Month: August 2014

A year ago, when chatter began about China lifting its one-child policy, we explained the implications (and warned of excess exuberance). As Bloomberg reports, it appears China's anticipated baby boom is more of a bust. Nine months after stock-market wagers on a baby boom in China reached record levels, the bets have turned into some of the nation’s biggest losers as living costs deter couples from having more than one child – less than 3% of the 11 million Chinese couples eligible for another child applied for permission by the end of May, jeopardizing government efforts to bolster a population that the United Nations predicts will start shrinking by 2030.

 

As Bloomberg reports, relaxation of the one-child policy in the world’s most-populous nation is part of the government’s broadest expansion of economic freedoms since at least the 1990s.

At stake is China’s ability to avoid a demographic crisis as its population ages.

 

China’s fertility rate of 1.66 per woman compares with the 2.1 level needed to sustain population levels, according to the UN.

But the people didn't procreate…

Less than 3 percent of the 11 million Chinese couples eligible for another child applied for permission by the end of May, jeopardizing government efforts to bolster a population that the United Nations predicts will start shrinking by 2030.

Costs prohibitive – no matter how 'open' policy is…“The cost is a top consideration,” Sun, 32, said by phone. “My four-year-old daughter is heading to school and that will mean extra classes and higher spending. A nanny is too expensive so the grandparents look after her. They are approaching 70 and I don’t think they can handle a second child.”

A couple would need to spend 2.76 million yuan to support a child from birth to college in Beijing, according to China’s official Xinhua News Agency. The July 2013 report cited an informal survey and calculations suggesting that a husband and wife earning the average per-capita income would theoretically need to work for 23 years without eating and drinking to afford it.

 

Raising a child from birth through to 18 years of age costs about 23,000 yuan ($3,745) a year, according to Credit Suisse Group AG, equivalent to 43 percent of the average household income in China.

 

Average household income in China is about 53,118 yuan, according to the China Household Finance Survey compiled by the Southwestern University of Finance and Economics in Chengdu.

 

The confidence of couples in their ability to provide for a second child may also be waning as China’s economic growth slows, Asian Capital’s Wan said. Gross domestic product will probably expand 7.4 percent this year, the weakest pace since 1990, according to economist estimates compiled by Bloomberg.

 

“People tend to give birth to a second child when the macro-environment and property prices are more favorable and they have job security,” Wan said by phone on Aug. 8.

The unsurprisng conclusion…

“There was too much speculation about a baby boom,” Zhang Gang, a strategist at Central China Securities Co. in Shanghai, said by phone on Aug. 8. “Baby-related stocks still have room to fall further.”

*  *  *

Wait what? Speculators over-estimated the impact of a government policy? Whocouldanode?

“With a rapidly aging population and declining birth rate, even relaxing the birth-control act now won’t help reverse the trend anytime soon,” Hao Hong, a Hong Kong-based strategist at Bocom, said on Aug. 15. “China will be dealing with wage pressure soon.”

 

As Bloomberg reports, relaxation of the one-child policy in the world’s most-populous nation is part of the government’s broadest expansion of economic freedoms since at least the 1990s.

At stake is China’s ability to avoid a demographic crisis as its population ages.

 

China’s fertility rate of 1.66 per woman compares with the 2.1 level needed to sustain population levels, according to the UN.

But the people didn't procreate…

Less than 3 percent of the 11 million Chinese couples eligible for another child applied for permission by the end of May, jeopardizing government efforts to bolster a population that the United Nations predicts will start shrinking by 2030.

Costs prohibitive – no matter how 'open' policy is…“The cost is a top consideration,” Sun, 32, said by phone. “My four-year-old daughter is heading to school and that will mean extra classes and higher spending. A nanny is too expensive so the grandparents look after her. They are approaching 70 and I don’t think they can handle a second child.”

A couple would need to spend 2.76 million yuan to support a child from birth to college in Beijing, according to China’s official Xinhua News Agency. The July 2013 report cited an informal survey and calculations suggesting that a husband and wife earning the average per-capita income would theoretically need to work for 23 years without eating and drinking to afford it.

 

Raising a child from birth through to 18 years of age costs about 23,000 yuan ($3,745) a year, according to Credit Suisse Group AG, equivalent to 43 percent of the average household income in China.

