Month: December 2016

The collapse of the US Treasury market in the last two days has sent the entire curve (from 2Y to 30Y) higher in yield on the year….

The belly is underperforming with 5Y and 7Y worst (+20 and 21bps respectively) with 2Y ‘best’ – yield up ‘only’ 11bps in 2016…

 

And US bond markets are drastically underperforming the rest of the developed world…

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An uncrewed Russian spacecraft meant to resupply the International Space Station appears to have suffered a malfunction shortly after launch today.

Roscosmos, Russia’s space agency, tweeted that it lost communication with the spacecraft 383 seconds into the flight.

????? ????? ??????-???????? «????-?» ? ???????? #??????????04 ? 383 ???. ??????? ??????????. ??????????? ?????????? ???????? ????????. http://pic.twitter.com/yiwx7NUxIF

— ????????? (@roscosmos) December 1, 2016

The third stage of the rocket, which helps propel the cargo ship to its final orbit, reportedly shut down “earlier than planned” according to NASA’s live broadcast of the mission…

ProgressMS04: NASA says 3rd stage may have shut down “earlier than planned;” telemetry is “not clear” as to whether solar arrays fully out

— William Harwood (@cbs_spacenews) December 1, 2016

As The Verge reports, Roscosmos has not said whether the spacecraft’s power-generating solar arrays have successfully deployed, or whether the ship was able to make it into its preliminary orbit. The spacecraft could already be headed back towards Earth if a malfunction occurred while the spacecraft was still executing its third stage burn.

The ship is carrying more than 5,300 pounds (2,400 kilograms) of cargo, including food, water, propellant, and other supplies.

NASA schedules cargo flights in such a way that a loss of one or two missions can’t directly endanger the crew aboard the space station. The next ISS resupply mission is supposed to take place sometime in early 2017. Roscosmos is one of three entities capable of resupplying the ISS. Two private spaceflight companies — SpaceX and Orbital ATK — have contracts with NASA that allow them to send cargo to the space station. A third company will join them in 2019.

This is the second time in the last two years that Russia’s space agency has had trouble with an ISS resupply mission. In April of 2015, Roscosmos lost control of its cargo spacecraft during the Progress 59 mission. That ship spun wildly out of control and eventually burned up in the Earth’s atmosphere.

Developing…

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In a note from Evercore ISI, titled simply enough “Investors Believe The World Has Changed”, the firm once again confirms that price drives narrative (recall that everyone was bearish should Trump win), and writes that “Post election, investors believe the world has changed. Whether or not Trump’s pro-growth agenda is enacted or succeeds, investors we surveyed yesterday seemed to buy into it. For example, the consensus of investors we surveyed yesterday put the S&P at the end of next year at 2425; a similar survey we conducted on Nov 3 put the S&P at 2087.”

Below is a summary of what the post-Trump survey found – note that a Trump presidency, widely panned by market participants before the election, is now seen at 6.5 on a scale of 0 to 10, with 10 being “wonderful”:

Next, Evercore asks if the world has indeed changed, and points out the following list of recent headlines:

 

… and yet, Evercore’s surveys paint a different picture at least so far:

The U.S. Economy Not Taking Off

Markets have rallied hard. Many US indicators have strengthened. But judging by EVRISI company surveys, which have been basically unchanged for six months, the economy is hardly taking off. The surveys  so far this week are down slightly. And airlines at 41.9 are still quite weak (problem with fares).

So is the market wrong about Trump, or does it even have anything to do with Trump?  Perhaps not: as Evercore ISI notes, “Incredible Monetary Expansion Still Going On” and concludes “In any event, US
money growth is almost +8% y/y, or almost an incredible +$1t.”

So is the Trump rally just a monetary expansion in a real-estate billionaire clothing? With the Fed’s second rate hike in only 10.5 yers, we will find out soon.

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It appears the growthiness of the new regime is not so friendly to FANG stocks and big tech as the Nasdaq just gave up all its gains post-election.While tech is the biggest loser in stock land, it's the bloodbath in bonds that is most worrisome as 30Y yields spike another 10bps today..

Nasdaq is the biggest loser post-Trump…

 

As FANG stocks slump…

 

But it is the bond bloodbath that is really notable…

In yield terms…

 

And in price terms…

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Someone at Reuters must be really short Bunds.

