Quantcast
Channel: AIG – silveristhenew
Viewing all 117 articles
Browse latest View live

ZeroHedge: The Fed Sends A Frightening Letter To JPMorgan, Corporate Media Yawns

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Pam Martens and Russ Martens via WallStreetOnParade.com,

Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. The letter carried frightening passages and large blocks of redacted material in critical areas, instilling in any careful reader a sense of panic about the U.S. financial system.

A rational observer of Wall Street’s serial hubris might have expected some key segments of this letter to make it into the business press. A mere eight years ago the United States experienced a complete meltdown of its financial system, leading to the worst economic collapse since the Great Depression. President Obama and regulators have been assuring us over these intervening eight years that things are under control as a result of the Dodd-Frank financial reform legislation. But according to the letter the Fed and FDIC issued on April 12 to JPMorgan Chase, the country’s largest bank with over $2 trillion in assets and $51 trillion in notional amounts of derivatives, things are decidedly not under control.

At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.” Why didn’t JPMorgan’s Board of Directors or its legions of lawyers catch this?

It’s important to parse the phrasing of that sentence. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”

That statement should strike fear into even the likes of presidential candidate Hillary Clinton who has been tilting at the shadows in shadow banks while buying into the Paul Krugman nonsense that “Dodd-Frank Financial Reform Is Working” when it comes to the behemoth banks on Wall Street.

How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other. Which bank poses the highest contagion risk? JPMorgan Chase.

The OFR study was authored by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, who found the following:

“…the default of a bank with a higher connectivity index would have a greater impact on the rest of the banking system because its shortfall would spill over onto other financial institutions, creating a cascade that could lead to further defaults. High leverage, measured as the ratio of total assets to Tier 1 capital, tends to be associated with high financial connectivity and many of the largest institutions are high on both dimensions…The larger the bank, the greater the potential spillover if it defaults; the higher its leverage, the more prone it is to default under stress; and the greater its connectivity index, the greater is the share of the default that cascades onto the banking system. The product of these three factors provides an overall measure of the contagion risk that the bank poses for the financial system.”

The Federal Reserve and FDIC are clearly fingering their worry beads over the issue of “liquidity” in the next Wall Street crisis. That obviously has something to do with the fact that the Fed has received scathing rebuke from the public for secretly funneling over $13 trillion in cumulative, below-market-rate loans, often at one-half percent or less, to the big U.S. and foreign banks during the 2007-2010 crisis. The two regulators released background documents yesterday as part of flunking the wind-down plans (living wills) of five major Wall Street banks. (In addition to JPMorgan Chase, plans were rejected at Wells Fargo, Bank of America, State Street and Bank of New York Mellon.) One paragraph in the Resolution Plan Assessment Framework and Firm Determinations (2016) used the word “liquidity” 11 times:

“Firms must be able to reliably estimate and meet their liquidity needs prior to, and in, resolution. In this regard, firms must be able to track and measure their liquidity sources and uses at all material entities under normal and stressed conditions. They must also conduct liquidity stress tests that appropriately capture the effect of stresses and impediments to the movement of funds. Holding liquidity in a manner that allows the firm to quickly respond to demands from stakeholders and counterparties, including regulatory authorities in other jurisdictions and financial market utilities, is critical to the execution of the plan. Maintaining sufficient and appropriately positioned liquidity also allows the subsidiaries to continue to operate while the firm is being resolved. In assessing the firms’ plans with regard to liquidity, the agencies evaluated whether the companies were able to appropriately forecast the size and location of liquidity needed to execute their resolution plans and whether those forecasts were incorporated into the firms’ day-to-day liquidity decision making processes. The agencies also reviewed the current size and positioning of the firms’ liquidity resources to assess their adequacy relative to the estimated liquidity needed in resolution under the firm’s scenario and strategy. Further, the agencies evaluated whether the firms had linked their process for determining when to file for bankruptcy to the estimate of liquidity needed to execute their preferred resolution strategy.”

Apparently, the Federal regulators believe JPMorgan Chase has a problem with the “location,” “size and positioning” of its liquidity under its current plan. The April 12 letter to JPMorgan Chase addressed that issue as follows:

“JPMC does not have an appropriate model and process for estimating and maintaining sufficient liquidity at, or readily available to, material entities in resolution…JPMC’s liquidity profile is vulnerable to adverse actions by third parties.”

The regulators expressed the further view that JPMorgan was placing too much “reliance on funds in foreign entities that may be subject to defensive ring-fencing during a time of financial stress.” The use of the term “ring-fencing” suggests that the regulators fear that foreign jurisdictions might lay claim to the liquidity to protect their own financial counterparty interests or investors.

JPMorgan’s sprawling derivatives portfolio that encompasses $51 trillion notional amount as of December 31, 2015 is also causing angst at the Fed and FDIC. The regulators wanted more granular detail on what would happen if JPMorgan’s counterparties refused to continue doing business with it if rating agencies cut its credit ratings. The regulators asked for a “narrative describing at least one pathway” for winding down the derivatives portfolio, taking into account a number of factors, including “the costs and challenges of obtaining timely consents from counterparties and potential acquirers (step-in banks).” The regulators wanted to see the “losses and liquidity required to support the active wind-down” of the derivatives portfolio “incorporated into estimates of the firm’s resolution capital and liquidity execution needs.” 

According to the Office of the Comptroller of the Currency’s (OCC) derivatives report as of December 31, 2015, JPMorgan Chase is only centrally clearing 37 percent of its derivatives while a whopping 63 percent of its derivatives remain in over-the-counter contracts between itself and unnamed counterparties. The Dodd-Frank reform legislation had promised the public that derivatives would all become exchange traded or centrally cleared. Indeed, on March 7 President Obama falsely stated at a press conference that when it comes to derivatives “you have clearinghouses that account for the vast majority of trades taking place.”

But the OCC has now released four separate reports for each quarter of 2015 showing just the opposite of what the President told the press and the public on March 7. In its most recent report the OCC, the regulator of national banks, states that “In the fourth quarter of 2015, 36.9 percent of the derivatives market was centrally cleared.”

Equally disturbing, the most dangerous area of derivatives, the credit derivatives that blew up AIG and necessitated a $185 billion taxpayer bailout, remain predominately over the counter. According to the latest OCC report, only 16.8 percent of credit derivatives are being centrally cleared. At JPMorgan Chase, more than 80 percent of its credit derivatives are still over-the-counter.

 

Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.

Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.

 

Three of the five largest U.S. banks (JPMorgan Chase, Bank of America and Wells Fargo) have now had their wind-down plans rejected by the Federal agency insuring bank deposits (FDIC) and the Federal agency (Federal Reserve) that secretly sluiced $13 trillion in rollover loans to the insolvent or teetering banks in the last epic crisis that continues to cripple the country’s economic growth prospects. Maybe it’s time for the major newspapers of this country to start accurately reporting on the scale of today’s banking problem.

via zerohedge


ZeroHedge: Institutionalized Lying – Why Central Bankers Never See Bubbles

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by David Stockman via Contra Corner blog,

Every day there is more confirmation that the casino is an exceedingly dangerous place and that exposure to the stock, bond and related markets is to be avoided at all hazards. In essence the whole shebang is based on institutionalized lying, meaning that prouncements of central bankers, Wall Street brokers and big company executives are a tissue of misdirection, obfuscation and outright deceit.

And they are self-reinforcing, too. As we indicated in our post over the weekend (The Keynesian House Of Denial), it’s all definitional by the lights of today’s central bankers and their Wall Street camp followers. Since the former are busy “accommodating”, massaging and “stimulating” economies all around the world—- bad things like recessions and stock market busts just can’t happen.

At the same time, the narrative from the casino always points to opportunity today and even better prospects tomorrow (i.e. in the second half and next year). Thus, S&P 500 earnings on an ex-items basis for Q4 2016 are projected to come in at $32 per share or up by 39% from the $23 posted for Q4 2015; and by year-end 2017, the patented Wall Street hockey stick points to a gain of 57%.

At today’s market close of 2094, therefore, what’s not to like about valuation levels and PEs?  After all, the full-year hockey stick points to $119 per share in 2016 and $136 in 2017. The implied PE multiples are a modest 17.3X and 15.3X, respectively.

Except they aren’t even remotely so. S&P 500 earnings on a GAAP basis came in at $86.47 for the LTM period just ended, and the current quarter is already conceded to be down by upwards of 10%.

In fact, the stock market is now valued at 24.2X—in the nosebleed section of history—-at a time when the global growth cycle is reversing, the US business expansion at 82 months is long in the tooth and actual GAAP earnings that you don’t go to jail for reporting are down 18.5% from the September 2014 LTM peak, and heading lower.

Average Length of Recoveries

Inside that yawning gap lies the pattern and practice of institutionalized lying. And to start the week we had another batch of whoppers.

Over the weekend the money-printing lunatic who heads the ECB, Mario Draghi, pronounced that there are no bubbles in sight on his watch—-notwithstanding the obvious fact that  he has turned the European bond market into a monumental bubble.

Likewise, before the markets opened this morning we had two fine examples of the same delusional prevarication. Both PepsiCo and Morgan Stanley reported disastrous result for Q1, but in utterly shameless fashion these were spun by company spokesmen and reported by the media as “beats”. Naturally this caused their stock prices to shoot into the green, and in the case of Pepsi to nearly an all-time high.

As to Morgan Stanley, it’s hard to imagine how its results could have been much worse. Non-interest revenues were down 26% over prior year, including drops of 18% and 43% for its core business of investment banking and trading, respectively.  Overall, total revenues plunged by 21% versus prior year, and net income dropped by a staggering 54%.

That’s right.  Compared to net income of $2.4 billion last year, its bottom line for Q1 came in at just $1.1 billion, while return on common equity plummeted from 14.1% to just 6.2%.

In an honest free market, Morgan Stanley would have been sent deep into the penalty box, but not in today’s casino. It was actually up because reported income of 55 cents per share “beat” the consensus expectation of 46 cents.

But then again, the “consensus” was for earnings of $1.00 per share as recently as last October. In the interim, there was a frenetic lowering of estimates that did not stop—-as is evident in the red line below—–until the very eve of its Q1 release.

Pretending that this is a “beat” is not only an insult to 9th grade intelligence, but actually emblematic of the institutional lying that has become built into the fabric of reporting and communications in the casino.

Indeed, the whole “beat” syndrome has now reached a ludicrous extreme. The only rational meaning for “beat” would be to describe results that actually improved upon previous performance and came as a genuine upside surprise to investors. By when results have been blatantly manipulated lower by the trained seals who pose as equity analysts, the few pennies per share gain over the latest pre-release “consensus” is not a beat; its a scam!

So is the “earnings ex-items” gambit that logically has no other purpose than to make PE multiples look lower and over-priced shares more attractive than the actually are. In that regard, the claim that companies are attempting to remove “noise” owing to one-time charges from their reports doesn’t cut it.

For one thing, one-timers go both ways, as in the case of capital gains from the sale of an asset. Beyond that, corporate write-offs of soured goodwill from deals gone bad, charges for plant and store closures owing to the termination of loss-making operations and expenses for severance and stock options—-all represents the consumption of real corporate resources and value.

If CFOs really wanted to be helpful in “normalizing” their lumpy quarterly GAAP numbers there is a far better way to do it. To wit, they could pool their non-recurring charges and present “adjusted” numbers based on smoothing or averaging these recurrent “non-recurring”  losses over a mutli-quarter period. Or they could simple amortize the write-off pool into quarterly earnings over some reasonable span such as four or eight quarters.

But that would be a wholly different kettle of fish. Under the current deceptive procedure, adjusted or ex-items earnings are always higher—-and frequently much higher—–than GAAP profits. In fact, over 2007-2015, adjusted S&P 500 earnings were over-stated by more than $1.1 trillion!

By contrast, if adjustments to GAAP were based on an averaging or amortization of one-time and nonrecurring expenses, ex-items earnings would be no higher than GAAP on a trend basis.

We harp on this topic because PepsiCo’s approach this morning was a naked exercise in just the opposite. They had the nerve to present a tissue of lies as to their results and then put it in the form of the cartoon below.

To wit, PEP’s net profit plunged from $1.2 billion last year to $931 million or by 24%. But via the magic of share buybacks and ex-items earnings manipulation, it turned reported earnings per share of 64 cents compared to last year’s 81 cents into 89 cents per share of profit, thereby handily beating the consensus expectation by eight pennies.

The transformation of “down” into “up” is actually breathtaking. A sales decline of 3% was turned into a gain of 3.5%; an operating profit drop of 10% was adjusted to a gain of 12%; and the 24% plunge in net income was twisted into a 11% gain on a ex-items per share basis.

Here’s the thing. Why does Uncle Sam spend billions per year trying to enforce GAAP accounting, when the denizens of the casino are more than happy with whatever results can be shoe-horned into an ex-items cartoon?

 

Meanwhile, here’s what actually happened. With Q1 results, PepsiCo’s LTM net income came in at $5.16 billion. That’s the lowest rate since June 2009.

Yes, PEP’s market cap has doubled from $75 billion to $150 billion in the interim, but why wouldn’t you pay 29X for a company in the no growth soft drink and snacks business?
PEP Net Income (TTM) Chart

PEP Net Income (TTM) data by YCharts

 S&P 500 is heading through 1300 from above long before it ever again penetrates from below its old May 2015 high of 2130——even as the robo-machines play tag with the chart points.

But as indicated above, reported LTM profits as of year-end 2015 stood at just $86.47 per S&P 500 share. That particular number is a flat-out bull killer. At a plausible PE multiple of 15X, it does indeed imply 1300 on the S&P 500 index.

It also means that the robo-machines and hedge fund gamblers have painted a scarlet numeral of 24.2X on the casino’s front entrance. But it comes at a time when the so-called historical average PE ratios are way too high for present realities. That is, in a world sliding into a prolonged deflationary decline, capitalization rates should be falling into the sub-basement of history, not soaring into it’s nosebleed section.

Why? Because current earnings are worth far less than normal owing to the prospect that renewed earnings growth anytime soon is lodged somewhere between zero and none.

So when capitalization rates should be plunging the casino has them soaring, while pretending its all awesome on the earnings front through the process of institutionalized lying, as was on such pointed display today.

Indeed, for the third time this century, corporate earnings are already in free fall. Yet the Wall Street hockey sticks are still pointing archly to the upper right of the chart.

SP500-Earnings-GDP-Growth-030616

Yet this time the backstory is even sketchier. When reported S&P 500 earnings peaked at $84.92 per share in June 2007 (LTM basis), they had grown at a 6.8% annualized rate since the prior peak of about $54/share in Q3 2000. By contrast, at the reported $86.47 level for the LTM period ending in Q4 2015, the implied 8-year growth rate is…….well, nothing at all unless you prefer two digit precision. In that case, the CAGR is 0.22%.

That’s right. Based on the kind of real corporate earnings that CEOs and CFOs must certify on penalty of jail time, profits are now barely above the June 2007 level, and are once again heading down the slippery slope traced twice already during this era of central bank bubble finance.

Yes, as per today’s blatant legerdemain, the sell side stock peddlers insist these GAAP profits are to be ignored because they are chock-a-block with non-recurring items.

Well, yes they are. As an excellent recent Wall Street Journal investigation showed, the Wall Street version of ex-items earnings came in for 2015 at $1.040 trillion for the S&P 500. But that was 32% higher than actual GAAP earnings of $787 billion!

Supposedly, the $253 billion difference indicated for 2015 in the chart above didn’t amount to anything special when it comes to valuing stocks.
The latter always and everywhere trend from the lower left to the upper right of the charts. And that’s because, apparently, by the lights of Wall Street there can’t be another recession. Central banks are on the job and have ruled out the possibility by definition.

.GS-Profits-SP500-Targets-022316

Not exactly. The above chart has been generated over and over and has been spectacularly wrong nearly as often, and most especially at turning points in the business cycle.

Indeed, the yawning $253 billion gap between reported earnings and the Wall Street ex-items concoction for 2015 is nearly the same magnitude as the disconnect in the Great Recession cycle.

Thus, S&P 500 aggregate net income on an ex-items basis for 2007 was $730 billion—so the sell side pitchmen had no problem insisting that the stock market was “reasonably” priced.  During 2007 the S&P’s average capitalization was about $13 trillion, implying an 18X PE multiple.

In fact, however, actual GAAP earnings that year were only $587 billion, meaning that the Wall Street ex-items number was 24% higher than the level of profits filed with the SEC. Like now, the pitchmen said ignore the $144 billion of charges and expenses that were deemed to be non-recurring; nor did they even remotely recognize the real market multiple on a GAAP basis was 22X and that this was extremely expensive by any historic standard—especially at the top of the business cycle.

Needless to say, Wall Street was shocked—–just shocked—-to find out the truth about it hockey sticks the next year. During the spring of 2007 it had happily predicted the usual—–that is, that ex-items earnings would rise by the usual 12-15% to about $120 per share in 2008. They actually came in, however, at $50 per share on an ex-items basis, but only $15/share on an honest GAAP basis.

Expressed in aggregate terms, the latter means that S&P profits plunged to $132 billion during 2008 after companies took a staggering $304 billion in write-downs for assets which were dramatically overvalued and business operations which had become hopelessly unprofitable. In short, during those two years alone—when the business and financial cycle was heading sharply southward—–the S&P 500 companies took nearly $450 billion in charges and losses that the Wall Street stock peddlers said to ignore. That amounted to full 37% of purported ex-items earnings for 2007-2008 combined.

Stated differently, the market is supposed to be a forward discounting agency. Yet at the stock index peak in October 2007 at a time when the subprime and credit markets were visibly fracturing——the Bear Stearns mortgage funds and Countrywide Financial had already blown up and Merrill Lynch and AIG were in evident distress—–the index was being valued at $13 trillion based on the goldilocks theory then prevalent on Wall Street.

That’s right. The stock market was trading at 100X the earnings that actually materialized the next year, not at 13X the forward hockey stick which the talking heads peddled on bubblevision day after day.

So here we are again at the inflection point of an even more egregious central bank fostered financial bubble. Like back then, the massive one-timers recorded during 2015 consisted of real corporate cash and capital that was destroyed——more often than not owing to bad business decisions that had earlier resulted from central bank falsification of interest rates and the price of debt and equity securities.

For instance, during 2015 one part of the gap was accounted for by the fact that the energy sector of the S&P 500  reported actual losses of $45 billion collectively but on an ex-items basis claimed profits of $48 billion. Did that $93 billion difference amount to a financial nothing?

No it didn’t. Instead, it was comprised primarily of massive write-downs of the carrying value of oil and gas reserves. Yet it was the global credit boom enabled by central banks which first drove the price of oil above $100 per barrel and encouraged massive malinvestment in high cost and excessive reserves.

And then, to add insult to injury, it was the drastic post-crisis repression of interest rates under the ZIRP and NIRP regimes which ignited a massive scramble for yield among money managers and homegamers alike. This central bank caused deformation, in turn, encouraged E&P companies to borrow upwards of $400 billion on the junk bond and junk loan market to fund investments in shale and elsewhere which were never remotely economic.

Those giant write-downs may be construed by Wall Street as non-recurring irrelevances, but in fact they amount to dead weight losses of real capital.

The same is true with the other sectors analyzed by the WSJ investigation. Materials companies reported $13 billion in GAAP earnings compared with $30 billion in ex-items profits. And health-care companies earned $104 billion under GAAP versus $157 billion as imagined by Wall Street analysts. Yet once gain, the $70 billion difference in these two sectors wasn’t chump change, nor was it invisible fairy dust.

For the most part it represented asset write-offs and restructuring charges from uneconomic investments and failed M&A deals. That is, the very thing which central bank falsification of financial prices inevitably fosters.

Even in tech, the degree of earnings fudging by Wall Street last year was egregious. While the hockey stick brigade dutifully reported $218 billion of aggregate profits for the tech sector, the reports sent to the SEC showed only $176 billion. Among that $42 billion of invisible red ink was a lot of busted M&A deal write-offs and stock options costs that do absolutely dilute shareholder earnings.

Finally, as to the mad money printer who runs the ECB, perhaps he should look at the 10-year bonds of his quasi-bankrupt native land.  They closed today at a yield of 1.36%, and that means they are riding the mother of all bond bubbles.

Below is the eight year trend in core consumer inflation in the eurozone. It is up at a 2.1% rate during the period, and 1.0% even during the last 12 months of deflation mongering by Draghi and his henchman. You could well and truly ask, therefore, as to why the mass of Europeans are not better off with 1% as opposed to 2% inflation. The answer that 2% is better-indeed imperative—- is known only to a tiny cadre of central bankers and their acolytes. But they are not telling, just asserting.

Euro Area Core Consumer Prices

No bubbles, Mario?

For crying out loud. Italy’s government is paralyzed, meaning that its fiscal vital signs just keep deteriorating. The spending share of GDP is off the deep end at 51.1% and the debt burden just keeps on rising.

Italy Government Spending to GDP

 

Italy Government Debt to GDP

Here’s the thing. Italy is fast turning into a socialist old age colony with a birth rate of only 1.3. On that path, the last Italian will disappear in the next century. But an economy which has been shrinking since 2007 will tumble into national bankruptcy long before.

Italy GDP Constant Prices

When the last of the hedge fund front-runners have bought their fill and the Germans finally shutdown the printing presses in Frankfurt, there will indeed be a day of reckoning as the massive bubble under the Italian bond violently deflates.

They will surely christen it the Draghi Bubble – a fit of insanity every bit as calamitous as that of John Law, the French Revolution and 1929.

via zerohedge

ZeroHedge: Government Officials Admit to ECONOMIC False Flag Operations

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

False flag attacks don’t just involve physical deaths and wars

They also involve faked economic events and financial casualties.

For example, two officials of the International Monetary Fund said last month that they needed the threat of an imminent financial catastrophe to force other players into accepting its measures such as cutting Greek pensions and working conditions, and – as the Greek government put it (via Bloomberg) – the IMF was “considering a plan to cause a credit event in Greece and destabilize Europe.”

High-level officials also admitted to intentionally destroying their own nations’ economies in order to “justify” structural economic reforms.

For example, Japanese Prime Minister Junichiro Koizumi and Japanese central bank officials admitted that they kept Japan’s economy in a deflationary crisis to promote “structural reform” which would allow the Japanese economy to be looted by foreign interests. Japanese central bank officials admitted the same thing.

Japan Times noted in 2003:

Official statements by BOJ executives [reveal]: The BOJ can be helpful by not being helpful. The princes recognized that such structural change was so opposed to the special and general interests of most Japanese — citizens, businessmen, bureaucrats and politicians — that it could be achieved only by crippling the economy and preventing its recovery.

Something similar happened in Thailand and the EU.

Indeed, the former head of the Bank of England said  last month that the depression in the EU was more or less a “deliberate” policy choice.

And an economist at insurance giant AIG – and former head of the European Commission’s unit responsible for the European Monetary System and monetary policies – said in 2008 that what European leaders wanted was to create a crisis to force introduction of “European economic government.”

Indeed, Greece (more), Italy, Ireland (and here) and other European countries have all lost their national sovereignty to the ECB and the other members of the Troika.

ECB head Mario Draghi said in 2012:

The EU should have the power to police and interfere in member states’ national budgets.

 

***

 

“I am certain, if we want to restore confidence in the eurozone, countries will have to transfer part of their sovereignty to the European level.”

 

***

 

“Several governments have not yet understood that they lost their national sovereignty long ago. Because they ran up huge debts in the past, they are now dependent on the goodwill of the financial markets.”