 

Average household income in China is about 53,118 yuan, according to the China Household Finance Survey compiled by the Southwestern University of Finance and Economics in Chengdu.

 

The confidence of couples in their ability to provide for a second child may also be waning as China’s economic growth slows, Asian Capital’s Wan said. Gross domestic product will probably expand 7.4 percent this year, the weakest pace since 1990, according to economist estimates compiled by Bloomberg.

 

“People tend to give birth to a second child when the macro-environment and property prices are more favorable and they have job security,” Wan said by phone on Aug. 8.

The unsurprisng conclusion…

“There was too much speculation about a baby boom,” Zhang Gang, a strategist at Central China Securities Co. in Shanghai, said by phone on Aug. 8. “Baby-related stocks still have room to fall further.”

*  *  *

Wait what? Speculators over-estimated the impact of a government policy? Whocouldanode?

“With a rapidly aging population and declining birth rate, even relaxing the birth-control act now won’t help reverse the trend anytime soon,” Hao Hong, a Hong Kong-based strategist at Bocom, said on Aug. 15. “China will be dealing with wage pressure soon.”

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A "Yes" vote for Scottish independence represents a "high risk" event according to Citi's Michael Saunders. With the so-called 'neverendum' now less than a month away, Citi continues to highlight three particular concerns if Scotland does vote for independence: Scotland’s relatively weak fiscal position, Scotland’s large banking system and uncertainties over the currency arrangements of an independent Scotland. The Scottish Government seems to be seeking a policy of "sterlingisation" – which even their economic advisors judge "is not likely to be a long-term solution." For now a "no" vote is most likely, however, even if the Scottish referendum does not pass, the UK political landscape is likely to remain in a state of flux.

 

Via Citi,

The referendum on Scottish independence will be held on September 18 this year, with a simple Yes/No vote on the question “Should Scotland be an independent country?” A simple majority of eligible votes will suffice to win. All parties involved have agreed to accept the result as binding. In the event of a “yes” vote, there will be negotiations between the UK and Scottish governments over the details for Scotland’s independence, with any actual move to independence probably taking place during 2016-19.

The potential problems that might face Scotland if it becomes independent have come into sharper focus.

First, the relative weakness of Scotland’s fiscal position is clearer. We judged back in March that the fiscal deficit of an independent Scotland (as a share of GDP) would be 2-3 percent of GDP above the UK average in coming years. This reflects Scotland’s relatively high level of public spending per head and the diminishing offset from oil and gas tax revenues, which are trending down amidst falling output and rising production costs. Data since then highlight this issue. Profits (ie revenues less operating costs and capital costs) from oil and gas production in Scotland (including a geographic split of oil and gas) have fallen from £14.0bn in 2011 to £7.2bn in 2013.

 

 

In turn, Scotland’s aggregate tax revenues (including a geographic share of oil and gas tax revenues) fell by 2.1% in 2013 after a 2.0% drop in 2012, with oil and gas tax revenues down 37% YoY in 2013 after a 24% drop in 2012. Scotland’s oil and gas tax revenues in 2013 totaled just £4.4bn (3.0% of Scotland’s nominal GDP), down from £9.2bn in 2011 and the lowest as a share of Scotland’s nominal GDP since 1999. Aggregate UK receipts of Petroleum Revenue Tax fell a further 42% YoY in January-July this year, although data for receipts of oil-related Corporation Tax (which recently have been larger than PRT) are not yet available.

 

Second, the referendum campaign has not dispelled uncertainties over Scotland’s possible currency policy. The SNP’s stated aim is to seek a formal currency union with the rest of the UK, while taking over a proportion of the UK national debt (either the population or GDP share, it would make little difference).

 

However, the Conservatives, Labour and Lib Dems have all ruled out a currency union. This point has been strengthened by the recent report from the UK Parliament’s Scottish Affairs Committee, which concluded that “a currency union between the continuing UK and a separate Scotland would not work well for either country. Scotland would be tied to an exchange rate which became less and less suitable for its economy, and heavily constrained in its economic policy. Without a banking and fiscal union, and the political union which is essential to sustain it, such a currency union would be unstable.”

