Month: January 2016

Via Finanz und Wirtschaft's Christoph Gisiger,

James Bianco, president of Bianco Research, expects more turmoil to come and warns that there will be no easy way out of zero interest rate policy.

The sigh of relief could be well heard on Wall Street. After days of heavy selling the stock market has calmed down somewhat at the end of last week. But according to Jim Bianco it’s too early for an all-clear signal. The influential market strategist from Chicago who is highly regarded among institutional investors expects equity prices to drop further. He’s also quite skeptical about the heavy-handed interventions of the authorities in China. With respect to the United States, he believes that there is going to be a massive liquidation in the oil patch. 

Mr. Bianco, stocks have taken a big hit. Is the sharp drop in equity prices justified or is it an emotional overreaction?

There is an old line in the market, first coined by the economist Paul Samuelson. It says that the stock market has predicted nine of the last five recessions. There is some truth to that phrase. But I would also point out that predicting nine of the last five recessions is a much better track record than the consensus of economists. We wish they were that accurate, but they’re far worse. Every time the financial markets get volatile and messy like this it deserves attention because the markets are trying to tell us that there is a severe issue out there. It’s been coming from all over the place: We got a collapse in commodity prices and we got financial markets across the globe selling off, including in the United States. So I’m going to pay a lot of attention to it.

What are the markets so worried about?

Two things: First, what they are worried about is a global slowdown. It’s a global slowdown in manufacturing. You see it in commodity prices, you see it in the GDP numbers out of China and you see it in the manufacturing numbers in the United States.

And second?

The heavy-handedness of central planning is going to be a lot harder to get rid of than people think. The big difference between now and any other hard sell-off since the financial crisis is that the Fed is raising rates. In 2011 for instance, the markets sold off a lot harder than they did now. But what did it take to end it? The Federal Reserve gave us Operation Twist which was a precursor to QE3. Now, that the markets are selling off the Fed is raising rates. So it’s doing exactly the opposite. Warren Buffett has a line that you don’t know who’s swimming naked until the tide goes out. We don’t know how dependent markets are on central bank policy until they start to reverse it. And now, as the Fed starts to reverse it, we’re finding it out and it’s a bigger problem than we think.

Meanwhile China is trying to move heaven and earth to calm down the markets. Do you think China’s economy can avert a hard landing?

China is a communist country. They’re communists and when their economy started to misbehave and when their markets started to get upset they went right into their communist thinking. They started throwing speculators in jail and  billionaires turned out missing. But this is not the way you handle a volatile market. The incompetent mismanagement of the Chinese markets and economy by the Chinese government makes it even worse. And by making it worse they make people lose their confidence. So this gross mismanagement results in a loss of confidence in the Chinese government of the wealthy. That’s why you have a giant capital outflow out of China.

How concerning is this flight of capital?

No one disputes the capital outflow. But the innocuous, “so I don’t get thrown in the Gulag”-way of saying it is: “The volatility in the markets are scaring investors out of China.” What’s been happening in China in the last couple of weeks is that as the markets have gotten volatile they have stepped up their market interventions, including last Thursday intervening in the currency market with the largest amount of money they have intervened with in the last three years. They’re trying to hold the currency steady but Chinese stocks were still down 2% on that day. They’re trying to make us all believe that there is nothing to see here. But there is still a lot of stress. You see it in the collapse of the Hong Kong Dollar to its lowest level in twelve years.

Tensions are also high in the energy sector. What’s going to happen if oil hovers around $30?

In the oil industry you have misallocation of capital, in part by seven years of zero interest rates. Especially in the United States the energy sector was grossly overbuilt with horizontal drilling and fracking. A lot of those companies borrowed a lot of money and have put themselves into a bad place. They have no choice but to keep drilling. In July of 2014 the price of crude oil was $107 per barrel and the US was producing 8.4 million barrels per day. Today, with the price at around $30 production is 9.3 million barrels per day. So more oil. If these companies stop drilling, they’re out of business. But if they keep drilling they are going to drive the price so low that they’re going out of business, too. In the oil industry the phrase to describe what’s happening now is called “dead man drilling”. That pretty much sums it up.

