purchases, interest rates will rise, as interest rates will seek a market level that isn't pushed to near-zero by the Fed's financial repression.

Higher rates will choke off tepid Fed-induced growth. We already see home refinancing rates plummeting to 2009 recessionary levels.

So the Fed risks blowing asset bubbles that will devastate the economy if it continues the QE pumping, but it risks killing the tepid recovery if it cuts back its pumping. Darned if you do, darned if you don't.

Put another way: if growth is needed to boost corporate sales and profits, but growth leads to higher interest rates and reduced central-bank suppport of markets, this is a double-bind with no exit.

2007 REDUX - Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies

Five Years After Lehman, BIS Ex-Chief Economist Warns "It's Worse This Time" 09-15-13 Zero Hedge

The froth is back. As we noted yesterday, corporate leverage has never been higher - higher now than when the Fed warned of froth, and as the BIS (following their "party's over" rant 3 months ago) former chief economist now warns, "this looks like to me like 2007 all over again, but even worse." The share of "leveraged loans" or extreme forms of credit risk, used by the poorest corporate borrowers, has soared to an all-time high of 45% - 10 percentage points higher than at the peak of the crisis in 2007.

As The Telegraph reports, ex-BIS Chief Economist William White exclaims, "All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle."

Crucially, the BIS warns, nobody knows how far global borrowing costs will rise as the Fed tightens or “how disorderly the process might be... the challenge is to be prepared." This means, in their view, "avoiding the tempatation to believe the market will remain liquid under stress - the illusion of liquidity."

Via The Telegraph,

The Swiss-based `bank of central banks’ said a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.

...

[The BIS] was the only major global body that clearly foresaw the global banking crisis, calling early for a change of policy at a time when others were being swept along by the euphoria of the era.

Mr White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines. “The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks.”

...

The BIS quietly scolded Bank of England Governor Mark Carney and his eurozone counterpart Mario Draghi, saying the attempt to use “forward guidance” to hold down long-term rates by rhetoric alone had essentially failed. “There are limits as to how far good communications can steer markets. Those limits have become all too apparent,” said Mr Borio.

Think its different this time and that we are indeed invincible - after all Maria Bartiromo and Hank Paulson told us so on Meet The Press this morning, right? Wrong! Here are the fact... (Via The BIS),

A trend favouring riskier lending was also evident in the syndicated loans market. A concrete manifestation was the growing popularity of “leveraged” loans, which are extended to low-rated, highly leveraged borrowers paying spreads above a certain threshold. The share of these loans in total new signings reached 45% by mid-2013, 30 percentage points above the trough during the crisis and 10 percentage points above the pre-crisis peak.

Market commentary attributed part of this increase to renewed investor demand for collateral loan obligations, which furthered a shift of negotiating power to borrowers. Thus, just as leveraged loans were gaining in importance, a declining portion of the new issuance volume featured creditor protection in the form of covenants.

and so back to Mr. White for the endgame...

Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. “I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,” he said.

BAML WARNS - If The US Economy Does Not Significantly Accelerate Now, It Never Will

BAML Warns "If The US Economy Does Not Significantly Accelerate Now, It Never Will" 09-14-13 BAML via ZH

Significant monetary stimulus, the end of fiscal austerity, a booming housing market, a cheap dollar, record corporate cash balances... BofAML warns - if the US economy does not significantly accelerate in coming quarters, it never will.

Crucially, they note, asset prices will not do as well in the next 5 years, no matter what the “nouveau bulls” say. Central banks will be less generous, corporations less selfish. And when excess liquidity is removed it will get "CRASHy" as we discussed previously. In the meantime, five years after Lehman, Wall Street has soared, but Main Street has soured.

After Lehman...

An unprecedented financial and economic crisis, crystallized by the September 15th 2008 bankruptcy of Lehman Brothers, was followed by an unprecedented monetary policy response, which in turn has been followed by unprecedented bull markets in bonds, stocks and now real estate. Wall Street has soared, but Main Street has soured. The exceptional “sweet spot” engendered by generous central banks and selfish corporations has been great for owners of capital, but bad for labor.

Wall Street vs Main Street

The "race to reflate" in the developed world and faltering Chinese macro leadership dictated the winners & losers of the past 5 years: Gold, High Yield, EM debt & Asian equities have been big winners; Commodities, Government Bonds & Japanese equities have been the big losers.

QE was the prime driver of the ‘09 trough in stocks & the ‘11 trough in real estate, and liquidity withdrawal has driven the jump in global interest rates in 2013. A further rapid, jump in rates would destabilize asset markets, but this threat remains low in coming quarters. The 100 basis point summer surge in the 30-year Treasury yield has tethered the S&P500 index to a tight 1600-1700 range and traumatized many fixed income & emerging markets.

We previously discussed BofAML's CRASH meme here - Conflict (policy, military), Rates (liquidity), Asia, Speculation (forced selling) and Housing are all potential catalysts for a much more contagious autumn market event - it is well worth a reminder.

ASIAN CRISIS II - The plight of four Asian countries - China, India, Indonesia and Japan.