 

The SNP does seem to have a Plan B, which is an informal policy of “sterlingisation” — whereby an independent Scotland would unilaterally adopt sterling as its currency without a formal currency union with the UK — while not accepting any obligation for Scotland’s share of the UK national debt. As SNP leader Alex Salmond recently argued: “There is literally nothing anyone can do to stop an independent Scotland using sterling, which is an internationally tradeable currency… Assets and liabilities go hand in hand, and no one would expect Scotland to pick up a share of the debt if we were being denied a share of the assets.”

 

However, sterlingisation would have considerable disadvantages for Scotland in our view, in that an independent Scotland would have no say in the monetary policy of the rest of the UK (rUK). In addition, while the BoE does regular sterling operations with a wide range of banks in respect of their UK business, Scotland’s banking system would have no guaranteed access to a lender of last resort facility or provider of emergency liquidity. The BoE’s adoption of a formal mission statement (“Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability”) makes it clear that the BoE’s responsibilities are limited to the economic and financial stability of the UK. The BoE is not responsible for the monetary and financial stability of any country (including an independent Scotland) that is pursuing a sterlingisation policy (although it might have to offset the effects on the rUK of any Scottish-related instability).

 

The experience of EMU crisis countries in recent years – until Draghi’s “whatever it takes” commitment made it clear that the ECB would seek to ensure financial stability in the periphery – highlights the possible dangers that could face an independent Scotland pursuing sterlingisation. Indeed, the Scottish government’s own Fiscal Commission has suggested that sterlingisation is unlikely to be a durable framework: “International evidence suggests that informal monetary unions tend to be adopted by transition economies or small territories with a special relationsip with a larger trading partner (e.g. between the UK and Jersey, Guernsey and the Isle of Man). Advanced economies of a significant scale tend not to operate in such a monetary framework. Though an option in the short-term, it is not likely to be a long-term solution.”4 The National Institute recently reached the same conclusion, arguing that sterlingisation probably would not be viable for long, especially given Scotland’s large banking sector5. In our view, it is astonishing that the Scottish government, in seeking independence, has reached this stage without a clear plan for an issue as basic as its currency and monetary policy setup.

 

Third, there continue to be uncertainties over the large Scottish banking system, with assets in excess of 1000% (one thousand per cent) of Scotland’s annual GDP and including large businesses in the rest of the UK. If these businesses remain Scottish-based, then the potential costs if the Scottish government has to provide a bail-out or deposit guarantee insurance could threaten Scotland’s fiscal position. However, as the National Institute warns, regulatory pressures might force these banks to re-domicile to the UK: “the Prudential Regulatory Authority is likely to require a systemically important bank carrying out its business in sterling to be based in the UK… The regulatory and commercial interests both suggest that at least the two government part-owned banks would redomicile into the rest of the UK.” Of course, if those banks were to relocate to the UK to gain a more secure fiscal backstop, Scotland’s economy and labour market would probably suffer.

Perhaps in light of these issues, the latest Scottish Social Attitudes survey shows that while a large majority of Scots still believe independence would lead to increased pride in their country, there are growing worries that independence would reduce Scotland’s voice in the world, harm the economy, increase income inequality, reduce the safety of bank deposits and harm peoples own financial position. The SSA survey suggests that the preferred option among Scottish voters is for increased devolution within the UK rather than independence outside the UK.

Opinion Polls Still Point to a “No” Vote

Although there is considerable variation among individual polls, we have not changed our base case scenario that a "yes" vote for Scottish independence remains a low probability, high risk event.
 

But What if… Some Possible Implications Of a “Yes” Vote

Nevertheless, even if a ”yes” vote looks unlikely at present, it is not impossible. In our view, a “yes” vote would have several key implications:

Bad for UK growth. Uncertainties over the economic prospects, policies and currency arrangements of an independent Scotland probably would hit growth in both Scotland and the rest of the UK (rUK), raising the incentive for firms to “wait and see” or to expand elsewhere. Exports to Scotland account for roughly 4% of GDP for the rUK and Scotland would immediately be the rUK’s second biggest trading partner, slightly behind the US and slightly above Germany. Moreover, many banks and businesses have sizeable cross-border exposures between Scotland and rUK, and some firms may seek to limit such exposure as a hedge against the possible breakup of sterlingisation (if that is the policy adopted).

