Month: January 2016

"What's mine is yours, for a fee," is the mantra of the new normal "sharing economy," as various segments of our heretofore under-utilized assets are 'rented' out for the enjoyment of others. However, as The LA Times reports, perhaps we are sharing just a little too much. As we previously noted, sexually transmitted diseases are on the rise across the nation, but the problem is particularly acute in Los Angeles County with health officials pointing the finger at casual sex arranged through social media as "the perfect storm."

 

 

Not only does the county have the most cases, it also has some of the highest rates of chlamydia, gonorrhea and syphilis in California and the nation.

Some public health experts have blamed the heavy use of online dating apps, arguing that they lead to more casual sex among people 25 and younger, who are the most likely to be infected and also the least inclined to seek testing.

STDs spread in large part because people don't get tested enough, so undiagnosed infections are unknowingly transmitted from one person to another.

 

As technology improves, Gaydos thinks people will eventually be able to pick up an STD test from a drugstore and get results immediately, much like a pregnancy test. "But in the meantime, they need to be tested."

 

Dozens of organizations now offer STD tests that can be ordered online and mailed to homes. The customer provides a sample, sends it back to a lab and receives results within a few days.

 

But as these tests become more popular, experts warn that they may not always be accurate.

 

"We don't know — they could be doing [the testing] in their garage, they could be doing this on their kitchen table," said Dr. Charlotte Gaydos, an STD expert and professor at Johns Hopkins University School of Medicine.

We can se the SuperBowl advert now – "Clap? There's An 'App' For That!"

*  *  *

So, in a consequence-free world of money printing to enable everything, too much of a good thing is bad for you after all…which reminds us…

What's dangerous and eats nuts?

 

…

 

…

 

Syphillis.

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Submitted by Eric via EricPetersAutos.com,

Ethanol – corn alcohol – won’t take you as far as a gallon of gas.

 

But that doesn’t mean it is isn’t powerful stuff.

Politically powerful stuff.

Republican presidential candidate Ted Cruz is feeling the heat right now as the ethanol lobby pressures him to openly commit to expanded support for federal ethanol mandates – a kowtow every recent presidential candidate from both parties has done up to now.

The ethanol lobby’s potency derives not only from the money it has and the campaign contributions it can make (or not) but also from the fact that – in a presidential election  year – the Iowa Caucuses are critical.

And Iowa is a farm state.

Cruz has at least criticized the federal Renewable Fuels Standard – the law behind the force-feeding of ethanol alcohol down the gullets of Americans and their cars.

But The Lobby is very persuasive.

 

And we are not talking “family farms” here but rather, enormous agricultural combines that exploit the family farmer by applying artificial economic pressure (via government subsidies) to divert food crops to ethanol production. Corn that  would otherwise be used to feed people – or animals that feed people – ends up being used to make ethanol, which is then mixed with gas in various concentrations.

Currently, 40 percent of the U.S. corn crop goes to ethanol production – up from just 10 percent as recently as 2005.

Most of the unleaded gas available in the United States is actually 10 percent ethanol and 90 percent gasoline. This fuel is labeled “E10″ gas.

Which would be ok … if that’s what the market wanted.

But it’s actually what the government (and corn lobby) want.

And now they want more.

 

Specifically, they want ethanol concentrations upped to 15 or even 25 percent (E15 and E25). And they want whomever is nominated and ultimately elected president to make it so.

Big money – and big pressure.

Cruz recently stated that “market access (for ethanol) is critical” and even gone so far as to argue that anti-trust laws be “vigorously enforced to ensure that the oil and gas industry cannot block access to the market for ethanol producers.”

But ethanol has never been blocked from entering the market. The problem is just the opposite. Ethanol producers want a “market” created for their product – enforced by government. They want to suppress the market’s verdict about ethanol, bypass the preferences expressed by Americans for gasoline rather than ethanol-adulterated “gas.”

 

They want ethanol forced down our throats – and into our tanks.

Ethanol sounds good – superficially – because it is “renewable” and produced here in America. The problem is that a gallon of ethanol-laced contains less energy than a gallon of straight gasoline. Your car’s fuel economy goes down on ethanol and ethanol-blend fuels – by as much as 5-10 percent vs. straight gasoline because the engine has to burn more ethanol-adulterated fuel to get the equivalent energy out of it vs. a gallon of pure gasoline.

So, Cruz’s statement (in a recent op-ed) that ethanol “could prove quite popular with American consumers” is based on a misunderstanding of the nature of ethanol as a fuel.

Similarly his statements regarding octane.

