Month: April 2017

The ink has yet to dry on Theresa May’s Article 50 signature from last week which officially started the UK’s 2-year long divorce from the EU, and already Europe has been traumatized by comments from former Conservative leader Michael Howard, who suggested that Theresa May is be prepared to go to war to protect Gibraltar as Margaret Thatcher once did for the Falklands, comments which according to the Guardian were “immediately criticized as inflammatory.”

Howard told Sky News on Sunday that: “There is no question whatever that our Government will stand by Gibraltar… 35 years ago this week another woman Prime Minister sent a task force half way across the World to defend the freedom of another small group of British people against another Spanish-speaking country…. I am absolutely certain our current Prime Minister will show the same resolve in standing by the people of Gibraltar.”

As The Telegraph adds, Howard said the British Government will stand by Gibraltar during Brexit talks amid claims of an EU “land grab” for the territory by Spain. It came as Spain confirmed that it would not initially block an independent Scotland’s attempts to join the European Union (EU). Alfonso Dastis, Madrid’s foreign minister, reportedly said Spain would not veto an independent Scotland’s EU hopes – while stressing he does not want to see the country leave the United Kingdom.

Aerial view of Gibraltar

A European Council document on Friday suggested that Spain will be given an effective veto on whether the Brexit deal applies to Gibraltar. Downing Street said May had called Fabian Picardo, the chief minister of Gibraltar, on Sunday morning to say the UK remained “steadfastly committed to our support for Gibraltar, its people and its economy”.

Taking British officials by surprise, the draft guidelines drawn up by EU leaders state that the Brexit deal will not apply to Gibraltar without an “agreement between the kingdom of Spain and the UK”.  One official told The Telegraph it is “absolutely unacceptable” and gives Spain too much power over the future of Gibraltar.

In response, on Sunday the Prime Minister told Gibraltar’s chief minister that Britain will never allow Spain to take over the peninsula against its will. Sir Michael Fallon, the Defence Secretary,  has also pledged to “protect” Gibraltar “all the way”. Speaking to the BBC’s Andrew Marr show, Fallon said: “The people of Gibraltar have made it clear that they don’t want to live under the sovereignty of Spain. Gibraltar is going to be protected all the way.”

“The Rock”, a British Overseas Territory since 1713 with 30,000 residents, remains a major source of diplomatic tensions. Gibraltar’s chief minister has warned the territory should not be used by Spain as a bargaining chip for Britain’s Brexit negotiations.

Fabian Picardo told the BBC this morning  that sharing sovereignty with Spain would be “absolutely awful” and  comparable to “living in somebody else’s land.”

 

He said he was “working closely with the British Government” and he would support the British Prime Minister in the upcoming negotiations to get the best deal.

 

“I am sure the UK will be batting for Gibraltar,” he said. “Gibraltar is not on the table as a chip”.

On Sunday, May told Mr Picardo that the UK is  “absolutely dedicated to working with Gibraltar for the best possible outcome  on Brexit”, Downing Street said. Quoted by The Telegraph, a May spokeswoman said Mrs May “reiterated our long-standing position that the UK remains steadfastly committed to our support for Gibraltar, its people and its economy”.

“The Prime Minister said we will never enter into arrangements under which the people of Gibraltar would pass under the sovereignty of another state against their freely and democratically expressed wishes, nor will we ever enter into a process of sovereignty negotiations with which Gibraltar is not content.”

 

“The Prime Minister said we remain absolutely dedicated to working with Gibraltar for the best possible outcome on Brexit and will continue to involve them fully in the process.”

 

Last night Boris Johnson, the Foreign Secretary, said that the UK’s support for Gibraltar will remain “implacable and rock-like”.

Elsehwere, when asked about the controversy surrounding May’s apparent threat to weaken security cooperation if Brexit talks turn sour, Defense Secretary Fallon said the negotiations had to cover both a trade deal and issues such as counter-terrorism and police cooperation. “It is very important to link trade and security because what we are now looking for is a deep and special relationship that covers both economic and security cooperation. Those two things go together,” he said.