One week ago, 2Y German Bunds tumbled after a Reuters report came out, according to which the ECB was looking for ways to lend out more of its huge pile of government debt to avert a freeze in the €5.5 trillion repo market that underpins the financial system, manifesting in the surge in short-term Bunds. The effect of that particular report lasted for all of one day as the market realized that no matter what the ECB does, the collateral shortage is likely to persist.

Fast forward to today, when the same thing happened, only this time, to the long end, when Reuters reported that, in advance of its March 2017 meeting, the ECB was considering sending a “formal signal after its policy meeting next Thursday that the program will eventually end.” As a result, Bund futures quickly slid to session low, dropping ~30 ticks in 10 minutes, on the back of the Reuters report.

 

 

In other words, tapering is coming. However, the ECB is not sure what form said tapering will take, especially since the primary message to be delivered is that QE will be extended beyond March, when it was originally scheduled to end, even if it is modestly (or not so modestly) reduced.

Reuters notes that even skeptics of more stimulus on the bank’s Governing Council “have accepted that an extension beyond the current expiry date of March is inevitable given weak underlying inflation and heightened political risk.”

However, the question remains how to structure that extension.  According to Reuters, much of the preparatory staff work has focused on a six-month extension at a steady pace of 80 billion euros per month, an option favored by many as growth is sluggish, inflation lacks momentum and political risk from key elections keeps the chances of market volatility high, three sources said.

But some have indicated they would favor an extension at lower volumes, for example nine months at 60 billion euros a month, fearing that a straight extension could make the program appear open-ended, two of the sources said.

A compromise under discussion would be to signal the program’s eventual end, possibly in the bank’s forward guidance, indicating that the purchases cannot be extended indefinitely. Another option is not to specify monthly purchase volumes, essentially making them dependent on economic developments, the sources said, similar to what the BOJ has done with its curve control operation. That would allow the ECB to buy up to 80 billion euros without requiring it to spend the full amount.

“Coupled with the extension, there’s a sense that you need to send a signal, also for the hawks, that we will not be in the QE (quantitative easing) business forever,” one of the sources said. “We’re not talking about tapering. We’re talking about a signal.”

Actually, you are talking about tapering. However, the reason you don’t want to use that word is because when Bernanke uttered it in 2013, it unleashed the infamous Taper Tantrum in the US and globally, leading to a plunge in bond yields.

There is another problem: with the US tightening at a time when demand for US debt will have to stay constant or rise to fund Trump’s fiscal stimulus, it would be up to Japan and Europe to provide the “helicopter money” to fund US economic growth as DB explained. Even a small hint that this is going away, and suddenly the Trump stimulus is looking very shaky.

Sure enough, as Reuters admits, some proponents of the extension fear an ill-timed signal about reduced buying in future could heighten market volatility, potentially undoing some of the benefits of the scheme.

To be sure, it is not a done deal yet:

Extending the asset buys would require the ECB to ease some of its self-imposed restrictions, a sensitive debate as most options on the table raise legal or political concerns, facing varying degrees of opposition within the Governing Council.

 

Still, ECB President Mario Draghi seemed to dismiss those concerns this week, arguing that the program was sufficiently flexible, suggesting that parameter changes would not stand in the way if policymakers opted for the extension.

However, with a spate of economic and political events in the first two weeks of December, it just may be that a tapering announcement by the ECB is the catalyst that finally blows over the house of cards market that has soared since November 8 on nothing but hope and lack of concrete news.

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Submitted by Jayant Bhandari via Acting-Man.com,

A Market Gripped by Fear

The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state.

The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost.

 

Indian jewelry merchant

 

Fear has gripped the bullion market, for one is deemed to be guilty until proven otherwise. People with perfectly legal cash are afraid of cameras recording their purchases and having to pay outrageous bribes. After an adjustment period people will buy more — not less — gold. For now, the gold market has gone mostly underground with the gold price hovering around US$1,700 per ounce. Did Modi want to boost the informal economy?

 

The Cultural and Political Undercurrent

The individual has been reduced to a cog in a big machine that exists in Modi’s imagination. The country is expected to rally behind him, for his glory.  The IMF is going along with Modi, for in their simplistic view, enforcing western-style institutions on India will lead to the replication of western economic development and the rule of law in India.

Not that increasingly totalitarian and centralized governing institutions work even in the West, but in the alien culture— irrational and tribal — of India, they rapidly mutate and become very corrupt. That is, unless such institutions are run by Europeans. But the days when Britain ruled India are over.