Ethanol can be used as an octane enhancer, but unless an engine was designed to operate on high octane fuel, using high octane fuel will usually result in reduced fuel economy. Octane is just a measure of a fuel’s burn rate, not its quality. High-octane premium is just the ticket for high-compression/high-performance engines designed for such fuels. But most cars are designed to run on regular (lower octane) unleaded – and so ethanol’s octane enhancing properties are irrelevant.

 

And ethanol in higher concentrations – such as E15 and E25 and E85 (15 percent, 25 percent and 85 percent ethanol, respectively) will cause physical damage to engines and fuel systems not specifically designed and built to handle high-alcohol-concentrations.

Alcohol is by nature corrosive – and it attracts moisture. If you read your vehicle’s owners manual you will find explicit warnings about using any gasoline with more than 10 percent ethanol (E10) unless the engine was designed for it – and an advisory that any damage resulting from its use will not be covered buy the vehicle’s warranty.

So, Cruz is misinformed, minimally, when he states that “the EPA – through regulations used in vehicle emissions tests – imposes a hard wall against mid-level ethanol blends such as E25, making it largely illegal to sell gasoline with higher blends of ethanol.”

 

The fact is that even E15 – 15 percent alcohol – would be disastrous for millions of vehicles currently in service. And not just for them, either. Virtually all the lawn mower, chainsaw and recreational power equipment (e.g., boat) engines currently in service cannot handle ethanol concentrations higher than 10 percent.

Neither can the infrastructure.

Pipelines and tanker trucks and the in-ground tanks where fuel is stored generally can’t stand up to higher-than-10-percent ethanol fuels. The fuels would have to be transported and stored separately – which involves duplication of effort – which adds another layer of artificial (government-imposed) costs.

 

The only “hard wall” limiting ethanol concentrations in fuel is the limitation imposed by how much damage to our cars and wallets we’re willing to tolerate for the sake of the corn lobby.

Cruz would be taking a political risk to say so openly – especially ahead of the Iowa Caucuses. But – as Donald Trump has shown – the public is desperate for straight-talking leaders who will stand up for them rather than serve as water-carriers for the “interests” that seem to own the government and use it for their benefit.

Cruz has said he favors an “all of the above” policy when it comes to fuels – and that Washington “shouldn’t be “picking winners ands losers.”

Exactly so.

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Over the past year, we have frequently warned that the biggest financial risk (if not social, which in the form of soaring worker unrest is a far greater threat to Chinese civilization) threatening China, is its runaway non-performing loans, which at anywhere between 10 and 20% of total bank assets, mean that China is one chaotic default away from collapsing into the post “Minsky Moment” singlarity where it can no longer rollover its bad debt, leading to a debt supernova and full financial collapse. And as China’s total leverage keeps rising, and according to at least one estimate is now a gargantuan 350% of GDP (incidentally the same as the US), the threat of a rollover “glitch” gets exponentially greater.

To be sure, in recent months the topic of China’s bad debt has gained increasingly more prominence among the mainstream, and notably none other than Kyle Bass has made the bursting of China’s credit cycle the basis for his short Yuan trade as noted here previously:

What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion.

And judging by the surge in recent and increasingly louder calls for a Chinese devaluation, some advocating a major one-off currency debasement, Bass’ perspective is certainly prevalent among the trading community. Bank of America goes so far as to speculate that the “upcoming G20 meeting in Shanghai offers an opportunity for policy makers to seize the “expectations” initiative via a one-off China devaluation.” It does, however, also add that the “risk is markets need to panic first” before instead of piecemeal devaluation, China follows through with a Plaza Accord-type currency intervention.

Friday’s adoption of NIRP by Japan, which send the US Dollar soaring, has only made any upcoming future Chinese devaluation even more likely.

But whether China devalued or not, one thing is certain: it is next to impossible for China – under the current socio economic and financial regime – to stop the relentless growth in NPLs, which even by conservative estimates at in the trillion(s), accounting for at least 10% of China’s GDP.

Sure enough, a cursory skimming of news from China reveals that even Chinese bankers now “admit the NPL situation is dire, but will keep on lending” anyway.

As the Chiecon blog notes, NPL “ratios might be closer to 10%… supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts.”

“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area. Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.

But the main reason why China is now trapped, and on one hand is desperate to stabilize its economy and stop growing its levereage at nosebleed levels, while on the other hand it is under pressure to issue more loans while at the same time it is unwilling to write off bad loans, can be found in the following very simple explanation offered by Mr. Zhou, a junior banker at a Chinese commercial bank.