“It is very important that we go on committed to the security of the continent.”

 

Fallon then talked about sending 800 troops to Estonia, others to Poland, and RAF Typhoons to Romania, which are all under Britain’s Nato commitments not linked to EU membership. “We are stepping up security because it remains our continent and this is a very uncertain time for Europe and right we should be playing our time on that. We’d all be worse off if there wasn’t a deal – we are expecting to have a deal.”

 

The defence secretary admitted some issues were inside the European treaties, and others (including Nato) not. “The letter refers to our ambition to have a completely new partnership on the economic side but also on security side,” he said, arguing that stating a fact about defence capabilities wasn’t a threat.

Meanwhile, the reaction in Gibraltar to the latest territorial posturing was quick. According to the UK’s Express.co.uk, the newspaper spoke to a host of Gibraltarians who are all adamant about one thing: there is nothing anyone could do to undermine their sovereignty as a proud nation: “one thing is very clear – people in Gibraltar are happy for Britain’s support, but said they can handle this on their own.”

Justine Rovegno said: “I think Gibraltar would be more prepared to relocate its entire population before we would let Spain take-over, we are an extremely stubborn community!”

Manuel Gracia added: “If Spain takes military action we’d stand our ground and I’m sure we’ll be helped by the UK.”  “If the EU cuts Gibraltar out of any deals and trade like I said Gib will stand it’s ground and look to other opportunities. “

“As far as I’m aware there’s always been talk of Spain ‘taking Gib back’ with force, politics and pretty much every way you can think of.  None of it has worked so far and I find it doubtful that it’ll come to that. There will be tensions. There will be arguments but that’s what it’s always been like.”

Danielle Barclay took a more blunt stance, referring to the actions of Spain and Donald Tusk as being: “F****** disgusting and inhumane.”

As Express adds, “the population of Gibraltar seems relatively unfazed by the prospect of a Spanish invasion, EU strong arming and political scheming and are confident they have seen it all before and will come out of this stronger – as they always have.”

But there is an ominous sense of dread about what is to come, as Justine said: “I think the Gibraltarian community has survived very dark times because of Spain, I think most of them believe they have gone through the worst, and Spain going about this in such an intimidating way is just fuelling a fire that was lit many years ago.

 

“I felt that the younger community was learning that there was not a giant brick wall between Gibraltar and the Spanish, but I think the angst they are creating is slowly putting those thoughts back into everyone’s minds which is extremely sad.”

Not even one full week into Brexit, and nationalistic tensions – the continent’s soft spot – across Europe are once again rising, this time not the direct result of Europe’s refugee troubles. The good news: for now it is being handled diplomatically. The bad news: as the following chart from Goldman shows, the Brexit process is just beginning, and the potential for political and economic complications will only eventually be fully appreciated.

 

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China’s ambassador to Canada, Lu Shaye, told the Globe and Mail that Beijing is seeking full access to Canada’s economy ahead of free trade talks, a move that could result in Chinese state-owned companies bringing their own employees to work on projects in Canada. Charles Burton, an associate political science professor at Brock University, said bringing their own workers abroad is “normal practice” for Chinese companies. “It’s not as if [the Chinese] would be asking something of Canada that they don’t expect from other countries,” he said.

Earlier this year, Canadian and Chinese officials held exploratory talks on a free trade deal and another meeting is set to take place this month,  Lu told the Globe, just as the US prepares to renegotiate NAFTA with Canada and Mexico.

Lu said that his government wants to avoid discussions of human rights issues, fearing it could become a “bargaining chip” in negotiations. Additionally, anticipating what has become an increasingly regular response by sovereign governments to China’s money-laundering disguised as M&A ambitions, the ambassador said China’s government would interpreted any attempt by Ottawa to block takeovers of Canadian companies on national security grounds as protectionism.