 

Bad for mainstream UK political parties, good for the anti-EU vote. Once independence happens, Scottish MPs would no longer attend or vote at the Westminster parliament. This would disproportionately hurt both Labour and the Lib Dems: Scotland accounts for 9% of seats at the Westminster parliament (59 out of 650 seats in 2010), but accounts for 16% of Labour seats, and 19% of Lib Dem seats. Conversely, only one out of the 306 Conservative MPs elected in 2010 is from a Scottish seat. However, although the maths of a postindependence Parliament would favour the Conservatives, we believe a “yes” vote would also badly hurt the personal position of PM Cameron, by making him the PM “who lost the UK”. The key winner in UK political terms would probably be UKIP: this reflects the damage to the three main Westminster parties, the evidence that voters are prepared to reject the establishment and vote for radical change, and also the extent to which the themes in the Scottish referendum debate — a choice between membership of a larger bloc or independence — are likely to have echoes in any future EU referendum. A secondary winner might be London Mayor Boris Johnson, who seems to be positioning himself as the radical outsider as candidate to succeed Cameron as Conservative party leader.

 

Uncertainties are likely to drag on for a while. The Scottish government has said that in the event of a “yes” vote, it would aim to complete negotiations quickly and for Scotland to become independent in March 201611, ahead of the Scottish parliament elections scheduled for May 2016. In practice, the process might well take longer, especially given the interruption of the UK general election in May 2015 and possibility that the election might change the UK government. Indeed, given that Labour has now moved slightly ahead of the SNP in voting intentions for the Scottish parliament in recent YouGov polls, one can imagine scenarios under which negotiations on Scottish independence have to be completed after May 2016 under a Labour-led Scottish government (which opposed independence), a Labour-led rUK government and with a Johnson-led Conservative party in opposition that is moving towards advocating EU exit.

 

BoE on the alert: BoE Governor Carney noted in his Inflation Report press conference that the BoE would be ready to act if Scotland-related uncertainties escalate: “we also have responsibilities, as you know, for financial stability in the United Kingdom and we will continue to discharge those responsibilities until they change… Uncertainty about the currency arrangements could raise financial stability issues. We will, as you would expect us to have contingency plans for various possibilities”.

*  *  *

With a “no” vote, the UK would still face rising political uncertainties. The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

More broadly, "Referendum Risk" is one of the more powerful manifestations of what we have termed Vox Populi risk, the Crimea being a particularly powerful, if extreme, example. In particular, what happens in Scotland will be particularly closely watched in Spain, which is facing a referendum on Catalan independence. Latent independence movements elsewhere, such as Belgium, could also be influenced by the outcome in Scotland. We regard the revival of local/national concerns, from Scotland to Spain and beyond, as part of continuing anti-establishment sentiment and a backlash against globalisation. And the UK experience (with growing support for UKIP alongside faster economic growth) raises the issue that economic recovery alone may not be enough to reverse the rise in anti-elite, anti-establishment sentiment.

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Submitted by Simon Black of Sovereign Man

China’s Reaction: America Is A “Disgusting Thief Spying Over His Neighbor’s Fence”

Only hours ago the US government announced that a Chinese fighter jet had intercepted an American military patrol plane over international waters east of China’s Hainan Island.

A Pentagon spokesman called China’s actions “unsafe and unprofessional”, and blasted such unprovoked aggression.

There was no mention as to why a US surveillance plane was just off the Chinese coast to begin with. They’re just playing the victim… and rather loudly at that.

Needless to say, the Chinese government has a slightly different story. I asked one of our Sovereign Man team members in mainland China to translate the following article from Sina News.

The first part of the article praises the pilot’s skill and boldness, as well as the efficiency and superiority of Chinese aviation technology.

The Jian-11B fighter, in fact, is 100% Chinese. There is no foreign engine or major component.

As for the rest of the article– I present it below with only one comment– it should be obvious to anyone paying attention that the US is no longer the world’s dominant superpower. It’s certainly obvious to the Chinese.

——–
From Sina News

Stop thief: China rejects the U.S. government calling our aircraft “dangerously close”

Sure enough, it is the American government who stamps its foot first after a similar event.

First the famous anti-China military scholar Bill Gertz played his “danger close” speech for the Washington Free Beacon.

And then the Pentagon also followed and said that it was a “dangerous intercept”. The White House called it “deeply worrying provocation”.

Adm. John Kirby, the Defense Department spokesman, said Washington protested to the Chinese military through diplomatic channels, and called the maneuvers “unsafe and unprofessional.”