“If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but lets say in a years time when the loan is due, if the borrower defaults, then I wont just see a pay cut, I’ll be fired, and still be responsible for loan recovery.“

And that, in under 60 words, explains why China finds itself in a no way out situation, and why despite all its recurring posturing, all its promises for reform, all its bluster for deleveraging, China’s ruling elite will never be able to achieve an internal devaluation, and why despite its recurring threats to crush, gut and destroy all the evil Yuan shorts, ultimately it will have no choice but to pursue an external devaluation of its economy by way of devaluing its currency presumably some time before its foreign reserves run out (which at a $185 billion a month burn rate may not last for even one year).

However, before it does, it will make sure that it also crushes every Yuan short, doing precisely what the Fed has done with equity shorts in the US over the past 7 years.

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On Friday, we brought you the 4 “D’s” of deflationary doom from BofA’s Michael Hartnett.

For those who missed it, Hartnett says the reason “an almost manic monetary policy been so ineffective at generating a broad, sustained economic recovery,” is that the following four secular deflationary factors are conspiring to impede a robust recovery:

• 1. Debt levels remain very large: according to the BIS, global debt as a share of GDP was 246% in Q4’2000, 269% in Q4’2007 and 286% in Q2’2014.
• 2. Deleveraging has impeded the housing recovery and its “multiplier” effect: CoreLogic’s Housing Credit Index, which measures mortgage credit availability in the US, has plunged from 100 to 42 in the past seven years; US mortgage credit outstanding has fallen more than $1tn since its peak of $14.8tn in ’08.
• 3. Demographics reveal a dramatic aging of the developed world’s population: in the next 10 days, 112,000 people in the US, Europe and Japan will reach the retirement age of 65.
• 4. Disruption via innovation in robotics, AI and so on, which the World Economic Forum forecasts will cause the loss of a net 5.1mn jobs in the next 5 years.

And so, those are the factors that explain why the DM world is stuck in neutral when it comes to economic activity. As BofA also suggested, the fact that the “recovery” isn’t really a recovery goes a long way towards explaining why populist candidates and political parties are polling so well across the developed world.

So what, pray tell, can policy makers do to right the ship now that the world appears to have been thoroughly Japanified? 

Well, to let BofA’s Hartnett tell it, there needs to be some manner of “global policy coordination” à la The Plaza Accord to reignite “corporate and household animal spirits” and combat the dreaded 4 “C’s”: China, commodities, credit, and the consumer. 

This policy coordination could come at the G20 Finance Ministers and Central Bank meeting in Shanghai next month, Hartnett writes.

We’ve long argued that if you want proof that the Keynesian insanity employed by DM central bankers has demonstrably failed, you needn’t look further than global demand and trade, which are both in the doldrums. 

In short, if you want to resuscitate demand, you need policies that have a real impact on those from whom final demand emanates. Inundating Wall Street with fungible liquidity doesn’t accomplish that. It may drive asset prices higher, but Ben Bernanke’s fabled “wealth effect” pretty clear doesn’t exist. 

So what’s the answer, you ask? Is there any hope for centrally planned markets in the wake of the extreme turbulence that played havoc with equities in January? Can central bankers reclaim the narrative on the way to orchestrating a real recovery? 

Well, probably not, but BofA says there are 4 points that must be addressed if officials intend to attempt a coordinated policy response to anemic global growth. Below, find commentary on a possible “Shanghai Accord”.

*  *  *

From BofA

In addition to the risk of a deeper profit recession, there is no doubt the recent sell-off has been exacerbated by policy impotence; the sense that policy-makers have little solution for global demand deficiency. A weak, disjointed recovery may also be threatened by the political shift toward capital controls in China, border controls in Europe and the US, as well as more aggressive redistributive taxation at a time of ongoing fiscal austerity.

There are some echoes of the period leading up to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the US dollar to help the US improve its huge trade deficit and spur economic growth out of the doldrums of the early-1980s. This pro-growth agreement was spurred by weak growth, macro divergence, and interestingly in light of the current political trends, rising protectionism in the US. Leading up to the 1985 accord, interest rates and inflation were low, but macro cycles were out of sync and exchange rates were targeted to induce macro convergence. In addition, West Germany agreed to tax cuts, the UK agreed to reduce its public expenditure and transfer monies to the private sector, while Japan agreed to open its markets to trade, liberalize its internal markets and manage its economy by a true yen exchange rate. All agreed to increase employment.

Most important was that the global policy cooperation inspired corporate and household animal spirits.

