Month: February 2019

It appears White House advisor Larry Kudlow is today’s ‘bad cop’ as he just told Fox Business that “there is a pretty sizable distance to go” in US-China trade talks. That has taken the shine off the latest algo BTFD ramp…

Perhaps most critically, having failed twice at the 200DMA, the S&P 5000 has just broken back below the 100DMA…

 

 

 

 

via ZeroHedge News http://bit.ly/2Djdnox Tyler Durden

Last month, the Financial Times sent shares of German global payments company Wirecard – a market darling which had seen its shares nearly quintuple in a span of less than four years – reeling when it published a story purportedly sourced from company insiders revealing the existence of an internal investigation into widespread accounting fraud. Before the rout was over, Wirecard shares had fallen more than 20%. But analysts backed up the company’s insistence that no wrongdoing had actually taken place, with one calling the report “fake news”.

But refusing to back down, the FT returned on Thursday with another even more extensive story, sourced Theranos-style “whistleblower” company insider who claimed to have been complicit in the alleged fraud. The whistleblower managed to leak a copy of a report compiled by a law firm that examines the alleged malfeasance in great and sometimes stunning detail. And as a result, Wirecard’s shares are moving lower once again.

This time around, investors might find it difficult to ignore the FT’s findings, or find them anything short of compelling. because not only does it cite information from company insiders, but it also includes details from a preliminary report from one of Asia’s top law firms that appear to back up the allegations of wrongdoing. The company, according to the report, committed widespread book-padding as it sought to take over a regional payments business from Citigroup that ultimately granted Wirecard a stretch of territory spanning from New Zealand to India.

The gist is simple: As Wirecard embarked on its quest for globe-spanning domination in the payments space, heads of regional businesses were encouraged to inflate the company’s transaction volume numbers, mainly through the use of a technique referred to by the FT as “round tripping.”

One year ago, Edo Kurniawan, a jovial 33-year-old Indonesian who runs the Asia-Pacific accounting and finance operations for global payments group Wirecard AG, called half a dozen colleagues into a Singapore meeting room. He picked up a whiteboard pen and began to teach them how to cook the books.

His company would soon become one of Germany’s most valuable financial institutions, but as Mr Kurniawan spoke, the immediate task at hand was to create figures that would convince regulators at the Hong Kong Monetary Authority to issue a licence so Wirecard could dole out prepaid bank cards in the Chinese territory. 

The group was seeking to take over payment operations from Citigroup, covering 20,000 retailers in 11 countries stretching from India to New Zealand. Regulatory approvals in every territory were crucial, even if it meant inventing numbers to be used in the Hong Kong licence application. 

Mr Kurniawan then sketched out a practice known as “round tripping”: a lump of money would leave the bank Wirecard owns in Germany, show its face on the balance sheet of a dormant subsidiary in Hong Kong, depart to sit momentarily in the books of an external “customer”, then travel back to Wirecard in India, where it would look to local auditors like legitimate business revenue.

The practice, according to the report cited by the FT, was used to appease regulators throughout Asia, which suggests that the fraud wasn’t merely the work of one rogue employee.

In isolation, Mr Kurniawan’s scheme might have appeared to be the act of a rogue employee in the provincial outpost of a little known financial group. But the account of what happened, in a preliminary report on the investigation by one of Asia’s most eminent legal firms, indicated it was part of a pattern of book-padding across Wirecard’s Asian operations over several years. Documents seen by the Financial Times show two senior executives in the Munich head office had at least some awareness of the round-tripping scheme: Thorsten Holten and Stephan von Erffa, respectively the company’s head of treasury and head of accounting.

The revelations call into question the figures reported by one of Europe’s few technological success stories, a German fintech group that has grown into a €20bn global payments institution. Before the FT exposed the existence of the investigation last week, the group was more valuable than Deutsche Bank or Commerzbank, whose place it has taken in Germany’s main stock market index. Wirecard is a favourite of retail investors, who saw its rapid expansion into Asia as a sign that it can challenge the world’s biggest banks for primacy in the $1.4tn market for payments. 

The “whistleblower” who spoke with the FT helped initiate the internal probe after finding the brazenness of one of the company’s regional managers, who had called a meeting to explain to employees how the fraud would be carried out, almost too shocking to be believed.