“Investment is investment. We should not take too much political considerations into the investment,” he said. “Just like the negotiations of the (Canada-U.S.) FTA, we should not let political factors into this process. Otherwise, it would be very difficult.”

Meanwhile, Canada’s ambassador to China, John McCallum, told the CBC that Prime Minister Justin Trudeau “is very clear that we want to pursue stronger ties with China. We think that in the medium term this will lead to more Canadian jobs.”

Canada’s ambassador to China, John McCallum, says a trade deal with China is
a priority for Prime Minister Justin Trudeau.

While China has recently pushed to adopt the mantle of the “world’s biggest defender of free trade” following Trump’s threats to impose protectionist measures, and has been among the most vocal countries in Trump’s proposed trade practices, critics say the country is itself a bastion of protectionism. They note China allows almost no foreign investment in banking and telecommunications. Many argue the country has not lived up to the commitments it made to open up its economy when it joined the World Trade Organization in 2001.

China’s interest in Canada lies primarily in energy, and in the possibility of exploiting Canada’s oilsands. The country will push for a reversal of Harper government-era policies that restricted the ability of Chinese state-owned businesses to invest in Canadian energy.

As Daniel Tencer writes, the vast majority of China’s largest corporations are state-run enterprises whose executives are often hand-picked by government. They also note that China’s notion of “full access” to an economy could be very broad. As the foreign policy blog OpenCanada notes, China’s 2015 free trade deal with Australia includes a provision that allows Chinese companies to bring their own employees into the country to work on projects, so long as those projects are worth more than AUD$150 million.

With the specter of being displased from their jobs by imported Chinese workers, opinion polls suggest Canadians are split on the issue of free trade with China. One poll carried out for the Asia Pacific Foundation of Canada last August found 46% support for a deal with China, and the same percentage opposed. However, that was a stronger showing than a poll six months earlier, which showed only 36-per-cent support for a China trade deal at that time.

Canadians were much more likely to support free trade deals with more developed economies, such as the European Union, Japan and Australia.

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At a conference near Washington, D.C., in February, Military.com's Hope Hodge Seck reports that the commander of all Navy special operations units made an unusual request to industry: Develop and demonstrate technologies that offer "cognitive enhancement" capabilities to boost his elite forces' mental and physical performance.

"We plan on using that in mission enhancement," Rear Adm. Tim Szymanski said. "The performance piece is really critical to the life of our operators."

Seck reports that Szymanski expanded on his remarks in a brief interview later, saying he has his eye on a number of technologies, including pharmaceutical aids. But the results of one breakthrough involving the direct application of electrical stimulation to the brain have particularly caught his eye.

"In experiments, people who were watching these screens … their ability to concentrate would fall off in about 20 minutes," Szymanski said. "But they did studies whereby a little bit of electrical stimulation was applied, and they were able to maintain the same peak performance for 20 hours."

Transcranial electrical stimulation was one of the technologies touted by then-Defense Secretary Ash Carter in July 2016 as part of his Defense Innovation Unit (Experimental), or DIUx, initiative. Since then, multiple SEAL units have begun actively testing the effectiveness of the technology, officials with Naval Special Warfare Command told Military.com.

"Earlier this year, Naval Special Warfare units, working with DIUx, began a specific cognitive enhancement project with a small group of volunteers to test and evaluate achieving higher performance through the use of neuro-stimulation technology," Capt. Jason Salata, a spokesman for the command, said in a statement.

The elements testing the technology include Naval Special Warfare Development Group, the unit known more popularly as SEAL Team Six. Other teams are also conducting tests, Salata said. He declined to confirm how many operators are participating in the testing, or to cite specific findings to date. But there have been positive outcomes so far, he said.

"Early results show promising signs," he said. "Based on this, we are encouraged to continue and are moving forward with our studies."

The company that makes the brain-stimulating device — a headset that could be mistaken for a pair of Beats by Dre headphones — is Halo Neuroscience. And the technology offers not cognitive enhancement, but neuro-priming, Chief Technology Officer and Company Co-Founder Brett Wingeier told Military.com.