Threats of Economic Terrorism

The Saudis said they would sell $750 billion in U.S. treasury securities and other assets in the United States if an investigation of Saudi involvement in 9/11 is allowed to occur. This sound like the mafioso who asks: “We wouldn’t want anybody to get hurt, now would you?”

American banks have carried out the same type of terrorist blackmail. For example, the Tarp bank bailouts in the U.S. were passed using apocalyptic – and false – threats. And they were not used for the stated purpose.

As I’ve previously reported:

The New York Times wrote last year:

In retrospect, Congress felt bullied by Mr. Paulson last year. Many of them fervently believed they should not prop up the banks that had led us to this crisis — yet they were pushed by Mr. Paulson and Mr. Bernanke into passing the $700 billion TARP, which was then used to bail out those very banks.

Indeed, Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn’t passed:

 

That is especially interesting given that the financial crisis had actually been going on for a long time, but – instead of dealing with it – Paulson and the rest of the crew tried to cover it up and pretend it was “contained”, and that it was obvious to world leaders months earlier that it was not a liquidity crisis, but a solvency crisis (and see this).

 

Bait And Switch

 

The Tarp Inspector General has said that Paulson misrepresented the big banks’ health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions.

 

And Paulson himself has said:

During the two weeks that Congress considered the [Tarp] legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.

So Paulson knew “by the time the bill was signed” that it wouldn’t be used for its advertised purpose – disposing of toxic assets – and would instead be used to give money directly to the big banks?

Senator McCain also says that Paulson pulled a bait-and-switch:

Sen. John McCain of Arizona … says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis, the housing meltdown.

 

“Obviously, that didn’t happen,” McCain said in a meeting Thursday with The Republic‘s Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. “They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street – I guess it was trickle-down economics – that therefore Main Street would be fine.”

Even the New York Times called Paulson a liar in 2008:

“First [Paulson’s Department of Treasury] says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either.”

What tax breaks is the Times talking about? The article explains:

A new tax break [pushed by Treasury], worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

The giant banks also essentially threatened to blow up the American economy if any of them were prosecuted for their massive, economy-destroying fraud.

via zerohedge

ZeroHedge: A Terrible Start To 2016 Turns Absolutely Brutal For Odey Who Refuses To Stop “Fighting The Fed”

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

For some people, such as the Horseman Global hedge fund which has been net short since 2012, fighting the Fed can be profitable (even if March was a different story). For others, it is become a nightmare. One such person is Crispin Odey who has – so far – had a truly terrible year.

Recall it was Odey who last February predicted that the “shorting opportunity is as great as 2007-2009”,  when he said that “we used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to try to counter the effects of a slowing China, falling commodities and EM incomes, and the ultimate First World effects. This is the heart of the message. If economic activity far from picks up, but falters, then there will be a painful round of debt default.”

He continued:

We have seen though some strange things, with economics 101 turned on its head. We’ve seen that falling prices produce more supply, as the biggest producers see that they can take market share and use the opportunity by reducing average costs through excess production. We’ve seen that in the oil, minerals and iron ore industries. We have also seen in the last couple of years that as bond yields fall, governments are able to issue more debt.

 

But this time round the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system’s ability to allocate capital and provide for society. For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is happening and believe that each event is an individual, isolated event. Whether it’s the oil price fall or the Swiss franc move, they’re seen as exceptions.

His bearish strategy worked in 2015… in 2016 not so much.

One month ago, we updated on his performance when we noted something startling:  after starting off the year with a P&L bang, things quickly turned sour and Odey by mid-March Odey was suffering daily AUM swings of more than 5%.  The billionaire was stunned, and used the famous line that “this was no longer an investment market but a battlefield.”

Markets need equilibrium to prosper. When the authorities have a problem, markets have a problem. We have been hurt by this rally in China-related companies, and indeed we reduced the gross and net positioning of the fund significantly in mid-March, to help reduce the short term volatility of the fund, but we remain convinced that China is in many ways in an even greater bind over policy than the developed world. By mid-March the fund was rising and falling by over 5% per day. At which point this was no longer an investment market but a battlefield. On the day that Draghi came out with his massive market support operation, the stock markets rose 2.5% and then closed down 1.5% on their lows. Imagine how painful it was to see the markets bounce the next day and celebrate his success. At that point I reduced the short book by a third and the long book by 10%.

It was not enough, and as the FT reports today, what until now was merely a terrible start to the year has turned absolutely brutal for Odey’s European fund, which is now down nearly a third, or 31%, in the first four months of the year, wiping out almost half a decade of trading profits in his flagship hedge fund in less than four months. His more popular EOC MAC Macro Fund did not do much better, and plunged a whopping 24.4% in the month, one of its worst monthly performances in history, pushing the YTD total to -26.8% which is shaping up to be the worst year for Odey since its inception year of 1994.

 

According to the FT, the value of the €729m Odey European Fund has now fallen 31.1 per cent to the middle of April, dragging it back to its lowest level since January 2012. His large bets against currencies and equities have gone awry, making his stockpicking fund one of the worst performers among large vehicles this year.

Odey’s story is well known to Zero Hedge regulars. “Mr Odey, who has been among the most prominent British financiers to back the country voting to leave the EU, has held strongly bearish views on emerging markets and China for more than a year.” And following the massive coordinated reflation attempt by not just the Fed but all central banks, Odey has learned the hard way what it means to fight not just the Fed but all central banks.

What, however, makes the loss especially painful is that as Odey’s latest March letter (below) explains, he is spot on. The only problem as noted previously, is that he picked the absolutely worst time to fight not one but all central banks.

Then again, he remains optimistic and as he concludes his letter, he believes that he will have the last laugh over the rotting carcases of central banks:

Losses in the banking sector at this point in the cycle are really bad news because banks are already suffering from weakening margins. They need rights issues to deal with these losses, but why should anyone subscribe to a rights issue when zero interest rates promise no let up to a fall in profits? The only way that banks could become attractive to underwriters of the shares are if profits are rising and the only way that profits can rise is if their loan book gets repriced. Yes, only higher interest rates would make banks attractive, but higher interest rates would bring on the recession that has been kept at bay by QE and zero interest rates. Less QE and more QED.

 

QE does however have an important effect. It drives all savings to embrace higher yielding assets globally. Life insurance companies and pension funds push more money into faraway places. However if the credit transmission is not there to support increased activity, QE is merely encouraging misdirected investment. Recovery rates from EM destinations are more in the teens that the twenty percents. Is this good signalling by central banks? Remember it was Keynes, the architect of their think-ing, who said, “It is good for people to travel, goods to travel but not for savings to travel.” The disconnect between travelling and arriving may be coming home to roost. It will make the retreat from Moscow appear painless.

Good luck!

* * *

From his manager’s report.

QE came out of Fisher’s work on business cycles in 1935. For him what created the depression was the cycle of over-indebtedness allied to overcapacity, which ensured that when prices declined, loans could only be repaid by assets being sold off. The debt paid back made the debt still owing that much more expensive, because in a deflationary age, zero interest rates still meant that money remained too costly.

 

QE involved lowering interest rates from nearly 5% to almost zero very quickly, taking over the weaker financial intermediaries – AIG, Washington Mutual in the USA and, in the UK, Northern Rock, Lloyds and RBS – so that assets did not have to be sold and the debt deflationary cycle did not have its pernicious way. Central banks in a world of QE have become obsessive of where they perceive the ‘risk premium’ to be too high. Where interest rates payable by industries or by banks are seen as too high, central banks intervene and buy the bonds and in the process grow their own balance sheets.

 

The idea behind all of this is that by keeping interest rates low, slowly the economies of the world can recover and that hopefully this recovery would not be led, as it had for the 20 years before 2008, by debt that grew faster than incomes.

 

Newspapers are still full of central bank promises that interest rates can go negative and that if the worst comes to the worst, money could be helicoptered into the  economy; a method that would involve increased government expenditure financed by the printing press. Quite apart from the practicality of charging individuals negative rates on their positive balances, there is a growing body of people believing that QE and zero interest rates have already done as much as they can.

 

For, by the nature of QE and zero rates, central banks put themselves in competition with the clearing banks. They are eating the same food. Banks make their money in two ways. Maturity transformation and credit spread. However in a world of per-sistent low rates, assets (loans) will reprice downwards following liabilities (deposits) that reprice more quickly. Net interest margins will fall and in the absence of costs falling, so do profits. Secondly, central banks buy sovereign bonds and then later corporate bonds, driving down yields and again driving down the profitability of investing in these assets by banks.

 

In a world of QE and low interest rates, banks become increasingly unprofitable which may lead them to become that much more reckless in pursuit of higher yields to expand into subprime, auto loans, leveraged loans and credit cards. It certainly does not encourage them to lend naturally. Without lending and credit however, economies will find it, as Japan has shown since 1996, difficult to grow. They can only grow as fast as productivity will allow. Factor outputs rising faster than factor inputs.

 

However a side effect of zero interest rates is that companies that would have gone to the wall, remain and help to keep compe-tition intense. Profit margins suffer. Equally, in the USA, low interest rates have served to encourage quoted corporate Ameri-ca to buy back shares with debt rather than invest. Why invest when competition is driving down prices, when buying back shares helps management to realise profits on their share options? So now zero rates are leading to weak investment spending.

 

For the first time, productivity globally has fallen either to zero or even below that. This tells a story of misallocated capital – again very likely in a world of zero rates – but more tellingly it reflects that now, where there has been overinvestment, and here China is the worst culprit, that overcapacity is leading industries – oil, iron ore, steel, coal, shipping – to sell their goods and services at prices below cost. These losses have to be financed in some way and in the end these bad debts end up with the banks.

 

However losses in the banking sector at this point in the cycle are really bad news because banks are already suffering from weakening margins. They need rights issues to deal with these losses, but why should anyone subscribe to a rights issue when zero interest rates promise no let up to a fall in profits? The only way that banks could become attractive to underwriters of the shares are if profits are rising and the only way that profits can rise is if their loan book gets repriced. Yes, only higher interest rates would make banks attractive, but higher interest rates would bring on the recession that has been kept at bay by QE and zero interest rates. Less QE and more QED.

 

QE does however have an important effect. It drives all savings to embrace higher yielding assets globally. Life insurance companies and pension funds push more money into faraway places. However if the credit transmission is not there to support increased activity, QE is merely encouraging misdirected investment. Recovery rates from EM destinations are more in the teens that the twenty percents. Is this good signalling by central banks? Remember it was Keynes, the architect of their think-ing, who said, “It is good for people to travel, goods to travel but not for savings to travel.” The disconnect between travelling and arriving may be coming home to roost. It will make the retreat from Moscow appear painless.

* * *

Finally, here is what Odey disclosed are his top 10 holdings in OEI Mac.

via zerohedge

ZeroHedge: US Taxpayer Is Now A Major Counterparty To Wall Street Derivatives

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Pam Martens and Russ Martens via Wall Street On Parade,

According to a study released by the Federal Reserve Bank of New York in March of last year, U.S. taxpayers have already injected $187.5 billion into Fannie Mae and Freddie Mac, two companies that prior to the 2008 financial crash traded on the New York Stock Exchange, had shareholders and their own Board of Directors while also receiving an implicit taxpayer guarantee on their debt. The U.S. government put the pair into conservatorship on September 6, 2008. The public has been led to believe that the $187.5 billion bailout of the pair was the full extent of the taxpayers’ tab. But in an astonishing acknowledgement on February 25 of this year, the Government Accountability Office, the nonpartisan investigative arm of Congress, issued an audit report of the U.S. government’s finances, revealing that the government’s “remaining contractual commitment to the GSEs, if needed, is $258.1 billion.”

This suggests that somehow, without the American public’s awareness, the U.S. government is on the hook to two failed companies for $445.6 billion dollars. And that may be just the tip of the iceberg of this story.

The official narrative around the bailout of Fannie and Freddie is that they were loaded up with toxic subprime debt piled high by the Wall Street banks that sold them dodgy mortgages. While that is factually true, the other potentially more important part of this story is the counterparty exposure the Wall Street banks had to Fannie and Freddie’s derivatives if the firms had been allowed to fail.

The New York Fed’s staff report of March 2015 concedes the following:

“Fannie Mae and Freddie Mac held large positions in interest rate derivatives for hedging. A disorderly failure of these firms would have caused serious disruptions for their derivative counterparties.”

Exactly how big was this derivatives exposure and which Wall Street banks were being protected by the government takeover of these public-private partnerships that had spiraled out of control into gambling casinos?

According to Fannie and Freddie’s regulator of 2003, OFHEO, “The notional amount of the combined financial derivatives outstanding of Fannie Mae and Freddie Mac increased from $72 billion at the end of 1993, the first year for which comparable data were reported, to $1.6 trillion at year-end 2001.”  A 2010 report from the Federal Reserve Bank of St. Louis updates that information as follows:

“Fannie and Freddie presented considerable counterparty risk to the system through its large OTC derivatives book, similar in spirit to Long Term Capital Management (LTCM) in the summer of 1998 and to the investment banks during this current crisis. While often criticized for not adequately hedging the interest rate exposure of their portfolios, Fannie and Freddie were nevertheless major participants in the interest rate swaps market. In 2007, Fannie and Freddie had a notional amount of swaps and OTC derivatives outstanding of $1.38 trillion and $523 billion, respectively.

 

“The failure of Fannie and Freddie would have led to a winding down of large quantities of swaps with the usual systemic consequences. The mere quantity of transactions would have led to fire sales and invariably to liquidity funding problems for some of Fannie and Freddie’s OTC counterparties. Moreover, counterparties of Fannie and Freddie in a derivative contract might need to re-intermediate the contract right away, as it might be serving as a hedge of some underlying commercial risks. Therefore, due to counterparties’ liquidating the existing derivatives all at once and replacing their derivative positions at the same time, the markets would almost surely be destabilized due to the pure number of trades, required payment and settlement activity, and induced uncertainty, and the fact that this was taking place during a crisis.”

Did the bailout of Fannie and Freddie save the same cast of characters on Wall Street as were saved under the bailout of AIG (which funneled more than half the money out the backdoor  to Wall Street banks and hedge funds who were counterparties to AIG)?

According to Fannie and Freddie’s prior regulator, OFHEO: “At year-end 2001, five counterparties accounted for almost 60 percent of the total notional amount of Fannie Mae’s OTC derivatives, and 58 percent of Freddie Mac’s.” The report also notes that “The market for OTC derivatives is highly concentrated among a small number of dealers, primarily brokerage firms and commercial banks that are counterparties for at least one side of virtually all contracts. The largest dealers include JPMorgan Chase, Citigroup…Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley Dean Witter.”

According to a current report from the Office of the Comptroller of the Currency, those same banks (minus Deutsche and Lehman) account for the vast majority of derivatives in the U.S.

Lehman Brothers filed for bankruptcy one week after the government placed Fannie and Freddie into conservatorship. Merrill Lynch was taken over by Bank of America the same week. If you’re looking for a potential list of names of Wall Street players that needed a quick bailout of Fannie and Freddie, the above list is an excellent start.

Matt Taibbi reported at Rolling Stone three days ago that the government has been fighting a pitched battle to keep 11,000 documents pertaining to Fannie and Freddie under seal in a court case. You can rest assured that some of those documents relate to Fannie and Freddie derivatives and counterparties. But that pile of 11,000 documents pales in comparison to the 25 million documents the Justice Department withheld from the public when it settled its case against Citigroup in 2014 for $7 billion. What the public got instead was a meaningless 9-page statement of facts.

Thanks to Occupy Wall Street and Senator Bernie Sanders, the public knows two concrete things about Wall Street: banks got bailed out, we got sold out and, the business model of Wall Street is fraud.

But until we have a President in the Oval Office who believes that the citizens of a genuine democracy deserve the right to sift through the documents of the most epic fraud in the history of financial markets so they can reach their own conclusions, all we really have are slogans, including the one that says we live in a democracy.

via zerohedge

ZeroHedge: Slew Of Negative News, Defaults And Failed Mergers Push Futures In The Green

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

It has been a busy weekend for mostly negative newsflow.

It all started with China which on Saturday reported yet another disappointing PMI print of 50.1, which both missed expectations and declined from the previous month; then we got the latest Iraq oil output and exports number which rose yet again, pushing it further into near record territory despite a weekend of political chaos in Baghdad which saw protesters loyal to al Sadr penetrate the fortified Green Zone; at the same time Russian total output dipped just 0.5% from its post-USSR record, suggesting the global oil glut is only set to deteriorate.

In M&A news the long awaited termination of the Halliburton-Baker Hughes merger finally took place when the companies announced last night they would not extend the termination deadline; more important was Puerto Rico’s announcement that it would default on a $422 million bond payment for its Government Development Bank while Atlantic City is also expected to announce a default later today; the US shale sector just had its two latest casualties after Ultra Petroleum filed for bankruptcy citing $3.9 Billion Debt; at the same time Midstates Petroleum also filed Chapter 11.

In sum, a bevy of negative news in the past 48 hours which perhaps explains why futures are fractionally in the green as of this moment.

Central planning humor aside, US – and certainly Japanese – equities continue to be driven mostly by the Yen, which has failed to decline substantially after last week’s surge, and as a result the USDJPY remains within several dozen pips of its post October 2014 lows of 106.2.

 

The yen soared almost 5 percent on the final two trading days of last week as the Bank of Japan unexpectedly refrained from boosting stimulus amid fading prospects for a U.S. interest-rate increase this summer.  As a result, Japan led a selloff in Asian equities, with the Topix index sliding for a fifth day as trading resumed after a break on Friday. The yen held its steepest back-to-back gains since the global financial crisis and the Stoxx Europe 600 Index reached a two-week low.

To sum it up in a single phrase, there was a gap in the communication between the BOJ and the market,” Yoshinori Ogawa, a market strategist at Okasan Securities in Tokyo told Bloomberg. “There are concerns the yen may strengthen beyond 105 per dollar. As we are in the middle of long holidays, liquidity is thin, which makes it easier for speculators to whip markets around with their selling.”

This ongoing pressure on the dollar explains why gold has finally breached the $1,300 resistance level.

What is perhaps strange is that despite a weaker dollar, oil continues to fall for a second day due to the noted previously Iraqi exports which approached record high in April, adding barrels to worldwide supply glut.  Operations weren’t affected Sunday after protesters stormed parliament in Baghdad, threatening to paralyze govt of OPEC’s 2nd-largest producer; disruption broke up Sunday as protesters agreed to leave govt area. “The rally is running out of steam,” says Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. “Negative sentiment and negative fundamentals are becoming more obvious. Most of the problem surrounds oversupply in the market, and that’s not going away.”

A notable move in Italy has seen local banks all slammed lower following the previously reported news that Italy’s bank bailout fund would use up a third of its firepower already just to buy most of the shares in Banca Popolare di Vicenza’s EU1.5b capital increase through an initial public offering after institutional investors showed little interest, in effect bailing out the first bank under its remit just weeks after being activated.

S&P 500 futures rose 0.1 percent after U.S. equities ended last week with their worst two-day drop since February, amid lackluster earnings and few signs of a pickup in economic growth.

Liquidity in the market will be particularly low today as markets are shut for holidays in China, Hong Kong and the U.K.

Latest Market Snapshot

  • S&P 500 futures up 0.1% to 2061
  • Stoxx 600 up less than 0.1% to 342
  • DAX up 0.9% to 10131
  • German 10Yr yield down 2bps to 0.25%
  • Italian 10Yr yield down 2bps to 1.47%
  • Spanish 10Yr yield down 2bps to 1.58%
  • S&P GSCI Index down 0.5% to 358.4
  • MSCI Asia Pacific down 1.2% to 130
  • Nikkei 225 down 3.1% to 16147
  • S&P/ASX 200 down 0.2% to 5243
  • US 10-yr yield down 2bps to 1.82%
  • Dollar Index down 0.23% to 92.87
  • WTI Crude futures down 0.9% to $45.49
  • Brent Futures down 1.3% to $46.77
  • Gold spot up 0.5% to $1,299
  • Silver spot down 0.2% to $17.81

Global Top News

  • Halliburton, Baker Hughes Abandon $28 Billion Merger Agreement: Halliburton to pay Baker Hughes $3.5b termination fee
  • Buffett Hits Hedge Funds While They’re Down, Faulting High Fees: At the annual meeting of his Berkshire Hathaway, he warned about the enduring risk of derivatives, defended stocks in his portfolio and signaled that some of the co.’s biggest subsidiaries are hitting speed bumps; Buffett Says Valeant Business Model Was ‘Enormously Flawed’
  • Apollo-Led Consortium Increases Offer for Apollo Education: Consortium led by Apollo Global Management has increased its offer to buy Apollo Education to $10/share, or $1.14b
  • Puerto Rico Will Default on Government Development Bank Debt: Will default on a $422m bond payment for its Government Development Bank; GDB and creditors reach tentative framework on 53% haircut
  • Ultra Petroleum Files for Bankruptcy, Citing $3.9 Billion Debt: Principal assets are gas-producing properties in Wyoming
  • Midstates Petroleum Co. files for bankruptcy protection
  • Euro-Area Manufacturing Growing at ‘Anemic’ Pace, Markit Says: Growth was little changed last month as stronger readings in Germany, Italy and Spain were offset by contraction in France
  • Energy Future Offers New Reorganization Plan Amid Deal Dispute: Proposal to sell Oncor unit to Hunt Consolidated in jeopardy
  • JPMorgan Says Justice Department, SEC Probing Hires in Asia
  • ‘Jungle Book’ Holds Off ‘Keanu’ to Stay No. 1 at Box Office: Collected $42.4m in its 3rd weekend in North American theaters
  • Oil Bulls Bet the Waning U.S. Shale Boom Will Curb Global Glut: Hedge funds boost bullish wagers to highest in 11 months: CFTC
  • AIG Raises $1.25 Billion Selling PICC Stock Near Bottom of Range: Sold 740 million PICC shares at HK$13.08 apiece
  • Short Sellers Target Perrigo After CEO Exit as Goldman Says Sell: Short interest at highest since 2013 after forecast cut

Looking at regional markets, Asia stocks opened the week in negative territory with Nikkei 225 resuming its BoJ-triggered declines as JPY strength slams exporters. Nikkei 225 (-3.1%) was dragged lower by a firmer JPY as well as poor earnings & forecasts from several Japanese firms. In addition, auto names were also pressured with Takata shares plunging 10% following reports that US authorities are to call for an expansion of car recalls affected by faulty airbags. Elsewhere, ASX 200 (-0.2%) conformed to the downbeat tone after discouraging Chinese PMI data whilst uncertainty over the upcoming RBA policy meeting adds to the caution. Finally, 10yr JGBs saw a mild uptick in trade amid a risk-averse sentiment in the region, while the 20yr yields declined to a fresh record low of 0.24%.