Deputy National Security Adviser Ben Rhodes said it was “obviously a deeply concerning provocation and we have communicated directly to the Chinese government our objection to this type of action.”

Such remarks are laughable. As we all know, the United States is the world’s largest hegemonic force and biggest rogue country.

Their various reconnaissance aircraft have been wandering around foreign airspace for decades and watching the military secrets of other countries like a disgusting thief spying over his neighbor’s fence.

However, when the neighbor comes back with a big stick, the thief will turn tail and run away, blaming the neighbor.

When you show people weakness, they will bully you. When you show people strength, they will respect you.

We [the newspaper] believe the Chinese Air Force and Naval aviation should maintain a high level of vigilence and morale in southeast coastal region to prevent the further US action.

America has lost face and does not want to show the world they are sick. They have been lording over other countries for so long, and they will never let it go after they eat this loss.

via Zero Hedge http://ift.tt/1q7Lfsu Tyler Durden

The summer is almost over again. Although meteorologically and astronomically speaking the season will last for a few more days or weeks, the better part of it is behind us and ultimately you could say the same about the financial markets. Everything is quiet on the surface, but the wider market is barely able to get ahead. This is also what we have seen all year: a few steps forward and a few steps back, but it is not going anywhere. Even more, a few important indices are barely in the green year-to-date, which is quite the contrast with previous years in which yearly gains surpassed historical averages by far.

In Sprout Money’s latest free newsletter we covered the progress of some of the market heavyweights and a few other segments, of which the poor performance of the Dow Jones was definitely the most remarkable. The only real stronghold for traditional stocks is technology (NASDAQ), which is also the one thing that is keeping the broader S&P 500 index from embarrassment. Digging deeper we found few positive outliers, but mostly losers among which the European stocks (DAX: -2,2%).

In our opinion this is not necessarily a bad development. These last few years the market has only crept higher, which at times made us worry about the sustainability of the current bull market. A few moments of peace and quiet on the markets can only be good news for the coming years, but that also means that we are probably not going to see any fireworks over the coming months. To the contrary, we are expecting volatility to pick up and the market to become much more turbulent with surprises to the upside and the downside. As a consequence, one can only guess where the indices will end up this year, although we do not expect them to land far from where we are now, because that is what has been on the menu for the entire year of 2014.

A few segments are performing above average this year. The laggards are definitely picking up the slack and, although commodities have left us with mixed feelings in general, a few laggards in that segment (among which is gold) have started to catch up. Other important commodities, like oil for example, are also doing well. Another market segment that is performing up to standard this year: emerging markets. This segment has been the punching bag of the financial world for years, but in 2014 this is no longer the case. The MCSI Emerging Markets ETF is listed no less than 8.7% higher, which is mostly related to the strong performance of specific countries – China and India in Asia and Brazil in South America. The emerging markets have definitely made a comeback.

A final segment that has gotten ahead of the pack with relative ease is the gold mining sector, which is probably the most hated segment of the financial markets in recent years. The strong correction in gold last year wreaked havoc in the gold mining sector and had a strong impact on valuations with share prices taking an 80% nosedive on average. That is, of course, already more than you need to know as an attentive investor: when a market segment loses three quarters of its value, you can expect an impressive rally to compensate for it. That is also exactly what we are seeing right now, as the average gold mining stock is listed 23% higher in 2014!

Some analysts are calling it a junk-rally, which would indicate the end of the bull market. In their view investors buy laggards in the last phase, which could be an explanation for what we have seen in 2014. We believe, however, that the market favorites of yesteryear are being picked up again, because traditional segments have become unattractive after years of unstoppable growth. It is not that we find the market too expensive in general, but it is high time for a break.

We expect this break to hold up for a little while longer, with more turbulence towards the end of the year because of higher volatility. We have already seen that large investors, among which George Soros, are hedging against that scenario to protect their portfolios as well. Laggards will remain in demand because they have quite some catching up to do. Gold mining stocks still need to double in value, for example, to end up around their historical average. Be vigilant, pay attention to your cash position, and give preference to the current winners of 2014.