This time questions about its Asian operations began internally, prompted by a whistleblower left stunned by Mr Kurniawan’s January meeting last year. Notifying Wirecard’s senior legal counsel in the region on March 26, the whistleblower identified two senior finance executives, James Wardhana and Irene Chai, as accomplices in the book-cooking operation. A separate whistleblower also raised concerns in February, and on April 3 that person supplied the compliance team with a suspect contract they had received via Telegram, the encrypted messaging app. Daniel Steinhoff, Wirecard’s head of compliance in Munich, flew in to Singapore for a briefing. On April 13 he ordered the email archives of these individuals “mirrored”, with copies seized.  Compliance staff, who evidently found the accounts of the whistleblowers credible, soon found enough in the documents to warrant a snap investigation, codenamed Project Tiger. They called in Singapore-based Rajah & Tann, which sent in a team of former prosecutors.

Eventually, much of the behavior that the whistleblower had complained about was borne out by the report, including “forgery and/or falsification” as well as “cheating, criminal breach of trust, corruption and/or money laundering.”

On May 4 R&T submitted a preliminary report, running to 30 pages of bombshell allegations: evidence in the documents of “forgery and/or of falsification of accounts”, as well as reasons to suspect “cheating, criminal breach of trust, corruption and/or money laundering” in multiple jurisdictions.  The trio in Singapore, led by Mr Kurniawan, appears to have been fabricating invoices and agreements to create a paper trail which could be shown to auditors at EY, as if money was moving in and out of Wirecard for legitimate purposes.

And in what was undoubtedly a bad look for the company’s top brass, once the investigation got rolling, the company’s top brass installed a senior employee who had allegedly been involved in some of the fraudulent activities to help oversee the probe, inviting comparisons to the “fox guarding the hen house.”

A briefing document dated May 7 2018 was prepared for a meeting of Wirecard’s four most senior executives. Alexander von Knoop, chief financial officer, thanked the author in an email following the meeting “for the great job you are doing to clarify the circumstances and to prevent Wirecard Group from any financial and reputational damage”.  The email also announced that Jan Marsalek, Wirecard’s chief operating officer, had been appointed to co-ordinate the inquiry, “to get the necessary pressure on the investigation”, Mr von Knoop said.

[…]

Wirecard’s lawyers in Singapore warned Mr Marsalek’s proposed role presented “a perceived and potential conflict of interest.” He was a material witness of fact who had worked closely with Mr Kurniawan on certain projects, they said. 

To sum up, to call Thursday’s FT report “damning” would be an understatement. It suggests that managers throughout the company’s vast global network brazenly and blithely invented money flows and even in some cases fake customers to back them up. The company also reportedly violated AML reporting guidelines. Taken together, the fraud calls into questions not just Wirecard’s recent earnings results, but the very perception of WireCard as one of the Continent’s most successful fintech startups.

Which begs the question: When this is all said and done, will Wirecard be remembered as Germany’s “Theranos?” As the whistleblower put it: “If a payments company can do this, how can we trust the system?”

via ZeroHedge News http://bit.ly/2DZxv0F Tyler Durden

Via OilPrice.com,

The stakes are rising for the Maduro regime, and new U.S. sanctions on the Venezuela’s oil industry may be the point of no return for the country’s troubled leader…

Things have certainly moved into a higher gear in Venezuela, with a genuine diarchy vying for control over the country’s resources and populace. The alleged smuggling of gold reserves, politicized humanitarian aid, rampant disinformation against the background of all-encompassing poverty and deprivation – Venezuela of 2019 bears an uncanny likeness to any stereotypical conflict-ridden Latin American country of the 20th century.

The US sanctions announced January 28 have driven a wedge between PDVSA and the United States, creating a point of no return for President Maduro. There is still no 100 percent certainty that Maduro will be ousted and if he manages to stay (through which, given his political skills and occasional antics, would be tantamount to a miracle), Venezuela could rethink its oil strategy on a grand scale. Let’s, however, look at the developments in Venezuela piece by piece before we jump into any conclusions.