Top Asian News

  • China Factory Stabilization Shows Little Need for Added Stimulus: Official factory gauge, the manufacturing purchasing managers index, stood at 50.1 in April
  • Macau Gaming Revenue Stabilizes, Falls Less Than Estimated: April gaming rev. decreased 9.5% versus 13.5% estimated decline
  • JPMorgan Hires Ex-BOJ Officials for Research Business in Tokyo: Former BOJ deputy director Hiroshi Ugai recruited as senior economist, Rie Nishihara as senior analyst for banking
  • Election Jitters Send Philippine Stock Investors to Sidelines: Rodrigo Duterte, who maintains lead a week before presidential vote, has given few details on economic policies
  • Mitsubishi Motors’ Fraud Hits Nissan as Minicar Sales Plunge 51%: Nissan Japan sales of mini, standard vehicle fall 22% in April, Mitsubishi minicar deliveries drop 45%
  • Beaches of Dead Fish Test New Vietnam Government’s Response: Thousands rally on Sunday calling for closing of Formosa plant in a nation where public protests, criticism are unusual
  • Westpac Warns of Rise in Consumer Defaults on Mining Slowdown: Defaults inching up in mining states of Queensland, WA
  • Ricoh Drops Most on Record After Forecasting Decline in Profits: Closes down 16%, most since Nov. 2008, after a record 17% drop during the day
  • Takata Falls on Report Recalls May Rise to 100 Million Autos: Co. says no decision on additional recall in U.S. in response to Nikkei newspaper report

The European morning has seen equities kick-off the week in a tight range amid the holiday thinned trade, with UK markets closed and many across Asia also away. European equities trade marginally higher, led higher by exporters amid the EUR strength and with gains capped by the losses in financials, stemming from Italian banks as the NPL saga continues. Additionally, the tone has been somewhat dampened following soft Chinese Official PMI figures over the weekend, subsequently hinting at modest weakening in regards to the momentum of China’s economy.

From a fixed income perspective, Bunds are trading higher with the yield curve seeing some bull flattening, while notable outperformance has been observed in the long end with 30yr yields lower by 4.4bps. As such, some have noted that the price of German paper has been underpinned by residual month-end demand.

Top European News

  • Air France-KLM Board Picks Janaillac as New CEO, Chairman: Selected veteran transportation manager Jean-Marc Janaillac as CEO and chairman, to start July 31
  • Italian Bank Shares Tumble After Investors Snub Pop. Vicenza IPO: Bank stocks dropped after private investors snubbed an IPO by Banca Popolare di Vicenza and Atlante, Italy’s bank- rescue fund, had to buy almost all the shares; Italy Exchange to Rule on Pop. Vicenza Listing After Stock Sale
  • Philips Said Disappointed With Lighting Bids, Leaning To IPO: Could seek valuation of about EU5.5b in potential listing
  • Ferrari CEO Switch Said Imminent With Board Choosing Marchionne: Ferrari set to appoint Chairman Sergio Marchionne to replace Amedeo Felisa as CEO as early as Monday, according to people familiar with the matter
  • Italy’s Intesa Sanpaolo Sells Payment Units in $1.2b Deal: To sell Setefi and Intesa Sanpaolo Card payment units to a group that includes Bain, Advent in deal valued at EU1.04b
  • Deutsche Bank Said to Be Faulted by FCA Over Lax Client Vetting: Firm says it’s fixing lapses regulator cited in March letter
  • Merkel’s $1.4b German E-Car Push Boosts Infineon, STMicro: Value of chips in e-cars, hybdrids double that in regular cars
  • Spanish Politics Enters Uncharted Waters as Fresh Election Looms: Deadline for patching together a majority from the most fragmented parliament in Spanish history falls at midnight on May 2, triggering a repeat election for late June

In FX, there is not too much to report from early Europe, with the overnight session seeing a USD/JPY test lower but holding off 106.00 for now. A bid tone seen in the EUR with the lead spot rate taking out 1.1470-75 resistance — 1.1500 now targeted but digital out-strikes here said to be providing some supply ahead of the figure. EU manufacturing PMI’s saw the final read up slightly to 51.7, but notable weakness seen in the French component. Nevertheless, last week’s healthy EU wide GDP number adds to encouragement to a move beyond 1.1500. Elsewhere, Cable is shaking off some favour to the Brexit camp, but the EUR/GBP is pushing to new recent highs on the above EUR sentiment. An offered USD tone clearly continues, pushing AUD higher despite RBA risk ahead — outside calls for a rate cut. USD/CAD still eyeing 1.2500 lower down, but trade tight ahead of the North American open.

In commodities, in thin European trade WTI has managed to hang on to gains seen last week and continues to reside above the USD 45.00/bbl handle while Brent remains in close proximity to USD 47.00/bbl. Elsewhere, gold has continued its rally and has risen above the psychological USD 1300/oz as risk-averse sentiment and USD weakness underpinned the safe-haven, Silver printed just below USD 18/oz at USD 17.93/oz, while copper saw flat trade amid a lack of market participants as various nations including the world’s largest consumer China were away.

On today’s calendar we’ll get the final revision for the US this afternoon while the main focus will be the April data for ISM manufacturing and prices paid prints. March construction spending data will also be released.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European bourses trade modestly higher, led by exporters as EUR/USD approaches 1.1500 to the upside
  • Fixed income remains supported amid light volumes this morning, with the UK away for May Day Bank Holiday
  • Highlights today include US Manufacturing PMI and scheduled comments from Fed’s Lockhart, ECB’s Draghi and Lautenschlaeger
  • Treasuries rally in overnight trading as equity markets mixed in Europe, lower in Asia with many bourses closed due to holiday; economic data this week will be dominated by Friday’s nonfarm payrolls report.
  • U.S. Treasury says China, Japan, Germany, S. Korea, Taiwan meet two of three criteria for pursuing FX policies that could provide unfair competitive advantage, under Trade Facilitation and Trade Enforcement Act of 2015
  • In a world awash with debt, it’s hard to imagine that there may not be enough to go around. Yet, JPMorgan predicts record-low global yields ahead
  • Italian bank stocks dropped in Milan trading after private investors snubbed an initial public offering by Banca Popolare di Vicenza SpA and Atlante, the country’s bank- rescue fund, had to buy almost all the shares
    Markit Economics in London said its monthly Purchasing Managers Index points to “anemic” factory growth in the Euro-area as stronger
  • in Germany, Italy and Spain were offset by contraction in France
  • Gold advanced above $1,300 an ounce as investors flood back to precious metals as risks to the global economy prompted the Federal Reserve to signal it will take a slower approach to further interest-rate increases
  • Puerto Rico will default on a $422 million bond payment for its Government Development Bank, escalating what is turning into the biggest crisis ever in the $3.7 trillion market that U.S. state and local entities use to access financing
  • Brazil’s President Rousseff promised increased spending on her party’s most popular social program and took other measures aimed at her electoral base, less than two weeks before the Senate is expected to vote in favor of the impeachment process she calls a coup d’etat
  • After ratcheting up lending at the behest of President Dilma Rousseff, Brazil’s state-controlled banks may be in store for more pain as Brazil’s longest recession in a century sparks a surge in delinquencies
  • Halliburton Co. and Baker Hughes Inc. called off their $28 billion merger that faced stiff resistance from regulators in the U.S. and Europe over antitrust concerns
  • The hundreds of protesters who pulled down blast walls and forced their way into Baghdad’s Green Zone on Saturday laid bare growing political chaos that increasingly poses a threat to the country’s security and the economy
  • Sovereign 10Y bond yields mixed; European equity markets mixed, Asian markets lower; U.S. equity-index futures rise. WTI crude oil drops, metals higher

US Event Calendar

  • 8:50am: Fed’s Lockhart speaks at Amelia Island, Fla.
  • 9:45am: Markit US Manufacturing PMI, April F, est. 50.8 (prior 50.8)
  • 10am: ISM Manufacturing, April, est. 51.4 (prior 51.8)
  • 10am: Construction Spending, March, est. 0.5% (prior -0.5%)
  • 5:30pm: Fed’s Williams speaks in Los Angeles

DB’s Jim Reid concludes the overnight wrap

Earnings will again be a big focus for markets this week with 124 S&P 500 companies set to report, headlined by the likes of Merck, Pfizer and Kraft Heinz. We’ll also get the latest reports from 17% of the Stoxx 600 including some of the big banks. With the market firmly back to scrutinizing the data too, the big focus there this week comes on Friday when we’ll get the April employment report in the US. We’ll have a full preview of that closer to the date but as well as the labour market numbers it’s worth also keeping an eye on today’s ISM manufacturing print which, following on from softer regional readings, is expected to show a modest 0.4pt decline to 51.4. Our US economists are actually forecasting for a drop below 50 (to 49.0) and the data will give an early insight into what extent, if at all, growth is rebounding in Q2. We’ll also get the April PMI’s this week, so there’s plenty to keep us busy.

Over the weekend the main focus has been on the China data released on Sunday. The data showed a slight drop in the official manufacturing PMI for April, declining a modest 0.1pts to 50.1 (vs. 50.3 expected) while the non-manufacturing PMI was also lower, falling 0.3pts to 53.5. New orders subcomponents for both were softer, although especially in the latter where the component dropped back below 50. We’ll have to wait for the reaction from markets in China as bourses are closed for a public holiday (along with Hong Kong) today. The focus is more on Japan however where markets have reopened following a public holiday of their own on Friday. With the Yen unchanged this morning but hovering around 18 month highs, the Nikkei has plunged -3.62%, while the Topix is -3.55%. Elsewhere the ASX (-0.63%) and Kospi (-0.73%) are weaker too while moves for Oil aren’t helping with WTI down close to -1%.

Meanwhile the other headline grabber from the weekend is the news out of Puerto Rico with the confirmation that Governor Padilla has declared a debt moratorium on a $422m repayment due today by the island’s Government Development Bank, and so triggering a default. The bigger news now might mean what this means for the nation’s other general obligation bonds, of which according to Bloomberg $800m are due to be repaid by July. A story worth following.

Moving on. Earnings season is ticking along and in the US we’ve now had the latest quarterly earnings from 310 S&P 500 companies. There’s a familiar trend to what we’ve seen in the past with 77% beating at the EPS line and 57% at the revenue line – which largely matches previous quarters although the beat in sales is a bit better than what we’ve seen historically. As we’ve highlighted previously however, this masks what has been a significantly weaker period for earnings relative to last year. Our equity colleagues in the US highlight the important point that analysts have chopped their EPS forecast by over 9% for this quarter since the turn of the year, making it less of a surprise to see so many companies coming ahead of estimates. In fact our colleagues note that Q1 EPS should wrap up at about 5% lower YoY unless we see big beats from the remaining reporters. We’re currently down close to 6% on a YoY basis although ex-energy that’s only -0.5% yoy.

In a quick recap of markets on Friday, it was a pretty soft close to the week for markets on both sides of the pond, with volatility across currencies and some fairly mixed data plaguing sentiment. A late bounce into the close helped limit the loss for the S&P 500 to just -0.51%, however European bourses moved the other way in the late stages of trading there, culminating with the Stoxx 600 closing with a -2.13% decline which was the biggest daily fall since February. There was a similar underperformance in credit markets with the iTraxx Main and Crossover indices ending 2.5bps and 11bps wider respectively, while in the US CDX IG ended the day just 1bp wider. Currency markets were dominated by weakness for the US Dollar. In fact the Dollar index closed the day down -0.72% meaning it weakened over 2% during the week with the index now back to trading at the lowest level this year. It’s the mirror image for the Euro with the single currency up +0.87% on Friday and a shade over 2% on the week.

In terms of the US data, the core PCE was confirmed as rising +0.1% mom in March as expected which has resulted in the YoY rate dipping a tenth to +1.6%. The employment cost index print was reported as increasing +0.6% qoq in Q1. Meanwhile, there was some mixed signals coming from the personal income and spending reports last month. Income rose +0.4% mom and a little more than expected (vs. +0.3% expected), while spending (+0.1% mom vs. +0.2% expected) was below consensus. The Chicago PMI for April declined a steeper than expected 3.2pts to 50.4 (vs. 52.6 expected) while there was similar weakness in the ISM Milwaukee (-6.7pts to 51.1). Finally later in the session we got confirmation of a downward revision to the final April University of Michigan consumer sentiment print, by 0.7pts to 89.0. More concerning perhaps was the 3pt downward revision to the expectations reading to 77.6 which is the lowest since September 2014.

There was plenty of data released in Europe on Friday too. The highlight was a better than expected Q1 GDP print (+0.6% qoq vs. +0.5% expected) for the Euro area. This had the effect of keeping the YoY rate unchanged at +1.6% and while the headline reads positive, our Macro colleagues in Europe noted that some caution is warranted, however. They highlight in particular that there are transitory factors at play and numerous forces – including global uncertainty, rising oil and political risk – to prevent underlying growth from accelerating. Meanwhile, there was some disappointment in the CPI headline estimate for the Euro area after printing at -0.2% yoy (vs. -0.1% expected), a decline of two-tenths. The core print was recorded as declining three-tenths to +0.7% yoy (vs. +0.9% expected). Elsewhere, German retail sales were reported as declining unexpectedly in March (-1.1% mom vs. +0.4% expected) and so shrinking annual growth to +0.7% yoy.

Staying in Europe, there was some focus also on Portugal on Friday after the nation retained its IG credit rating status from DBRS. The news is significant as the agency is the only one to rate Portugal investment grade and so according to the FT, this allows the country to continue to benefit from QE bond buying by the ECB.

We’ll also get the final revision for the US this afternoon while the main focus will be the April data for ISM manufacturing and prices paid prints. March construction spending data will also be released. Away from the data we’ll start to hear from a number of Fedspeakers again. Lockhart (today and Wednesday), Mester (Tuesday), Kashkari (Wednesday) and Bullard (Thurday) are all scheduled while Bullard, Kaplan, Lockhart and Williams are all due to take part in a panel interview on Friday. Meanwhile the ECB’s Draghi is scheduled to speak this afternoon, while Weidmann is also due to speak later in the week.

It’s another big week for earnings with 124 S&P 500 companies set to report, accounting for 16% of the index market cap. The highlights look set to be AIG (today), Pfizer (Tueday), Kraft Heinz (Wednesday) and Merck (Thursday). In Europe we’ll get reports from 17% of the Stoxx 600 including Shell, HSBC, BNP, UBS and BMW.

via zerohedge

ZeroHedge: Frontrunning: May 3

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

  • Global stocks slide as yen, euro gains question policy potency (Reuters)
  • U.S. Index Futures Signal Stock Losses as AIG Drops on Earnings (BBG)
  • EU Sees Weaker Growth in Eurozone and Wider EU as China Slowdown Weighs (WSJ)
  • Euro Set for Longest Run of Gains Since 2013 as Fed Focus Fades (BBG)
  • German Bonds Advance as EU Cuts Euro-Area Inflation Outlook (BBG)
  • Trump hopes to land decisive blow in Indiana showdown with Cruz (Reuters)
  • Hedge Funds Under Attack as Cohen Says Skilled People Are Scarce (BBG)
  • China’s banking regulator moves to contain off-balance sheet risk (Reuters)
  • Two Sigma Co-Founder `Very Worried’ Machines Will Take Jobs (BBG)
  • Aeropostale Preparing to File for Bankruptcy This Week (WSJ)
  • Fairway Group Holdings files for Chapter 11 bankruptcy (Reuters)
  • Pfizer Beats Estimates as Vaccine, Cancer Drug Sales Surge (BBG)
  • UBS Drops as Profit Misses Estimates on Wealth, Trading Income (BBG)
  • Commerzbank Plunges as Low Interest Rates Hit Sales, Trading (BBG)
  • Halliburton adjusted profit beats estimate, helped by cost cuts (Reuters)
  • The Super Rich Were the First to Bail During the Financial Crisis (BBG)
  • Islamic State breaches peshmerga defenses north of Mosul (Reuters)
  • Iraq Cleric’s Moves Test Political Order (WSJ)
  • Australia Budget Highlights Low-Growth Challenge: Moody’s (BBG)
  • Drought-hit Zimbabwe sells off wild animals (Reuters)

 

Overnight Media Digest

WSJ

– Aeropostale Inc is preparing to file for bankruptcy protection this week and close more than 100 stores, according to people familiar with the matter, as the teen-apparel retailer contends with mounting losses and falling sales. (http://tinyurl.com/jkabzlq)

– The Colorado Supreme Court ruled Monday that municipalities can’t bar hydraulic fracturing, a long awaited decision in a legal battle that has rippled across this energy rich state. (http://tinyurl.com/h9jzg4a)

– Donald Trump, with a big lead in the polls in Indiana and the Republican presidential nomination within his reach, kept attacking his GOP rivals on the eve of the state’s primary, while democratic front-runner Hillary Clinton ignored her opponent and looked ahead to the general election. (http://tinyurl.com/zu8amcp)

– Microsoft Corp updated its Bing search app for iOS on Monday with a new feature that lets you search for images by taking a photo with your iPhone or uploading an image from your camera roll. (http://tinyurl.com/zspmtx3)

 

FT

* France’s competition authority ordered Engie to raise its natural gas prices for companies, saying that in some cases the energy company utility was engaging in “predatory pricing” and harming competitors.

* Philippe Hebert, chief risk officer of Barclays France, has alleged money laundering and mis-selling failures at the bank in a letter written to Tony Blanco, chief executive of Barclays France, which was seen by the Financial Times.

* Eurozone economies would benefit at the cost of Britain if it decided to leave the European Union, a prominent French economist has predicted, with a relocation of financial activity out of London causing sterling to plummet.

* The stock market in Milan said it could not allow regional lender Popolare di Vicenza to list after it failed to find sufficient buyers for its 1.7 billion euros ($1.96 billion)capital raising.

 

NYT

– WhatsApp, a messaging service owned by Facebook, was shut down in Brazil on Monday after a court order from a judge who is seeking user data from the service for a criminal investigation. (http://tinyurl.com/gse8b79)

– Puerto Rico’s default on most of a $422-million debt payment on Monday puts the spotlight back on Washington to enact a rescue package for the island, and congressional aides said a revised bill would be introduced next week. (http://tinyurl.com/jb2qr44)

– The Dutch chapter of the environmental activist group Greenpeace on Monday disclosed a trove of documents from the talks over a proposed trade deal between the European Union and the United States. (http://tinyurl.com/jzgo5qh)

– Hulu, until now primarily a rerun service for episodes of broadcast television shows, is working to create a more robust offering that would stream entire broadcast and cable channels to consumers for a monthly fee. (http://tinyurl.com/zy9uopz)

 

Britain

The Times

– Range, a discount furniture retailer, and NewDay, one of the country’s largest providers of store cards, have begun talks with investors about flotations that could value the companies at more than 1 billion pounds ($1.47 billion) each. (http://bit.ly/1Z4UU23)

– David Cameron is to put curbing Islamist extremism at the heart of the Queen’s Speech this month as he seeks to fend off claims that he is becoming a lame-duck prime minister. (http://bit.ly/1Z4W4L9)

The Guardian

– Britain’s most senior civil servant, Jeremy Heywood, is reviewing HS2 as fears grow that the high-speed railway cannot be built within its 55 billion pound budget in its current form. (http://bit.ly/1Z4XPrw)

– Worries about the EU referendum in June, rising labour costs and China’s slowdown have knocked UK business confidence to a four-year low, according to a report by ICAEW. (http://bit.ly/1Z4XVzt)

The Telegraph

– A Brexit will cost up to 100,000 jobs while the NHS and other public services will face significant cuts, Cabinet Minister Greg Hands has warned. (http://bit.ly/1Z4Ybyw)

Sky News

– Restaurants and bars could also be stopped from adding service charges to bills to remind customers they do not have to tip if they don’t want to. Tips left by customers should go to workers in full and not their employers, the government has said in a report. (http://bit.ly/1Z4YJnR)

The Independent

– The chairman of Business Select Committee examining the collapse of BHS has said the retailer’s former owner, Philip Green, has “enormous questions” to answer surrounding the sale of the 88-year-old high street chain, accusing him of “crashing” it into a cliff. (http://ind.pn/1Z4ZBZF)

 

via zerohedge

ZeroHedge: In Latest Blow To Hedge Funds, AIG Redeems $4 Billion; CALSTRS Says “2 And 20” Model Is “Off The Table”

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

The wave of anti-hedge fund sentiment that we have predicted ever since 2013 – a direct consequence of centrally planned markets in which central bankers have become marketwide Chief Risk Officers, who intervene every time there is even a 5% drop, and have made risk hedging moot – has finally been unleashed: “in less than seven days, hedge funds have been subject to a three-pronged attack by some of the biggest names in finance,” Bloomberg writes.

As a reminder, over the weekend, none other than folksy crony capitalist billionaire, Warren Buffett unloaded what he called a “sermon” about hedge funds and investment consultants, arguing that they are usually a “huge minus” for anyone who follows their advice, adding that passive investors can do better than “hyperactive” investments handled by consultants and managers who charge high fees.

This followed just days when a member of the very group that was bashed by Buffett, Dan Loeb, said that the past few months have been a “catastrophic” time for hedge funds adding that there is “no doubt that we are in the first innings of a washout in hedge funds and certain strategies.”

Then last night, another prominent hedge fund billionaire, Steven Cohen, whose former hedge fund pleaded guilty to securities fraud in 2013, said he’s astounded by the limited number of skilled people in the industry. “Frankly, I’m blown away by the lack of talent,” Cohen said at the Milken Institute Global Conference in Beverly Hills, California, on Monday. “It’s not easy to find great people. We whittle down the funnel to maybe 2 to 4 percent of the candidates we’re interested in. Talent is really thin.”

According to Bloomberg, Cohen said the industry has “gotten crowded” with too many managers following similar strategies. He said fund firms seem to think they can hire skilled people and “magically” generate returns.

Cohen said one of his biggest worries last year was that his firm might become the victim of an indiscriminate market selloff as other funds endured troubles and reduced risk. He said his worst fears were realized in February when U.S. stocks fell to an almost two-year low and his firm lost 8 percent.

But the real threat to hedge funds is neither “catastrophic” returns, nor a “wash out”, nor the lack of investing talent (surely Cohen can just turn to Twitter where nobody ever loses paper money while “trading”), but what investors and LPs in what has been a dying product ever since central banks decided to go activist on the stock market, would do.

It is here that the problem is suddenly becoming very acute.

For a troubling indication that the pain for hedge funds is only just starting, Chris Ailman, who runs investments at the $187 billion California State Teachers’ Retirement System, or CALSTRS, said in a Bloomberg Television interview from the Milken conference that the hedge fund industry’s two-and-twenty fee model is “broken” and “off the table” for large institutional investors.

His statement follows a vote last month by New York City’s pension for civil employees to exit hedge funds, determining that they didn’t perform well enough to justify high fees.

And then the latest blow to the suddenly struggling industry came overnight from none other than the firm which started the bailout regime, AIG, which following its earnings report announced that the insurer – burned by losses on hedge funds – has submitted notices of redemption for $4.1 billion of those holdings.

“As of today, we have received $1.2 billion of proceeds from those redemptions,” Chief Financial Officer Sid Sankaran said Tuesday in a conference call discussing results at the New York-based insurer.

 

For those wondering why the smart money has been selling, or rather forced selling, stocks for a record 14 weeks even as the market has soared…

… the pattern of suddenly surging redemptions may provide a much needed hint.

via zerohedge


ZeroHedge: In Latest Blow To Hedge Funds, Largest US Life Insurer Is Redeeming Most Of Its Investments

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

It has been a terrible year for hedge funds, not only in terms of performance but more importantly when it comes to keeping LPs and investors happy and invested, and it is only getting worse.

Recall that in recent weeks some very prominent alternative money managers have been slammed with major substantial requests such as Brevan Howard which was served with an cash call for $1.4 billion, and Tudor which has seen $1 billion in redemptions, while New York City’s pension for civil employees voted this month to pull $1.5 billion from hedge funds.