>>> Will the gold price crash or rally from here? Find out now!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

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Unthinkable…

 

Source: Cagle

h/t Jim Quinn

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President Obama’s cunning plan to ‘quasi-ouster’ Shiite PM Maliki, in the vague hopes that a more egalitarian all-inclusive Iraqi government could be formed that will magically lead the ‘people’ of the Sykes-Picot-defined nation to coalesce in sovereignty against The Islamic State has, somewhat understating it and perhaps unsurprisingly, hit a roadblock. As Bloomberg reports, Obama’s effort to have Arabs take the lead in combating Islamic State suffered a setback when Sunni lawmakers quit talks on forming a new Iraqi government after Shiite gunmen killed scores of worshipers at a Sunni mosque. The killings in Diyala province derailed attempts to form an Iraqi government with bigger roles for Sunni Arabs and Kurds that would strengthen the fight against the terrorist group. It appears the common knowledge of who is friend and who is foe remains very much in the air.

 

Iraq’s survival, including its ability to beat ISIL, depends on Iraqis rising above their differences, U.S. Vice President Joe Biden wrote yesterday in an op-ed in the Washington Post. He and Obama are encouraged by signs of Iraqi leaders recognizing the need to end the deadlock, he said.

Doing so would require acknowledging that, in opposing Islamic State, the U.S. and Sunni Arabs have a common interest with traditional foes such as Syrian President Bashar al-Assad, Iranian Supreme Leader Ayatollah Ali Khamenei and Hezbollah, which the U.S., the European Union and Israel consider a terrorist organization.

But, as Bloomberg reports,

U.S. President Barack Obama’s effort to have Arabs take the lead in combating Islamic State suffered a setback when Sunni lawmakers quit talks on forming a new Iraqi government after Shiite gunmen killed scores of worshipers at a Sunni mosque.

 

The killings in Diyala province derailed at least temporarily attempts to form an Iraqi government with bigger roles for Sunni Arabs and Kurds that would strengthen the fight against the terrorist group. Ben Rhodes, the deputy White House national security adviser, said yesterday that the U.S. will consider airstrikes in Syria if needed to combat Islamic State.

However – this is a silver lining to The State Department…

“This senseless attack underscores the urgent need for Iraqi leaders from across the political spectrum to take the necessary steps that will help unify the country against all violent extremist groups,” deputy U.S. State Department spokeswoman Marie Harf said in a statement.

So, let’s get this straight – due to the senseless Sunni-Shia attack, amid efforts to bring the two sides politically closer to take on The Islamic State together, the US State Department says the Sunni and Shia shoould move quicker towards partnership?

The breakdown in talks came as U.S. officials underscored what they called a growing threat posed by Islamic State, which also is known as ISIL, for Islamic State of Iraq and the Levant.

The airstrikes are not quite going according to plan either…

Yesterday’s attacks brought the number of American airstrikes in Iraq to 93.

 

Expanded airstrikes, especially if they extend to populated areas, also would run an increased risk of causing civilian casualties and property damage.

 

That could drive some Iraqis and Syrians into the arms of Islamic State, these officials said. Like Hamas in Gaza, they said, IS would use civilians, including Christians, Yezidis, Turkmen and other minorities, as human shields.

 

Instead, three of the officials said, Obama has emphasized the need for Iraq’s Shiite Prime Minister-designate Haidar al-Abadi to grant Sunnis and Kurds more power and positions in a new government.

 

Without that, these officials said, Sunni tribes in central Iraq that in 2006 joined U.S. forces in fighting al-Qaeda in Iraq, a predecessor to IS, will remain on the sidelines or allied with the extremists.

 

The Kurds, who’ve done much of the fighting so far, will be reluctant to fight outside the northern areas they claim, especially if the Kurdistan Regional Government remains embroiled with the central government over the right to sell oil.

*  *  *
What a mess!?

*  *  *

We suspect, in some dark corner of Washington, Hillary is grinning from ear to ear.

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Submitted by Lance Roberts of STA Wealth Management,

1. Nothing To Fear From Fed Rate Increase

There is an overwhelming consensus of opinion that the markets, and the majority of mainstream commentators, that when the Fed begins raising rates that it is a "good thing."

The primary premise behind that consensus is that the economy is now growing steady enough to absorb the impact of higher interest rates. This opinion was espoused yesterday by Kansas City Fed President Esther George who stated:

"I don't want us to be behind the curve in beginning to normalize interest rates. When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that."