A Wake-Up Call For Asia 09-15-13 Asia Confidential

FEDERAL RESERVE - At the very heart of our economic problems

25 Fast Facts About The Federal Reserve 09-17-13 Michael Snyder of The Economic Collapse blog via ZH

Submitted by Michael Snyder of The Economic Collapse blog,

As we approach the 100 year anniversary of the creation of the Federal Reserve, it is absolutely imperative that the American people understand that the Fed is at the very heart of our economic problems.  It is a system of money that was created by the bankers and that operates for the benefit of the bankers. 

The American people like to think that we have a "democratic system", but there is nothing "democratic" about the Federal Reserve.  Unelected, unaccountable central planners from a private central bank run our financial system and manage our economy.  There is a reason why financial markets respond with a yawn when Barack Obama says something about the economy, but they swing wildly whenever Federal Reserve Chairman Ben Bernanke opens his mouth. 

The Federal Reserve has far more power over the U.S. economy than anyone else does by a huge margin.  The Fed is the biggest Ponzi scheme in the history of the world, and if the American people truly understood how it really works, they would be screaming for it to be abolished immediately.  The following are 25 fast facts about the Federal Reserve that everyone should know...

#1 The greatest period of economic growth in U.S. history was when there was no central bank.

#2 The United States never had a persistent, ongoing problem with inflation until the Federal Reserve was created.  In the century before the Federal Reserve was created, the average annual rate of inflation was about half a percent.  In the century since the Federal Reserve was created, the average annual rate of inflation has been about 3.5 percent, and it would be even higher than that if the inflation numbers were not being so grossly manipulated.

#3 Even using the official numbers, the value of the U.S. dollar has declined by more than 95 percent since the Federal Reserve was created nearly 100 years ago.

#4 The secret November 1910 gathering at Jekyll Island, Georgia during which the plan for the Federal Reserve was hatched was attended by U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and a whole host of representatives from the upper crust of the Wall Street banking establishment.

#5 In 1913, Congress was promised that if the Federal Reserve Act was passed that it would eliminate the business cycle.

#6 The following comes directly from the Fed's official mission statement: "To provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."

#7 It was not an accident that a permanent income tax was also introduced the same year when the Federal Reserve system was established.  The whole idea was to transfer wealth from our pockets to the federal government and from the federal government to the bankers.

#8 Within 20 years of the creation of the Federal Reserve, the U.S. economy was plunged into the Great Depression.

#9 If you can believe it, there have been 10 different economic recessions since 1950.  The Federal Reserve created the "dotcom bubble", the Federal Reserve created the "housing bubble" and now it has created the largest bond bubble in the history of the planet.

#10 According to an official government report, the Federal Reserve made 16.1 trillion dollars in secret loans to the big banks during the last financial crisis.  The following is a list of loan recipients that was taken directly from page 131 of the report...

Citigroup - $2.513 trillion Morgan Stanley - $2.041 trillion Merrill Lynch - $1.949 trillion Bank of America - $1.344 trillion Barclays PLC - $868 billion Bear Sterns - $853 billion Goldman Sachs - $814 billion Royal Bank of Scotland - $541 billion JP Morgan Chase - $391 billion Deutsche Bank - $354 billion UBS - $287 billion Credit Suisse - $262 billion Lehman Brothers - $183 billion Bank of Scotland - $181 billion BNP Paribas - $175 billion Wells Fargo - $159 billion Dexia - $159 billion Wachovia - $142 billion Dresdner Bank - $135 billion Societe Generale - $124 billion "All Other Borrowers" - $2.639 trillion

#11 The Federal Reserve also paid those big banks $659.4 million in fees to help "administer" those secret loans.

#12 The Federal Reserve has created approximately 2.75 trillion dollars out of thin air and injected it into the financial system over the past five years.  This has allowed the stock market to soar to unprecedented heights, but it has also caused our financial system to become extremely unstable.

#13 We were told that the purpose of quantitative easing is to help "stimulate the economy", but today the Federal Reserve is actually paying the big banks not to lend out 1.8 trillion dollars in "excess reserves" that they have parked at the Fed.

#14 Quantitative easing overwhelming benefits those that own stocks and other financial investments.  In other words, quantitative easing overwhelmingly favors the very wealthy.  Even Barack Obama has admitted that 95 percent of the income gains since he has been president have gone to the top one percent of income earners.

#15 The gap between the top one percent and the rest of the country is now the greatest that it has been since the 1920s.

#16 The Federal Reserve has argued vehemently in federal court that it is "not an agency" of the federal government and therefore not subject to the Freedom of Information Act.

#17 The Federal Reserve openly admits that the 12 regional Federal Reserve banks are organized "much like private corporations".

#18 The regional Federal Reserve banks issue shares of stock to the "member banks" that own them.

#19 The Federal Reserve system greatly favors the biggest banks.  Back in 1970, the five largest U.S. banks held 17 percent of all U.S. banking industry assets.  Today, the five largest U.S. banks hold 52 percent of all U.S. banking industry assets.

#20 The Federal Reserve is supposed to "regulate" the big banks, but it has done nothing to stop a 441 trillion dollar interest rate derivatives bubble from inflating which could absolutely devastate our entire financial system.