Then, just three days ago, AIG joined the anti-hedge fund fray when it announced it would redeem $4 billion from its hedge fund investments, while Chris Ailman, who runs investments at the $187 billion California State Teachers’ Retirement System, or CALSTRS, said that the hedge fund industry’s two-and-twenty fee model is “broken” and “off the table” for large institutional investors.

Moments ago we the latest confirmation that the hedge fund business model is indeed suffering through an existential battle when MetLife Inc., the largest U.S. life insurer, said was seeking to exit most of its hedge-fund portfolio after a slump in the investments. According to Bloomberg, the insurer is seeking to redeem $1.2 billion of the $1.8 billion in holdings, a process that may take a couple of years to complete, Chief Investment OfficerSteven Goulart said Thursday in a conference call discussing first-quarter results at the New York-based company. The portfolio, which posted negative returns in the quarter, was cut by about $600 million in 2015, he said.

“It’s had up-and-down years and really it’s just too inconsistent, we think, in actual performance,” Goulart said. “What we’ll be left with is a small portfolio of really our most consistently performing managers in hedge funds.”

Oh, so past performance is indicative of future performance after all?

As Bloomberg adds, MetLife, which has an investment portfolio of more than $520 billion, has been looking in recent years for alternatives to bonds because interest rates are so low. While results from private equity have been satisfactory, hedge funds have been more volatile, Goulart said.

Chief Executive Officer Steve Kandarian added that he is seeking to increase the portion of earnings that can be returned to shareholders. That focus on free cash flow factored into the decision to cut the hedge-fund investments, Goulart said.

In other news, MetLife reported profit Wednesday that missed analysts’ estimates. Investment income fell 17% to $4.56 billion, hurt by both hedge funds and low bond yields. Kandarian said Thursday that the insurer will continue to hold some investments beyond bonds.

“Some earnings variability is an acceptable risk, as these asset classes have provided strong returns to MetLife shareholders over time,” Kandarian said. Variable investment income, which includes hedge funds and private equity, “was better than planned in 7 of the past 10 years.”

In other words, the surprising redemption is as much as an attempt to scapegoat hedge funds as it is a statement on the alternative asset management industry. But whatever the reason, the reality is that now that the process is in motion, we expect billions more in redemptions as the great “wash out” predicted by Dan Loeb takes place. It also means more forced sales and liquidations, which in the current illiquid market will only result in even more volatility and even more underperformance by those other hedge funds who have matched positions to those being unwound.

Finally, for those seeking the ultimate culprit why the hedge fund industry has been on such a poor roll in recent years, look no further than the Fed, which continues to intervene any and every time there is even a modest correction in the process crushing the short books and leading to unprecedented short squeezes such as the ones experienced in February and March of this year.

via zerohedge

ZeroHedge: Wall Street ‘Whistleblower’ Analyst Exposes Clinton Foundation As “Charity Fraud”

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

The Clinton Foundation’s finances are so messy that the nation’s most influential charity watchdog put it on its “watch list” of problematic nonprofits last month.

 

The Clinton family’s mega-charity took in more than $140 million in grants and pledges in 2013 but spent just $9 million on direct aid.

 

The group spent the bulk of its windfall on administration, travel, and salaries and bonuses, with the fattest payouts going to family friends.

 

“It seems like the Clinton Foundation operates as a slush fund for the Clintons,” said Bill Allison, a senior fellow at the Sunlight Foundation, a government watchdog group where progressive Democrat and Fordham Law professor Zephyr Teachout was once an organizing director.

 

– From last year’s post: Senior Fellow at Sunlight Foundation Calls the Clinton Foundation “A Slush Fund”

Thanks to Charles Ortel, it’s time to prepare ourselves for some more Clinton Foundation revelations.

The Washington Free Beacon reports:

The Wall Street analyst who uncovered financial discrepancies at General Electric before its stock crashed in 2008 claims the Bill, Hillary, and Chelsea Clinton Foundation has a number of irregularities in its tax records and could be violating state laws.

 

Charles Ortel, a longtime financial adviser, said he has spent the past 15 months digging into the Clinton Foundation’s public records, federal and state-level tax filings, and donor disclosures. That includes records from the foundation’s many offshoots—including the Clinton Health Access Initiative and the Clinton Global Initiative—as well as its foreign subsidiaries.

 

This week, Ortel is starting to release his findings in the first of a series of up to 40 planned reports on his website. His allegation: “this is a charity fraud.”

 

The Sunday Times of London described Ortel as “one of the finest analysts of financial statements on the planet” in a 2009 story detailing the troubles at AIG.

 

“Where you or I see pages of numbers, [Ortel] sees a narrative,” wrote Sunday Times reporter Tim Rayment. “Sometimes the theme is a company’s potential for growth. Sometimes it is the prospect of self-destruction. And at times the story does not make sense, because the figures are hiding a fraud.”

 

Ortel turned his attention to the Clinton Foundation in February 2015. To learn more about the charity, he decided to take it apart and see how it worked.

 

“I decided, as I did with GE, let’s pick one that’s complicated,” said Ortel. “The Clinton Foundation is complicated, but it’s really very small compared to GE.”

 

When Ortel tried to match up the Clinton Foundation’s tax filings with the disclosure reports from its major donors, he said he started to find problems.

 

“I decided it would be fun to cross-check what their donors thought they did when they donated to the Clinton Foundation, and that’s when I got really irritated,” he said. “There are massive discrepancies between what some of the major donors say they gave to the Clinton Foundation to do, and what the Clinton Foundation said what they got from the donors and what they did with it.”

 

Last year, the Clinton Foundation was forced to issue corrected tax filings for several years to correct donation errors. But Ortel said many of the discrepancies remain.

 

“I’m against charity fraud. I think people in both parties are against charity fraud, and this is a charity fraud,” he said.

A spokesperson for the Clinton Foundation did not comment on the claims.

I covered the Clinton Foundation and all its shadiness repeatedly last year. Here are a few highlights:

Exposed – The Clinton Foundation is Running a $20 Million Private Equity Firm in Colombia

How the Clinton Foundation Paid Sidney Blumenthal $10K per Month as He Gave Horrible Libya Advice to the State Dept.

How Donations to the Clinton Foundation Led to Tens of Billions in Weapons Sales to Autocratic Regimes

What Difference Does it Make? 1,100 Foreign Donors to Clinton Foundation Never Disclosed and Remain Secret

Senior Fellow at Sunlight Foundation Calls the Clinton Foundation “A Slush Fund”

More Clinton Foundation Cronyism – The Deal to Sell Uranium Interests to Russia While Hillary was Secretary of State

More Hillary Cronyism Revealed – How Cisco Used Clinton Foundation Donations to Cover-up Human Rights Abuse in China

This is How Hillary Does Business – An Oil Company, Human Rights Abuses in Colombia and the Clinton Foundation

Clinton Foundation’s Deep Financial Ties to Ukrainian Oligarch Who Pushed for Closer Ties to EU Revealed

Hillary Clinton Exposed Part 2 – Clinton Foundation Took Millions From Countries That Also Fund ISIS

via zerohedge

ZeroHedge: The Cure Is Worse Than The Disease

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Authored by EconomicPrism's MN Gordon, annotated by Acting-Man's Pater Tenebrarum,

A Week to Remember

Today we look back to the recent past with singleness of purpose.  Context and edification for the present economy is what we’re after.  We have questions…

How come the recovery has been so weak?  Why is it that, nearly seven years after the official end of the Great Recession, the economy’s still mired in a soft muddy quagmire?  Squinting, focusing, and refocusing, there’s one particular week that rises above all others.

 

Hank the scaremonger

Hank the scaremonger – in meetings behind closed doors, he threatened Congressmen with financial apocalypse and even martial law if they didn’t hand over $700 billion in tax payer money with essentially no oversight. This has been independently confirmed by several Congressmen. Griffin’s “The Creature from Jekyll Island” is often decried as “conspiracy theory” by establishment shills, but it inter alia contains an eerie prediction of practically everything that eventually happened in 2008.

 

On Saturday September 20, 2008, Treasury Secretary Hank Paulson delivered a draft of the Troubled Asset Relief Program (TARP) to Congress for review.  If you recall, it had been another wild week.  On Monday, September 15, after 158 years of operation, Lehman Brothers vanished from the face of the earth…Dick Fuld, “The Gorilla,” be damned.

All week the sky relentlessly fell on financial markets.  Even money market funds were in full panic.  In fact, a record $169.03 billion of capital had vacated money market funds in the week ended September 17.

That same day, the Wall Street Journal’s headline was, “U.S. to Take Over AIG in $85 Billion Bailout.”  On top of that, the Primary Fund broke the buck – falling to $0.97 cents a share.  The SEC also went so far as to impose a 10 trading-day ban on short sales of 799 financial stocks.

 

DJIA - July - December 2008

Wild days on Wall Street – the crash wave of 2008 – click to enlarge.

 

The Free Market is Dead

Certainly, this week of bank bailouts, busted money markets, and extreme SEC intervention was unsettling.  But looking back in retrospect, bringing it into context with the present, one brief statement above all others captures the essence of it all, both then and now.

Kentucky Senator Jim Bunning said on September 19:

“The free market for all intents and purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America.  The American taxpayer has been mislead throughout this economic crisis.  The government on all fronts has failed the American people miserably.”

Bunning’s remarks turned out to be both accurate and prescient.  For he uttered them prior to the insanity of quantitative easing.  If the free market wasn’t already dead with the rollout of TARP, in the post quantitative easing world it is a corpse.

 

Bunning

Kentucky senator Jim Bunning – in order to save the village, it had to be destroyed.

 

Free markets, in particular free credit markets have been destroyed.  The rewards of accumulating capital through saving no longer exist.  Unfortunately, a lifetime of saving will no longer support people through their golden years by living off the interest.  These days a lifetime of saving only buys you a cup of coffee.

At the same time, asset prices have been so distorted has become near impossible to tell what represents an investment and what a speculation.  For example, ExxonMobil recently lost its Triple A credit rating, a grade it had maintained since 1930.  Like many other corporations, broken credit markets have enticed them to practice financial engineering.

 

The Cure is Worse than the Disease

The Fed’s monetary policies have made funding share buybacks and dividend payments with borrowed money an attractive management tactic.  In the face of stalling business prospects, these short-term gimmicks can make business operations appear healthy.  But surely even someone with a Masters in Finance can recognize this is merely transferring money from bond holders to shareholders.

Naturally, executives love borrowing money to buyback shares…especially those receiving handsome compensation in the form of stock options.  For it lines their pockets and gives a short boost to earnings per share.  But what it doesn’t do is create new value.

 

XOM

XOM, daily – in spite of the weak oil price, the stock price of XOM has been successfully “engineered” back to its highs – alas, for the first time since 1930, the company no longer enjoys an AAA rating – click to enlarge.

 

In ExxonMobil’s case, without the proper price signals provided by a free functioning credit market, the company was compelled to shoot itself in the foot.  When oil prices were high, also an effect of monetary pumping, executives drained off the cash reserves they would need to weather an oil price decline.  Strength garnered through a century of sound business practices evaporated.

Up and down the DOW the story repeats.  In 1980, over 60 U.S. companies had a Triple A credit rating.  Now, just two companies – Johnson & Johnson and Microsoft – remain.

Such is the fate of a planned economy, with manipulated credit markets, and an elastic currency.  Slow growth, and soon no growth, coupled with rising corporate debt and falling operating cash flow is the Frankenstein economy Ben Bernanke and Hank Paulson have gifted us.  The net result: the cure has turned out to be worse than the disease.

via zerohedge

ZeroHedge: How Hedge Funds Invest Heavily In Washington D.C.’s Culture Of Corruption

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Earlier this week, Ryan Grim and Paul Blumenthal published a blockbuster piece in the Huffington Post, titled: The Vultures’ Vultures: How A New Hedge-Fund Strategy Is Corrupting Washington.

It details the secretive world of the dark money groups representing mercenary hedge funds in their insatiable quest for more and more money. In many ways, it’s merely a microcosm of America in 2016. A culture in which ethics has become so irrelevant, it isn’t even a nuisance; it simply never factors into the equation.

The first few paragraphs set the stage perfectly:

WASHINGTON – Take Robert Shapiro.

 

A Harvard-trained economist, Shapiro is the head of a consulting firm called Sonecon. That business card doesn’t do it for you? He’s got a few more in his wallet:

Senior fellow at the Georgetown University School of Business.

 

Adviser to the International Monetary Fund.

 

Director of the Globalization Initiative at NDN, a progressive think tank.

 

Shapiro, a Democrat, has advised presidents and presidential candidates, and has held powerful government posts. It stands to reason, then, that when he has thoughts on public policy, he can find an outlet ready to publish them.

 

Recently, he’s had ideas on how the government can address the debt crisis in Puerto Rico and how it can end the conservatorship of Fannie Mae and Freddie Mac by moving them into the private market. Before that, he had a take on how to deal with Argentina’s debt crisis. For all three, he produced academic-looking papers, complete with footnotes and charts.

 

All three situations have one thing in common: If they were resolved the way Shapiro suggested, a variety of bets placed by a select group of the most politically powerful hedge funds would pay off in a huge way. In the case of Argentina, they mostly have. Fights over how to resolve the other two issues are still raging in Washington.

 

For this article, we called Shapiro to ask on whose behalf he has been waging these intellectual battles. His answer was surprising in its honesty: He’s working with DCI Group, a political dark arts master known to be advocating on behalf of a group of powerful hedge funds that are changing how Washington works.

If you want to get a sense of what’s motivating Donald Trump and Bernie Sanders voters, it’s a desire to take people like Robert Shapiro, remove them from the halls of power, and toss them into a cardboard box on the street. Of course, that won’t be happening any time soon, but that’s what a lot of people want.

What follows are some additional excerpts from the piece, which I strongly suggest you read in full.

Shapiro, it turns out, is but one foot soldier in the hedge fund infantry. A review of public documents, tax filings and interviews with people involved finds that in each of the three campaigns, hedge funds have enlisted the same set of lobbyists, political operatives, dark money groups and think-tank experts spanning the political spectrum.

 

The band that has gotten together for the big three hedge fund jam sessions includes some unlikely allies: There’s DCI Group, the powerhouse lobbying firm. Then there’s the Raben Group, operatives whose specialty is working in the progressive space and lobbying Democrats. There’s the American Continental Group, a bipartisan lobbying firm. There’s 60 Plus and the Center for Individual Freedom, two groups that call themselves part of the conservative movement, but in reality are dark money groups known to run whatever campaign they’re paid to run, and that are happy to conceal the source of the funding. All these groups have roughly nothing in common, other than that they all have united in advocacy campaigns that alternately go up against the Argentinian people, Puerto Ricans and the rest of the American public.

 

Each of these campaigns appears to have been run by or aided by the DCI Group. We say “appears” because DCI is one of Washington’s great black boxes — news articles that involve DCI routinely include a line informing readers that the organization did not respond to a request for comment. This article is no different.

Old Washington hands involved in these particular fights say that nothing they’ve seen before in politics has prepared them for the mercenary campaigns the hedge funds are now waging.

 

“There’s something about this that’s almost more disturbing, because you get an issue that’s not particularly a big public issue and people can spend and spend and spend,” said a veteran policymaker who found himself on the wrong end of the hedge funds. “And I don’t know how anybody can compete with it. And then you start losing the narrative and you see groups on the left get bought out and corrupted — really corrupted. I don’t know what to do about it.”

It’s so bad, even the critters in Congress are disgusted by it.

And it’s not ideological, either. If a big group of hedge funds decided to short the health insurance industry, it could easily be in their interests to fund a dark money campaign on behalf of single-payer health care. If they short the big banks, they’ve now become allies with Sen. Elizabeth Warren (D-Mass.).

 

In Puerto Rico, the group of hedge funds waging the biggest lobbying campaign own debt that is first in line to be paid off in case of any calamity. (That’s not to say there aren’t other hedge funds that own different sets of Puerto Rican debt lobbying so that they’re the first to be paid; more on them later.) They’re now betting that they can stop Congress from rescuing Puerto Rico by amending bankruptcy laws to allow Puerto Rico to cover its basic expenses before paying out the hedge funds.

 

Betting that Congress does nothing is often a smart wager. If the island government is forced to pay off creditors first, it will have to take those funds from vital programs threatening the livelihoods of people who live there.

Here’s an example of how they threaten Congressional aides.

Or even against staffers. In the midst of the debate over how to restructure Fannie Mae and Freddie Mac in early 2014, Jim Millstein was sitting down on Capitol Hill with Michael Bright, an aide to Sen. Bob Corker (R-Tenn.), who was working on the legislation. Millstein, like other hedge-fund titans lobbying on the bill, had a set of structural recommendations he thought the Senate should take up.

 

Millstein was worth listening to: While a top Treasury Department official, he had overseen the successful restructuring of AIG after the government bailout. But Millstein had an extra recommendation: The Fannie Mae shareholders needed to be paid out — shareholders like Millstein.

 

The aide told Millstein he didn’t see why shareholders, who bought Fannie stock for pennies when the government had already bailed it out, needed a windfall. The meeting turned tense. “Don’t worry kid, you’re about to get yours,” Millstein said, according to a Democratic committee staffer later briefed on the episode. Bright, reached for comment, declined to speak for this article.

 

The DCI Group most famously built its reputation doing the dirty work of the tobacco industry. That long-running operation involved funding “experts” who would question the medical science around smoking, and targeting individual advocates and lawmakers. It pioneered the use of shadow groups that concealed the true source of funding for the campaign, and can be seen as a blueprint for the hedge fund campaigns.

Of course it did.

Back in 2007, DCI was instrumental in killing legislation that would have regulated Fannie Mae and Freddie Mac, a doomed effort that may have prevented the lenders from melting down. It earned $2 million from Freddie Mac for its work.

 

DCI was also part of American Task Force Argentina, the hedge-fund backed effort that battled Argentina over its default. Raben Group’s Robert Raben and Shapiro led the task force, and Shapiro’s consulting firm was paid at least $450,000. While there are no public filings today, the group is helping run the Fannie hedge-fund operation, according to DCI managing partner Justin Peterson, who has privately talked about DCI’s work. Shapiro, too, said he was working with DCI for his housing policy work.

 

McGill represented NML Capital, a subsidiary of Elliott Management, the hedge fund connected with GOP megadonor Paul Singer, in the lawsuit against Argentina, along with Aurelius Capital Management. That lawsuit allowed the hedge funds to extract billions from the Argentinian people. It came after the years-long slash-and-burn campaign run from the  American Task Force Argentina — a lobbying coalition of Covington & Burling, DCI Group and the Raben Group.

Well, well, well, will you take a look at that. Who do we find amongst hedge fund mercenary groups? None other than Covington & Burling. That’s right, the law firm that Eric Holder worked at before spinning through the revolving door into government, just in time to serve as Obama’s attorney general in order to protect bank executives from prosecution.

Recall what we learned in the post, Cronyism Pays – Eric “Too Big to Jail” Holder Triumphantly Returns to His Prior Corporate Law Firm Job:

After failing to criminally prosecute any of the financial firms responsible for the market collapse in 2008, former Attorney General Eric Holder is returning to Covington & Burling, a corporate law firm known for serving Wall Street clients.

 

The move completes one of the more troubling trips through the revolving door for a cabinet secretary. Holder worked at Covington from 2001 right up to being sworn in as attorney general in Feburary 2009. And Covington literally kept an office empty for him, awaiting his return.

 

The Covington & Burling client list has included four of the largest banks, including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. 

For more information on one of the most shameless cronies and fraudsters in American history, see:

Must Watch Video – “The Veneer of Justice in a Kingdom of Crime”

The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally

Eric Holder Announces Task Force to Focus on “Domestic Terrorists”

Eric Holder and the DOJ Have Spent Millions of Taxpayer Dollars on Unreported Personal Travel

Elizabeth Warren Confronts Eric Holder, Ben Bernanke and Mary Jo White on Bankster Immunity

Even Washington D.C. Insiders Admit Eric Holder is a Bankster Puppet

Eric Holder Claims Emails Using Words ‘Fast and Furious’ Don’t Refer to Operation Fast and Furious

Screen Shot 2016-05-13 at 2.05.41 PM

via zerohedge

ZeroHedge: What The Biggest Hedge Funds Did In Q1: The Full 13-F Summary

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

While far less attention is being paid to hedge fund 13F filings, which show a stale representation of equity long stakes among the hedge fund community as of 45 days prior, than in years gone by as a result of increasingly poor performance by the 2 and 20 crowd, they still remain closely watched source of investment ideas but mostly to find out what the new cluster ideas and hedge fund hotel stocks are at any given moment so they can be faded.

Courtesy of a Bloombert compilation, here are some highlights from the latest round of 13F filings.

Valeant.

 What used to be one of the industry’s most popular holdings has fallen out of favor with just about every major hedge fund holder save Pershing Square Capital Management’s William Ackman. Brahman Capital, which had invested in Valeant for at least 2010, exited the 8.12 million shares it held at the end of 2015 during the first quarter. The New York firm was joined by a who’s who of hedge fund giants: Andreas Halvorsen’s Viking Global Investors, Stephen Mandel’s Lone Pine Capital, Philippe Laffont’s Coatue Management and Barry Rosenstein’s Jana Partners all sold off the former high-flier, which has plunged about 90 percent from its peak last August.

Allergan

The merger-arb blow up of the year has claimed its set of scalps, however the company’s failed acquisition by Pfizer took place after the end of Q1, which is why all those who loaded up in the first quarter are now nursing big losses on their failed M&A bets. Among them are Lone Pine and Seth Klarman’s Baupost Group who bought into Allergan Plc during the first quarter, establishing stakes shortly before Pfizer Inc. decided in April to terminate a $160 billion deal to combine with the Dublin-domiciled company as the U.S. cracks down on corporate inversions. Pentwater Capital Management, Arrowgrass Capital Partners and Eton Park Capital Management also took new stakes or increased their Allergan holdings. The stock has fallen 28 percent this year.

Cutting back equity exposure

As noted earlier, the value of Soros Fund Management’s publicly disclosed holdings dropped by 25% to $4.5 billion as of the end of the first quarter. He was not alone in rapidly derisking his portfolio. At Glenview Capital Management, the hedge fund run by Larry Robbins, investments in U.S.-listed stocks declined by 22 percent. At Louis Bacon’s Moore Capital Management, the value of the holdings fell by about 29 percent.

Gold

Gold is gaining popularity among prominent investors. Soros established a $264 million position in Barrick Gold Corp., acquiring a 1.7 percent stake in the world’s biggest bullion producer that was the fund’s biggest equity position. Soros also disclosed owning bullish options on 1.05 million shares in the SPDR Gold Trust, an exchange-traded fund tracking the price of bullion. Other major investors also sought safety in the yellow metal. Eton Park purchased 3.6 million shares in the same gold ETF, a $422 million position. Bessemer Group bought 546,000 shares valued at $64.3 million.

As has become the norm, John Paulson once again went the other way and cut his holdings in the gold ETF. Paulson & Co. owned 4.8 million shares of ETF at the end of the first quarter, compared with 5.8 million as of Dec. 31. Instead he bought over $50 million worth of Office Depot stock which suffered a spectacular collapse after its merger with Staples was also terminated shortly after.

* * *

Here are the rest of the notable highlights among the marquee hedge fund names.