In a similar fashion, we would argue that the upcoming G20 Finance Ministers and Central Bank meeting in Shanghai (Feb 26-27th) offers an opportunity for policy-makers to seize the “expectations” initiative. It’s probably too early to expect a Shanghai Accord, and our deep concern is that the macro and the markets may first need to worsen to inspire the correct policy response. But absent a rapid improvement in the 4C’s, we believe the investment bulls will need to sit on the sidelines until a G20 meeting announces:

• A one-off devaluation in the Chinese currency
• Fed announces swap lines, or other measures of financial system support, to avert contagion into fragile EM’s
• The US Treasury announces it will act to pursue dollar stability, so as to help end the death spiral in US manufacturing, oil, and EM
• The US, Germany, UK and France promise fiscal stimulus to boost public investment, especially in high-quality infrastructure

*  *  *

The danger, Hartnett concludes, is that in order for officials to agree on the four measures outlined above, markets will need to collapse first. We close with BofA’s simple conclusion: 

“2016 risk is that markets need to panic [before there’s a coordinated policy response].”

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While Caracas – the capital of socialist utopia Venezuela where gun control is extreme – remains the number one most violent city in the world, there are two new entrants from the USA into the World's Top 20 least desirable places to walk the streets – St. Louis (15th most violent city in the world) and Baltimore (19th). America, land of the free to indiscrimanently kill other people?

As Statista's Nial McCarthy details, out of the world's 50 most violent cities, 41 are in Latin America including 21 in Brazil.

The Mexico Citizens Council for Public Security releases its findings on the homicide rate in cities with populations over 300,000 every year. This infographic shows the world's top 20 cities, with Caracas, Venezuela, in first place with 119.87 homicides per 100,000 residents in 2015.

 

San Pedro Sula, Honduras (111.03 homicides per 100,000) came second with San Salvador, El Salvador (108.54 homicides per 100,000) rounding off the top three. The majority of the violence in Latin America can be attributed to drug trafficking, gang warfare and political instability.

The following map shows the number of homicides per 100,000 residents in 2015…

You will find more statistics at Statista

And here is the Top 50 – including 4 American cities…

 

Exceptional USA not #1? Something to "shoot" for in 2016…

 

h/t The Burning Platform blog

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…if you are an immigrant…

As OneNewsNow reports, an attorney representing laid-off Disney workers claims the Fortune 500 company broke federal laws when it replaced them with immigrants.

Attorney Sara Blackwell filed a federal lawsuit this week on behalf of two former tech employees of Disney after the corporation hired H-1B visa recipients from overseas.

 

The employees were among approximately 250 laid off approximately a year ago, and some of them have filed complaints with the Equal Opportunity Employment Commission, The Orlando Sentinel reported.

 

Blackwell tells OneNewsNow she is accusing Disney of violating Title VII, which bans discrimination under the Civil Rights Act of 1964.

 

The lawsuit also accuses Disney of RICO-like violations, claiming it colluded with two hiring firms to misrepresent hiring plans in visa paperwork. 

 

If a judge dismisses the lawsuit, Blackwell says, “I have 31 other plaintiffs that I can bring. It’s not going to stop me.”

 

Disney said in a statement that the lawsuits are “based on an unsustainable legal theory and are a misrepresentation of the facts.”

Congratulations, you’re going to unemployment-land…

Source: Townhall.com

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Submitted by Jeffrey Snider via Alhambra Investment Partners,

It makes for quite the juxtaposition, though perhaps not so jarring given that global banks are still enormous and disparate operations. On the one hand, Citigroup’s CEO was eminently confident from within the confines of Davos and the status quo:

The market is “adjusting” to a series of headwinds that can be overcome, Citigroup CEO Michael Corbat said Thursday, a day after theS&P 500 fell to its lowest level in nearly two years.

 

“We view what’s going on really as more a repricing than any big fundamental shift,” he told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland.

The question is who is the “we” to which he is referring? It was just a year ago that no bank would even contemplate the possibility of recession entering Janet Yellen’s perfect year, especially as it was setup by “unquestionable” growth in the middle of 2014 (best jobs market in decades). This January, however, while Citi’s CEO downplays recent turmoil, the staff inside his very own bank is thinking very much otherwise:

The global economy is on the brink of a recession, with central bank stimulus less forthcoming and growth weakened by the slowdown in China, Citigroup warned on Thursday.

 

The bank cut its 2016 global growth forecast to 2.7 percent from 2.8 percent and slashed its outlook for the U.S., U.K. and Canada, plus several emerging markets including Russia, South Africa, Brazil and Mexico. [emphasis added]

That’s a lot of slashing in order to be so sanguine. I don’t agree with the premise, namely that this is all or even mostly due to China (the Chinese sell their industrial production to whom?), but the condition of the Chinese economy offers more universal interpretations upon these kinds of circumstances. That starts with the idea that China is slowing but within a more cheering transition to consumer rather than investment-led activity and margins. It is this idea that manufacturing and production matter, but not nearly as much as they used to and thus not enough to make a full recessionary difference right now.