#21 The Federal Reserve was designed to be a perpetual debt machine.  The bankers that designed it intended to trap the U.S. government in a perpetual debt spiral from which it could never possibly escape.  Since the Federal Reserve was established nearly 100 years ago, the U.S. national debt has gotten more than 5000 times larger.

#22 The U.S. government will spend more than 400 billion dollars just on interest on the national debt this year.

#23 If the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.

#24 According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress is the one that is supposed to have the authority to "coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures".  So exactly why is the Federal Reserve doing it?

#25 There are plenty of possible alternative financial systems, but at this point all 187 nations that belong to the IMF have a central bank.  Are we supposed to believe that this is just some sort of a bizarre coincidence?

CRONY CAPITALISM - The 7 Choices Left To The Military-Industrial Complex

The 7 Choices Left To The Military-Industrial Complex 09-14-13

Since 2002 the US government has presided over one of the most dramatic financial bubbles of all time: the bubble of the military-industrial complex. (A few will remember that Dwight Eisenhower warned Americans about this in 1961.) This bubble, like all others, will pop, and it looks to be deflating right now - as we have pointed out vociferously.

The amounts of money that have been spent in the past decade can only be characterized as obscene. But the point that really matters is this: Military spending is just part of the bubble. The military-industrial-intelligence-law enforcement complex has only a few choices left in front of it. (Aside from rational things, like giving up their immoral and abusive game.)

Submitted by Paul Rosenberg via Free-Man's Perspective blog,

...In addition to the military complex, we have a massive intelligence complex.

Not only that, but we also have a massive law enforcement complex. The Department of Homeland Security has given them at least $34 Billion in the past several years, on top of their take from local taxes, state taxes, fines, seizures, and other Fed money.

Take a look at these graphs. First, defense spending:

Then, intelligence spending, or as close as I’ve been able to get to real numbers:

Lastly, War on Drugs spending, which we’ll use as a proxy for overall law enforcement spending (numbers that are more difficult to acquire):

Needless to say, this multi-headed beast is huge, requiring oceans of money… and it’s about to have its rations cut. Actually, that may be why they’re so hot for a war in Syria – they need to goose spending again, and quickly.

Yeah, I know that word’s not in the dictionary, but it should be.

These agencies are drunk on power and stupid on arrogance.

There’s no other way to describe a situation where the intelligence and law enforcement branches of this beast have been waging a war against the American people for the last few years.

Think of the endless search for “domestic terrorists,” the sickening NSA spying on everyone, and the 135 SWAT team raids per day in America. Apparently it has never entered their minds that people might eventually resent being abused.

It’s also useful to understand that “intelligence agency” is the same thing as “secret service,” and very little different from “secret police.” They’ve had secret courts for some time, after all.

I won’t even talk about the rampant corruption that runs through all of these departments; you can either trust me on that one or not.

And this situation reaches all the way to local cops. I had a conversation recently with a young man who recently completed a stint with the US Marines and didn’t know what he wanted to do next. At one point, he said that he thought about being a police officer (an easy fit for a Marine), but he rejected the idea.

“Why?” I asked.

“Cops are bullies,” he responded.

And indeed they are. They lie all the time, they intimidate people all the time, and they treat everyone as a violent perp. (Except if you’re rich or politically connected, of course.) Like the rest of the military-industrial complex, they are out of control.

There used to be cops who were exceptions to this young man’s “bully” statement, but they have been vanishing rapidly. Cops are routinely taught to intimidate and lie.

So, while things look absolutely horrible at the moment, the rug is being pulled out from underneath these wastrels.

The issue here (as it so often is) is fiat currency. The money for all of this War Welfare has NOT come from taxes. Instead, it has come from deficits, a.k.a. money printing. The problem is, the money printing game is sputtering. And without a strong money printing program, future increases in military spending will have to come from increased taxes – and there simply isn’t any more to be taken.

American workers already have about half their money taken from them. The now-denuded middle class is surviving on food stamps, disability payments, and a dozen other programs that dish out federal money. They’ve undergone a long, hard fall, from working machines to working government programs.

The military-industrial-intelligence-law enforcement complex has only a few choices left in front of it. (Aside from rational things, like giving up their immoral and abusive game.)

Those choices include:

1. Find a way to legitimately juice the economy. (Good luck.)
2. Make people want to be poorer. (Again, good luck.)
3. Act like Stalin and terrorize your populace openly. (Americans still have guns.)
4. Create a really, really scary foreign devil. (A tough sell these days, but not for lack of trying.)
5. Create an iron-clad, world monetary system and government. One that can feed them no matter what. (Probably requires a nuclear war first.)
6. Create a truly scary war, with piles of dead people in US cities. Then folks will be frightened enough to hand over the rest of their money.
7. Down-size: Work with their politicians and bankers to dominate only the major cities, the major corporations, and those who will live as dependents to the system. Abandon most of the rest and stop meddling in all the world’s affairs.

The one other possibility for them is to convince the Fed to print faster and damn the consequences. And they may choose that option first, since it would allow them to kick the can just a little bit further down the road.

But once that’s done, they’ll be right back to these seven choices.