There are a couple of things worth considering at this point:

1) As I addressed previously, the economy is very closely tied to the cost of capital.  When you consider that a large chunk of corporate profitability as of late has been created through the use of cheap loans to buy back shares, rising borrowing costs make this option much less lucrative. Rising borrowing costs also directly impact the consumer spending through variable rate credit, auto sales as loan payments rise, and housing through increase mortgage payments. (The referenced article has further points on this issue)

2) With regards to the statement, on full employment there is really only one type of employment that ultimately matters which is full-time.  Part-time and temporary employment do not foster household formation, higher levels of consumer spending or increased tax revenues. The issue is that even though the unemployment rate is approaching levels of "full-employment," it has been primarily a function of the shrinking of the labor force.  As shown in the chart below, full-time employment is basically at the same level as it has been since the financial crisis as "real employment" has primarily been a function of population growth and little else.

3) There is little evidence that current levels of inflation are stable. As I wrote in "Will The Fed Move To Soon", the decline in economic growth globally, along with increased deflationary pressures, is likely to be reflected in the domestic economy sooner than later. Furthermore, given the fact that it is highly likely that the U.S. will have another exceptionally cold winter, the reality is that current levels of inflation have been little more than a transient surge. (See: Worse Than 1930's Depression, Europe's Recession)

There is little argument over the fact that the current economic growth rate has been "sluggish" at best and that growth has been primarily supported by the Federal Reserve's ongoing balance sheet expansion. The Federal Reserve is now going to start increasing interest rates, removing that accommodation, at a time when economic growth is at extremely low levels. The question that we must consider is whether the "patient" can survive without "life support."

4) Lastly, the table below shows the history of Federal Reserve rate hikes, from the month of the first increase in the 3-month average of the effective Fed Funds rate to the onset of either a recession, market correction or both.

The average number of months between the first rate hike and a recession has been 42.4 with a median of 35 months. However, if we take out the two extremely long periods of 98 months following the 1961 increase and 84 months following 1994; the average falls to just 28.6 months.  Given the fact that the current economic cycle is extremely weak and, at more than 60 months, already the fifth longest Post-WWII recovery, it is likely that even 28 months is on the long end.

The average stock market correction following the first rate has occurred 21.2 months later. If the first rate hike occurs in 2015, this would put the next market correction in 2016 which would correspond with my recent analysis on the collision of the "Decennial and Presidential Cycles:"

However, the IMPORTANT FACT is that the number of times the Federal Reserve has hiked interest rates without a negative economic or market impact has been exactly ZERO.

 

2. Stock Buybacks On The Decline

As discussed above, one to the impacts of rising interest rates is an increased cost of capital which makes two things MUCH less lucrative. The first, and most importantly, is the "carry trade" which has been a primary driver of asset prices over the last five years. Banks have been able to borrow capital at effectively zero, leverage it, and then buy higher yielding assets to capture the spread. This has created an immense amount of profitability for banks, in particular, in recent years.  However, higher borrowing costs significantly reduce that profitability.

Secondly, corporations have been using exceptionally low interest rates to borrow capital, not for the purposes of ramping up production and capital investments, but to buy back stock to artificially boost profits per share. The focus on share buy backs has been intense over the last couple of years as the benefits of cost cutting, employment reductions and wage suppression met their inevitable limits. Like other profitability gimmicks, share buybacks are also finite in nature. After more than two years of increased share repurchases, recent data suggests that this may be coming to an end.  As Brett Arends penned:

"U.S. corporations have been spending hundreds of billions of dollars a year buying in their own stock, simultaneously increasing the demand for the stock and reducing the supply. And this matters right now because…er…they just stopped.

 

The amount spent on share buybacks plunged by more than 20% last quarter…As SG notes, 'US corporates (have) been the major net buyer of US equity in recent years, purchasing over $500 billion of stock last year alone.' But, notes the bank, this happy trend may be drawing to a close."

The ready supply of "free capital" has been a "punch bowl" to corporations from which they have drunk deeply. According to the Federal Reserve, corporate debt has risen 27% over the past five years to $9.6 trillion. So, much for those deleveraged balance sheets and when the Federal Reserve does increase interest rates; a major supporter of asset prices in recent years will disappear.