The most evident and palpable consequence of the US sanctions was the almost immediate cessation of activity with US Gulf Coast refiners. The US Treasury has stated that under President Maduro PDVSA has become a “vehicle for embezzlement and corruption” and hence from January 28 onwards all income from the sales of Venezuelan crude should be transferred to escrow accounts in the United States, accessible only by the Guiadó government. Given that PDVSA has been a vehicle for embezzlement every single year of its 43-year old history, it is remarkably naive to believe a transfer of control from Maduro to Guaidó would bring about any structural shift, however, the severeness of the punishment brings across a powerful political message – a message that US refiners cannot shrug off easily.

Statistically, every day two cargoes of Venezuelan crude were being loaded in its ports and setting sail towards market outlets. The odds were that one of these two cargoes is destined for the US market – roughly 44 percent of Venezuelan exports went to American customers in 2018. The initial shipping numbers might bring you a smaller percentage, yet keep in mind that Aruba, Curacao and the Dutch Caribbean islands worked as transshipment hubs towards America for PDVSA. Absent a swift removal of Maduro from office, all of that will be gone after April 28 when the 3-month winding down period for cutting all ties with PDVSA comes to an end. It is difficult not to understate the importance of the US market to Venezuela – as opposed to dealings with China and Russia (where PDVSA was paying back advance payments by the medium of oil), exports to US provided one of the rare opportunities to receive much-needed hard currency, an estimated $1 billion per month.

Given that Venezuela has defaulted on more than $60 billion worth of bond issuances (the only bond that is still intact is the PDVSA 2020 bond), such a lifeline of dollars will be sorely missed. However, it has to be stated that Venezuelan supplies were essential to US Gulf Coast refiners, too.

Despite all the public bravado, refiners will have a hard time replacing Venezuelan volumes with grades of equivalent quality and, most importantly, similar price level. Valero Energy, taking in approximately 90kbpd of Venezuelan crude in Q4 2018, stated it will replace them with Canadian volumes, pretty much the only heavy sour stream that demonstrates healthy USGC coking margins. Yet as we have determined in our previous weekly columns, Canada is struggling to market all of its produced crude (which is not helped by the mandated Alberta production cuts) and will remain to do so until new pipeline capacity and rail tank car additions hit the market in late 2019. There is a high probability that the price of Canadian crudes will increase on the back of USGC refiners’ interest, pushing the margins further down.

Valero’s future travails pale in comparison with those of Citgo, which has become a proxy battlefield between Venezuela’s two rival leaders. First Maduro has ordered all Venezuelan Citgo employees to return home, then Guaidó has urged them to stay where they are, thus now no one really knows what to do. Citgo will become a litmus test of Guaidó’s political prowess – dealing with Venezuelan authorities with the backing of a hawkish US Administration is one thing, finding a compromise with Russian state-owned (and may I add, US-sanctioned) oil company Rosneft is an entirely different one. Citgo’s minority 49.9 percent stake was pledged by Maduro to Rosneft as collateral in return for a 1.5 billion loan provided in 2016, following which the Russian company immediately filed a lien with the Delaware Department of State asserting its right to own those 49.9 percent in case PDVSA defaults.

Guaidó has asserted that both China and Russia would be better off with him in power, pledging to respect the investments both Beijing and Moscow have made in Venezuela. Antagonizing Rosneft would be an unwise thing to do as it effectively operates the 150 kbpd Petromonagas crude upgrader facility, one of three working across the country capable of converting bituminous Orinoco crude into exportable volumes, and has stakes in five upstream projects (Petrovictoria, Petromonagas, Petromiranda, Petroperija, Boqueron). Chevron operates the 210kbpd Petropiar upgrader and envisages that it can keep up the stable operation despite all the political tension. The third upgrader, the 190kbpd Petrocedeno operated jointly by Total, Equinor and PDVSA, was expected to undergo a major maintenance program this quarter, however, seems to be working thus far.

Perhaps a bit wrongly, most of media attention was directed at the trading consequences of US sanctions, even though the most dramatic ramifications will be witnessed in Venezuela’s upstream sector. According to Platts estimates, up to 300kbpd of Venezuelan production might be out of operation amid an all-encompassing dearth of diluent, traditionally used to render the bituminous Orinoco crude transportable. Citgo was heretofore the major supplier of diluent, with some 120kbpd worth of exports effectively barred by the White House to sail to Venezuela under current circumstances. Reliance (having loaded two 2MMBbl VLCCs over the past few days – MT Folegandros I and MT Baghdad), having previously supplied 65kbpd, will most likely cease diluent supplies before April 28 so as not to put its US subsidiary RIL in the line of fire.