After some minor encouragement in December, industrial factors in January have turned (yet again) to the depressively concerning. Today it was industrial profits.

Profits earned by Chinese industrial firms in December fell 4.7 percent from a year earlier, the seventh straight month of declines, as the slowing economy hits sales and forces many companies to cut prices to win business.

 

The weak performance is bound to spark fresh concerns about investment cuts, job losses and bad loans in the world’s second-largest economy, and could put more pressure on China’s stock markets, which have been pummelled [sic] to 14-month lows.

China’s stock market is a small, relative matter; the more troubling imbalances lie and remain elsewhere. This change in production profitability is concerning on three fronts; first in terms of where China’s economy, even in just industry, might actually be at right now. GDP says slowing but rather steady; these figures and many others suggest quite the opposite.

China saw annual industrial ¬profits fall for the first time in more than a decade, prompting calls for strong stimulus to boost growth, even as Premier Li Keqiang on Wednesday vowed to cut loans to zombie firms and ¬increase financial support for high-tech industries.

 

The gloomy figures add to the economy’s grim start to the year, coming amid growing panic over the depreciation of the yuan and state media reports on short sellers’ “attacks” in manipulating the market for the renminbi and other Asian currencies.

“For the first time in more than a decade” is becoming a consistent qualifier for these sorts of economic indications. A week ago, China reported electrical output and steel production now at just such historical comparison:

China’s output of electric power and steel fell for the first time in decades in 2015, while coal production dropped for a second year in row, illustrating how a slowing economy and shift to consumer-led growth is hurting industrial consumers.

 

China’s economy grew at its weakest pace in a quarter of a century in 2015 and efforts to restructure have not only slashed demand but also exposed massive overcapacity in industrial sectors such as coal, steel and power.

Despite these dire results and measurements, there is still this tug of “consumer-led transition” that, as noted in the quote above, remains as a bulwark optimistic sentiment. It can be distilled as if an economy operates in completely discrete and replaceable fashion; as if when industry struggles then services will just continue on that much better until industry no longer matters at all; and if industry really, really struggles, consumption and the service economy should only factor a minor nuisance being so separated. There are no such Chinese walls (pun intended) within an economic system (which extends globally).

That brings up the second contradiction noted by persistently decreasing industrial activity in China (and elsewhere). To this point, despite production and output cuts (and to capex and capacity growth) there has yet to be the major transition to across-the-board resource reduction, including and especially labor. In other words, consumption in China might not look as bad as production but only because there are time lags and frictions (as economists call them) that forestall synchronization even in these downward recessionary legs. Once production stalls and contracts long enough, especially in profitability terms, businesses will eventually seek to harmonize production with their resources – the very bad news of total cutbacks, including and especially pay and then labor in full.

To wit:

China’s business confidence and recruitment activity slipped to record lows in January, a survey showed, adding to signs of weakness in the world’s second-largest economy that could prod policymakers to roll out more support measures…

 

The staffing index fell to 50.3 in January, near the 50 no-change mark, from 50.8 in December, hitting its lowest since the survey began, as businesses have become more hesitant to recruit as economic activity weakens, the survey showed.

And:

The slowdown in the Chinese economy has spread its tentacles to China’s white-collar workers who have received fewer year-end bonuses, according to a survey carried out by a recruitment company.

 

The study by Zhaopin, a Beijing-based recruitment website, said 66 per cent of the 10,615 white-collar workers polled had not received, or expected, a year-end bonus.

That compares with the 61.2 per cent who gave the same answer when polled the previous year.

 

About 14 per cent of the people surveyed did get a bonus for 2015.

 

The average paid out was over 10,000 yuan (HK$12,000), nearly 3,000 yuan down from 2014, the survey showed. Workers were polled in 32 cities across China.

The production decay is only, perhaps, just now starting to impact the wider Chinese economy. It counts not just in resource management and eventual capitulation on those terms, but also financial terms – precisely the problem with China’s “outflows.” This is the third worrisome notice from China’s industrial profitability, namely that defaults or at least perceptions of default risk will only exacerbate an already tenuous position for China’s financial networks; especially its “dollar” short.