Developed for elite athletes, the headset purports to work by stimulating the brain to enter a state of hyper-elasticity, allowing users to learn better and more efficiently. In physical training, he said, the technology has proven useful in developing explosive power for athletes whose sports require vertical leaps or sudden starts.

For operators, the same system could improve shooting performance, Wingeier said.

"Whatever you're training on as far as a movement-based skill," he said, "if you do deep practice, hard repetition, this accelerates the benefit of that."

Regardless of the technology or method, he said it is important that the military conduct robust tests and demonstrations on aids to human performance, contributing resources to making the warfighter stronger and more resilient the way it did to developing cutting-edge aircraft and gear.

"You really want to test these things in high-end training environments, which could tell you, do these matter in a warfare scenario," he said. "We need to really believe that investing in the human makes sense."

Szymanski signaled an interest in testing other performance-enhancement technologies, as well as pharmaceutical aids such as blood testosterone in the future. But he said he's approaching the field of enhancements carefully, with an eye to side effects, and warning operators not to take the first steps on their own.

"I'm always anxious, because I'm in a community of risk-takers," he said. "Guys may want to try experimenting on their own, which is against policy and has to be completely drug-tested and those types of things. So I'd want to do that in a very systematic kind of way."

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Authored by John Rubino via DollarCollapse.com,

For a while there it looked like the US and its main trading partners had finally achieved escape velocity. Growth was up, inflation was poking through the Fed’s 2% target, and most measures of consumer sentiment were bordering on euphoric.

Then it all started to evaporate. Lackluster manufacturing and consumer spending reports sent the Atlanta Fed’s reading of Q1 GDP off a cliff to less than 1%:

And this morning the Wall Street Journal highlighted some recent changes in the yield curve that point towards further slowing:

Flatter Yield Curve in 2017 Shows Growth Concern Lingers

Long-term Treasury yields have declined modestly, while short-term yields have risen.

 

A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth.

 

Long-term Treasury yields, which are largely driven by the U.S. economic and inflation outlook, have declined modestly this year, following a sharp rise in the wake of the November election of Donald Trump as president. The 10-year U.S. Treasury yield has fallen to 2.396% from 2.446% at the end of 2016.

 

At the same time, short-term yields, which are more influenced by monetary policy, have risen in 2017 as Federal Reserve officials have made clear that they expect to continue raising the fed-funds rate through the rest of the year.

 

As a result, the yield premium on the 10-year note relative to the two-year note—known in the market as the 2-10 spread—slipped Wednesday to 1.107 percentage points, its lowest level since the election.

 

FIRST QUARTER REPORT CARD

 

While the yield curve, like all market indicators, is subject to the ebb and flow of investor sentiment, economic data and political developments, a flattening yield curve gets special attention from investors world-wide because it can serve as an early signal of both economic slowing and overpricing in riskier asset classes.

 

Those concerned that U.S. share prices were getting ahead of themselves took note in the first quarter when they “started to see the flattening of the yield curve,” said David Albrycht, president and CIO of Newfleet Asset Management, the fixed-income affiliate of Virtus Investment Partners . The Dow industrials have fallen 2% since hitting a record of 21115 on March 1.

 

Though economic data in the first quarter were mixed, many investors believe the flattening of the curve is the result of the unwinding of “Trump trade” bets that inflation and growth would pick up imminently with the adoption of tax cuts and fiscal stimulus President Donald Trump has promised. Hopes of a so-called reflationary agenda have been set back by the defeat in Congress of a White House sponsored health-care bill. That raised questions about whether Mr. Trump can get other legislation through Congress.

 

Expectations for higher long-term yields and a steeper curve rested on two pillars: first, that the economy on its own was showing signs of improvement, and second, that it would get an extra lift from promised tax cuts, infrastructure spending and regulatory relief.

 

At the outset of the second quarter, both of those pillars are still standing, yet neither is looking as sturdy as before.