ADAGE CAPITAL

  • New stakes in GCP, CHTR, FOXA, ROK, X
  • Boosts RTN, DD, GE, DAL, VZ, AGN
  • Cuts SYF, PFE, CFG, BA, TYC, BAC
  • No longer shows MHK, VC, SUNEQ, SFG, SO, EBAY

APPALOOSA MANAGEMENT

  • New stakes in FB, SYF, MHK, BAC, FOXA, VRX, GLBL
  • Boosts ETP, WPZ, CYH, AMLP, NXPI, DAL, GOOG, AGN, PFE, TERP
  • Cuts GM, KMI, HCA, GT, URI
  • No longer shows PCLN, AAPL, HPE, CBI, EMN

BAUPOST GROUP

  • Reports new stakes in AGN, VMW, SRAQU, LQ, GNW
  • Boosts EMC, AR, FOXA, OLN, LNG, FOX
  • Cuts PYPL, PBF, BXE, NG
  • No longer shows FTR, OCN, KOS, MU, SN

BERKSHIRE HATHAWAY

  • New stake in AAPL
  • Boosts PSX, IBM, CHTR, LBTYA, DE, V, BK
  • Cuts PG, MA, WBC, WMT
  • No longer shows T

BLUE HARBOUR

  • New stakes in FFIV, LM
  • Boosts AVT, AGCO, VRNT, XLNX, RAX
  • Cuts INXN, CHS, BIN, BW
  • No longer shows AKAM, GWR

BLUEMOUNTAIN

  • New stakes in MBLY, AIG, IBKR, XLY, TV, ENDP
  • Boosts IMS, POST, AVGO, JCI, BBY, TSO, HLF
  • Cuts PFE, NUVA, IAC, EURN, GNRT, TARO, VRNT
  • No longer shows TEVA, BRCM, SLH, BAC, VRX, WTW, MET

BRIDGEWATER ASSOCIATES

  • New stakes in EWZ, DIS, MCD, POT, DISH, MDLZ, GOOG
  • Boosts VWO, EEM, INTC, ESRX, RL
  • Cuts AAPL, PEP, SPY, EXC, ORCL, M
  • No longer shows BCE, VIAB, FOSL, TU, KO, JNJ

COATUE MANAGEMENT

  • New stakes in PYPL, SPLK, FFIV, CMG, HTZ, SQ
  • Boosts EA, AVGO, AKAM, LCI, LBTYA, GOOGL
  • Cuts GOOG, NFLX, MSFT, HAIN, EXPE, CHTR, AMZN, GPRO, FB
  • No longer shows AAPL, AGN, TWX, CBS, VRX, LNKD, IBM

CORVEX MANAGEMENT

  • New stakes in NOMD, TMH, VRX, GLPI
  • Boosts PFE, PAH, SIG, COMM, P, BLL, FNF
  • Cuts GOOGL, VER, AGN
  • No longer shows BAC, AN, CMA, CFG, KMI, TWX

DUQUESNE FAMILY OFFICE

  • New stakes in KO, PM, SO, DUK, PPL, PEP, CAT, VZ
  • Boosts GOOGL, PSTG
  • Cuts AMZN, MSFT, FB, HDB
  • No longer shows RTN, CTRP, NOC, SYF, CMG

ELLIOTT MANAGEMENT

  • New stakes in QLIK, PFE, PAH, EGN, NE, HLF
  • Boosts HES, CNP, SYMC, CAB, AA, BXLT, AGN
  • Cuts IPG, ODP, PRGO, RYAAY, FCB, TWC
  • No longer shows XLE, VMW, HPE, XOP, STE, NBL, SHPG

EMINENCE CAPITAL

  • New stakes in LEN, HUM, ZBRA, RL, ANTM
  • Boosts CAA, AN, CCE, SPGI, LNKD
  • Cuts TRIP, SJM, ZNGA, ADSK, FOSL
  • No longer shows YUM, GOOG, HOT, ATVI, YELP, GNC

ETON PARK CAPITAL

  • New stakes in BXLT, GLD, ITC, MHK, CDK, HOT
  • Boosts TWC, AGN, EMC, CRTO, CI
  • Cuts MSFT, ADBE, SHW, SBAC, ODP, JAH
  • No longer shows ADSK, PRGO, AER, HUM, RAD

FAIRHOLME CAPITAL

  • Boosts BAC, SRSC
  • Cuts SHLD, LUK, SHLDW, JOE, LE
  • No longer shows MRC, CNQ, BRK/A, BRK/B, AIG, IBM

GATES FOUNDATION

  • Boosts TV, ECL, AN
  • Cuts BRK/B

GLENVIEW CAPITAL MANAGEMENT

  • New stakes in FIS, AAP, GPN
  • Boosts HCA, TWC, GOOGL, HLS, LBTYK, ABBV
  • Cuts MON, TMO, HUM, MCK, CI, DOW
  • No longer shows PCLN, CYH, PVH, AMAT, UHS, AIG

GREENLIGHT CAPITAL

  • New stakes in HTS, PVH, CYH, GSAT, LAMR
  • Boosts AAPL, YHOO, M, AGNC, YELP, AER, FOXA
  • Cuts IAC, AGR, TTWO, IM, TWX, KORS
  • No longer shows CBI, OI, GRMN, ON, SGMS, MTCH

HIGHFIELDS CAPITAL MANAGEMENT

  • New stakes in MAR, PEP, PFE, DIS, BXLT, CL, TWX, GS
  • Boosts WBA, GOOG, WMB, GOOGL, ABBV, IAC, AER
  • Cuts MCD, DD, ICE, APC, HOT, CBS, EBAY, YUM
  • No longer shows MSFT, SPGI, PRGO, YHOO, SRE, PYPL, AGN

ICAHN ASSOCIATES

  • New stakes in MFS
  • Boosts XRX, AIG
  • Cuts NUAN, PYPL
  • No longer shows AAPL, HOLX, TGNA, MENT, PBY, GCI

ICONIQ CAPITAL

  • New stakes in UNH, APO, BX, OAK, KKR, CG, SUNEQ
  • Boosts GLD, IAU, VTI, IWB, SPY, FB
  • Cuts PARR, BABA, VEA, VWO, ACWI, CVX
  • No longer shows AMLP, PXD, TSLA, RIG, TOT

JANA PARTNERS

  • New stakes in GOOG, SRCL, HDS, TDG, BAC
  • Boosts PFE, SPY
  • Cuts CAG, LGF, AGN, LVNTA, WBA, MSFT, TWC
  • No longer shows QCOM, AIG, LBTYK, BAX, STRZA, TWX, VRX, WMB

KERRISDALE ADVISERS

  • New stakes in BRO, EBAY, MENT, PYPL, SNPS
  • Boosts CTSH, LXFT, YELP, ETSY, PRXL
  • Cuts TARO, MCK, PCLN, MRKT, BGCP, TFM
  • No longer shows KFY, BID, EPAM, WSM, RHI

LAKEWOOD CAPITAL

  • New stakes in GS, COF
  • Boosts CDK, HCA, BIDU, CMCSA, ORCL, MA
  • Cuts WRK, ACAS, IM, GTS, TSE, FDX, TWC
  • No longer shows TSO, UNP, NPO, SPR, JBLU, GME, NFLX

LANSDOWNE PARTNERS

  • New stakes in FB, JCI, UNH, RAI, AGR, GLPI, KO
  • Boosts WFC, GOOGL, AMZN, JPM, UTX, UPS, NKE, LNKD
  • Cuts ACN, AAPL, LB, DIS, V, DAL, CMCSA, FIT, MTCH
  • No longer shows GS, TMUS, C, SYF, ETFC, BAC, MS, SCTY

LONE PINE CAPITAL

  • New stakes in AGN, BXLT, PYPL, MNST, YUM
  • Boosts FB, GOOG, NOC, GOOGL, EQIX, ADBE, BUD, NKE
  • Cuts ILMN, V, EA, AMZN, JD, MA, MSFT
  • No longer shows WMB, VRX, WBA, ATVI, ADSK

LONG POND CAPITAL

  • New stakes in HLT, CBG, CAA, LQ, CFG
  • Boosts KEY, CLNY, TCO, H, SRC
  • Cuts FCE/A, SRG, BPOP, FPO, SFR
  • No longer shows HOT, LHO, ARPI, SBAC, AL, BYD

MARCATO CAPITAL

  • New stakes in RLGY, SFR, LIND
  • Boosts M, LBRDK, LBRDA, BLDR, VRTS
  • Cuts GT, BID
  • No longer shows LPLA, CAR, MDCA, TOWR, BLD

MAVERICK CAPITAL

  • New stakes in LRCX, NOC, CMCSA, PCRX, USB, NVDA, VIAB
  • Boosts PCLN, FB, AGN, ADBE, AVGO, BUD
  • Cuts LBTYK, PF, CIT, PFE, ST, GOOG, ARMK
  • No longer shows ARRS, SC, FLT, CHTR, ORI, AER, SNY

MELVIN CAPITAL

  • New stakes in NFLX, HD, COST, KHC, MNST, WYNN
  • Boosts EXPE, AMZN, LOW, V, MHK, FB, NKE
  • Cuts LVS, JD, GIL, BABA, ORLY, HBI
  • No longer shows MCD, RCL, ADS, GOOGL, BC, PCLN, LULU, SBUX

MILLENNIUM MANAGEMENT

  • New stakes in COP, MRO, CMS, ZBH, PG, RCL, DPZ
  • Boosts APC, PEP, T, FIS, PCG, ADBE, YHOO
  • Cuts OXY, PPL, NEE, LOW, HFC, TEVA, NBL, FB
  • No longer shows WMT, AMZN, OII, GG, PSX

MOORE CAPITAL

  • New stakes in EEM, FIS, XHB, FXI, BG, ATVI, HD
  • Boosts GOOGL, AAPL, AME, MGM, DLTR, AIG
  • Cuts FB, AMZN, CTRP, EQIX, RH, BABA
  • No longer shows BAC, C, XOP, JPM, MCD, MSFT, MS, GS

OMEGA ADVISORS

  • New stakes in UNH, PYPL, GILD, ETP, BLL, AAPL, EA
  • Boosts MSFT, TRGP, SYF, TRCO, WBA
  • Cuts GOOGL, AGN, AIG, DISH, AER, FB
  • No longer shows C, JPM, EEM, PFE, GLBL, AMZN, HLT

PASSPORT CAPITAL

  • New stakes in TSM, TAP, MRK, QVCA, PCLN, CHTR
  • Boosts CMCSA, JNJ, YHOO, PFE, LMT, HDP, BABA
  • Cuts NKE, GOOG, SBUX, MSFT, HD, KO, MCD
  • No longer shows SYT, DAL, UNP, NFLX, LBTYK, LLY

PAULSON & CO

  • New stakes in BEAV, ATVI, ACAS, ODP, ALXN, EXPE, BXLT, FB
  • Boosts AKRX, ENDP, RDN, PFE, BIIB, ETSY, CVC
  • Cuts TWC, HOT, AGN, TMUS, AIG, PRGO
  • No longer shows OUT, PMC, ABBV, GMED, LH, PCLN

PERRY CORP.

  • Boosts AER
  • Cuts TWX, AIG, HCA, SE
  • No longer shows WMB, CPGX, CYH, ETE, ETP

PERSHING SQUARE

  • New stakes in NOMD
  • Boosts QSR
  • Cuts APD, MDLZ

POINT72 ASSET MANAGEMENT

  • New stakes in NFLX, COP, MNST, YHOO, KORS
  • Boosts LOW, FB, APC, NWL, VRX, TWX, AMZN
  • Cuts NKE, AAP, SIG, GOOGL, COH, MCD, RL, MDVN, EA
  • No longer shows AMAT, TYC, CELG, LULU, TJX, WTW

POINTSTATE CAPITAL

  • New stakes in CELG, MDVN, EEM, HAL, COG
  • Boosts CHTR, LYB, ABBV, AGN, MSFT
  • Cuts TEVA, TWC, NOC
  • No longer shows LUV, BAC, CFG, GD, JAZZ

SANDELL ASSET

  • New stakes in HOT, BXLT, CAG, AFFX, FCS, CPGX
  • Boosts YHOO, CAM, MEG, YOKU, CVC, CIT
  • Cuts VIAV, TVPT, ARG, XLF, ALLY, BOBE
  • No longer shows ETH, PMCS, FCE/A, ABG, SFG, VSLR

SOROS FUND MANAGEMENT

  • New stakes in ABX, BXLT, CCI, AVGO, SLB, AET
  • Boosts EQIX, GLPI, EMC, HOT, SPY
  • Cuts SYF, CY, AGRO, AGN, LYB, PYPL, DISH, AMZN
  • No longer shows LVLT, DOW, ENDP, DAL, MCD, BUD

STARBOARD VALUE

  • New stakes in MRVL, DEPO, NXST
  • Boosts YHOO, M, BAX, CW, WRK
  • Cuts DRI, FCPT, QTM
  • No longer shows MDAS, MEG, WPP, RLD, ODP, CI

TEMASEK

  • New stakes in FIS, BGNE
  • Boosts ILMN, REGN, JD, GILD
  • Cuts MON

TIGER GLOBAL

  • New stake in Z
  • Boosts CHTR, EHIC, ETSY, XO
  • Cuts AMZN, JD, AAPL, PCLN, DATA, QSR, FLT, MA, SQ
  • No longer shows VIPS, TDG, RH, BUD, ATHM, TWC

THIRD POINT

  • New stakes in GOOGL, BXLT, LOW, EMC, VMW, FOXA, WMB
  • Boosts YUM, DHR, CB, BUD, STZ, KHC
  • Cuts AMGN, AGN, SJM, ROP, DOW, MHK, TWC
  • No longer shows LBTYK, EBAY, MS, AXTA, CWEI

TRIAN FUND

  • Boosts SYY, PNR, DD, BK, MDLZ
  • Cuts GE
  • No longer shows PEP

TUDOR INVESTMENT

  • New stakes in PEP, ITC, CL, MEG, CSCO
  • Boosts FIS, MRK, SPY, WMT, ZBH
  • Cuts FB, CSRA, EFX, CSC, TEVA, LLY, K, SJM
  • No longer shows ULTI, IYR, EWJ, ADP, BABA, V

VALUEACT

  • New stake in ADS
  • Boosts WLTW, CBG
  • Cuts ADBE, AGU, MSI, MSCI
  • No longer shows HAL

VIKING GLOBAL

  • New stakes in FB, LLY, JD, NWL, DVA, MET, TMUS
  • Boosts COG, ECA, AVGO, GPOR, AMZN, AET, MA
  • Cuts PXD, LYB, AGN, WBA, HUM, LNG, ANTM, CCI, PFE
  • No longer shows VRX, MCK, PCLN, QUNR, BK, CMG, NKE, HAL

Source: BBG

via zerohedge

ZeroHedge: Legendary Investor Paul Tudor Jones Cuts Hedge Fund Fees As A Result Of Poor 2016 Performance

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

One month after news that legendary investor Paul Tudor Jones’ $11.6 billion hedge fund Tudor Investment had seen some $1 billion in redemptions as a result of poor performance and the exit of several money managers, some of whom spent decades at the firm, the inevitable next step has followed: Tudor is trimming the fees it charges some clients in its biggest fund amid losses this year.

According to Bloomberg which first reported the fee cuts, an inevitable shift in a world in which most hedge funds have underperformed their benchmarks and the broader stock market for eight years in a row, Tudor will modestly reduce fees for a share class that contains most of the main fund’s money to 2.25% of assets and 25% of profits, according to a letter sent to clients on Monday and obtained by Bloomberg. The fees were 2.75% and 27% Tudor is also introducing a new pool for clients with $50 million investments or more that will charge 2 percent of assets and 25 percent of profits. The changes will take effect July 1.

The cut does not affect everyone: Tudor is keeping fees for the main fund’s oldest share class unchanged at 4% of assets and 23% of profits. Even with the cut, Tudor will continue to charge more than the traditional hedge fee structure of 2% on assets and 20% on performance.

Tudor, which veteran macro-economic trader Jones, 61, started in 1980, is among the many macro hedge funds that have posted lackluster returns since the global financial crisis. Its clients had asked to pull about $1 billion in the first quarter. Tudor’s main BVI Global macro fund, which makes bets on broad economic trends by trading everything from currencies to commodities, has lost 2.6 percent for clients this year through May 13, according to an investor report. The fund’s oldest class has declined 3 percent. Patrick Clifford, a spokesman for Tudor, declined to comment on the cut in fees.

As Bloomberg adds, Tudor is being hit with client withdrawals as the hedge fund industry comes under attack for high fees and lackluster performance. Billionaire Warren Buffett last month described the fees as “a compensation scheme that is unbelievable” and said investors would be better off ditching expensive money managers. As previously reproted, the $187 billion California State Teachers’ Retirement System said the model is “broken,” while the University of California’s $97.1 billion of endowment and pension assets said paying high fees for mediocre performance is “absurd.” Also a month ago, the NYC Pension system said it would pull $1.5 billion from key hedge fund names while AIG joined in the redemption fray pulling billions of its own funds allocated to alternative investments.

The reason for hedge fund underperformance are numerous and have been extensively discussed on these pages previously: among the many factors causing underperformance for managers is the relentless stimulus unleashed by central bank stimulus worldwide, declining trading volumes and markets marked by both narrow and wide swings in prices. As well as Tudor, investors are pulling their money from Alan Howard’s Brevan Howard Asset Management, another macro fund. BlackRock Inc. and Fortress Investment Group LLC are among fund companies that said last year they would be liquidating their macro funds following losses.

Tudor has been spared greater redemptions due to his track record: Jones began his career in 1976 after graduating from University of Virginia with a bachelor’s degree in economics. Through his uncle who was a cotton merchandiser, he got a job as a trader on the floor of the New York Cotton Exchange. From there, Jones became a commodities broker at E.F. Hutton & Co., trading futures on the cotton exchange for clients before starting Tudor.

The impact on Tudor will nonetheless not be negligible: a source estimates that using the cpp allocation table on ask/fees calculation, a cut of 25bp implies the allocators suspect Jones will see a net draw over the next 5 years of -600bp if one uses their historical leverage of 160. As the source notes, if players with 10+ year records can not get fee premiums, it does not bode well for the rest of the old world.

They only have central banks to thank for making “hedging” a market downturn a quaint anachronism of the past.

via zerohedge

ZeroHedge: Japan’s Broken Economy – 25 Years Of Failed “Stimulus”&“Temporary Illusions”

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Jeffrey Snider via Alhambra Investment Partners,

So thoroughly destroyed is Japan’s economy that some of the numbers it produces are beyond comprehension, just staggering in any meaningful context. For example, Japan’s real GDP (SAAR) for Q1 2016 was ¥530 trillion (chained 2005). That compared to ¥447 trillion in Q1 1994. Over two decades and two additional years the Japanese economy has grown by a grand total of 18.5%. On straight arithmetic alone it doesn’t work out to 1% per year let alone on a compounded basis.

Since the first quarter of 2001, meaning fifteen years, real GDP “advanced” 10.4% total. Clearly the Japanese economy as bad as it was has slowed from even that revolting baseline. We don’t have to venture far or try too hard to guess when this new “slowing” occurred: since the first quarter of 2008, Japanese GDP thanks to Q1’s positive number is now the slightest amount more than eight years ago (¥530.01 trillion now vs. ¥529.63 trillion, or +0.1%). As everywhere else around the world, the Great Recession was not only a global event, it “somehow” broke the global economy in chillingly uniform fashion.

ABOOK May 2016 Japan GDP Trajectory GDP

There is something quite sinister contained within this review, particularly since I haven’t presented the Japanese economy much of any baseline at all. It is fashionable especially of late to believe this is all some trick of slowing demographics and therefore all “stimulus” is to some degree helpless in the face of Japan’s determined self-extinction. There is some truth to the charge, which is the same of any good lie, but it doesn’t amount to a 1% baseline. Capitalism is not strictly population; in fact, that is the true hidden genius and value of capitalism as it creates productive, sustained societal gain well above any demographic shifts. At 1% and less over nearly a quarter century we can safely assume there has been no capitalism practiced in Japan during that time.

For sake of further (and more damning) argument, let’s just assume that the aging population is actually to blame for Japan’s 1% unevenness. That still leaves the final slowing, the right hand side of the chart above where even 1% is now a dream and a seemingly unattainable goal. Retirement and aging didn’t suddenly amplify in 2008 and 2009.

ABOOK May 2016 Japan GDP Trajectory QE Drags

Given the history of intervention and “stimulus”, and more so when it occurs and really re-occurs, any impartial observer would be forgiven if they believed that QE’s were actually constant impediments to growth (a negative multiplier in the parlance of the orthodoxy). The proliferation of “stimulus” after the GR correlates only with this downshift in the Japanese economy that cannot be due to demographics. At best, QE’s have accomplished nothing at all positive, leaving no trace of something actually being stimulated for all the sustained “stimulus”; at worst, QE is the cause of Japan’s further nightmarish descent.

There is an easy case to be made against quantitative easing – starting with the distinct inability of the Bank of Japan (or any central bank inflicting it upon whatever economic system) to get the quantity “right.” If it is supposed to be a precisely-determined amount of precisely-measured “stimulus” then having to do it over and over and over invalidates at least the “Q” if not the “E” too. In Japan, the damage from QE is a little easier to observe than in other places, but as anywhere else it is households/consumers that bear the brunt of these unfortunate distortions that amount to little other than PR stunts (no matter how poorly QE’s perform, the media dutifully and reflexively continues to call it all “stimulus”).

ABOOK May 2016 Japan GDP Trajectory HH

Household spending in Japan has underperformed even overall GDP during these lost decades – not even managing steady 1%. After the rift in 2008 and 2009, HH’s further underperformed like overall GDP though had managed to get close to the pre-crisis trajectory. That was before QQE devastated even that likeness of recovery. Monetarists have claimed that somebody has to lose in these kinds of redistribution schemes, and the elevated quantity of QQE makes clear who that was.

These losers are only supposed to be on the short end for a short while until the stimulated recovery brings the economy roaring back so that they are paid in full for their forced “contributions.” Yet, as is clear of overall GDP, QQE, as the numerous QE’s before it, has been all cost with no recovery at all; in fact, as noted above, the Japanese economy is worse off now than it was before. The massive scale of QQE intrusion and the violent, negative reaction to it in household spending shows the true nature of all QE no longer entangled in other economic factors; the purest distillation of cause and effect. 

What we find, then, of Japan is the combination of factors that are evident almost everywhere else around the world post-Great Recession. Monetary “stimulus” is asking consumers and households to bear the burdens of that “stimulus” in order that the full recovery will take place – except as we find elsewhere, the post-GR environment has already proven that the recovery will never take place. Central banks are thus placing greater burdens upon their people for an outcome that simply can’t happen. I think that easily amounts to “stimulus” that adds only more negative factors to a global economy with already a huge burden.  

The reason for it is straight forward owing to a fallacy about the GR itself. It was never a cyclical event, nor was it the cause of this split in the economy – all economies for that matter. The Great Recession was instead a revelation of the true global economic state that existed for a long time before it. Growth and prosperity, even in Japan where GDP actually accelerated for the briefest of moments near to the 1.25% “upper bound” (a very sad commentary on Japan where just 0.25% more in GDP compounding amounts to a different world entirely) was never more than a temporary illusion.

All the world’s “stimulus” has not been able to budge it since the paper economy of the precrisis evaporated into the credit default swaps of AIG, and the collateral shortage that never has replaced the uniformity of MBS repo; like Humpty Dumpty, all Bernanke’s horses and all Kuroda’s men haven’t been able to put together the one unifying factor from Japan to the United States, from Europe to China. It’s as if there was something else all along that took every monetarism that every central bank offered anywhere it was offered and swallowed it whole without leaving the slightest economic trace, only further and further slowing. What can possibly be bigger than all the world’s QE’s and “stimulus” combined?