With minimal or no diluent to render its crude palatable, the current Venezuelan leadership risks seeing its production fall below 1mbpd on a permanent basis.

Venezuelan Oil Production

Should Maduro retain his post for longer and reroute the majority of Venezuela’s exports from the US to Asia, he would still see his income shrink on the back of falling production. Output decreases would further exacerbate the fuel shortage in the country – if today Paraguana works at 20 percent of capacity, further out it might drop even lower. This only goes on to highlight the complexity of US sanctions, which, despite being applicable for US companies only, have effectively cut off every entity with some interest or equity in the United States (as can be attested by all of Europe stopping PDVSA bond trades). At the same time it goes on to demonstrate the double game behind the humanitarian aid effort – its possibility was floated only when the “bringing Maduro to ruin” strategy reached the endgame.

Oddly enough, the United States keep on (the optimist might say involuntarily) curbing the world’s heavy sour streams. First actively contributing to Venezuela’s production downfall from 2.1mbpd in Jan 2017 to 1.1mbpd in Jan 2019, then making away with 1mbpd of Iranian exports, and now seeming intent on bring Caracas’ exports even lower. This can be, of course, easily explained in political terms, yet ultimately it is the US refiner who bears the economic brunt – whatever replacement there is for Venezuelan crude, be it WCS or Ecuadorian Napo, comes in insufficient quantities and thus would most likely be overpriced.

via ZeroHedge News http://bit.ly/2t9T1tj Tyler Durden

Is the torrid 6-week rally that started on December 26 finally, and led to the best January performance since 1987, finally over?

That is the second lingering question traders would like answered this morning (the first one being just what caused the dramatic plunge in USD libor overnight).

Indeed, after what seems like weeks of calls for a pause and retest of the rebound rally, it looks like stocks are ready to give it a go, according to Bloomberg’s Andrew Cinko who notes that the “turgid growth forecasts for the UK and euro-area are a good enough excuse to step back today and let prices contract” and adds that enthusiasm for equities certainly appears to have waned given “tepid U.S. composite trading volume and the lack of price movement intraday.”

Not that there aren’t tactical reasons for the sudden shift in sentiment, with Nomura’s Charlie McElligott highlighting the latest  “growth scare” pile-on, including:

1. the EC slashes their Euro-Area growth- and inflation- forecasts
2. the RBI shock with a surprise rate cut earlier overnight, just one day after an RBA banker pivoted hard from hawkish to neutral earlier in week, which in turn followed a surprisingly hawkish RBA statement
3. the BoE too cut their forecasts as well, showing the scale of the slowdown fear, permeating global central banks

What does this mean? According to McElligott the tactical implication is that the 2018 “hawkish normalization era” is long-gone, and instead we have resumed the “race to zero” posture, as globally, central banks scramble to be “more dovish” than their neighbor, which is also driving further USD strength, as the by-far “best of an ugly bunch.”

In the meantime, Nomura notes that amid this latest global growth scare, fixed-income has accelerated its rally, with German Bunds making new contract highs after the European outlook cut headlines, while Equities and growth-sensitives (commodities/Risk FX/EM FX) sell-off, tied to this ongoing USD strength. Also of note, the previously discussed – and unexplained – sharp plunge in 3M USD Libor, which saw its biggest fixing drop since Mary 2009.

A few more observations from Nomura on the recent surge in the dollar, which has seen a “a huge reversal to the upside” with the DXY +1.4% since the day following the Fed’s dovish pivot, as the rest of world joins the parade in what looks to be a “race to the bottom” as noted above in bullet 2.

This “TINA” dynamic with US Dollar is, without a doubt, the largest hindrance to “weak USD” consensus view in most 2019 forecasts, McElligott’s  included –as the global slowdown and idiosyncratic issues again “force” Dollar stickiness as “the cleanest dirty shirt” of the bunch.

As such, at least over the short term, the key catalyst to watch closely is the Dollar (and US rates) to determine if the consensus trade of early 2019 disintegrates, resulting in further risk assets weakness, as global economic headwinds force traders to rush into the safety of the greenback.