How low can oil go?

At the heart of the collapse of the oil price has been a slowdown of demand. That’s why we’re seeing inventories around the world blown up to the highest level ever. So to get a real bottom in oil prices we need to take production out of the market. That’s an euphemistic way of saying that oil companies have to go away. There has to be massive liquidation. For that, the oil price doesn’t have to go any lower. It doesn’t need to go to $20 or $15. If in June the oil price is at $35 it will be still too low for most of these companies and it will do the damage. It needs to get into the high forties for the industry to have a chance to survive. At this point this means it has to go up almost 70%.

The fear of bankruptcies in the oil patch is putting a lot of pressure on high yield bonds. How dangerous could this get for the financial sector?

Part of this misallocation of money in the oil industry was that a lot of these companies bought into the high yield market, partly because the Federal Reserve drove yields down so low. That made it economical enough for a risky project like oil drilling to finance itself.  Today, energy is maybe 7% of the high yield market. But at the high of July 2014 it was around 20%. That’s what happens if you kill the market: It is no longer a big weighting in the market. But the problem is it was a big weighting. And now you’ve got chaos in the high yield sector driven largely by the error investors have made in energy.

So what are the ramifications of that?

Many experts pretend that this is no big deal. But the same experts also said subprime doesn’t matter, Greece doesn’t matter, the Yuan doesn’t matter or volatility in the stock market doesn’t matter. Well, some of those things mattered and some mattered a lot. This is the way all these crises have started. They always start with something you think is small and then they metastasize in ways you cannot begin to understand. This is going to impair everybody in the high yield market from borrowing. Everybody is going to pay a higher cost of capital because of the energy error in high yield. How much does it affect everybody? Well, tell me when it stops. I don’t know how much wider spreads on high yield bonds are going to get. But I think they’re going to continue to get wider. We’re not done yet.

Wider spreads on junk bonds are usually also a sign for trouble in the economy.  How robust is the economy in the United States?

Most economists will tell you that the US economy is okay and everything looks good. That is correct if you take a view backwards. But the market is telling you that from this moment forward things are maybe not as good as we think they are. Forward looking measures are not that good and one of the best forward looking measures are earnings which are terrible right now. So the question is: Is the marketplace telling us that going forward from here we should expect a different type of economy? The low interest rates on treasury bonds, the falling expectations for inflation that the tips market is showing us and the volatility in the stock markets makes me believe that the answer is yes. We should expect something different.

What does that mean for the Federal Reserve?

The Fed wanted to get out of the market manipulation game. They knew that QE didn’t work anymore for the economy. It just served to push up stocks and they didn’t want to be in that game. So a month ago they raised rates and they promised us that they were going to raise rates four times this year according to the dot chart. But nobody else believes that they are going to move four times. So the Fed has a very difficult choice in front of them: Do they cave to market expectations and then be forever branded as being reactionary to the financial markets. Or do they stick to their guns and then be branded as the people that caused undue market stress. There is no win in this situation. I don’t know which way they are going to go on this. But I wouldn’t be surprised if we saw some kind of moderation out of the Fed so that they talk about less rate hikes.

What does all this mean for the outlook on the stock market?

Ironically, one of the better performing markets has been the S&P 500. The index had its low point on the 20th of January when it was down 14% from its peak. Nevertheless, it’s been performing a lot better than most of the other stock markets around the world, Most of them are down more than 20% which is the general definition of a bear market. I suspect that in the first half of this year the S&P 500 will get to  that, too. Maybe we’re ready to have a little bit of a relief rally over the next couple of days or a week. But we have yet to find a situation where the markets sells off for ten days real hard. So at the minimum we will revisit the lows of last Wednesday one more time.

via Zero Hedge http://ift.tt/1ZOdiM7 Tyler Durden

Late last week the markets soared after the S&P hit 1812 – a 15% drop from its all time highs – with oil enjoying its biggest two-day surge in 7 years, on what most agree was a furious oversold bounce.