ABOOK Apr 2016 Econ Baselines GDP Dark Leverage Supply

ABOOK May 2016 Europe GDP Nominal Baseline

ABOOK May 2016 China Trade Paradigm Shift

via zerohedge


ZeroHedge: It Takes A Village To Maintain A Dangerous Financial System

0
0

Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Screen Shot 2016-06-06 at 10.42.11 AM

Injustice anywhere is a threat to justice everywhere. We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.

 

We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.

 

The answer lies in the fact that there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws. I would agree with St. Augustine that “an unjust law is no law at all.”

 

We should never forget that everything Adolf Hitler did in Germany was “legal” and everything the Hungarian freedom fighters did in Hungary was “illegal.” It was “illegal” to aid and comfort a Jew in Hitler’s Germany. Even so, I am sure that, had I lived in Germany at the time, I would have aided and comforted my Jewish brothers.

 

– From the post: Martin Luther King: “Everything Adolf Hitler did in Germany was Legal”

Last month, Anat R.Admati, the George G.C. Parker Professor of Finance and Economics at Stanford University’s Graduate School of Business, published a very important working paper titled, It Takes a Village to Maintain a Dangerous Financial System. At 26 pages, it’s a bit longer than what you might leisurely read in the course of your daily activities, but I strongly suggest you take the time. Of course, if you don’t have the time, I’ve provided some key excerpts for you below.

Despite deconstructing an intentionally complicated subject, the paper was both an enjoyable read and easily understandable. Additionally, the range of issues she successfully covered in such an short piece was nothing short of heroic.

I knew it would be good after reading the abstract…

Abstract: I discuss the motivations and actions (or inaction) of individuals in the financial system, governments, central banks, academia and the media that collectively contribute to the persistence of a dangerous and distorted financial system and inadequate, poorly designed regulations. Reassurances that regulators are doing their best to protect the public are false. The underlying problem is a powerful mix of distorted incentives, ignorance, confusion, and lack of accountability. Willful blindness seems to play a role in flawed claims by the system’s enablers that obscure reality and muddle the policy debate.

Here’s some more. Enjoy:

1. Introduction

“If it takes a village to raise a child, it takes a village to abuse a child.”

 

Policymakers who repeatedly fail to protect the public are not accountable partly because false claims obscure reality, create confusion and muddle the debate.

 

It is useful to contrast safety in banking and in aviation. Tens of thousands of airplanes take off, fly and land daily, often simultaneously within small geographical area. Yet, crashes are remarkably rare. It takes many collaborating individuals, from engineers and assembly workers to mechanics, airline and airport employees, air controllers, and regulators, to achieve and maintain such safety levels. In banking, instead, there are strong incentives to take excessive risk; banks effectively compete to endanger. The victims are dispersed and either unaware of the endangerment, misled into believing that the risk is unavoidable or that reducing it would entail significant cost, or powerless to bring about meaningful change. Most of those who collectively control the system benefit from its fragility or choose to avoid challenging the system, effectively becoming enablers.

 

Society’s interest in aviation safety is aligned with the incentives of those involved in maintaining it. Crashed planes and dead passengers are visible to the public and easy to understand. Airplane manufacturers and airlines stand to suffer losses from compromising safety. Radars, flight recorders and other technologies uncover the exact cause of most plane crashes, and those responsible face consequences. Screening procedures try to prevent terrorist attacks. The fear of being directly responsible for deaths prevents individuals involved in maintaining safe aviation from failing to do their part.

 

In banking, the public interest in safety conflicts with the incentives of people within the industry…Even if a crisis occurs, the enablers of the system can promote narratives that divert attention from their own responsibility and from the fact that much more can be done at little if any social cost to make the system safer and healthier.

 

Designing appropriate rules requires professional expertise. Experts, however, may provide biased or flawed advice. Sometimes experts are paid by interested parties to help tilt the rules in specific ways. Even supposedly neutral academics and other experts may provide poor policy guidance. For example, medical research about drugs and medical devices can get corrupted when pharmaceutical companies are involved in funding research or employ researchers or policymakers. In one case involving a spinal fusion product, researchers paid by the manufacturer suppressed serious side effects (Meier, 2012). In another, members of the Food and Drug Administration (FDA) in U.S. had direct ties with manufacturers that created conflicts of interest (Lenzer and Epstein 2012).

 

Many aspects of the financial system in developed economies are unjust because they allow powerful, better informed people to benefit at the expense of people who are less informed and less powerful. The injustice can be described from a number of perspectives. First, the system contributes to distortions in the distribution of income and wealth, as some of those who benefit from it are among the most privileged members of society, while those who are harmed include the poorest. Second, by allowing the privatization of profits and the socialization of losses, the financial system distorts basic notions of responsibility and liability. Financial crises affect employment and the economic well-being of many segments of society, but those who benefit most from this system and who enable it tend to suffer the least harm. The persistence of this unjust system illustrates how democracies sometimes fail to serve the interest of the majority of their citizens.

 

2. Other People’s Money

“Traders risk the bank’s capital…. If they win they get a share of the winning. If they lose, then the bank picks up the losses…. the money at risk is not their own, it’s all OPM — other people’s money…. Traders can always play the systemic risk trump card. It is the ultimate in capitalism — the privatization of gains, the socialization of losses…. Traders are given every incentives to take risk and generate short-term profits.”

 

Business corporations use money from investors in exchange for financial claims such as debt or shares of equity. Outside banking, it is rare for healthy corporations, without any regulations, to fund more than 70 percent of their assets by borrowing, even though corporate tax codes typically favor debt over equity funding.

 

In banking, heavy borrowing is less burdensome than elsewhere, because banks’ lenders (such as depositors) are unusually passive and do not impose harsh terms even if banks take significant risk that endangers their ability to pay their debts. Depositors trust that the government (or a deposit insurance fund) will pay them if the bank cannot. Lenders who can seize some of the banks’ assets ahead of depositors also feel safe lending to banks under attractive terms.

 

Since many financial institutions are exposed to similar risks and interact extensively with one another, the financial system can become fragile and prone to crises when institutions are funded almost exclusively with debt. Fears of contagion or “systemic risk” lead governments and central banks to offer supports and bailouts that prevent the default of banks and other institutions. Whereas supports and bailouts prevent default, banks are often allowed to persist in an unhealthy state of distress and possible insolvency for extended periods of time, which distorts their decisions and makes them inefficient or dysfunctional (Admati and Hellwig 2013a, chap. 3, 11). Bailouts and supports help institutions to pay their debt in full, often to counterparties within the financial system itself, as happened with insurance company AIG.

 

Excessive fragility and inadequate safety rules have always affected banking. As governments created central banks and deposit insurance and thus allowed banks more privileged access to debt funding, equity levels declined consistently (Hoenig 2016). The problem has gotten more severe in recent decades. Financial innovations such as securitization and derivatives, which can be used to manage risk, have enabled financial firms to take more risk while hiding this fact within the increasingly complex and opaque global system. As privileged access to funding and opportunities to hide risk expanded, regulations and disclosure rules failed to keep up and counter the distorted incentives.

Just in case you’re still drinking the Kool-Aid that the financial system is much safer now following the crisis.

Contrary to claims by many, the reformed capital regulations are overly complex, dangerously inadequate and poorly designed. They are not based on a proper analysis of the costs and benefits of different approaches and fail to reflect key lessons from the crisis and the true relevant tradeoffs (Admati et al 2013, Admati and Hellwig 2013a, 2015). International minimum standards allow banks to fund as little as three percent of their assets by equity, and the details of how this ratio is determined are subject to lobbying and debate. The measures of financial health used by regulators are unreliable and can lull regulators and the public into a false sense of safety just as happened prior to the Crisis. They still count on problematic accounting rules, credit ratings, and complex “risk weights” that give the pretense of science while in fact being distortive, political and counterproductive.

 

Banks are allowed, indeed encouraged, to persist in a permanent state of excessive, inefficient and dangerous level of indebtedness.

 

Society is made to tolerate an inefficient and dangerous system because policymakers contribute to and fail to counter distorted incentives and ability to endanger.

 

The main beneficiaries from this situation are managers and executives in banks and other financial institutions, who have access to cheap funding and enjoy magnified profits and bonuses during prosperous periods, often while suffering little on the downside (Admati and Hellwig 2013a, chap. 8-10 and Kay 201, Admati 2015. Admati 2012, Bhagat 2016 and Bhagat and Bolton 2014). Auditors, credit rating agencies, law firms, consultants and lobbyists are offered many profitable opportunities from overly complex rules.

 

Those who manage other people’s money in institutions such as pension funds and mutual funds also tend to benefit on the upside and have little to lose if they take risk for which their investors or clients are not properly compensated. These institutions may not be run fully in the interests of the small investors whose money they invest (Bogle 2006 and Jung and Dobbin 2012), and may prefer to collaborate with banks; indeed, they may be partly owned or sponsored by banking institutions. Other enabler, as discussed later, benefit from the current rules or have reasons to avoid challenging the status quo.

This angle is a very dangerous one, and something I’ve covered repeatedly. See:

SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior

Additional Details Emerge on How Hedge Funds and Private Equity Firms Loot Public Pensions

South Carolina Pension Shifts Assets Into “Alternative Investments” – Disastrous Performance Follows

The main losers from this system are taxpayers and the broader public. Those lured into borrowing too much in a credit boom face harsh consequences when boom turns to bust, and the economy is harmed by an unstable financial system that does not allocate resources efficiently (Taylor 2015). The harm, however, is diffused and difficult to connect to actions or inaction by specific individuals, and it persists because of a powerful mix of distorted incentives and pervasive confusion.

 

3. Many Enablers

“Banks are still the most powerful lobby on Capitol Hill; and they frankly own the place.”

 

It takes many collaborating individuals, each responding to their own incentives and roles, to enable a dangerous financial system. Who are the enablers and what are their motivations? As we discuss in this section, enablers work within many organizations, including auditors and rating agencies, lobbying and consulting firms, regulatory and government bodies, central banks, academia and the media.

 

The enablers have reasons to defend the system and the regulations and to avoid challenging the financial industry and each other. Their actions, or failures to act, endanger and harm the public even as some of them are charged with protecting the public and most claim and are believed to act in the public interest. Some enablers are confused or misinformed, but as discussed later, the confusion is often willful.

 

Accounting rules and risk models used in regulations allow significant discretion. Exposing fraud in disclosures or flaws in models can be costly for individuals throughout the financial system or within watchdogs and regulatory bodies. Whistleblowers are often ignored or fired, and they are likely to lose career opportunities.

 

Regulatory dysfunction is often associated with the notion of “regulatory capture.” One cause of capture are the “revolving doors” where the same people rotate their roles within institutions in the financial system, politics and regulations, and other organizations, including the media. Connaughteon (2012, loc. 459), who worked in policy and as a lobbyist, describes Washington DC as

 

a place where the door between the public sector and the private sector revolves every day. A lawyer at the SEC or Justice Department leaves to take a position at a Washington Law firm; a Wall Street executive takes a position at the Treasury Department. The former will soon be defending the Wall Street executives his old colleagues are investigating; the latter will soon be preventing (or delaying or diluting) any government policy that Wall Street doesn’t like.

 

Government officials and staff routinely proceed to take positions in the financial sector, lobbying or consulting firms, or think tanks sponsored by companies. Government positions are often filled by people currently in the financial sector.

 

Revolving doors contribute to excessive complexity of regulation, because complexity provides an advantage — and creates job opportunities — to those familiar with the details of the rules and the regulatory process. Complexity also opens more ways to obscure the flaws of the regulations from the public and create the pretense of action even if the regulations are ineffective. Revolving doors do not ensure, as is sometimes claimed, that people who stay in policy throughout their careers are effective regulators; they might well be at a disadvantage relative to people in the industry. The best regulators are sometimes the few who have worked in the industry and have no plans to return.

 

This is also why bills passed by Congress tend to be thousands of pages. No one reads them. Lobbyists only care about the few pages they were allowed to write and then they go back to their clients and explain the relevant loophole to be exploited. Politicians only care that they handed out sufficient pork to their cadre of corporate sponsors.

 

Politicians write laws, and they appoint and monitor top regulators. A safe banking system is often not politicians’ top priority. Politicians may want banks to provide funding to particular industries and constituents or to help in political campaigns even if these actions put citizens and the economy at excessive risk.

 

Blanket guarantees to large banking institutions are particularly dangerous because banks have significant discretion as to how they use the subsidized funding, and guarantees are an effective license for recklessness, even lawlessness (Admati 2014). Politicians are rarely held accountable for the harmful effect of implicit guarantees combined with poor regulations.

 

Capture takes many subtle forms in the context of financial regulations. Social connections, shared experiences, and lack of expertise can make policymakers inclined to accept claims made by financial experts even when the claims are false or misleading. Situations in which policymakers’ worldview is strongly affected by those they interact with have been referred to as “cognitive capture” (Johnson and Kwak 2013), “cultural capture” (Kwak 2014), “social capture” (Davidoff 2010) and “deep capture” (Baxter 2011). Prins 2014 documents the ties between presidents and top bankers.

 

Regulators and politicians are subject to significant lobbying from interested parties as they set and implement the rules (see, e.g., McGrance and Hilsenbarth 2012). Lobbying played a role in reckless lending practices that were key to the Great Financial Crisis of 2007- 2009 (Igan et al. 2011 and Vukovic 2011). Between 1999 and 2012, regulators in the US were less likely to initiate enforcement actions against lobbying banks (Lambert, 2015), and lobbies are also involved in drafting laws (Connaughton 2012, Drutman 2015, Lipton and Portes 2013, and Mufson and Hamburger 2014). In one case, part of the U.S. financial reform law passed in 2010 was reversed in 2014 as part of a budget law, with the active participation of bank lobbyists in writing the law (Eichelberer 2014). Advisory committees to regulators are often stacked with industry participants (Dayen 2016 and Eisinger 2012b).

See: Wall Street Moves to Put Taxpayers on the Hook for Derivatives Trades

Economists and other experts become apologists for the status quo and enablers of ineffective policies when they fail to point out problems or, worse, when they provide “scientific” support that contributes to and obscures or justifies flawed rules. Some experts are employed by industry groups or sponsored organizations paid to produce specific research.

 

Research conducted within government and regulatory bodies can be tainted, especially if key individuals are affected by lobbying or political pressure. Staff economists or other experts are often expected to produce research to support pre-set policies.18 Bureaucratic approval processes scrutinizes staff research before it becomes public. As a result, approved research tends to promote the “official” narratives, while research whose conclusions would contradict the preferred policy may be suppressed, possibly by the researchers themselves.

 

Even experts considered neutral, such as academic economists, are not immune to the forces of capture (Zingales 2013, 2015). Their incentives may be colored by the desire for job or consulting opportunities, positions on advisory or corporate or policy boards, prestige, sponsorship of research or conferences, data, and research collaborations. Challenging people within the financial system or other enablers is inconvenient or costly.

 

It is easier and more convenient for academics and other experts to find ways to collaborate with the many other enablers and to express themselves vaguely rather than directly contradict the viewpoints favored by policymakers. When issues appear technical and confusing, claims by people considered “big shots” may resonate or even sound profound to many who do not see their flaws. Making claims that serve the interest of powerful people can pay off, and with enough caveats there is little if any downside risk.

 

Writing clever mathematical models and elaborate empirical studies is valued and rewarded within economics. The desire to motivate and present research as relevant for the real world and for policy can blind researchers to the possibility that the model’s conclusion may depend critically on implausible or false assumptions and thus be inadequate for such applications. Just as a bridge built on faulty assumptions may be prone to collapse, the use of inadequate models in banking regulations can support reckless practices and dangerous and flawed laws and regulations.

 

Central banks play a critical role in the financial system and in the economy, and this role has expanded dramatically during and since the Great Financial Crisis. They are often involved in designing and implementing regulations and among their key role is providing “liquidity supports” to banks and sometimes to other financial institutions so as to prevent defaults. Institutions that have access to such supports are able to borrow more easily than they would otherwise. By providing excessive supports, central banks enable weak, even insolvent “zombie” institutions that are dysfunctional and do not help the economy, to persist for extended periods of time. Among the benefits of ensuring that banks are safer and less opaque is that they would be less likely to run into liquidity problems. Because central bank supports are loans, the supports do not reduce indebtedness; if central banks lend at below- market rates, the loans provide hidden subsidies to commercial banks and other firms.

 

Whereas they are meant to be independent, central banks are subject to political pressure (e.g. Conti-Brown 2016 and Nyborg 2016). Their decisions regarding whether and under what terms to provide support are often made with little if any scrutiny. The supports can obscure not only banks’ weakness but also the failure of regulators (sometimes within the central bank itself) to intervene early and reduce the likelihood of banks needing supports. Excessive interventions by central banks distort markets, and dysfunctional banks interfere with other central bank objectives (Gambacorta and Shin 2016). These issues are often ignored.

 

Although financial instability and excessive subsidies to the financial sector distort the broader economy, few business leaders speak up on financial regulations. Some may be unfamiliar with the issues, believe that regulatory reform is not working, or are inclined to view regulations as bad in themselves. Business leaders may also prefer to avoid challenging financial firms or policymakers whose collaboration may be useful.

 

Democratic governments should ultimately be accountable to citizens. Policy failures can persist, however, if citizens are unaware of the problem, confused about the issues, or powerless to bring about change. Enablers often come from across the political spectrum, leaving citizens few if any choices of effective advocates. Financial regulation is often not a salient topic in political campaigns. Even when there is anger about the financial system (as is the case currently in the U.S.), some key issues are not well understood.

Bernie Sanders was the only one really hammering home this issue. If Hillary gets the nomination, neither of the major party candidates will do anything about the parasitic and cancerous financial system.

News and commentary, however, may get distorted. Most media companies are for-profit businesses. In an extreme example, a newspaper avoided covering a story to protect advertising revenue (Osborne 2015). The interests of media owners, and even their lenders, may also affect coverage (Zingales 2016). Investigative reporting has declined because it can be expensive and adversarial (Starkman 2014).

 

Most of the time, the impact of private interests on news media is subtle. The same forces that cause cognitive and other forms of capture also operate here. One important factor in news media is reporters’ need for access to sources of news and stories, which brings them in frequent contact with those they cover (see e.g. Luyendijk 2015, chap 9). Publishing negative reports, or asking challenging questions, can interfere with access to stories or interviews. “Balanced” reporting may involve quoting false or misleading statements from industry or enablers (e.g. Oreskas and Conway 2010 and Admati and Hellwig 2013a, 2015, note 3).

 

Editorial decisions about topics, content and prominence of news and commentary can have important impact on public perception and policy. Those who make such decisions face implicit and explicit pressures from individuals and organizations keen to have favorable coverage and prevent unfavorable coverage, and who seek to use the media to promote their image and views. People and institutions with significant power, status and name recognition tend to be more successful in impacting media. Utterances by “important” individuals are reported as news, and these individuals are interviewed and quoted frequently with little if any scrutiny. Power and status also enables easier access to opinion pages where desired narratives can be promoted.

Even worse, totally discredited and provably harmful individuals in America continue to be supported and profiled by the media simply because they represent the status quo. Larry Summers is a perfect example. The man is a cultural disease with no cure.

— Matt Taibbi (@mtaibbi) June 6, 2016

If the news media gives more access and coverage to the industry and its enablers, and if it echoes rather than challenges flawed claims and fails to clarify issues in investigative reporting or commentary, it helps maintain or exacerbate confusion and diffuse accountability. Sometimes reporters or commentators accept claims made by people considered experts because examining the claims’ validity requires expertise that reporters lack. When media is used to explain the issues properly, it can elevate the discussion and help the public.

 

4. Spin and Narratives

“The few who understand the system will either be so interested in its profits or be so dependent upon its favors that there will be no opposition from that class, while the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

 

The financial system is dangerous and ineffectively regulated largely because the industry and the many enablers get away with their “spin” on reality and on specific issues.

 

Powerful people are not immune to confusion and to putting trust in people who may be conflicted or misinformed. Anecdotal evidence and discussions with many insiders suggest that “blind spots” about key issues related to banking and finance are pervasive. People are reluctant to question the assumptions behind convenient narratives and to engage with alternative and less convenient ones. They often display “motivated reasoning” (Kahan 2016) and variations of Upton Sinclair’s famous quip: “it is difficult to get a man to understand something when his salary depends upon his not understanding it!”

 

What people want to know becomes at least as important as what they actually know. Codes of silence evolve from collective blindness and an implicit agreement to maintain the silence. We may lie to ourselves and live in hope.

Recall what Larry Summers said to Elizabeth Warren: Stunning Quote – Larry Summers to Elizabeth Warren in 2009: “Insiders Don’t Criticize Other Insiders”

Misleading jargon obscures the issues and excludes many from the discussion. Lanchester (2014, 6) writes that when hearing the economists speak, “it’s easy to think that somebody is trying to con you… [or] trying to put up a smoke screen” and expresses the “strong feeling that a lot of the terms … were deliberately obscure and confusing.” The jargon can also muddle the debate by suggesting false trade-offs.

 

The problem goes much beyond jargon and the meaning of words. A bestselling textbook, written by an academic economist who served in high level policy positions, includes fallacious statements contradicting material in introductory finance courses. As already mentioned, basic economic forces are often denied and ignored in banking, and models in which risk is assumed to be unpreventable imply that regulations are futile or costly. Financial crises are portrayed as akin to natural disasters, for which emergency supports are the main tool. In fact, as discussed earlier, effective regulations can do much at little social cost to dramatically reduce the incidence and cost of crises and to correct other distortions.

 

Bankers and some enablers of the system often warn that tough regulations will have “unintended consequences” such as restricting credit and growth. In fact, healthier and safer banks can make loans more consistently and with fewer distortions, and credit suffers when banks have too little equity. The claim also presumes that all lending is good for the economy when excessive credit is typically a precursor to bust and crises. Ironically, such claims are made even as banks seek, and are allowed to deplete their equity by making payouts to shareholders that they could have used to make loans.

 

5. Is Change Possible?

“Collective moral disengagement at the social system level requires a network of participants vindicating their harmful practices.”

 

Good people can do harm and feel good about themselves, especially when many reinforce one another and remain unaccountable, and when the harm is diffuse, abstract and invisible (Bandura 2015). Spreading flawed claims that cannot be definitively contradicted, as lobbyists and enablers often do, is no crime. Distorted incentives, ignorance, and confusion combine for a powerful mix. How might those strong forces be overcome?

 

Some of those who understand that current regulations are ineffective focus on symptoms and overlook steps that can produce huge benefits at small cost. For example, the excessive size of too-big-to-fail institutions is enabled by their privileged access to subsidized debt funding, which creates enormous harm and distortions. These distortions can be addressed at little cost, and the likelihood of failure would also be reduced, if these institutions were forced to rely much more on equity and thus reduce their dependence on subsidized debt funding.

 

As discussed in this chapter, those at the controls of the financial system do not have strong incentives to protect the public; instead they stand to benefit from actions that contribute or tolerate harm and endangerment. Making the financial system safer would require better rules as well as better monitoring of the system, akin to radars in aviation. Yet, disclosures in banking remains poor and systems to track financial transactions and contracts have been slow to develop. The main obstacle is not the technical difficulty of controlling risk in banking, but rather the lack of political will to do so.