In the irrational and extremely tribal society of India, where calculation and planning are much more difficult, institutions must be much more decentralized than in the West if they are to function properly. At the moment Modi is doing the exact opposite: rapidly increasing his centralized control.

Modi and the other fake-elites are not the only people responsible for the mess.  The real poison comes from society itself. India’s salaried middle class has been given western education. But the concept of critical thinking and reasoning never really got any traction in India’s society. The situation has steadily worsened since the British left 69 years ago.

Similar to other Indian institutions, the education system has continued to deteriorate. Members of the middle class, while retaining their superstitions, did learn the superficial mechanics, but devoid of any deeper meaning. In their simplistic, mechanical thinking (for complex thinking never evolves until one has critical thinking), they came to believe that superficially copying western institutions should be the way forward for India.

Moreover, the salaried middle class that supports to Modi, is currently unaffected by the currency ban and hence can claim the moral high ground. It is the hungry, wretched and starving people, the small businesses, the real backbone of the economy, that are worst affected.

Politicians within Modi’s party and in the opposition have struggled to oppose Modi effectively, for they are all corrupt. Given the irrationality of Indian society, people tend to communicate in slogans and sound-bites, not through argumentation.  The slogan they have been given by Modi is: If you oppose demonetization, you are hiding unaccounted for, corrupt money.

What most in the self-centered salaried middle class forgot to consider is that their paper-shuffling jobs will soon be at enormous risk, as the cascading effect of the harm done to small businesses will eventually destroy their own jobs. Within three weeks, people are getting laid off across the country. The middle class will also suffer from the inevitable increase in crime that the hunger and desperation of poor people is likely to bring about.

 

Factories are closing. Millions of the most vulnerable are rapidly losing jobs. Hunger, poverty and famine are on its way. Is this Modi’s version of Mao’s cultural revolution?

 

Indian institutions had to mutate to cater to the underlying culture. Institutions of India as left by the British are now rapidly degrading, with Modi acting as the catalyst. India will become more totalitarian as the last vestiges of democracy and the associated liberties are destroyed.

It is hard to believe that India can continue to exist as a single unit for long. The problem is that nothing in India is structured to allow for a peaceful breakup. Secession is not recognized in the constitution or in the law, ensuring that any breakup will be accompanied by massive violence and pain, perhaps worse than what happened in 1945, when India and Pakistan split up.

 

Laid off from jobs, people now visit religious institutions — here a Sikh institution — for free food

Photo via punjab-spectrum.com

 

Money Monopoly

It would have been almost impossible for me to believe that a single person would be able to bring a large, complex, and extremely diverse society like India to a sudden standstill.

One could change the government, change some important laws, or even impose dictatorship, but it is almost impossible to quickly and significantly change the direction of the Titanic.

Despite my pessimism about India, I had not considered that there could have been a single key issue that would fundamentally change society, stall the economy, and throw society into utter confusion, desperation and depression –  but Modi found a way.

Banning 88% of the monetary value of the currency in circulation, which catered to 97% of consumer transactions, meant that the economy went into a traumatic shock, throwing financial commitments and contracts out of gear.  Now a vicious cycle is underway.

Fiat currency is fully under the government’s control. This paper-based currency system is extremely corrupt, as it has no inherent value of its own. All its perceived value is derived from regulatory edicts and citizens have to look to the government for directions. Control over the printing press gives the government autocratic control over inflation, deflation, and credit.

I realize now that monopolistic control over the currency is an even worse problem than I thought. As a result of Modi’s decrees, the concept of money has died for a large section of society.

 

Social Engineering

A simple instruction led to a ban on 88% of the monetary value of the currency. Even if this had been well-planned, the decision was so drastic that it would have required massive and continuous tinkering. It was horribly planned though,  requiring a series of patch-up jobs.

The government has continued to release new instructions on how much banks could convert, to whom and on what basis, what would be taxed, and what would be deemed to be illegal cash. No one really knows what the latest rules are and even the banks are confused. One wonders if Modi himself still knows what he wants.

The government had no way to replace the old banknotes by new ones. Merely printing the notes would have required at least six months. Distributing these to villages, which can be tens of kilometers from the nearest bank, would have taken a lot longer.

In the meantime whatever good money is still available — the 12% of the still-legal tender — is rapidly going out of circulation, disappearing below the mattresses of the relatively rich. ATMs and banks are constantly running out of cash to dispense.