As the eurodollar standard built China in what looked like “hot money” inflows, that created lending formation and chained liabilities predicated on China being China forever; not China placing all its hopes and dreams on an unproven and hardly-detected consumer transition (that wasn’t really specified until economists started to belatedly recognize “something” was wrong with industry where they were sure nothing ever could be wrong). There are enormous financial implications in the slowdown as it reaches unknowable trigger points, some of which we have undoubtedly already witnessed. If you are a “dollar” provider into China’s banks, as NPL’s rise with this production massacre you are not going to remain statically attached while it all seems to get worse and worse (especially as central bankers and “experts” continue to protest there isn’t anything wrong in the first place that temporary tweaks won’t alleviate).

Economics becomes finance, and finance only furthers those negative economics. Financial distress in and of China both confirms the onrushing economic disaster as it was, while suggesting, because financial imbalance has not yet relented, not even close, much more to come.

Our three parts then sum to: China’s industry persists at only getting worse even though it has already reverted to a state not seen in a decade or more; consumer appearances may seem generally optimistic despite all that but only because industrial activity has yet to fully make adjustments through resources and labor; and financial trends are likely already at the stage of self-reinforcement within and without. You can see why China’s problems might trouble Citi’s economists and staff researchers in a way that perhaps the bank’s CEO might rather gloss over and around.

“Our” problem is that these trends and analytics are not just for and of China. There are no discrete pockets of fortified economic resolve with which to withstand a global “manufacturing recession.” There are only interconnections between individual economic circumstances that are augmented, amplified and affected by reflexivity in financial markets and conditions. That Citigroup is now recognizing this as a very real possibility, in sharp contrast to last January’s “transitory” commandment, shows how truly far along the economic and financial disease has infiltrated – globally. After all, China’s vast industrial might was built through eurodollars to service “global consumers”, of which Americans account for the bulk; upward as well as downward.

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Back in August we explained why the headline figures for EM FX reserves paint an incomplete picture with regard to the UST liquidation among commodity producers and emerging market reserve managers.

As Credit Suisse wrote last year, “for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ ‘petrodollar’ accumulation because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia.”

In other words, official data on FX reserves don’t tell the whole story. Not by a long shot. In fact, “oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets.”

This has very real implications for markets.

As a reminder, SWFs hold a variety of assets including equities. Just as FX reserve drawdowns act like QE in reverse, SWF sales put pressure on markets and drain liquidity from the system. Put simply: when the funds that have for years plowed their commodity proceeds into assets suddenly cease to be net exporters of capital, everyone should pay attention.

Just four days ago we showed you which stocks are most likely to be sold by EM governments and wealth funds. For those who missed it, here’s the list:

Earlier this month, we also discussed how large the equity outflow is likely to be.

According to JP Morgan, SWFs will sell some $75 billion in equities this year. “Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016,” the bank’s Nikolaos Panigirtzoglou wrote.

This week, Panigirtzoglou is out with a closer look at exactly what stocks are most vulnerable to SWF selling.

*  *  *

From JP Morgan

For the oil producers that have SWF assets (other Middle Eastern, Norway, African and Latam countries), we assume a current account deficit for 2015 of around $40bn, again based on previous IMF estimates. This current account deficit was likely funded via depletion of SWF assets.

What does this mean in terms of asset selling by SWFs and reserve managers? For the asset allocation of SWFs into public equities, government bonds, corporate bonds, cash and alternatives, we used information available from Norway, Abu Dhabi, Kuwait and Qatar investment authorities, which should be largely representative of the SWF universe. Using AUM weights results in a weighted asset allocation of 51% to public equities, 18% to government bonds, 7% to corporate bonds, 19% to alternatives such private equity and real estate and 6% to cash. For FX reserve managers, to accommodate the difference in the asset allocation of Saudi Arabia FX reserves (which accounted for the majority of reserve depletion of oil producing countries), we assume a 20% allocation to equities, 67% to government bonds, 3% to corporate bonds and 10% to cash.

Assuming selling in accordance to the average allocation of FX reserve managers and SWFs above, and assuming no selling of alternative assets given their illiquidity, we estimate that in 2015, oil-producing countries sold $90bn of government bonds, $50bn of public equities, $7bn of corporate bonds and $15bn of cash instruments.

What about 2016? For 2016, assuming an average oil price of $35, i.e. close to current prices, we project the current account balance for oil-producing countries to worsen from around $80bn in 2015 to $240bn in 2016. This estimate is based on the same sensitivity of the current account balance to the change in oil prices as last year – i.e. between 2014 and 2015. This dis-saving of $240bn should be mostly met via depletion of official assets, i.e. FX reserve and SWF assets ($220bn) rather than issuance of government debt ($20bn). For 2016, we assume a similar depletion in FX reserves as last year of around $130bn, and the remainder $90bn met from SWF asset depletion.