 

I have been intensely involved in the debate about banking regulation since 2008, first through discussions with colleagues and academic writing, and, starting in 2010, engaging with a broader set of people. The impetus for this deeper involvement came from individuals within regulatory bodies who alerted me that flawed claims are having an important impact on policy and urged me to speak up and help clarify the issues. Many of the references in this chapter reflect efforts to alert policymakers and the public to the remaining danger and distortions in the financial system and to propose ways to address them.

 

Luyendijk 2015 classifies the moral attitudes of the people he met within the financial system and describes his reaction to these attitudes. One type he finds ethically most disturbing he calls “cold fish.” Cold fish believe anything that is legal is perfectly fine to do.

For those who adhere to this philosophy, I’d like to remind you of the following: Martin Luther King: “Everything Adolf Hitler did in Germany was Legal”.

There are well-intentioned people in government and elsewhere, including within the financial system itself, who would want to act to promote the public interest, but are often prevented or deterred from doing so by political constraints, institutional policies and more subtle forms of discouragement. In a system dominated by powerful industry players and supported by powerful enablers, the need to promote institutional objective puts many people in conflict with the public interest. Regulators and financial practitioners may put their careers, status and prestige at risk if they challenge certain narratives.

 

Tenured academics, who have the most expertise, job security and academic freedom to express themselves and to engage in policy without being conflicted, are in a unique position to bring about positive change. Yet, some academics are important enablers of the badly regulated and dangerous financial system. By such behavior as making false statements in textbooks, creating models and narratives with assumptions that distort reality in critical ways, misusing or tolerating the misuse of research to propose or support bad policy, or making vague and misleading claims whose flaws, often subtle, can be difficult to detect, these economists exacerbate confusion, muddle the debate, and harm instead of promote the public interest. Someone with sufficient background to understand the academic literature, who has been employed by major financial institutions, quipped recently when discussing some statements by academic economists: “with such friends, who needs lobbyists?”

 

Ultimately, in a functioning democracy political change comes from public pressure, which requires better awareness and understanding. Education is extremely important, so that people become savvier in their own interactions with the financial system, and so they come to see past the fog of confusion.

I couldn’t agree more with the above paragraph. Indeed, it’s precisely why I dedicate so much of my time to writing this website.

Excellent work, Professor Admati. Here’s a link to the entire working paper: It Takes a Village to Maintain a Dangerous Financial System.

via zerohedge

Global Shares Slide As Japan Stimulus Disappoints, RBA Underwhelems, Italy Bank Fears Return

0
0

European stocks slid to a two-week low amid mixed earnings, as bank stocks extended yesterday’s decline as fears that Italy is not “fixed” have reemerged sending both UniCredit and Monte Paschi tumbling, not helped by an adverse market reaction to a disappointing Japanese fiscal stimulus announcement, while the AUD first dropped but then jumped after the RBA’s priced in rate cut was announced, seen as underwhelming.

As expected by both economists and the makrket, in the main central bank event overnight, the RBA cut rates by 25 bps to a new record low of 1.5%, however as Citi analysts quickly observed, much of RBA’s statement today – widely seen as hawkish – was a reproduction of the July comments, with no mention of further easing guidance, adding that the RBA appears to be sanguine about the housing market. “We wouldn’t be surprised if AUD ended up higher following the RBA’s interest rate cut,” Todd Elmer, Singapore-based strategist at Citigroup writes in note. He was right. After the AUD, which had already seen downward pressure ahead of RBA, dropped in kneejerk reaction to the rate cut, it promptly rebounded and was trading at session highs of moments ago in what has been a largely wasted “buy the currency news” rate cut.

And speaking of reacting to the news, the other notable overnight event was Japan’s announcement of its JPY28 trillion stimulus plan, which however as we warned last week proved to be underwhelming, and as a result Japanese shares fell the most in almost four weeks to lead a slump in Asian equities, while the yen strengthened against all of its major peers and Japanese bonds tumbled after a 10Y debt auction drew widest tail since March 2015, which coupled with fears that  that the BOJ may soon be phasing out QE, sent 10Y yields spiking higher by 8.5bp post-auction, almost back to 0%, and putting selling pressure on both US and European yields.

AS Bloomberg put it, the Japanese yen appreciated to the strongest level in three weeks against the dollar as extra spending announced by the government amounted to only a small part of a headline number flagged by Prime Minister Shinzo Abe last week. The currency climbed against all except one of its 16 major peers as Japan’s government announced 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year, as Abe seeks to bolster the economy without abandoning targets for improving fiscal health. The measures are part of what Abe referred to in a speech last week as a 28 trillion yen stimulus package. Faltering stock markets also caused investors to shun riskier assets in favor of havens such as the yen.

The yen appreciated 0.7 percent to 101.70 per dollar at 10:33 a.m. in London. It touched 101.46 per dollar earlier, the strongest level since July 11.

“The acknowledgment is that the fact the fiscal package is not going to be the panacea to the ills of Japan in terms of emerging from deflation.” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “We are seeing risk appetite moving sharply on the defensive and accordingly we are seeing a flight to safety which will invariably favor a lower dollar-yen.”

The currency jumped last week as the Bank of Japan enlarged a program of buying exchange-traded funds, while keeping its negative interest rate unchanged and avoiding an increase in raising the target for the monetary base. “The headlines were 28 trillion yen, but the actual new spending will only be a quarter of that,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “So another sign following Friday’s BOJ decision, policy makers aren’t beating expectations.”

Shifting to Europe, Commerzbank AG led Europe’s banking shares lower as Germany’s second-largest lender tumbled 8% after it scrapped its profit target for this year and forecast a drop in earnings.  In Italy, UniCredit plunged 5.4% following yesterday’s 9.4% drop, and was again halted as Il Messaggero reported that the lender
may consider a capital increase of as much as 8 billion euros.

“There doesn’t seem to be much confidence for banks making profit in this low-cost environment,” said Guillermo Hernandez Sampere, the head of trading at MPPM EK. “Oil prices were one of the main subjects in Q1 and now it’s back, but the situation hasn’t changed. There’s still too much being produced by the large oil countries.”

The MSCI All-Country World Index fell 0.3% in early trading, while the Stoxx Europe 600 Index slipped 1 percent. Royal Dutch Shell Plc lost 2 percent, pulling crude producers lower. Metro AG dropped 6.9 percent after reporting third-quarter sales and profit that missed estimates because of swings in currencies. Deutsche Lufthansa AG declined 2.6 percent after saying that average ticket prices fell in the second quarter due to a combination of lower demand stemming from terrorist attacks and excess capacity across the airline industry. S&P 500 futures dropped 0.2%, signaling U.S. equities will extend losses into a second day after erasing gains in late trading Monday, while the Dow’s losing streak – 6 days in a row as of yesterday –  in over a year may continue

Oil stayed near $40 a barrel, after a slide that pushed it into a bear market on Monday. West Texas Intermediate crude was 0.2 percent higher at $40.13 a barrel after sliding to its lowest settlement price since April 18 on Monday. Futures have retreated 22 percent from a peak reached in June, meeting the common definition of a bear market.

On today’s docket, investors will look to economic data which includes releases on personal income and spending forecast to show continued expansion for June. Earnings will also be in focus, with companies including Pfizer Inc. and American International Group Inc. posting results. About 57 percent of S&P 500 members that have reported so far beat sales projections, while 80 percent topped profit forecasts. Analysts estimate profit at S&P 500 companies fell 3.2 percent in the second quarter.

Market Snapshot

  • S&P 500 futures down 0.3% to 2159
  • Stoxx 600 down 1.2% to 336
  • FTSE 100 down 0.8% to 6642
  • DAX down 1.4% to 10186
  • German 10Yr yield up 3bps to -0.07%
  • Italian 10Yr yield up 2bps to 1.2%
  • Spanish 10Yr yield up 3bps to 1.05%
  • S&P GSCI Index up 0.2% to 333.2
  • MSCI Asia Pacific down 0.7% to 136
  • Nikkei 225 down 1.5% to 16391
  • Hang Seng closed amid typhoon
  • Shanghai Composite up 0.6% to 2971
  • S&P/ASX 200 down 0.8% to 5541
  • US 10-yr yield up less than 1bp to 1.53%
  • Dollar Index down 0.31% to 95.42
  • WTI Crude futures up 0.1% to $40.12
  • Brent Futures up 0.2% to $42.24
  • Gold spot up 0.5% to $1,360
  • Silver spot up 0.7% to $20.58

Top Global News

  • Australia Cuts Rates to Record Low to Spur Inflation, Jobs
  • Carney Quantifies Gloom With BOE Stimulus Debate at Crunch Point
  • Infineon Drops After Earnings Disappoint on Smartphone Weakness
  • Treasuries drop in overnight trading, global equities mostly lower and commodities rally as Australia’s central bank cuts rate to record low 1.5% and 10-year JGB auction drew widest tail since March 2015.
  • Japan’s government announced 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year, as Prime Minister Shinzo Abe seeks to bolster the economy without abandoning targets for improving fiscal health
  • The Bank of Japan is unlikely to wind back its record monetary stimulus after completing a review of its policy, Governor Haruhiko Kuroda said
  • Six weeks after Britain’s vote to leave the European Union sent shock waves across the nation, on Thursday the Bank of England governor will present a detailed assessment of what it means for the economy as well as his plan of action
  • Euro-denominated investment-grade notes had their biggest monthly returns in four years in July as the ECB bought more and more corporate and sovereign bonds and drove yields lower
  • Around the world, governments are planning fresh spending to boost growth and support wages, heeding the advice of those who have argued that economies need the jolt as society ages and productivity sags
  • Investors managing $163 billion are throwing their weight behind what BlackRock Inc. dubbed the “great migration’’ to emerging-market debt in search of antidotes to the near-zero yields offered by their staple assets
  • Saudi Arabia may be embarking on a new phase in its efforts to stave off the worst of a cash crunch among its banks as its central bank offered domestic lenders about 15 billion riyals ($4 billion) in short-term loans
  • Fed’s Kaplan stated in speech this morning, “In light of the decline in the neutral rate, using monetary policy to help manage the economy has become more challenging”

* * *

Looking at regional markets in detail, Asia traded mostly lower amid initial cautiousness ahead of the RBA rate decision and following the weakness seen in Wall St., where declines in energy to bear market territory and discouraging data dampened sentiment. This saw Nikkei 225 (-1.5%) underperformed as participants awaited Japan’s stimulus announcement which was expected to be around JPY 28TN (later confirmed), which some analysts feel may not be enough to have a sustained impact. ASX 200 (-0.8%) traded subdued with a widely expected RBA rate cut failing to provide counterbalance the commodities led weakness. Shanghai Comp (+0.6%) saw indecisive amid mixed earnings, while Hong Kong markets remained closed due to a typhoon. 10yr JGBs continued to feel the repercussions from last week’s BoJ disappointment with prices down nearly a point while a poor 10yr auction, which saw the b/c and lowest accepted price decline from prior and a wider tail-in-price, further exacerbated losses in the paper.

Top Asian News

  • World Equity Traders Flip Switch From Hate to Love for China
  • Hong Kong Closes Stock Market Amid Typhoon
  • Australia Cuts Rates to Record Low to Spur Inflation, Jobs
  • Honda Profit Exceeds Estimates as Sales Climb in U.S., China
  • Nintendo Benefits From Pokemon Go Halo as 3DS Game Sales Double
  • China Said to Consider Merging Xinxing Cathay, First Heavy
  • Uber Said to Plan Boosting Resources for Southeast Asia, India
  • Noble Group Sinks in Singapore, Triggering Query From Exchange

European equities have slipped this morning with sentiment dampened by fears over the banking sector, in particular, the concerns surrounding Italian banks NPLs. As such, shares in UniCredit had been halted having fallen over 5% after reports suggest that the bank is considering raising EUR 7-8bIn worth of capital. While Monte Paschi (-8.1%) shares yet again underperform as some investors doubt the viability of a bail out for the bank. Elsewhere, the slew of poor earnings from the European banking sector continues, with Commerzbank (-8.2%) the latest bank to announce that profits have been hampered by the low interest rate environment. Furthermore, UK banking names are also feeling the squeeze amid an extension to the PPI deadline to 2019 (2018 was the originally planned date) and the UK property sector has also been hampered by the latest UK construction PMI, which although beat expectations, revealed the steepest fall in commercial building for over 6.5yrs. Another contribution to the downside in EU bourses has been the declines observed in the oil complex with WTI crude futures breaking back below USD 40. Moreover, fixed income markets were initially pressured most notably stemming from the pickup in JGB yields which rose for a 4th consecutive session after last Friday’s disappointment from the BoJ and a tepid reception to the latest Japanese stimulus package. Furthermore, a disappointing 10yr JGB auction also acted as a drag on prices with UK investors also concerned ahead of the UK DMO’s 2022 auction which was said to be one of their more illiquid offerings by the debt agency. However, Gilts saw a move higher in the wake of the auction which drew an impressive b/c of 2.28. Additionally, despite the initial downside, Bunds have recouped some losses after finding support at the 167.00 level allied with the softness across the oil complex.

Top European News

  • BMW Pledges to Stay Atop Luxury-Car Market as Sales Lag Mercedes
  • Metro Sales, Profit Miss Estimates on Currency and Costs
  • Commerzbank Scraps Full-Year Target, Sees Decline in Profit
  • Infineon Drops After Earnings Disappoint on Smartphone Weakness
  • Lufthansa Sees Difficult Second Half as Terrorism Damps Demand
  • Top Airbus A320neo Buyer IndiGo Considers Slowing Deliveries
  • U.K.’s May Wants ‘Economy Firing’ in Post-Brexit Industrial Plan

In FX, the yen jumped 0.7 percent to 101.61 per dollar as the government announced 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year, accounting for about a quarter of the total amount Prime Minister Shinzo Abe flagged in a speech last week. “The market is buying the rumor and selling the fact, so the yen has rallied after the headlines,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. The announcement was another sign, after the central bank’s meeting last week, that officials are failing to beat expectations, he said. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 peers, fell for the fifth time in six days. The Australian dollar advanced 0.4 percent to 75.48 U.S. cents, reversing earlier declines. While Australia’s economy has grown faster than the central bank predicted, core inflation and wage growth are both at record lows. The MSCI Emerging Markets Currency Index retreated 0.1 percent a day after it reached its highest level since July 2015. Malaysia’s ringgit led declines, weakening 0.8 percent, the most since July 18. The country loses 450 million ringgit ($111 million) in annual income for every $1 drop in oil and the nation derives about a fifth of its revenue from energy-related sources, according to government data. South Africa’s rand and Mexico’s peso both dropped 0.5 percent.
 
In commodities, West Texas Intermediate crude was 0.2 percent higher at $40.13 a barrel after sliding to its lowest settlement price since April 18 on Monday. Futures have retreated 22 percent from a peak reached in June, meeting the common definition of a bear market. While American crude and gasoline inventories are forecast to have declined last week, they’ll likely remain around the highest seasonal level in at least two decades. Nigeria has also resumed payments to former militants as the government seeks to establish a cease-fire after attacks cut the country’s oil output to the least since 1989. Factions in Libya have reached a deal to re-open oil terminals. Gold headed for its longest stretch of gains since early July, advancing 0.4 percent to $1,366.33 an ounce. Copper advanced 0.3 percent, while aluminum gained 0.1 percent and nickel rallied 0.8 percent.

Looking at today’s calendar it’s a fairly quiet start to the day this morning with Euro area PPI for the June the sole release. In the US we’ll get the core PCE and deflator readings for June along with the personal income and spending report. There shouldn’t be too much in this report because the figures were already incorporated into the Q2 GDP report on Friday. We’ll also get the ISM NY reading, while later it’s worth keeping an eye on the July vehicle sales data. Our US economists note that these should rise but only incrementally compared to June. In the past the trend in vehicle sales has tended to lead the trend in overall consumer spending and so if vehicles sales continue to moderate, it would provide early evidence that we have likely seen the peak in consumption growth for the cycle. One to keep an eye on. Away from the data the Fed’s Kaplan is due to speak again while earnings will also be back in the limelight. Today 40 S&P 500 companies report, including Pfizer and Procter & Gamble (both prior to the open).

* * *

Bulletin Headline Summary From RanSquawk and Bloomberg

  • European equities trade lower across the board as financial names continue to be pressured amid concerns around the Italian banking sector and soft Commerzbank earnings
  • Elsewhere, Japanese Prime Minister Abe’s cabinet have now approved the JPY 28tr1 stimulus package and the RBA cut rates by 25bps as expected
  • Looking ahead, highlights include US Consumer Spending, PCE Deflator, API Crude Oil Inventories, earnings from BMW, AIG, P&G and Pfizer

US Event Calendar

  • 6:15am: Fed’s Kaplan speaks in Beijing
  • 8:30am: Personal Income, June, est. 0.3% (prior 0.2%)
  • 8:55am: Redbook weekly sales
  • 9:45am: ISM New York, July (prior 45.4)
  • TBA: Wards Domestic Vehicle Sales, July, est. 13.06m (prior 12.76m)
  • 4:30pm: API weekly oil inventories

DB’s Jim Reid concludes the overnight wrap

The first day of August didn’t bring much joy to markets yesterday as another steep leg lower for Oil – which has been wobbling in the background for a while now – largely dictated the weaker sentiment. Yesterday WTI tumbled -3.70% and at one stage dipped below $40/bbl before steadying to finish a shade above that by the close. You have to go back to late April to find the last time Oil went below $40/bbl. It now means that since touching an intraday high of $51.67/bbl on June 8th, Oil has slid an impressive -22.25% after accounting for the very modest bounce back (+0.32%) this morning. The weekend news that Libya had provisionally reached a deal to reopen three eastern ports appeared to be the main culprit of the latest leg lower, while Saudi Aramco also announced that it had cut its export prices into Asia by the most in 10 months.

Equity markets started the new month on the back foot as a result, although declines in US markets were fairly modest as tech and healthcare names stood firm. The S&P 500 closed -0.13% with the energy component down over -3% although the index did actually briefly reach a new record high early in the session. European equities were weaker. The Stoxx 600 fell -0.59% and the Italian FTSE MIB was down a steep -1.73%. As you’ll see below much of that had to do with Banks. Meanwhile the US CDX HY index was 15bps wider reflecting that energy weakness. The index is now at the widest level since July 7th.
Meanwhile, we wondered in yesterday’s EMR how long the relief rally in European bank equities would last after the results of the stress tests given that profitability concerns are no nearer to being addressed. The answer was 6 minutes as an immediate +1.27% rally in the Euro Stoxx 600 banks index reversed not long after the open and ended the day closing -1.79% lower. In fact of the 48 banks in the index, just 6 finished up on the day and it was peripherals in particular that underperformed with the likes of Unicredit (-9.40%), Bank of Ireland (-6.49%), Banco Popolare di Milano (-6.22%) and UBI (-6.20%) sharply lower. While some of this may reflect the general level of scepticism over Friday’s stress tests it’s likely that the weakness in Italian banks in particular may be down to renewed fears that more recaps are needed in the sector.

Financials credit did however hold in much better. While the iTraxx senior fins index ended up 1bp wider, the iTraxx sub-financials index was actually 2bps tighter on the day. In fact a quick glance at some of the AT1 cash bonds suggests that the asset class outperformed (Unicredit, Intesa, Lloyds and Barclays as examples were all up 1pt or so). This is probably a reflection of the comfort over capital levels in banks (current and that some will be forced higher) after the stress tests.

Looking at banks on the other side of the pond, last night we saw the latest quarterly Fed senior loan officer survey. We always look to the corporate and industrial (C&I) number as it’s well correlated with future corporate defaults. The results showed the fourth quarter of net tightening even if the figure of 8.5 was improved on the 11.6 seen last quarter. In the 26 year history of the survey we’ve never seen two or more successive quarters of net tightening without it eventually leading to a recession. It’s quite a cyclical series. However the amount of net tightening seen so far is still mild relative to recessionary levels. The bulls would argue that the oil and gas sector has been the main negative driver. However losses in one or two sectors can cause banks to tighten the spigots elsewhere so it’s still relevant.
Staying with credit, yesterday saw the latest weekly ECB CSPP numbers (as of 29 July 2016) and they’ve continued to make impressive progress considering the time of year even if last week did mark the second successive week of sub €300m daily purchases. They settled €1.365bn last week to leave the grand total at €13.214bn. This implies €273m of daily purchases last week against the average run rate of €367m since early June.

The monthly report is also out and it shows that 94.1% of the total now is from secondary with only 5.9% from primary. The number for July showed a slightly higher 7.8% from primary. Whilst we’ve been pretty bullish on the likely impact of the ECB on spreads it’s fair to say that they will likely need to up the amount of primary they buy as the year progresses if they want to hit their targets. Secondary will get harder and harder once all the loose bonds are bought.

Changing tack now and switching over to Asia where markets are eagerly awaiting the latest out of Japan and specifically the confirmation and details from the Government of PM Abe’s fiscal stimulus plan. As we type there’s still no word yet, with the Nikkei (-0.68%) and Topix (-0.78%) both in the red owing largely to the weakness stemming from the move in oil. The Yen is 0.20% weaker while JGB yields continue to march higher. The 10y is currently 8bps higher. Elsewhere bourses in China are little changed and the Kospi (-0.45%) and ASX (-0.41%) are also slightly lower. The Hang Seng index is closed following a typhoon warning. Also in focus this morning is the RBA which as expected cut the cash rate by 25bps to a record 1.5%. The Aussie Dollar (-0.25%) is a touch softer post the news.

Moving on. Yesterday’s economic data didn’t move the dial all that much. Firstly we got confirmation of the final July manufacturing PMI’s. The Euro area reading was revised up 0.1pts to 52.0 helped by an upward revision to Germany. Notable was the further downgrading of the UK data to 48.2 (from 49.1). The wider periphery was also weaker last month. Indeed the PMI for Italy declined 2.3pts to 51.2 (vs. 52.5 expected) while Spain fell 1.2pts to 51.0 (vs. 51.5 expected). In the US the final manufacturing PMI was unrevised at 52.9 which represents a 1.6pt rise from June. Meanwhile the ISM manufacturing last month fell 0.6pts to 52.6 (vs. 53.0 expected). New orders were little changed at 56.9 while production rose (+0.7pts to 55.4) however the employment component did fall back below 50 to 49.4 (from 50.4) which is notable ahead of Friday’s employment report. The other data yesterday was a much softer than expected construction spending print for June (-0.6% mom vs. +0.5% expected).

Interestingly despite the fairly underwhelming data and leg lower for Oil, the US Dollar was a smidgen higher yesterday while US Treasury yields rose and are back to more or less pre-GDP report levels. Indeed 10y yields rose 6.8bps yesterday and much of that appeared to be attributed to comments from the NY Fed’s Dudley. Notable given his influence as a more dovish member of the committee and who’s views are seen as aligning with those of Yellen, Dudley said that while ‘directionally, the movement in investor expectations towards a flatter path for US short term interest rates seems broadly appropriate’, it is however ‘premature to rule out further monetary policy tightening this year’. He went on to add that should the incoming data validate his view of the outlook, then US monetary policy would need to move at a faster pace than implied by futures markets. Dallas Fed President Kaplan (moderately hawkish) also spoke yesterday although his comments didn’t offer a whole lot of new info. Kaplan said that September is ‘very much on the table’ but that we’ll have to see how events unfold.