With every passing day, the queues have grown longer and longer. Old people, the disabled and women (unless they were prepared to endure sexual harassment) had no way to convert their currency. They were hoping for the queues to shorten and become more orderly. This is no longer going to happen.

By November 24, the government realized that even this chaotic conversion could not be sustained. It gave notice that the conversion of old banknotes was to be  abruptly discontinued.

With the end of conversion those who have no bank accounts — 50% of the India’s population — are now left in a situation in which their banned currency has indeed become toilet-paper.

In a country in which the vast majority of people survive on a dollar or two or often much less per day, whatever they had has been stolen by the government, taxed away indirectly. Could there be a worse tax than this?

Theoretically, they can still walk into a branch of the Reserve Bank of India, which  only has a handful of branch offices around the country, in order to convert Rs 500 bills. Rs 1,000 bills will no longer be converted at all.

Modi now expects these poor people to travel hundreds of kilometers and spend a fortune to change Rs 2,000 or so ($30) at the most. Apparently, Modi cannot even do primary school math.

Those who think Modi is in favor of the free-market should pay attention to what the concept actually means to him and his followers. To them, the free-market means the ability of the government to confiscate the property of poor people — for example, their land for infrastructure — for the so-called “greater good”, to be handed over to corporations or the State.

 

Tourists trapped in “Incredible India”, left to perform on the streets or beg, for a return ticket to Delhi

Photo via hindustantimes.com

 

This is the irony of India. The communist revolutions of China and Russia were at least partly about getting rid of the entrenched middle class, a.k.a the “bourgeoisie”. The Modi-led revolution in India is about the salaried middle class trying to get rid of poor people — India’s deeply entrenched caste system does not allow for poor people to be seen as human beings.

There will eventually be blowback from the poor people and it will not be pleasant for the members of the salaried middle class. But irrational as they are, they cannot yet foresee what is likely to come next.

The government has also given notice that it will tax all the cash deposited that it thinks is somehow suspicious at a minimum rate of 50% and will require the remaining 50% to be frozen for four years.

Interest rates are now falling, helping out debtors and the well-connected, to the detriment of savers, while destroying the future economy by interfering with the efficient allocation of capital.

 

Demonetization has not Achieved any of the Claimed Benefits

Modi claimed that this demonetization would flush out fake currency bills. Not many have turned up, certainly not in any unusual quantities. Perhaps Pakistan is now vindicated, as it had been accused of printing most of the fakes.

Despite the fact that the new bills have been in circulation for less than three weeks, fakes of the new banknotes have already begun are circuating – to such an extent that many people are refusing to accept the new bills.  The new bills — even when they are not fake — are badly printed with many errors.

 

These are not fakes, but defective new banknotes

Photo via indian24news.com

 

The new bills of Rs 2,000, with a face-value twice as large as the largest of the old banknotes, are proving very efficient for giving and taking bribes.

Finally, with a large part of the country’s cash now removed from circulation and having moved into the banking system, the cash reserve ratio has been increased, as excess liquidity in the banking system has flooded into the bond market. This has driven bond yields lower against the RBI’s wishes, which is moreover in danger of running short of collateral for its repo operations.

As a next step, the government will issue “market stabilization bonds” to soak up excess liquidity in the banking system. Thus private capital has been crowded out, moving into the hands of Modi’s government.

 

Protests have started in isolated pockets. I am tempted to side with them, but I am fully aware that any counter-revolution or organized protest virtually always involves a heavy-handed approach. The opposition will be no different from Modi’s brigade, and the next sociopath to come after Modi will probably be even worse than he is.

Photo credit: PTI

 

Protest against demonetization

 

Conclusion, for Those Living in India

Once social engineering of this size has started, people will and should take steps to protect themselves and their families. Decisions should be made today, not tomorrow.

People’s money in banks is frozen and can no longer be used for purposes involving cash. Every indication is that this money will stay frozen, as Modi wants coerce people into invest their money according to his preferences: into low-interest bonds or negative-yielding infrastructure projects.

Any rational person should be to trying to avoid getting stuck in what is a rapidly emerging police state that will control people’s finances and eventually their entire lives.  It will probably be best to take as much investment-related money as one can out of the system, or even better out of India.

A few escape routes still exist for the time being. By law it is still possible to move out US$250,000 per year outside India. This window cannot stay open too long. Until it is shut, one still has the option to move money into foreign currency or investments in more productive instruments outside of India.  One should also be able to store gold with an offshore entity in a country that respects private property.