Again, assuming selling in accordance to the average allocation of FX reserve managers and SWFs above, and assuming no selling of alternative assets, these assumptions would imply selling of $107bn of government bonds, $80bn of public equities, $12bn of corporate bonds and $19bn of cash instruments. Thus, the selling of government bonds by reserve managers and SWFs this year will likely be similar to last year, but worse for equities and corporate bonds.

Within equities which sectors are most vulnerable? We aggregate publically available holdings data to see how overweight these SWFs funds are positioned in terms of sectors and regions relative to the composition of the MSCI AC World index. With the caveat that these publicly available data represent only a portion of their public equity holdings, we find that SWFs are most overweight Financials and Consumer Discretionary, and most underweight Healthcare, Consumer Staples and Technology. In terms of regional allocation, they appear overweight Europe, Middle East and Africa and Developed Asia and underweight North America and Emerging Asia. In terms of absolute holdings, they are more heavily invested in Western European equities as well as Mid East and Africa. Across sectors, they are more heavily invested in Financials and Consumer Discretionary (Figure 3 and Figure 4). 

*  *  *

Bear in mind that these estimates are conservative. The Saudis burned through $19 billion in reserves in December and Norway is tapping its massive rainy day fund as well. 

Expect SWF flows to be a major talking point if commodity prices remain in the doldrums.

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

Submitted by Pater Tenebrarum via Acting-Man.com,

Let’s Do More of What Doesn’t Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.

 

BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?

 

At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:

 

The Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust – click to enlarge.

 

This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.

For decades Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough!

 

Going Big and Failing Again

After the reelection of Shinzo Abe and the installation of Haruhiko Kuroda as BoJ governor, the BoJ decided to simply continue doing what it has always done – more than 20 years of utter failure notwithstanding. However, in deference to the admonitions of the Bernankes and Krugmans of this world, it increased the size of its meddling by an order of magnitude:

 

Assets held by the Bank of Japan: since Kuroda has started this “QE on steroids” program in 2012, the central bank’s balance sheet has grown in parabolic fashion – click to enlarge.

 

In short, over the past four years the BoJ has thrown all remaining caution to the wind, with the declared goal of reviving Japan’s economy and creating an annual “inflation” rate of 2%. However, it seems now that even that was not enough just yet!

As an aside to this: no-one knows or can sensibly explain what lowering the purchasing power of one’s currency by exactly 2% p.a. is supposed to achieve. There exists neither theoretical nor empirical evidence that could possibly support the notion that it is a desirable goal. It is just another Keynesian mantra. Central bankers have basically pulled the 2% figure out of their hats.

The BoJ has certainly succeeded in devaluing the yen’s external value and impoverishing Japan’s citizens accordingly. It has also created a short term windfall for people buying Japanese stocks. To give you a rough idea how its “success” has manifested itself otherwise, here are a few charts illustrating the situation. The first one shows the quarterly annualized growth rate of Japan’s machinery orders (note the most recent figure, which has been released only last week):

 

The most recent data point of the BoJ-engineered “recovery”: machinery orders plunge by 14.4% – click to enlarge.

 

And here is the monthly growth rate in manufacturing production – a sector that due to its export prowess was supposed to be an especially great beneficiary of Kuroda’s destruction of the yen:

 

Japan’s manufacturing production, monthly annualized growth rate – the December data haven’t been released yet, but in light of last quarter’s machinery orders, production growth will likely be back in negative territory – click to enlarge.

 

In light of the enormous decline of the yen’s exchange rate since 2012, one would normally expect that the BoJ has at least succeeded in achieving its bizarre goal of raising the consumer price inflation rate to 2%. Well, it did – for exactly one month. However, that was mainly due to a hike in the sales tax, so it can actually not be attributed to the BoJ. Japan’s consumers have been very lucky so far – the planned assault on their wallets has turned out to be a complete dud as well:

 

Japan’s consumer price inflation rate, month-on-month. No dice, so far – click to enlarge.

 

The Time for More Insanity has Come

Stock markets around the world have recently swooned, with the Nikkei delivering an especially weak performance. After assuring everyone that the BoJ saw no need to add to its already enormous debt monetization program, Mr. Kuroda seems to have been convinced by recent market volatility that is was time to move on from an insane monetary policy to even more insane monetary policy. As Reuters reports:

“The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

 

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

 

“What’s important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” BOJ Governor Haruhiko Kuroda told a news conference after the decision.

(emphasis added)

Obviously, the BoJ cannot allow Draghi to get away with imposing policies that are even more crazy than its own. So it has now caught up with the lunatics running the monetary asylum in Europe. It is actually quite amusing that this admission of the complete failure of the policies implemented to date apparently caused stock markets to rally. JGB yields declined by more than 56% (!) on the day to a mere 10 basis points, and the yen got kneecapped, surrendering much of the gains it has achieved in recent weeks.