Before we jump into the day ahead, earnings took a bit of a back seat yesterday given the fairly quiet calendar, however that gives us a good chance to take stock of where we’re up to now. Based on Friday’s close we’ve now had 316 S&P 500 companies report with 63% beating on EPS with a weighted average beat of 2.4% (20% have missed). On the sales side, 34% have beat with a weighted average beat of 0.9% and 29% have missed, with the remainder in line. Despite the earnings beats, EPS YoY growth is now -2.2% for the index, although that jumps to +2.8% ex-energy. Sales YoY growth is -0.6% and +2.8% ex-energy. We’re still seeing the same pattern of analyst EPS cuts during the quarter prior to reporting however. While it’s not quite to the same extent as Q1 (c.-9%) or the 5y average (c.-4.2%), earnings have still been cut c.-3% this quarter which is aiding the beat ratio. We highlight that this data is based off DB’s David Bianco’s US equity insights publication and he also adds that analysts are continuing to cut Q3’16 EPS during this quarter. Indeed bottom up consensus EPS for next quarter is $30.40, down from $30.85 seen on 1st of June.

Looking at today’s calendar it’s a fairly quiet start to the day this morning with Euro area PPI for the June the sole release. Over in the US this afternoon we’ll get the core PCE and deflator readings for June along with the personal income and spending report. There shouldn’t be too much in this report because the figures were already incorporated into the Q2 GDP report on Friday. We’ll also get the ISM NY reading, while later this evening it’s worth keeping an eye on the July vehicle sales data. Our US economists note that these should rise but only incrementally compared to June. In the past the trend in vehicle sales has tended to lead the trend in overall consumer spending and so if vehicles sales continue to moderate, it would provide early evidence that we have likely seen the peak in consumption growth for the cycle. One to keep an eye on. Away from the data the Fed’s Kaplan is due to speak again (11.15am BST) while earnings will also be back in the limelight. Today we’ve 40 S&P 500 companies reporting including Pfizer and Procter & Gamble (both prior to the open). In Europe BMW is due to report.

Dear Job Market, Take This Indicator & Shove It!

0
0

Authored by Danielle DiMartino Booth,

Some songs are just destined to be belted out while speeding down an open highway with the all the windows down, your hair whipping in the wind and the dust flying. Donald Eugene Lytle, aka, Johnny Paycheck, delivered one in spades with his catchy, purposely grammatically incorrect rendition of David Allan Coe’s working man’s anthem. The song, Take this Job and Shove It, which has earned cult status in the Honky Tonk hall of fame proved to be the only number one hit of Paycheck’s career.

Ironically, Paycheck didn’t change his name to fit the song; that happened 13 years earlier when he borrowed it from a top-ranked Chicago boxer whose claim to fame was his 1940 fight against Joe Lewis for the heavyweight title.

Very few of us have escaped those lyrics invading our mind from time to time. You might have been slopping sauce on one more pizza, bagging yet another bag of leaves on someone else’s lawn or plugging away at a spreadsheet for which you’d never get credit – all for meagre pay. Whatever the thankless task, you sure would have relished unleashing those words to your boss’ face. Just take this job and shove it!

The 1977 hit was so popular it went on to inspire a not so popular 1981 movie. Alas the movie of the of the same name, billed as “The comedy for everyone who’s had it up to here…” fell flat at the box office. It was the timing that was all wrong. A movie with a “job shoving” theme was unseemly considering the economy was veering headlong into a double-dip recession. The worker bees of the economy were understandably unamused by the idea of brazenly quitting their jobs.

Today, in 2016, it’s looking more and more like Janet Yellen is less than amused with her own greatest hit, The Labor Market Conditions Index. She conceived this alternative measure of the job market and debuted it to much fanfare in an August 22, 2014 speech at the Shangri La of economic confabs in Jackson Hole, Wyoming.

With that, a whole new cottage industry was born. Two gauges measuring the state of the job market, nonfarm payrolls and the official unemployment rate, ballooned into 19. Joy for the economist community in the form of 17 new raison d’etres!

How have things worked out since then?

Appreciating the historic context is an essential first step to answering that question. At its December 2012 meeting, with unemployment at 7.8 percent, the Federal Open Market Committee announced its first ever unemployment rate target of 6.5 percent. Fed economists projected that this bogey would not be reached until the end of 2015. At that point, they anticipated the rate would be inside a 6.0-6.6-percent range.

One voter in the FOMC room begged to differ. Richmond President Jeffrey Lacker dissented, recognizing the folly of the quantitative commitment. The Fed was effectively boxing itself in as financial markets would price in a rate hike the minute the threshold was visible on the horizon.

As if wearing blinders, then-Chairman Ben Bernanke predicted that the target would act, “as an automatic stabilizer,” with the added qualifier that the new policy, “by no means puts monetary policy on autopilot.”

Of course, that’s just not the way financial markets work. They are forward-looking beasts precisely because they set prices based on the inputs provided.

Hence the Fed’s panicked emergency videoconference meeting on March 4, 2014 on the heels of that year’s April jobs report, which revealed a steady unemployment rate of 6.7 percent. The markets’ conclusion: A June rate hike was imminent, a full year and a half before Bernanke had any intention of tightening policy.

Though still the subject of furious debate, the missing link from Fed economists’ models was the permanence of the decline in the labor force participation rate fed by the 2009 introduction of 99 weeks of unemployment insurance. Needless to say, politicians clamoring for easy votes extended these extraordinary benefits time and again.

By the end of 2013, 99 weeks had become all too ordinary. Millions of workers had simply dropped out, disincentivized by design. Because the unemployment rate is calculated against the number of people in the labor force, it declined much more rapidly than historic precedent suggested it would.

And so, with mis-measured inflation still too low for comfort (another full blown story for another day), policymakers backtracked on their commitment. The March 2014 FOMC meeting minutes attempted to explain: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The schizophrenic behavior did nothing to bolster the Fed’s credibility. To counter perceptions, the Fed, under the new leadership of labor economist Yellen, came up with yet another model. As she illustrated in great detail at that year’s Jackson Hole gathering, the LMCI would better measure the slack in the labor market without unduly “rewarding” the decline in the labor force participation rate which cast the low unemployment in too positive a light.

“Assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty,” Yellen said, reminding the audience that in 2012 the Fed had caveated that, “factors determining maximum employment ‘may change over time and may not be directly measurable.’”

More variables, more math, more clarity? Not hardly. OK – that was a pretty extensive history lesson. But sometimes the setup is key to understanding the outcome.

Once again, the markets are heavily anticipating Yellen’s 2016 Jackson Hole speech. Will she posit that the LMCI was flawed at inception to now justify a rate hike? Her baby, so to speak, has been wailing for six straight months, the longest slide since the end of the 2009 recession.

At this year’s June 15th press conference, Yellen once again highlighted the importance of the context of the current backdrop, which has apparently rendered the LMCI, “a kind of experimental research product.” Is it any wonder the media characterized her remarks as “bipolar”?

The question is, what went wrong, if anything?

The nature of the LMCI’s components is a good starting point. As a recent Goldman Sachs report detailed, “The LMCI inputs are detrended, and the estimated trends likely ‘soak up’ some of the growth in labor market activity (such that only growth in excess of the trend contributes positively).” Yours truly added the emphasis as this ‘detrending’ is key to explaining away the alarm emanating from the LMCI.

The Goldman report goes on to say that labor market indicators tend to level off in the middle of an economic cycle even as trends continue on their established pathways, driven by momentum: “The LMCI in effect reflects a combination of the rate of change in labor market conditions – the first difference – as well as recent acceleration or deceleration – the second difference.”

Did someone mention ‘Nuanced” with a capital ‘N’?

And then there are the actual inputs. The index’s 19 indicators endeavor to capture movements not just in job creation, but underemployment, wages, worker flows and both consumer and business surveys. A few examples help to illustrate.

The National Federation of Independent Businesses queries small businesses on their hiring plans and whether it is hard to fill open positions. So fairly straight forward, forward-looking indicators.

Then you have temporary employment, which once provided a reliable signal on the direction of nonfarm payrolls to come. But temps have lost some of their predictive powers in a world increasingly dominated by firms cutting costs where they can, even if it entails classifying near-permanent employees as temporary to reduce benefit expenses.

The same goes for new help-wanted ads, which have been trending down for a year now. Not to worry, says the Fed itself, whose economists recently debunked fresh postings as unreliable given Craigslist’s near doubling of fees since the end of 2012. The rising costs associated with advertising thus distills the message in the mere four percent rise in postings through yearend 2015 in the help wanted data vs. the 48 percent rise in the job openings data series. We’re supposed to file that one in the “If you say so” file.

Finally, you have the distinct ‘job leavers unemployed for less than five weeks,’ which is buried in the household survey, and the now-beloved ‘quit rate’ from the monthly job openings data. Workers having the hutzpah to tell their employers where they can put their cruddy job is measured by the quit rate. When the rate rises, it tends to coincide with a high degree of confidence that you can storm out one door and waltz into another in a short timeframe. So a rise in unemployed for less than five weeks is thus a good thing reflecting workers’ certainty about the job market’s prospects.

While the unemployed-for-less-than-five-weeks metric has held up of late, the quits rate has fallen. So call this a wash for the moment. In addition, net hiring plans have come off their highs, concomitant with the decline in the number of job openings. These data are released with varying degrees of lag, which can be frustrating for the impatient type who’d prefer to not be sideswiped by a data miss.

That brings us to perhaps the best indicator of what’s to come, which cannot be explained away, though it too comes from help wanted ads. You may recognize the name Jonathan Basile, AIG’s Head of Business Cycle Research. As his pragmatic title suggests, he is duty bound to have a crystal clear crystal ball.

Let’s just say we should all adopt one of his favorite indicators on the labor front, the reposting of job positions. Just about every anecdote we’ve heard in recent years has touched on the dearth of skilled labor. As that slack was absorbed, it became increasingly difficult to source good talent. What to do if you can’t fill a position? Well, you repost it until it does get filled. That way you succeed in achieving your original goal of growing that top line by satisfying the incremental demand that triggered the need for a new hire in the first place.

You see where this is going. If you no longer need to repost that position while the hiring rate is falling…well you get the picture, a picture that’s come into increasing focus since repostings peaked last November.

“When companies stop reposting help wanted ads, it means they’ve given up on adding additional headcount,” Basile said. “It’s a more cautious signal about the outlook. It means their balance sheets can’t handle the additional labor costs. This is what happens when revenue and earnings headwinds bleed into the labor-intensive parts of the economy, like construction and services.”

 

Revenues? Earnings? Those certainly don’t sound like economic data points. They sound so much more real.

 

“Labor sits at the intersection of revenues and earnings because it is the biggest cost on corporate balance sheets,” Basile continued. “Many sell-side nonfarm payroll (NFP) models show labor begetting labor – labor data used as inputs to generate NFP as the output. But in business, balance sheets beget labor. You increase or decrease your headcount based on what your revenues and earnings do, the source that pays for labor. How is this left out of the equation?”

Great question. The conclusion: the earnings recession we’ve been told to ignore is, after all, relevant. Get it, got it, good.

You will recall that the bright spot in the awful GDP report was consumption. Hate to go out on any limbs here, but it’s pretty hard to consume if you don’t have a job.

“All it takes is another shock to tip this one-legged pirate of an economy over,” Basile worries. “That’s why I’m on 100% watch.”

We should probably all be watching Yellen’s math as she shoves the jobs data around until it’s contorted enough to fit her agenda’s perfect picture frame. Not so perfect are the prospects for those ungainfully employed who are apparently a figment of our collective imagination. They can only dream of a world where jobs are plentiful enough to not-so-respectfully request their employer take their job and shove it.

Musical Chairs

0
0

 

 

 

 

Musical Chairs
Posted with permission and written by Jeff Thomas (CLICK HERE FOR ORIGINAL)

 


 

You’re familiar with the children’s game of musical chairs. Ten children walk around nine chairs whilst listening to music. When the music stops, each must quickly find a chair and sit in it. One child is out of luck and is out of the game. Then a chair is removed and the nine remaining children walk around the eight remaining chairs, waiting for the music to stop again.

 

Economics is a bit like musical chairs. In a recession, the economy takes a hit and there are some casualties. Some players fail to get a chair in time and are out of the game. The game then goes on without them. The economy eventually recovers.

 

But a depression is a different game entirely. Since 2007, the world has been in an unacknowledged depression. A depression is like a game of musical chairs in which ten children are walking around, but suddenly nine of the chairs are taken away. This means that nine of the children will soon be out of the game. But it also means that all ten understand that the odds of them remaining in the game are quite slim and that desperate times call for desperate measures. It’s time to toss out the rule book and do whatever you have to, to get the one remaining chair.

 

Of course, the pundits officially deny that we have even been in a depression. They regularly describe the world as “in recovery from the 2008-2010 recession,” but the “shovel-ready jobs” that are “on the way” never quite materialize. The “green shoots” never seem to blossom. So, what’s going on here?

 

Depressions do not occur all at once. It takes time for them to bottom and, if an economy is propped up through economic heroin (debt) the Big Crash can be a long time in coming.

 

In that regard, this one is one for the record books. As Doug Casey is fond of saying, a depression is like a hurricane. First there are the initial crashes, then a calm as the eye of the hurricane passes over, then, we enter the trailing edge of the other side of the hurricane. This is the time when things really get rough – when even the politicians will start using the dreaded “D” word. We have entered that final stage, as the economic symptoms demonstrate, and this is the time when the game of musical chairs will evolve into something quite a bit nastier.

 

In normal economic times, even including recession periods, we observe financial institutions maintaining their staunchly conservative image. For the most part, they deliver as promised. But, as we move into the trailing edge of the second half of the hurricane, we notice more and more that the bankers are rewriting the rule book in order to take possession of the wealth that they previously held in trust for their depositors.

 

And they don’t do this in isolation. They do it with the aid of the governments of the day. New laws are written in advance of the crisis period to assure that the banks can plunder the deposits with impunity. Since 2010, such laws have been passed in the EU, the US, Canada and other jurisdictions.

 

Trial balloons have been sent up to ascertain to what degree they will get away with their freezes and confiscations. Greece has been an excellent trial balloon for the freezes and Cyprus has done the same for the confiscations. The world is now as ready as it’s going to be for the game to be played on an international level.

 

So what will it look like, this game of musical chairs on steroids? Well, first we’ll see the sudden crashes of markets and/or defaults on debts. Shortly thereafter, one Monday morning (or more likely one Tuesday after a long weekend) the financial institutions will fail to open their doors. The media will announce a “temporary state of emergency” during which the governments and banks must resolve some difficulties in order to “assure a continued sound economy.” Until that time, the banks will either remain shut, or will process only small transactions. (This latter announcement is a nice way of saying that the depositors will be on an allowance from the bank until further notice.)

 

Much as Greeks may now withdraw €420 per week, much of the rest of the world will be operated under a similar allowance. What about a business that would need to pay that amount for even one salary? What of a restaurant that would pay that amount for even a small food delivery? That remains to be seen – but business will not be robust.


Of one thing we can be sure. The banks will part with no more than they absolutely have to in order to avoid riots. Their wish will be to confiscate as much as possible themselves, and the new laws allow them to do just that.


And that’s when we’ll discover that nine chairs have disappeared.


Remember, what we’re looking at is the end-game. The banks will no longer maintain the ruse of client-concern beyond this point. Each player grabs as much as he is able, because banking as we know it will come to an end.


To be sure, a new banking system will rise from the ashes in a few years, but for now, the wealth that’s on the table will be swept up by those who have the laws on their side.


Many of the most august names in banking may well disappear over the next few years. Some institutions folded in 2008, but re-opened under new names (minus the debt that sank them in the first place). Others, like Bear-Stearns and Lehman Brothers are gone for good. They will be joined by a host of other stalwarts of the industry. Merrill Lynch, AIG, Royal Bank of Scotland, Fortis, Fannie Mae and Freddie Mac all teetered on the edge of collapse in 2008. These and many more stand to go off the cliff in the coming crisis.


And they will not go with dignity. They will go out with a last-minute grab of as much of the deposits as they can manage. (Those who have taken part in a bank liquidation will know that, what little the departing bankers leave behind on the table, the liquidators gobble up in fees. Depositors, at best, get the scraps.)


Well. Pretty grim. If history repeats, as it generally does, more than 95% of depositors will lose most or all of their savings. But there will be those who are only impacted in a minor way – those who decided to get their wealth (no matter how large or small) out of the banks before the crash.


How so? First, and most essential, remove all your wealth (except for a maximum of three months’ operating capital) from the bank. Second, move it to a jurisdiction that’s at a lesser risk than the jurisdictions stated above. (Pick the healthiest one you can find, with the lowest taxation rate and a reputation for stable government over decades.) Third, since banks in other jurisdictions may also be at risk, place your wealth in those forms of ownership that are least likely to be under attack from your home government (precious metals and real estate). Overseas real estate is the safest bet, as any attempt for a foreign government to confiscate it amounts to an act of war. However, real estate is not the most liquid means of holding wealth, so quite a bit must be held in precious metals – again in the overseas jurisdiction where it’s harder to confiscate.


Should you need a sudden cash infusion at home, precious metals are always easy to sell quickly and the proceeds are easily repatriated (countries in economic trouble never complain about money coming in, only money going out.)


Finally, if possible, create an overseas location for yourself, either where your wealth is, or another location – one that’s likely to be peaceful to live in, when crisis reaches your home jurisdiction.


In this game, the odds of being the lucky one who gets the last chair are very slim. The alternative requires more preparation, but is, by far, the safer choice.

 

 

Please email with any questions about this article or precious metals HERE

 

 

 

 

 

Musical Chairs
Posted with permission and written by Jeff Thomas (CLICK HERE FOR ORIGINAL)

Musical Chairs

0
0

Submitted by Jeff Thomas via InternationalMan.com,

You’re familiar with the children’s game of musical chairs. Ten children walk around nine chairs whilst listening to music. When the music stops, each must quickly find a chair and sit in it. One child is out of luck and is out of the game. Then a chair is removed and the nine remaining children walk around the eight remaining chairs, waiting for the music to stop again.

Economics is a bit like musical chairs. In a recession, the economy takes a hit and there are some casualties. Some players fail to get a chair in time and are out of the game. The game then goes on without them. The economy eventually recovers.

But a depression is a different game entirely. Since 2007, the world has been in an unacknowledged depression. A depression is like a game of musical chairs in which ten children are walking around, but suddenly nine of the chairs are taken away. This means that nine of the children will soon be out of the game. But it also means that all ten understand that the odds of them remaining in the game are quite slim and that desperate times call for desperate measures. It’s time to toss out the rule book and do whatever you have to, to get the one remaining chair.

Of course, the pundits officially deny that we have even been in a depression. They regularly describe the world as “in recovery from the 2008–2010 recession,” but the “shovel-ready jobs” that are “on the way” never quite materialize. The “green shoots” never seem to blossom. So, what’s going on here?

Depressions do not occur all at once. It takes time for them to bottom and, if an economy is propped up through economic heroin (debt), the Big Crash can be a long time in coming.

In that regard, this one is one for the record books. As Doug Casey is fond of saying, a depression is like a hurricane. First there are the initial crashes, then a calm as the eye of the hurricane passes over, then, we enter the trailing edge of the other side of the hurricane. This is the time when things really get rough—when even the politicians will start using the dreaded “D” word. We have entered that final stage, as the economic symptoms demonstrate, and this is the time when the game of musical chairs will evolve into something quite a bit nastier.

In normal economic times, even including recession periods, we observe financial institutions maintaining their staunchly conservative image. For the most part, they deliver as promised. But, as we move into the trailing edge of the second half of the hurricane, we notice more and more that the bankers are rewriting the rule book in order to take possession of the wealth that they previously held in trust for their depositors.

And they don’t do this in isolation. They do it with the aid of the governments of the day. New laws are written in advance of the crisis period to assure that the banks can plunder the deposits with impunity. Since 2010, such laws have been passed in the EU, the US, Canada and other jurisdictions.

Trial balloons have been sent up to ascertain to what degree they will get away with their freezes and confiscations. Greece has been an excellent trial balloon for the freezes and Cyprus has done the same for the confiscations. The world is now as ready as it’s going to be for the game to be played on an international level.

So what will it look like, this game of musical chairs on steroids? Well, first we’ll see the sudden crashes of markets and/or defaults on debts. Shortly thereafter, one Monday morning (or more likely one Tuesday after a long weekend) the financial institutions will fail to open their doors. The media will announce a “temporary state of emergency” during which the governments and banks must resolve some difficulties in order to “assure a continued sound economy.” Until that time, the banks will either remain shut, or will process only small transactions. (This latter announcement is a nice way of saying that the depositors will be on an allowance from the bank until further notice.)

Just as Greeks may now withdraw €420 per week, much of the rest of the world will operate under a similar allowance. What about a business that would need to pay that amount for even one salary? What of a restaurant that would pay that amount for even a small food delivery? That remains to be seen—but business will not be robust.

Of one thing we can be sure. The banks will part with no more than they absolutely have to in order to avoid riots. Their wish will be to confiscate as much as possible themselves, and the new laws allow them to do just that.

And that’s when we’ll discover that nine chairs have disappeared.

Remember, what we’re looking at is the end-game. The banks will no longer maintain the ruse of client concern beyond this point. Each player grabs as much as he is able, because banking as we know it will come to an end.

To be sure, a new banking system will rise from the ashes in a few years, but for now, the wealth that’s on the table will be swept up by those who have the law on their side.

Many of the most august names in banking may well disappear over the next few years. Some institutions folded in 2008, but re-opened under new names (minus the debt that sank them in the first place). Others, like Bear Stearns and Lehman Brothers, are gone for good. They will be joined by a host of other stalwarts of the industry. Merrill Lynch, AIG, Royal Bank of Scotland, Fortis, Fannie Mae and Freddie Mac all teetered on the edge of collapse in 2008. These and many more stand to go off the cliff in the coming crisis.

And they will not go with dignity. They will go out with a last-minute grab of as much of the deposits as they can manage. (Those who have taken part in a bank liquidation will know that what little the departing bankers leave behind on the table, the liquidators gobble up in fees. Depositors, at best, get the scraps.)

Well. Pretty grim. If history repeats, as it generally does, more than 95% of depositors will lose most or all of their savings. But there will be those who are only impacted in a minor way—those who decided to get their wealth (no matter how large or small) out of the banks before the crash.

How so? First, and most essential, remove all your wealth (except for a maximum of three months’ operating capital) from the bank. Second, move it to a jurisdiction that’s at a lesser risk than the jurisdictions stated above. (Pick the healthiest one you can find, with the lowest taxation rate and a reputation for stable government over decades.) Third, since banks in other jurisdictions may also be at risk, place your wealth in those forms of ownership that are least likely to be under attack from your home government (precious metals and real estate). Overseas real estate is the safest bet, as any attempt by a foreign government to confiscate it amounts to an act of war. However, real estate is not the most liquid means of holding wealth, so quite a bit must be held in precious metals—again in the overseas jurisdiction where it’s harder to confiscate.

Should you need a sudden cash infusion at home, precious metals are always easy to sell quickly and the proceeds are easily repatriated (countries in economic trouble never complain about money coming in, only money going out.)

Finally, if possible, create an overseas location for yourself, either where your wealth is or another location—one that’s likely to be peaceful to live in, when crisis reaches your home jurisdiction.

In this game, the odds of being the lucky one who gets the last chair are very slim. The alternative requires more preparation, but is, by far, the safer choice.

Viewing all 117 articles
Browse latest View live


Latest Images