* * *

While the above may explain the tactical considerations for stocks, and why a drop in the S&P may be in the offering, what about the strategic factors? Here McElligott makes the following key point, whose punchline is that going forward the only thing that matters is inflation, and when it comes back:

• After ruminating on Powell since last week (and Fed speakers since the blackout was lifted), it has become clear to me that the Fed is now a “one trick pony,” with broad “data dependence” a myth in my eyes, and instead, now just a singular focus on INFLATION as their lone mandate
• A point that I have made over the better part of the past year is best expressed through asking a simple question: “What was the catalyst that awoke last year and drove the new cross-asset volatility regime?”
• My answer: “green shoots” on INFLATION is what shook markets and instituted the new volatility paradigm witnessed in 2018, where the “match” of explosive US fiscal stimulus onto an already “full steam ahead” US economy (which was running above-trend growth already) lit the US Rate Vol “fire,” and meant that for the first time in the post GFC regime, traders lost their visibility on the future path of US interest rates…especially as we saw a new Fed Chair enter the arena with perceived “hawkish” chops
• As I have previous made clear, the late December 2017 / January 2018 “spot (S&P) up, VIX up” environment was a rather profound signal for the imminent “tipping over” of risk, and the catalyst of this volatility was the move in US Rate Vol (UST 10Y term premium from at the time near-cycle lows of -60 on Dec 15th 2017 up to just -14bps by Feb 9th 2018 / 3m10Y USD Swaption Vol from 52.3 on Dec 13th 2017 to 74bps on Feb 6th 2018)
• Why did Rate Vol “suddenly” reappear then?  My prior point on Inflation, which had been dismissed as an afterthought over the prior 8+ years…but across the month of January 2018, we saw US CPI MoM beat, a number of very large regional Fed “Prices Paid” beats, and ultimately a shock beat in US AHE YoY
• The final “wage inflation” surprise signaled from the AHE YoY suddenly saw the long-dormant “Philips Curve” argument brought back to life as the seeming “death blow” to the “Goldilocks” narrative—and occurred on February 2nd, which saw the S&P 500 trade -2.4% on the session thereafter and more-glaringly, the leveraged VIX ETN “extinction event” on the trading day following (2/5/18), as S&P turned to dust, -5.4% on the day
• Fast-forward to the “now”—we are seeing “short volatility” positions re-established in earnest (systematic vol strats back in “roll-down” mode / “short vega” again for the first time in 4+ months), along with the general view from fundamental investors that the Fed is “out of the picture” for the next 5-6 months, and with perceived certainty that the next move thereafter is to EASE—all in-light of a group-think view that “INFLATION IS DEAD”
• As such, a reacceleration in inflation is without question the largest downside risk to the stock market—with regards to the view that inflation beat(s) / wages & earnings beat(s) would then see the Fed forced back-into the picture, and mean we are back on the “tighter financial conditions” / 2018 regime hamster-wheel again in that scenario—all tied to this implicit linkage between the reacceleration of “short volatility” positioning and a consensual view on slowing-inflation

With this in mind, and as concerns for a renewed drift lower in stocks bubble up, what could be the catalyst for inflation upside surprise?  As MCElligott explained yesterday, one place where a global reflation wave could emerge from is the Chinese “liquidity- / credit- impulse”, which he is “keenly watching” for signs of continued pivot higher that could bleed-through into global inflation expectations.

To be sure, this sharp rebound in the “Chinese Liquidity- and Credit- Impulse” is currently evidencing itself in Shanghai Commodities Future YTD performance (Nickel +11.6%, Zinc +6.0%, Bitumen 22.9%, Fuel Oil +19.4%, Deformed Bar +6.7%, Wire Steel +8.7% and Qingdao Iron Ore +15.1% YTD).

While it remains to be seen if China can sustain this bounce in credit conditions, if the answer is yes, and if China’s latest reflation attempt spills over across the Atlantic and impacts the US, then watch out below as the Fed will now be truly trapped between the threat of sliding risk assets on one hand, and a tidal wave of new Chinese inflation set to arrive on US shores.

via ZeroHedge News http://bit.ly/2TBMZNP Tyler Durden

Via AlMasdarNews.com,

A new satellite image that was released by Image Sat International revealed on Tuesday that Syria’s S-300 system was ready for service.

According to the image, at least three of the four S-300 batteries were visible, but the picture did show them erected.

Based on the information from previous satellite images, these S-300 batteries are located around the strategic city of Masyaf in the western countryside of the Hama Governorate.