 

JGB yields plunge by 13 basis points to just 10 basis points – a loss of 56% in just one trading day – click to enlarge.

 

 

The yen is murdered, surrendering a large part of the gains it has made since early December – click to enlarge.

 

As to the BoJ’s commitment to “achieve inflation”, it may well end one day with price inflation going from zero to infinity in the space of a few months. Kuroda should be thankful that Japan’s citizens haven’t lost confidence in the currency yet in spite of his efforts; one of these days they will, and then it will probably be “game over” in a flash.

We should also point out that there is actually no deflation in Japan. There never has been and very likely, there never will be. Here is a chart of Japan’s narrow money supply M1, which consists of currency and demand deposits:

 

Japan’s narrow money supply M1 since the 1950s. What terrible, terrible deflation! – click to enlarge.

 

Reuters then unquestioningly parrots the official “reasoning” for why falling prices are allegedly “dangerous” (never mind that prices haven’t really fallen in Japan anyway – at best they were stable for a number of years) – readers are evidently supposed to just accept these unproven assertions as if it were perfectly obvious that they are true:

“In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.”

This shows how utterly divorced from reality today’s mainstream economists and central bankers are – not to mention how lazy financial journalists are, who never seem to question this nonsense. The above assertion even flies into the face of economics 101. People buy less when prices decline? Since when? In what universe? Japanese consumers are allegedly waiting since the 1990s for “prices to fall further”? To call this utter bullsh*t feels almost like an insult to bullsh*t.

We guess the billions of people in the world who keep buying smart phones, computers, TV sets and all the other things that are continually falling in price in spite of the ministrations of central bankers must represent the “exception from the rule”.

 

Japan’s consumer price index has recently reached a new multi-decade high. Shouldn’t the central bank be glad that prices have actually been stable for so long? – click to enlarge.

 

In his press conference Kuroda uttered the following:

“Kuroda said the world’s third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

 

“But there’s a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset,” he said.

 

“The BOJ decided to adopt negative interest rates…to forestall such risks from materializing.”

Perhaps Kuroda should instead have pondered what risks are likely to materialize on account of the imposition of negative interest rates. We have already discussed this topic extensively in the context of the ECB’s decision to introduce negative rates, but here is a brief reminder:

Neither zero nor negative originary interest could possibly exist in an unhampered free market economy. Time preference cannot become zero or negative. Conceivably it could become zero if one were to fall into a black hole (it is theorized that no time passes there), or if scarcity were completely eliminated one day and no economic or technological progress would be seen as possible anymore. Neither of these hypothetical cases will ever be of practical importance.

Other than that, the only thing artificially imposed negative rates will achieve is to destroy what is left of the economy – they will slowly but surely transform prosperity into poverty. As Ludwig von Mises has warned:

“Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption. The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction.

 

Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple.

 

What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

As we have always said in these pages, the cunning plan of the mad hatters running the world’s central banks seems to consist of making people richer by making them poorer. One can safely assume that they haven’t really thought this one through.

 

Conclusion

It appears to us that the ever more desperate monetary policy measures adopted by the BoJ are coming closer and closer to crossing a point of no return. In other words, the BoJ seems to be entering what is popularly known as the “Keynesian endgame”. Once the threshold beyond which confidence is finally lost is crossed, the long maintained sophisticated fiat money Ponzi scheme and the associated three card Monte played between central banks, commercial banks and government treasuries will come to a screeching halt.

Naturally, we cannot tell you where this threshold precisely lies or how quickly said “endgame” will be playing out. Nor do we know with any precision what gyrations we may yet see as the situation evolves. We do however know that Kuroda’s decision has brought the world another step closer to the end. It would be a dangerous error to believe that such policies can be adopted without inviting severe consequences.

Kuroda is a member of a small coterie of central planners running the worlds currency systems, who are completely divorced from reality and are playing with the savings and lives of millions. They are implementing extremely risky experiments and evidently haven’t even the faintest inkling of what the ultimate outcome will be.

Unfortunately, none of us can do anything to stop them. It is therefore vitally important that one make a plan for oneself. It is quite ironic actually: the very people the economy depends on the most with respect to wealth creation are also most likely to be terrified by these developments. Consequently they are likely to withdraw more and more from genuine wealth creation activities. They will simply be far too busy trying to save themselves while it’s still possible.

via Zero Hedge http://ift.tt/23AzRbS Tyler Durden