But what was the catalyst? The start of the rebound has been widely attributed to Thursday comments by the ECB’s Mario Draghi, however according to Citi’s Brent Donnelly, this is incorrect and he notes that the wrong central bank is getting credit for the sharp risk-on move that started well before the ECB’s statement and press conference: instead of the ECB it is the Bank of Canada that should be getting all the credit.

Here is how Donnelly sees what happened last week, and why it is not the European but Canadian central bank that should take the credit for this particular bounce:

Stephen Poloz Saves the World

 

I was out travelling Thursday/Friday last week and a lot has happened since the last AM/FX. The EURGBP short is working as the ECB turns more urgently dovish. EURCHF is pressing the top of the range but has not quite fully broken out yet. And, most importantly, Stephen Poloz saved the world! By breaking the back of the strong USDCAD, weak oil spiral, it looks like the Governor of the Bank of Canada (with an assist from Super Mario) put in a short-term bottom for risky assets.

 

I am exaggerating slightly, but those who believe in the idea of interconnected markets and the butterfly effect probably agree that the “no cut” from the Bank of Canada was important. Take a look at Chart which shows the Bank of Canada’s decision to hold rates came just two or three hours before the low in the S&P 500.

 

I realize some people will think this is complete lunacy and I am ascribing causality to a random chain of events but personally I believe pretty strongly in the interconnected markets concept. The same speculators that are limit short crude are most likely limit long USDCAD and receiving CAD rates. So squaring in CAD markets leads to squaring in crude markets which leads to short covering in spoos.

Intuitively this makes a lot of sense: stronger CAD -> stronger crude -> stronger stocks and a sharp squeeze. Visually it looks as follows:

So how long did Poloz save the world for? At least until the depression that has gripped Alberta and is spilling over to other parts of the country makes a rate cut – ultimately into negative territory inevitable. Until then, however, thank Canada for giving the financial world a few more days in which to STFR.

via Zero Hedge http://ift.tt/1SfApP1 Tyler Durden

Submitted by Jeffrey Snider via Alhambra Investment Partners,

If the Wall Street Journal meant to reach for reassuring comfort, they fell far short. After spending late summer last year and into the fall proclaiming that manufacturing didn’t matter (12%), the newest round of talking points are “false positives.” In other words, manufacturing and industry does matter, after all, but just “not enough” to tip into full recession. That would seem to suggest some kind of balance on the plus side, but what they give us is actually the opposite.

The case for a downside is quite compelling, a point very grudgingly accepted in the article. In the truly forward-looking case, there are industrial production, corporate profits and the stock market (that latter is and has been dubious, but this is the Wall Street Journal).

On those three counts there is nothing but growing concern rather than “transitory” irrelevance.

Industrial production has declined in 10 of the past 12 months, and is now off nearly 2% from its peak in December 2014. Corporate profits peaked around the summer of 2014 and were off by nearly 5% as of the third quarter of last year, according to the Commerce Department. Stocks have fallen viciously so far this year, with the Dow Jones Industrial Average down 7.6%, despite a rally late last week.

The economy is in much worse shape than just those, however, as the Journal makes no mention of the supply chain at any level other than production. That matters greatly because industrial production has already declined significantly (enough to suggest recession) without making the slightest difference in inventory. Retail sales just experienced the worst holiday season outside of 2008 and 2009 – and that includes auto sales. Wholesale sales continue to slump and inventory across the economy remains, despite production cuts to this point, elevated in the extreme.

These are truly forward-looking indications, where businesses will have no choice but to scale back now that “confidence” has been shaken enough to even dent the heretofore invulnerable stock market. The Journal dutifully reports the role of confidence in recession, being an organ of orthodox persuasion, after all. When confidence is lost in terms of rational expectations theory, that is saying something to an economist.