While this may be good news for Syria’s coastal region, it does not provide much relief for the Damascus countryside that is constantly targeted by the Israeli Air Force.

As long as Israel maintains air superiority over Lebanon, repelling the latter’s strikes on Damascus will be very difficult for the Syrian military.

The S-300 system was delivered by the Russian Federation to Syria on October 1st; this move came after a Russian IL-20 reconnaissance aircraft was accidentally downed over the Latakia coast.

Russia accused an Israeli F-16 jet of using the IL-20 for cover as Syrian air defense missiles attempting to down the enemy aircraft in the eastern Mediterranean.

via ZeroHedge News http://bit.ly/2GfidHt Tyler Durden

While Libor remains a vestige of a bygone era in which unsecured overnight bank lending still mattered – hence made obsolete by $1.5 trillion in excess reserves sloshing around – traders are puzzled by the sharp move in 3M USD Libor this morning, which on Thursday morning was fixed lower by 4.063bp, falling from 2.73763% to 2.69700%.

Libor fell to 2.69700% from 2.73763%, making it the largest one-day drop since May 2009.

While Libor, beset by a decade of scandals including massive manipulation that involved most banks during the financial crisis, is on its way out and set to be replaced by the Fed’s SOFR alternative in two years, it is still a reference security for trillions in floating-rate debt, and more importantly, remains the primary way to bet on short-term interest rates via eurodollar futures which settle into Libor, and according to Bloomberg, has 12.52 million contracts in open interest, vastly more than Fed Fund futures which have total positioning of only 1.8 million contracts (SOFR remains an experimental speck with just 85K futures after 9 months of existence).

As such today’s massive move has prompted lots of question, and no answers for the violent move lower.

Making matters worse, whereas previously there would at least be disclosure of LIBOR fixing by bank, which in the days leading up to the financial crisis would allow traders to discern which financial institution is suffering from liquidity shortage – and prompted even more Libor manipulation by member banks to hide their financial troubles – the current iteration no longer provides this level of transparency. Or any level for that matter.

“That a key benchmark can exhibit such sudden volatility with no observable rationale” is a problem according to Bloomberg commentator Cameron Crise, although according to Nomura’s Charlie McElligott, “the move could be driven by an adjustment towards current 90d CP rates” as CP yields have been falling even as Libor has been relatively flat, prompting speculation that Libor was overdue to catch down to CP.

BMO strategist Jon Hill shares this view, writing this morning that “our sense is that the move largely represents the market catching up to cash rates, though the speed and severity of the adjustment were faster than presumed.” Hill also sees a marked difference between the current period and situation in 1Q 2018; noting that this time around 3-month OIS is steady, while 3-month Libor is declining.

He also noted that “it’s not too much of a stretch to claim that not only are short-term borrowing costs not increasing, they’ve declined by half a hike since the December FOMC meeting.”

In any case, the sharp drop in Libor appears to be powering today’s rally in US rates, even as Bloomberg notes that it “raises the thorny questions of how and why the rate fell so precipitously in one day” adding that it is not a bet on Fed policy as OIS rates have been stable.

Some have invited comparisons with the “jumpy” SOFR rate, which is far more volatile than Libor, which is “likely going to be viewed as a bug rather than a feature, but at least you know that the rate is fixed based on hundreds of billions of dollars of transactions.”

Yet the question in light of today’s sharp move is “what drives the Libor fixing?” As of this moment, nobody really knows.

via ZeroHedge News http://bit.ly/2SeCALg Tyler Durden

Authored by Brandon Smith via Birch Gold Group,

The mainstream economic community has a notoriously short attention span and a lack of long-term perspective. After the longest government shutdown in American history subsided, the mainstream proclaimed the fight well and over – in other words, nothing to see here, Trump “folded” and all is well. Of course, what they consistently seem to ignore is the fact that the shutdown was only placed on a three week hiatus. This is hardly any assurance of a return to “normalcy”.

As I write this, the Trump Administration has yet to make its State Of The Union Address, and it is possible we will know more afterwards on the shutdown issue. Trump’s propensity for saying one thing and doing another makes it difficult to discern the future on policy actions. We don’t have long to wait, however, as this March is set to be possibly one of the most tumultuous times for the modern U.S. economy.