 

3. The Taper Effect

The team at GaveKal Capital did a great piece of research confirming something that I have discussed many times in the past which is simply that everything is tied to the Federal Reserve's liquidity interventions. 

As the Federal Reserve has begun to taper their ongoing bond purchases, now at $25 billion and expected to be eliminated by October, the effect has been felt on a host of asset classes and economic statistics from inflation to stocks.  To wit:

"…the number of stocks trading above their 200-day moving average has dropped back in line with what the taper model would suggest. If this continues to follow suit, we could see the fewest number of stocks trading above their 200-day moving average in over 2+ years."

There are two important points to take away from this analysis.  First, as I discussed previously, there is an ongoing belief that the current financial market trends will continue to head only higher. This is a dangerous concept that is only seen near peaks of cyclical bull market cycles. While the analysis above suggests that the current bull market could certainly last some time longer, it is important to remember that it is "only like this, until it is like that."

The problem for most investors is that by they time they recognize the change in the underlying dynamics, it will be too late to be proactive.  This is where the real damage occurs as emotionally driven, reactive, behaviors dominate logical investment processes.

via Zero Hedge http://ift.tt/1ziQDu1 Tyler Durden

by Bruno de Landevoisin @ StealthFlation

Left without the original healthy clean source of naturally effervescent spring water spouting from the ground up, the misguided monetary authorities have attempted to artificially inseminate  the clouds above, in the hopes of drenching the parched soil below with torrential rain so as to generate their forever heralded and promised green shoots.  Unfortunately for us all, when these artificially seeded clouds eventually do burst, they will produce nothing but the toxic inflationary rains of StealthFlation.  

Under the imposition of StealthFlation, the Velocity of Money lies dormant while increasing Inflationary risks build below the surface.

When an economy is healthy, there is much buying and selling and money tends to move around quite swiftly.  Unfortunately, the U.S. economy is manifesting the precise opposite of that these days.  In fact, the velocity of M1 & M2 has fallen to near all-time record lows.  This is a very serious sign that the underlying economy has entered a period of extreme stagnation.

In its infinite wisdom, the Federal Reserve has been attempting to counter this economic standstill by absolutely flooding the financial system with new money.  As it always does, this has created monumental financial and fixed asset bubbles, however, it has not addressed what is fundamentally and structurally wrong with our economy.  On a very basic level, the amount of real economic activity that we are witnessing is not anywhere near where it should be, and the anemic flow of money through our economy is proof certain of the ongoing dilemma. 

Clearly the transmission mechanism between the relentless synthetic origination of fresh money by the monetary miracle men and the velocity at which that new money is circulating in the real underlying economy on the ground is completely disconnected, FUBAR.  

Why is this?  Well, it’s really not that difficult to comprehend.   First of all, much of the supposed economic activity generated today is not being driven from the the bottom up by the healthy deployment of excess savings naturally created from genuine self-sustaining productive economic activity on the ground, but rather in an unnatural fashion, force fed from the top down via the easy street ZIRP/QE induced debt financing incessantly being encouraged by our misguided megalomaniac monetary authorities.

Perhaps even more malignant, the largest capital market of them all, namely the U.S. bond market has been put down by the Fed’s activist zero bound anesthesiologist.  Thus, the utterly comatose American treasury market is no longer facilitating the natural growth of traditional savings income streams generated via secure interest bearing accounts and prudential savings products throughout the financial system’s depository structure. In short, the healthy income flows constructively generated from legitimate savings produced from genuine economic activity namely people going to work every day, has been effectively terminated by these wizards of wanton monetary policy at the wayward central bank.

Let’s face it, if the major pension funds can’t generate 5-6% per year holding conservative debt instruments in order to meet their massive obligations, they are up a creek without a paddle. The Fed understands this all to well, and so should you. Having effectively shut down the sound, well established and prudent financial avenues which have consistently engendered bona fide and constructive growth over the years through productive savings, the foolish authorities have left themselves with only one risky road to travel down. Indeed, now that they have totally cracked the transmission on our fiscally busted and broken down American bus, they have become 100% reliant on the equity market to drive their top fuel funds into the U.S. economy via the wealth effect.  Pedal to the metal at 2,000 SPX mph.  Make no mistake my friends, we are on a crash course from hell. God help us all…………….

via Zero Hedge http://ift.tt/1wlknue Bruno de Landevoisin