Again, however, the point of the article was clearly meant for encouragement. In transitioning to the “bright side”, it points out that false positives have occurred in the past with IP, profits and stocks; indeed they have, but in either 1986 or 1965 there wasn’t this tide of inventory, not even close (nor “dollar”, commodities crashing or very real global economic strain all tied together). But the real foundation of optimism is exactly what you would expect from economists:

On the bright side, the U.S. job market is perhaps the best recession indicator of all, and it isn’t flashing trouble.

 

In the past 50 years, every recession has seen the number of jobs in the economy decline by at least 1%. And jobs have never declined by that much outside of a recession.

 

Today, the number of jobs in the U.S. has been growing briskly—up 292,000 in December and up 2.7 million over the past year. This is why many economists remain confident the U.S. can avoid recession.

That’s it; false positives and the unemployment rate to balance out not just stocks but commodities, funding, and especially credit; not just corporate profits but actually revenue; not just industrial production but sales, trade and inventory. The US job market is not “perhaps the best recession indicator” at all because it is at best a lagging measure. It may not suggest that full-scale recession is in progress right now, but at the very least it tells us nothing about the immediate future. Even on its own terms, the purported level of job gains has failed to live up to itself for years now.

The very basis for this persistent over-optimism has been the BLS figures, both the Establishment Survey and the unemployment rate. Yet, despite robust numbers on either account we are in this mess already. And it was economists and their unemployment rate devotion who told us last year that the “best jobs market in decades” would almost guarantee nothing but the best for the rest of it. It was in many ways the entire basis for the assertions of “transitory.”

In viewing labor market statistics so very charitably, the Journal article points to one of its regular economists:

“I just don’t buy for a second the idea that U.S. households are so terrified by what’s happening that they’re going to behave like Germans and wean themselves off buying stuff,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referencing the high-saving and low-consumption German economy.

Mr. Shepherdson has been very faithful to that interpretation of the unemployment rate for some time. Last April, he was quoted in the New York Times again suggesting that labor data in no way indicated any kind of rough economic future:

“The [jobless] claims numbers simply do not support the idea that the first quarter slowdown in growth is indicative of some underlying malaise in the economy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

And in February 2015, Shepherdson was named the Wall Street Journal’s “most accurate economic forecaster in 2014” largely on the strength of what he said were interpretations of labor statistics. It isn’t surprising, however, that despite being given that honor by the Journal, Shepherdson’s expectations were still quite conventional in this same respect:

Like many economists, Mr. Shepherdson was too optimistic about overall economic growth. The ranking was based on a survey conducted in early January 2014, before it became obvious that a very harsh winter would cause economic activity to contract in the first quarter.

Based on his view of the labor market at that time, he was, like all economists, undeniably enamored by the idea of “transitory” being completely overwhelmed by this fountain of job growth:

What do the numbers say about 2015? Mr. Shepherdson is forecasting the real GDP will grow a blistering 3.7% in 2015 and the unemployment rate will end this year at 5.2%.

 

“When oil was at $100 [a barrel] I thought we would see more growth from capital spending,” he said. “Now with cheap oil, we will see more consumption and less capital spending, hurt by oil companies cutting back.”

After suggesting about a year ago that the labor market would push the economy up into a real growth trajectory because of jobs, after factoring a collapse in oil to that point no less, now that the economy is falling far, far short of that and may actually be in danger of recession he now claims that same labor statistic is enough for the economy to actually avoid it? If the unemployment rate was not nearly enough of a positive factor last year, why would it be this year after significant damage already taken and spreading?

I am in some ways being quite unfair to Mr. Shepherdson in singling him out as his view was shared widely by economists up and down the line, not any different than the views expressed by Janet Yellen and the FOMC. It is the backwards priorities of economics; to view all modeled outlooks as if “more real” than observed condition including market prices. Such Aristotelian process raises more questions than confidence, especially surrounding labor statistics. If the labor market is so robust, why are there no wage gains? To the orthodoxy, it’s not a puzzle but an article of faith; there have to be wage gains, just pushed off to some point in the future. Thus, no matter what happens right now, that future expectation is all that is meaningful in economics; every negative until that future is just “transitory.”