It should be noted that the timing of the possible return of the shutdown is set just before the Trump Administration’s decision on expanded tariffs against China. The trade war “pause” is yet another event which was wrongly heralded by the mainstream as the “end of uncertainty”. Along with the propaganda surrounding the Fed “pause” in policy tightening, I am starting to see a pattern here.

For the past month, it has seemed as though market risk sentiment is being manipulated to the positive side through numerous promises – The promise that the shutdown has been averted, the promise that the trade war will be over by March, and the promise that the Fed has “capitulated” on raising interest rates and cutting the balance sheet. Perhaps all of these promises will turn out true, but my suspicion is that most, if not all, of them will be found false.

In terms of the shutdown, I see little indication that there has been a change in narrative. Keeping the false left/right paradigm in mind, as well as the fact that Trump works closely with elitist banking and think tank interests within his own cabinet, the screenplay for our little drama continues to present a staunchly divided political arena. Democrats are unlikely to budge on their opposition to the southern border wall, and Trump is unlikely to budge either.

This can culminate in one of two ways: Either Trump will re-initiate the government shutdown fight by the end of February, or, he will declare a state of emergency, bypassing the shutdown altogether and using the military to build the wall through funding at the executive level.

Another possibility, which I personally subscribe to, is that BOTH events could occur simultaneously – a shutdown and a declaration of emergency. There is the potential for obstruction by Democrats in the Senate or by the military itself in a declaration of emergency, which would add considerable confusion to the matter.

A shutdown in this case would be unavoidable. But some liberty activists might ask, why should we care? Don’t we prefer a government shutdown? Ideally, yes, but there are consequences for the venture that need to be addressed.

First, it is important to realize that the government is the largest employer in the U.S. The federal government employs approximately 2.7 million civilians; its closest competitor is Walmart with 2.3 million employees. But if we take into account every person that takes home a government paycheck from the state and federal level, including school teachers, police officers, DMV workers etc., the number rises dramatically to over 22 million people.

Some people might argue that state workers would be unaffected by a government shutdown, but this is not necessarily true. With most states utterly dependent on federal funding to operate public programs and entitlement programs, states can in fact be affected by a long-term shutdown.

The near panic that ensued over the last shutdown was motivated by some legitimate concerns. It is not just the millions of government employees which represent the largest part of the American economy, but the millions of people (families) dependent on those employees for their survival. In an economy which is around 70% retail and service based, the removal of ANY existing pillar of consumerism can have negative reverberations through the entire system.

Beyond a freeze in pay to America’s largest employment base, there is also the issue of welfare programs like EBT, which were already on the verge of being cut off this month if not for early payments. A return to the shutdown is likely to last much longer, and with EBT payments delayed through March, a panic would ensue.

This is why it is important to take the shutdown into account, as a trigger event as well as a mass distraction from central bank activity.

The “pause” in the trade war with China also represents a kind of non-event that is driving false optimism. With the trade deficit only expanding further with China, one must question what the goal of the conflict actually is. The potential extradition of Huawei CFO Meng Wanzhou does not help matters, as well as the series of unproductive trade meetings ending with more declarations of progress but no written deal.

The U.S. economy is like a massive Jenga tower in which most of the vital supporting pieces have already been removed. Pull even one more, and the whole structure will collapse. Before we get too focused on a shutdown scenario or the trade war, though, we should ask, who removed all the other supporting pieces?

The Federal Reserve has done this expertly through the inflation of the ‘everything bubble‘ and the subsequent and deliberate deflating of that bubble, all while using Trump’s ventures into government shutdown and the trade war as cover for their activities.

Recent changes in language to Fed statements have led to an astonishing sea change in the views of the economic world. Within a month’s time market sentiment has gone from fears over Fed tightening to euphoria over assumed capitulation. I would remind the people embracing this sentiment, though, that the Fed pulled this same con only two months ago.

In November of last year Jerome Powell changed minor language to his statements, which was broadly interpreted as “dovish” by markets. This led many to believe that Fed rate hikes and cuts were over. Only a month later in December, Powell stunned investors with aggressively “hawkish” language on top of an interest rate hike and more asset dumps. I mention this event because I believe it is dangerous and foolish for analysts to now proclaim the Fed has capitulated when all we have to go on is mere rhetoric that the Fed can change any moment it wishes.