The Journal goes on to note that the spreads between Treasuries and junk bonds are widening, which indicates growing fears of a slowdown-induced credit crunch. And that junk bond issuance is soaring, which implies a desire on the part of sub-investment-grade borrowers to raise cash while they can.

What’s happening? There are several possibilities:

1) There never really was a recovery. The post-election pop was, as the Journal asserts, just the human nervous system responding to a “new and improved” US government the way grocery store shoppers instinctively reach for boxes that promise a better version of an old stand-by. Now that the novelty has worn off, the markets are experiencing a “same corn flakes, different box” let-down. In which case 1% – 2% growth might be the ceiling, and debt/GDP will continue to soar world-wide. Make no mistake, this is an epic worst-case scenario.

2) Oil spiked in 2016, which led many to conclude that the global economy was growing because it was demanding more energy. But then crude gave back most of its gains, extinguishing the previous optimism and causing economic indicators like consumer spending to stall (because we’re all paying a bit less for gas lately). So risk-off: sell stocks and junk bonds, buy Treasuries. It’s no more complicated than that.

3) No one has the slightest idea what’s happening as insane levels of debt distort the models economists use to predict the future. From here on out, it’s unpleasant surprises all the way down.

Time will tell, but door number 3 is an increasingly safe bet.

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The Trump administration has stopped disclosing material information about the size and nature of the U.S. commitment to military action in Iraq and Syria, including the number of U.S. troops deployed in either country, in a bid to “surprise” the Islamic State with the number of US troops in the region the LA Times reports.

Earlier this month, the Pentagon quietly dispatched 400 Marines to northern Syria to operate artillery in support of Syrian militias that are cooperating in the fight against Islamic State, according to U.S. officials. That was the first use of U.S. Marines in that country since its long civil war began. In Iraq, nearly 300 Army paratroopers were deployed recently to help the Iraqi military in their six-month assault on the city of Mosul, according to U.S. officials.

The decision appears to be making good on Trump’s promise as a candidate to insist on more of an “element of surprise” in battle tactics.

 

“In order to maintain tactical surprise, ensure operational security and force protection, the coalition will not routinely announce or confirm information about the capabilities, force numbers, locations, or movement of forces in or out of Iraq and Syria,” said Eric Pahon, a Pentagon spokesman.

While neither of those deployments were officially announced prior to their implementation, Gen. Joseph Votel, the top US commander in the Middle East did acknowledge the additional troop presence in Syria to the House Armed Services committee on Wednesday.

“They have deployed,” Votel said, adding that there were likely more troops headed for deployment. “We have recognized that as we continue to pursue our military objectives in Syria, we are going to need more direct all-weather fire support capability for our Syrian Democratic Force partners,” Votel told the committee. “We have not taken our eye off what our principle mission is, which is to advise and assist and enable our partners… Help our partners fight, but not fight for them.”

A representative of Operation Inherent Resolve (OIR) confirmed that “routine” troop deployment announcements will stop under Donald Trump as US forces want the Islamic State terrorists to be the “first to know about any additional capabilities the Coalition or our partner forces may present them on the battlefield.”

Under the Obama administration, Pentagon policy was to announce conventional deployments after they occurred. That administration even took the unusual step of revealing in 2015 that 200 special operations forces — whose missions often are classified — had been sent to Syria. That’s now changed, according to Pentagon officials.

“The coalition commander’s intent is that ISIS be first to know about any additional capabilities the coalition or our partner forces may present them on the battlefield,” Pahon said, using an acronym for Islamic State.

Ned Price, National Security Council spokesman under President Barack Obama, criticized the new approach of Trump’s administration not to share such crucial details with Americans. “The position of the Obama administration was that the American people had a right to know if servicemen and women were in harm’s way,” Price told the LA Times. “It’s truly shocking that the current administration furtively deploys troops without public debate or describing their larger strategy.”