Like Mr. Shepherdson, I looked at unemployment claims last April and came to a far different conclusion.

That would further explain as to why Janet Yellen and the FOMC are so confused about the economy, as they view the Establishment Survey with all its adjustments and stochastic processes as hardened gospel, unchallenged as to whether past assumptions still apply. Despite the dynamic nature of the real world, after all made more so by the“neutral” efforts of the Greenspan/Bernanke/Yellen complex, orthodox economics exists exclusively upon static assumptions, “laws” and “rules.”

 

If there is no longer a solidified link between jobless claims and the actual economic cycle, the FOMC and orthodox economists are relying, almost exclusively, upon a false signal. Again, that would expound on their “ability” to see an economy that no one else does, nor certainly not one of majority experience.

The weight of lackluster wages, increasingly dour spending and the spread of consumer irregularity suggested not a robust jobs market at all, but one increasingly divorced as a statistical regime. If there were actual job growth, then it would be easily observed someplace other than the unemployment rate. Instead, the Establishment Survey seemed to tick only with jobless claims, suggesting not a labor market trend in the real economy but more so a statistical anomaly devoid of historical circumstance with which to draw upon for a baseline (or benchmark).

A broad survey of the economy outside of the BLS jurisdiction suggested something very wrong with the mainline payroll estimates, and that they would become even more divergent than the actual economic conditions signaled by funding markets, then credit markets, then commodities markets and now stock markets. The jobs number became a meaningless and tortured imputation shorn of any relevant context. I think that still the most likely explanation as to how the labor market might seem so tantalizingly robust yet in only that one, very narrow place. It is uncorroborated all across the statistical spectrum of economic accounts; a feature that grows rather than conforms.

Last year was supposed to be “the” year because of faith in only the BLS’ numbers. It was advertised as full deliverance of the promises of QE and ZIRP, but instead 2015 delivered only recessionary impressions. That contrast is itself enough to call into great doubt the reliance on the unemployment rate and Establishment Survey for suggesting real economic circumstances and, more importantly, what is to come. Yet, as noted by this Journal article clearly meant to reassure, that is all that remains on that account. If all the optimists have left to stand upon is the unemployment rate, we are in much worse shape than even I thought.

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

Anyone who dares to question Obama’s grand renaissance is supposedly peddling fiction. Meanwhile, in today’s latest mass layoff event (which, oddly enough, has become a daily thing during the “recovery”) some 2,500 Sprint workers  – 8% of the company’s 31,000 total employees – have already received, or are about to be “peddled” pink slips.

According to the Kansas City Star, “layoffs and cutbacks at Sprint Corp. have claimed at least 2,500 jobs and struck six customer care centers, company officials confirmed.

The job cuts are coming mostly in customer care but also include 574 other positions eliminated at the Overland Park headquarters campus. The total does not include any jobs that may have been eliminated at other Sprint employment centers.

 

Last week, Sprint notified Kansas officials that 829 Sprint employees were told their headquarters jobs were being eliminated. Boyd said these included 255 at the Overland Park headquarters campus call center. She said 360 employees at the center would remain on the job after the cutbacks.

 

This wave of layoffs is part of a months-long effort to slash $2.5 billion in spending across all parts of Sprint’s operations. It also marks the third round of cutbacks at Sprint in the last two years.

 

Sprint shed 1,700 jobs in the fall of 2014 and announced plans to cut 2,000 more. The 2,500 come on top of those totals, bringing the announced job cut total in that time to more than 6,000.

 

An email notified all employees last week of the six call center closings that will idle about 2,000 employees. Marci Carris, Sprint’s senior vice president of customer care, said in the email that all of the layoff notices had gone out and that all of those employees would qualify for the current severance benefits, which can amount to two weeks pay for each year employed plus $1,000.