Many rich Indians already do the above, all legally. They own swaths of properties in HK, Singapore, and Thailand, and increasingly also in Canada and New Jersey (USA). Many directors of Indian public companies are officially resident in Singapore, to avoid becoming a puppet of the extra-ordinarily corrupt and rapacious Indian government, which has been made much worse by Modi.

With India’s institutions now rapidly degrading and the salaried middle class having been zombified, risks are extremely high. Explore your options before the encroaching police state closes the remaining avenues of escape.

Of course, being totally incompetent, India’s government cannot enforce a full-blown police state, but that will not stop massive damage to the economy and what will bring about chronic and frequently acute anxiety among Indians.

India will fundamentally change going forward, in a very negative way. It may eventually disintegrate, a possibility for which one should be prepared.

 

As the month of November 2016 comes to a close, members of the lower classes who must convert their soon-to-be-paid salaries to cash will face even greater desperation.

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Late last week, we reported that in its latest push to limit and/or halt capital outflows, China unveiled new capital controls meant to stem further capital flight disguised as outbound M&A by clamping down with tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook. Beijing was said to focus on “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business. The new controls would apply to deals yet to receive approval from China’s top economic planning agency.

It did not end there.

One month after we noted a Bloomberg report that China was preparing to impose curbs on Bitcoin – which has in the recent past become a widely accepted mechanism to bypass capital controls – including policies restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad, overnight we learned that China was taking a page out of the Indian demonetization playbook, and was curbing gold imports in another attempt to clamp down on capital leaving the country.

As the FT reported, some banks with licences have recently had difficulty obtaining approval to import gold, they said — a move tied to China’s attempts to stop a weakening renminbi by tightening outflows of dollars, the banks added.

To summarize, in just the past month, China has unveiled at least three distinct sets of “controls” aimed at curbing capital flight out of China, at a time when as Goldman calculated recently, the true extent of capital outflows if far greater than what is reported by the central bank.

 

Then, overnight, the PBOC added a fourth unique form of “capital control” when China’s central bank announced it would limit the amount of renminbi that Chinese companies and individuals can remit outside the country, “imposing a cap for the first time in more than two decades”, according to the SCMP, to stem the yuan’s outflow as the currency plumbs daily lows.

As the Hong Kong publication reports, companies domiciled in China will be limited to net currency outflows equivalent to 30 per cent of the owners’ equity, according to Order No. 306 issued Monday by the People’s Bank of China. Commercial banks should “utilise an integrated prudential management for cross-border payment in both foreign currency and yuan,” according to the central bank’s statement.

Among the other rules established by the PBOC in setting yuan-denominated loans to overseas entities, are the following, courtesy of Bloomberg and Reuters:

• Onshore corporates can only make yuan loans within quota; banks should stop handling business if cos use up quota
• Lender also has to have been registered for at least a year; borrower has to be a related entity
• Lender can’t make personal loan to overseas borrower, and also can’t use debt financing for purpose of an overseas loan to a foreign entity
• Party making a yuan loan to an overseas entity must first register the loan with SAFE; must keep loan within a certain limit which wasn’t specified
• Lenders should have shareholding relationships with borrowers
• Banks need to strictly examine whether use of yuan funds offshore is genuine and appropriate
• Interest rates for loans need to be above 0%
• Tenor should be 6 mos to 5 yrs; loans with maturities of 5 yrs or above need to be registered at local PBOC branches
• If lenders can’t justify why borrowers don’t repay debt on time, banks need to stop handling new business and report it to local PBOC branches

This is a stunning reversal in government policy, which had previously encouraged the renminbi’s worldwide usage, part of a long-term strategy to internationalise the currency, culminating with the renminbi’s admission into the IMF’s SDR basket. Needless to say, the latest announcement will hardly impress the IMF which has been pushing for less government control of the currency.

As SCMP notes, among the other measures, not listed above to halt capital flight, the central bank has instituted a range of measures to plug gaps where the currency could be remitted amid its 7 per cent slump this year against the US dollar, from banning Chinese citizens from buying insurance policies offshore, to requiring credit card companies to seek currency licenses.

* * *

Two days ago, Horseman Global’s Russell Clark asked “Is China running out of money.” With every incremental “capital control” the answer is becoming increasingly obvious.

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