Currently 5,262 US troops are authorized to be in Iraq, a US military official told the Military Times last Thursday. Another 503 are authorized to be in Syria by Washington. What makes the deployment complicated is that such an authorization has not been granted by the capital Damascus, which considers the US presence an illegal invasion. The US officials further noted that the real numbers may be way larger as those figures fail to reflect those servicemen who are sent to Iraq and Syria on so-called temporary “non-enduring” missions. There are roughly 1,000 US special operations forces, Marines and Army Rangers in Northern Syria today – and that number might soon grow even larger.

Commenting on a Fox News report that the Pentagon is sending two units – comprising 200 to 300 soldiers in total – from the 82nd Airborne Division’s 2nd Brigade Combat Team (2nd BCT) to Iraq, Pahon told the Military Times, that there was no plan to announce the temporary deployment because it will last less 120 days and will not count against the authorized number of American troops in the country.

* * *

Meanwhile Operation Inherent Resolve has released its latest Combined Joint Task Force – Operation Inherent Resolve (CJTF-OIR) Monthly Civilian Casualty Report, which admitted 9 additional civilian deaths caused by the US-led coalition – five in 2017 and four more from 2015. The Pentagon has reported receiving 41 new reports of possible civilian casualties in Iraq and Syria during the month of February 2017. The report said the coalition completed the assessment on 17 reports, while a total of 43 inquiries are still open and are being probed.

Out of 17 assessed reports, the coalition dismissed twelve as “non-credible” while five were assessed to be “credible.”

Despite numerous human rights organizations’ reports of the mounting civilian death toll in Mosul, Iraq, the US-led coalition claimed it received only 15 credible reports of incidents in which civilians were killed by the time US-coordinated Iraqi forces who freed Eastern Mosul in February.

“In Mosul, Iraq, since the start of operations to liberate the city on Oct. 17, 2016, to the liberation of the East side of Mosul on Feb. 18, 2017, the total number of reports of possible civilian casualties was 37. The total number of credible reports during this time period was 15,” the US-led coalition said, without specifying how many civilians were killed in these incidents.

The Pentagon said that in total from August 2014 to February 2017, the coalition conducted a total of 18,645 strikes that included 42,089 separate engagements accidentally killing 229 civilians. Meanwhile, rights groups and activists such as the UK-based monitoring group Airwars, believe the number could be more than 10 times higher.

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We start off Sunday with the traditional anecdote from One River’s Eric Peters

“Humans sell low and buy high,” said Yoda, high in the Rockies. “And in those moments they believe it’s for good reason. It cannot be otherwise.” Snow fell, rain too. Spring on its way.

 

“Bear markets end when every piece of news is seen as an excuse to sell. And bull markets peak when the opposite is true.” Somewhere in the clouds Nasdaq futures were breaching all-time highs, defying the latest Twitter tempest.

 

“The longer a market trends lower, or higher, the more confident people become that tomorrow will look like today.” He turned his palms upward, heavy flakes landing, melting. “And what they forget is that the single most important consideration in investing is your starting point.”

 

The trail led higher, and Yoda knowing his way, felt the summit nearing. “In bear markets, prices are low, economies are in crisis, policies are in flux, and these things in combination create the starting point for enduring recoveries.” In bull markets, of course, the opposite holds. “It is often easy to lose track of where you are. But eight years into an uninterrupted economic recovery and historic bull market, you must not forget how far we’ve climbed.”

 

In March of 2009, the S&P 500 traded 666, and is now 240% higher. Unemployment was 8.3%, it’s now 4.7%. Overnight interest rates were 0.00%, they’re now 0.75%. 10yr bond yields were 2.88%, they’re now 2.40%. Household net worth was $55trln, it’s now over $93trln.

 

“You must remember that at cycle highs a new narrative always captures investor imaginations. It is never something that was evident at the lows, or during the heart of the climb. It always appears near the highs, as if it had always been there for everyone to see.” And Yoda took a seat. The sleet yielding, clouds lifting, revealing the valley far below.