 

Sprint is reducing severance benefits for employees notified after Jan. 30. The new benefits will provide one week of pay for each year worked.

What little good news there is for Sprint employees is that they will largely know their fate over the next week: Michelle Boyd, a Sprint spokeswoman, said the layoff notices would be “largely completed” by Jan. 30.

However it is Sprint’s customers who may be stuck with the worst news of all: with fewer call centers operating, Sprint is urging customers to handle routine inquiries – such as checking bill balances and making payments, checking on device upgrade status, and checking on phone lease status – online or through the Sprint Zone app.

Also, if for some reason ObamasRecovery.gov gives you a 404 error, just keep trying.

And now, unleash the Sprint activist investors and bring on the debt-funded buybacks.

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

Earlier this month, Fox News released a poll showing Ted Cruz leading Donald Trump by four points, and the mainstream media and GOP establishment quickly huddled around the campfire, content that The Donald had jumped the shark and normal service could resume with a candidate that was 'bearable'. Well that is over… As WaPo reports, Trump is now up by 11 points, a 15-point swing in the two weeks between surveys with gains across the board.

Two weeks ago, Trump trailed Cruz by six points among those who would probably vote. Now he leads with that group by 15 — more than his overall lead against Cruz.

Trump has regained the advantage.

It's still a surprising development. Trump's gained a lot, across the board, while most of his competitors have slipped. Cruz is still over-performing with conservatives and tea partiers (meaning that his support among those groups is 11 and seven points higher than his overall support), but Trump gained 11 and 17 points with those groups over the past two weeks. Cruz's support among the groups fell.

Trump continues to lead in the polls and prediction markets but Jeb Bush domninates the national endorsements, which The NY Times reports is the single-best predictor of a party's nominee for the past 35 years…

We suspect – dare we says it – this time may be different.

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

The world has yet to fully digest what is currently happening in Japan.

Japan is the global leader for Keynesian Central Banking insanity. The ECB and US Federal Reserve began implementing ZIRP and QE after 2008. The Bank of Japan has been employing both ZIRP and QE since 2001.

Put simply, by the time the Great Crisis of 2008 rolled around, the Bank of Japan had nearly a decade’s experience seeing what QE, ZIRP, and the like could accomplish.

On top of this, the Bank of Japan has been the single most aggressive Central Bank post-2008. In 2013, it launched a single QE program equal to roughly 25% of Japan’s GDP (the Fed’s largest program was less than 10% of GDP).

As if this wasn’t insane enough, the Bank of Japan then expanded the program, not because it was working, but because doing so would result in its models appearing more accurate.

In short, the Bank of Japan crossed the Rubicon long ago as far as monetary insanity goes.

Which is why it’s critical to note two things:

1)   The Head of the Bank of Japan, Haruhiko Kuroda has admitted Japan’s “potential” GDP growth is 0.5% or less.

2)   The Bank of Japan just boosted its ETF purchases but not its bond purchases in response to Japan re-entering a recession.

Regarding #1, this is an implicit admission that QE doesn’t generate GDP growth. Anyone who’s studied QE knew this already, but it’s an incredible admission from a Central Banker. These are the people responsible for instilling confidence in the system.

Which brings us to #2.

The illusion that QE is anything other than a market prop is over. The BoJ has admitted QE doesn’t generate economic growth. This is confirmed by the fact that it only boosted the stock related component of its current QE program, NOT the bond-buying component.

Mind you, this is AFTER Japan entered a recession, which only gives credence to Kuroda’s admission that QE cannot generate GDP growth.

However, the big news is that despite the boost in ETF purchases, Japan’s Nikkei has collapsed, taking out the bull market trendline running back to the first hint of Abenomics back in late-2012.

In short, not only has the Bank of Japan admitted QE is not a successful tool for boosting GDP, but we’ve reached the point at which even increases in QE are no longer having the desired effect

The markets have yet to digest this, but when they do, it’s going to be one heck of a show.

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Chief Market Strategist

Phoenix Capital Research

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