So far there is little indication beyond changes to Fed speech that tightening will stop anytime soon. Balance sheet cuts continue, and the Fed dot plot for interest rates still calls for at least two more hikes this year. Stock markets for now are driven by pure blind optimism that the Fed will step in with stimulus, not to mention the hundreds of billions of dollars in liquidity that the Chinese have been pumping into global assets in the past month.

The fact is, nothing fundamental has changed. The effects of Fed tightening are currently evident in housing markets as overall home sales continue to plunge, auto markets see the most dismal sales in years, credit markets continue to tighten, and corporate earnings have been mostly disappointing.

As a reader recently reminded me, Fed excess reserves are also falling rapidly. Financial institutions have kept excess reserves with the Fed for years because it offered a separate, higher interest rate as it lowered the Fed funds rate to near zero during Quantitative Easing. The Fed used these excess reserves for “overnight lending” to numerous domestic and foreign corporations during the credit crisis.

As the Fed has raised the funds rate, the outflow of banks funds from the Fed’s excess reserves has increased dramatically in the past several months. While normal economic logic would say that this is a good thing because it would encourage banks to lend that money to get a better return, this has not been the case.

Bank lending has not improved to keep pace with the repatriation of excess reserves once held at the Fed. So, the question is, if banks are not holding that money with the Fed, and they aren’t lending it, then where are the trillions of dollars going? My theory – probably into stock buybacks, which would explain the bull rally despite all reason during the first half of 2018.

The continued outflow of excess reserves stands as more proof that the Fed is continuing to tighten policy while the mainstream wrongly convinces itself that the Fed is planning to reverse.

Of course, as excess reserves dwindle and the Fed raises interest rates, making corporate debt more expensive, one wonders what will be left to artificially support stocks? The systemic crash of December will return with a vengeance if Fed language on dovish “accommodation” doesn’t pan out with action.

The next major Fed meeting with a potential for a rate hike is set for March, and perhaps it is just a coincidence that both the trade war and the shutdown fight are poised to explode at the exact same time. If the Fed goes hawkish once again, or makes a move which surprises markets in any way, the shutdown and the trade war would provide more than enough distraction in the event that stocks plummet as they did in December.

That said, it is possible that there will be no shutdown or declaration of emergency. Maybe the trade war will end in March with an equitable deal that makes China and the U.S. happy rather than another non-deal that both sides claim is “optimistic” while escalating the confrontation with more tariffs. And, maybe the Fed will reverse course on balance sheet cuts and interest rates, admitting policy failure and taking responsibility for lying about economic recovery. This would be quite a miracle, but miracles do happen.

via ZeroHedge News http://bit.ly/2WPTHSu Tyler Durden

As it turns out, Jesse from “Dude Where’s My Car?” is surprisingly good at business.

A meditation app backed by actor and husband-to-Mila Kunis Ashton Kutcher has been valued at $1 billion – making it Silicon Valley’s newest unicorn – in a funding round led by TPG Growth partners.

The app “Calm” has raised $88 million during the round, which included both existing investors like Insight Venture Partners and Kutcher’s Sound Ventures, as well as Hollywood’s famed Creative Artists Agency. The brings the company’s total raised to $116 million, according to Bloomberg.

The funding makes San Francisco-based Calm a major player in the wellness industry, which has drawn attention in recent years from investors as well as stressed-out users. Companies like mindfulness app Headspace Inc. and meditation wearable maker Muse have also raised money from VCs, though at lower valuations.

Calm aims to help people tackle mental health issues such as anxiety and insomnia through mediation sessions, stretching tutorials and music. There are even bedtime stories on the app, including some read by celebrities like Matthew McConaughey.

“Our vision is to build one of the most valuable and meaningful brands of the 21st century,” co-founder and Co-Chief Executive Officer Michael Acton Smith said in a statement. His co-founder and co-CEO, Alex Tew, added that the company would prioritize spending on international growth and creating new content.

Calm, which has 50 employees, said it’s profitable. The app has been downloaded more than 40 million times and has more than 1 million paying subscribers, who pay $60 a year (or $12.99 a month) for a premium version.

The vaunted unicorn valuation is a major coup for Kutcher & Co. And we can think of at least one person who will be curious to learn what Kutcher has planned next.

via ZeroHedge News http://bit.ly/2DX13vM Tyler Durden