* * *

Bonus: a belated April Fools vignette from Peters:

If we’d assembled 100 investors, economists, strategists and policy-makers on October 31st and told them Trump would be President, where would they have said stocks would be on April 1st? The CIOs responded to my question, “Down between 10%-15%.” And if we then showed them Trump’s Twitter feed for the last week of March, replete with Russian intrigue, legislative failure, and environmental overturns, what would they have then said? The CIOs laughed, “Down 25%-35%.”

 

So then why is the S&P 500 up 11% from Halloween? 

 

So if we told our esteemed group of investors, economists, strategists and policy makers on March 21st – two days before the vote to repeal Obamacare – that the Freedom Caucus would prevail, Trump would fail, and the vote wouldn’t even take place, where would they have said stocks would be on April 1st? “Down between 5%-10%,” answered the CIOs.

 

So then why is the S&P 500 up 0.8%? They shrugged.

 

Then I asked, how often this kind of odd disconnect between expected price action and actual outcome leads to higher prices?

 

“Almost always.”

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Submitted by Wolf Richter of WolfStreet

The Last time automakers tried this was in 2009!

In a few days, automakers are going to report their new vehicle deliveries for March. TrueCar, Kelley Blue Book, and LMC Automotive are predicting total vehicle sales slightly above the flat-line compared to March a year ago, though sales were down year-over-year in both January and February.

TrueCar forecasts an increase of 0.2% year-over-year to 1.586 million new cars and light trucks, with retail deliveries (excluding fleet sales) growing 1% to 1.276 million units. J.D. Power and LMC Automotive said on Friday that they expect an increase of 1.9%, to 1.62 million units, with retails sales up 1%, boosted by record incentives.

If sales nevertheless fall, everyone will blame the winter storm that arrived in the winter – “unexpectedly” or something. And it is possible that sales might fall. There was no winter storm in February, which was one of the warmest Februaries on record. Yet, sales in February fell 1.1% year-over year. They edged down in January too. And sales in both months combined fell 1.4% from the same period a year ago.

It’s not like automakers haven’t been trying. They paid out record incentives to accomplish this feat of slowing down the sales decline. In February, the industry in the US shelled out on average $3,587 per vehicle in incentive spending, per TrueCar. It was the highest ever for a February.

We’ll get to the March incentives in a moment. Just a quick word on what transpired in February. The table below shows average incentive spending per unit sold:

Some standouts among US brands:

• GM clocked in at over $5,125 per unit in incentives. That’s apparently what it took to get its sales to rise 4% year-over-year.
• Ford, which has been priding itself in its “disciplined approach” to incentives, spent over a grand less, $4,011 on average, and its sales declined 4%.
• Fiat Chrysler may be beyond help. That’s perhaps why CEO Sergio Marchionne has been so desperately looking for a buyer. FCA spent $4,362 per unit on incentives in February, as total sales still plunged 10% and are down 11% for the first two months.
• Car sales for GM, Ford, and FCA plunged 23%, 24%, and 26% respectively. While GM and Ford showed gains of 16% and 5% respectively in light truck sales, FCA couldn’t even do that, and its trucks sales fell 7%.

These are averages per unit: At $5,125 per unit at GM, there may be some models with $10,000 in incentives and others with none, depending on what GM needs to move at the moment, based on inventories on dealer lots, production, and profit margins (that range from very fat on high-end pickups to very slim on small cars).

For March, J.D. Power and LMC Automotive pegged incentives at $3,768 per new vehicle sold – the highest ever for any March. The prior record for March was achieved in 2009 as the industry was collapsing. In June 2009, GM filed for bankruptcy.

By these estimates, the incentives in March would amount to 10.4% of suggested retail price, in the double digits for the first time since 2009. These are some seriously desperate incentives!

TrueCar estimates that incentive spending in March rose 13.4% year-over-year to an average of $3,511 per vehicle sold. But this would be 2.1% lower than the desperate incentives in February:

Some standouts:

• GM cranked up its incentives by 21.4% from a year ago, but dialed it back 4.5% from February.
• Honda increased incentive spending 27% year-over-year, and increased it 2.9% from February.
• FCA, which had already been dousing the market with incentives a year ago, increased it another 7% year-over-year, but remained about flat with February.
• Subaru, lowest on the list with a modest $901 in incentives per unit sold, nevertheless felt it needed to crank them up by 59% from a year ago.

And look at the total dollar amounts spent in March: $5.54 billion! In just one month! GM alone spent $1.3 billion in March.

If GM piles on incentives at this rate three months in a row, it would spend nearly $4 billion on incentives, in just that quarter, just in the US alone. How much dough is that for GM? In Q1 2015, GM reported global net income of $2.0 billion. In Q1 2015, it reported global net income of $0.9 billion. These incentives can eat an automaker’s lunch in no time. And they did in the years before the industry collapsed during the Great Recession.

For consumers in the mood, there’s an old saw: “Good deals are made in tough times.”

But not for automakers. They face another reality: Sales have peaked. The seven-year up-trend has ended. Pent-up demand from the Great Recession has disappeared. Trading is getting more difficult, with falling used vehicle prices and rising interest rates. Subprime lending is facing real hardship. And these enormous incentives are now required just to keep sales from falling more quickly, and to defend market share against other desperate automakers and their incentives.

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According to William Dudley, the president of the Federal Reserve bank of New York, we might see the Federal Reserve reducing the size of its balance sheet sooner rather than later. Whilst Dudley seemed to have been hinting at just letting the securities on the balance sheet mature and take the cash out of the market (rather than reinvesting the proceeds), this isn’t the only option on the table.

On the exact same day when Dudley discussed the size of the balance sheet of the Fed, the president of the St Louis Fed, Bullard, also launched his own idea. Rather than just slowly reducing the balance sheet of the central bank by not reinvesting the proceeds from securities which reach their maturity date, Bullard openly discussed the potential to just sell the assets.

Source: St Louis Fed

As you can see on the previous image, the total size of the Fed’s balance sheet is approximately 4.5 Trillion, and figuring out how to reduce it perhaps isn’t the worst idea to investigate. After all, by selling securities on the open market, the Fed will be taking more (easy and cheap) cash out of the market as well. So technically and theoretically, selling (hundreds of) billions in assets on the market could have a similar impact as a rate hike.

After all, selling debt securities will reduce the price of those securities and thus increase the yield to maturity. And this could immediately solve another problem the Fed has been facing.

According to Morningstar, the flattening yield curve is worrying investors, as the spread between the 10 year bonds and 2 year bonds has decreased to just over 1.1%. This could indicate that ‘either the economy is slowing down, or the riskier asset classes are overpriced’.

Source: St Louis Fed

This might very well be true. Due to the cheap money policy of the Federal Reserve and its European counterparts, it became extremely cheap for companies to issue debt. For most robust and strong companies this was a real blessing as the lower interest rates allowed them to cut the interest expenses, which boosted the bottom lines of these companies.

Unfortunately the ultra-low yields (with some companies being able to issue debt with YTM’s of close to 0%) pushed some investors into a ‘yield-chasing’ mode, buying whatever they could to increase the average interest income in their portfolios. This blind yield-chasing has led to some very undesirable results as now even the companies without investment-grade debt quality were able to secure funding.

Source: Bloomberg

And this puts the entire economic system at risk again, as reducing the liquidity in the markets will have  a double undesirable effect. First of all, due to the higher interest rates and higher spread, the demand for sub-investment grade securities will decrease (as the yield-chasing appetite will be reduced); and this could (and very likely will) have a negative impact on the survival chances of those companies. And of course, should they go belly-up, the debt holders very likely won’t recoup their original investment, creating a new round of investment losses and a further contraction in available liquidity as the risk appetite will undoubtedly decrease as well.

Whatever the Federal Reserve wants to do next, it should think long and hard before acting as it won’t be easy to repair the damage…

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