Category: zerohedge

Submitted by Pam Martens and Russ Martens via WallStreetOnParade.com,

Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. The letter carried frightening passages and large blocks of redacted material in critical areas, instilling in any careful reader a sense of panic about the U.S. financial system.

A rational observer of Wall Street’s serial hubris might have expected some key segments of this letter to make it into the business press. A mere eight years ago the United States experienced a complete meltdown of its financial system, leading to the worst economic collapse since the Great Depression. President Obama and regulators have been assuring us over these intervening eight years that things are under control as a result of the Dodd-Frank financial reform legislation. But according to the letter the Fed and FDIC issued on April 12 to JPMorgan Chase, the country’s largest bank with over $2 trillion in assets and $51 trillion in notional amounts of derivatives, things are decidedly not under control.

At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.” Why didn’t JPMorgan’s Board of Directors or its legions of lawyers catch this?

It’s important to parse the phrasing of that sentence. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”

That statement should strike fear into even the likes of presidential candidate Hillary Clinton who has been tilting at the shadows in shadow banks while buying into the Paul Krugman nonsense that “Dodd-Frank Financial Reform Is Working” when it comes to the behemoth banks on Wall Street.

How could one bank, even one as big and global as JPMorgan Chase, bring down the whole financial stability of the United States? Because, as the U.S. Treasury’s Office of Financial Research (OFR) has explained in detail and plotted in pictures (see below), five big banks in the U.S. have high contagion risk to each other. Which bank poses the highest contagion risk? JPMorgan Chase.

The OFR study was authored by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, who found the following:

“…the default of a bank with a higher connectivity index would have a greater impact on the rest of the banking system because its shortfall would spill over onto other financial institutions, creating a cascade that could lead to further defaults. High leverage, measured as the ratio of total assets to Tier 1 capital, tends to be associated with high financial connectivity and many of the largest institutions are high on both dimensions…The larger the bank, the greater the potential spillover if it defaults; the higher its leverage, the more prone it is to default under stress; and the greater its connectivity index, the greater is the share of the default that cascades onto the banking system. The product of these three factors provides an overall measure of the contagion risk that the bank poses for the financial system.”

The Federal Reserve and FDIC are clearly fingering their worry beads over the issue of “liquidity” in the next Wall Street crisis. That obviously has something to do with the fact that the Fed has received scathing rebuke from the public for secretly funneling over $13 trillion in cumulative, below-market-rate loans, often at one-half percent or less, to the big U.S. and foreign banks during the 2007-2010 crisis. The two regulators released background documents yesterday as part of flunking the wind-down plans (living wills) of five major Wall Street banks. (In addition to JPMorgan Chase, plans were rejected at Wells Fargo, Bank of America, State Street and Bank of New York Mellon.) One paragraph in the Resolution Plan Assessment Framework and Firm Determinations (2016) used the word “liquidity” 11 times:

“Firms must be able to reliably estimate and meet their liquidity needs prior to, and in, resolution. In this regard, firms must be able to track and measure their liquidity sources and uses at all material entities under normal and stressed conditions. They must also conduct liquidity stress tests that appropriately capture the effect of stresses and impediments to the movement of funds. Holding liquidity in a manner that allows the firm to quickly respond to demands from stakeholders and counterparties, including regulatory authorities in other jurisdictions and financial market utilities, is critical to the execution of the plan. Maintaining sufficient and appropriately positioned liquidity also allows the subsidiaries to continue to operate while the firm is being resolved. In assessing the firms’ plans with regard to liquidity, the agencies evaluated whether the companies were able to appropriately forecast the size and location of liquidity needed to execute their resolution plans and whether those forecasts were incorporated into the firms’ day-to-day liquidity decision making processes. The agencies also reviewed the current size and positioning of the firms’ liquidity resources to assess their adequacy relative to the estimated liquidity needed in resolution under the firm’s scenario and strategy. Further, the agencies evaluated whether the firms had linked their process for determining when to file for bankruptcy to the estimate of liquidity needed to execute their preferred resolution strategy.”

Apparently, the Federal regulators believe JPMorgan Chase has a problem with the “location,” “size and positioning” of its liquidity under its current plan. The April 12 letter to JPMorgan Chase addressed that issue as follows:

“JPMC does not have an appropriate model and process for estimating and maintaining sufficient liquidity at, or readily available to, material entities in resolution…JPMC’s liquidity profile is vulnerable to adverse actions by third parties.”

The regulators expressed the further view that JPMorgan was placing too much “reliance on funds in foreign entities that may be subject to defensive ring-fencing during a time of financial stress.” The use of the term “ring-fencing” suggests that the regulators fear that foreign jurisdictions might lay claim to the liquidity to protect their own financial counterparty interests or investors.

JPMorgan’s sprawling derivatives portfolio that encompasses $51 trillion notional amount as of December 31, 2015 is also causing angst at the Fed and FDIC. The regulators wanted more granular detail on what would happen if JPMorgan’s counterparties refused to continue doing business with it if rating agencies cut its credit ratings. The regulators asked for a “narrative describing at least one pathway” for winding down the derivatives portfolio, taking into account a number of factors, including “the costs and challenges of obtaining timely consents from counterparties and potential acquirers (step-in banks).” The regulators wanted to see the “losses and liquidity required to support the active wind-down” of the derivatives portfolio “incorporated into estimates of the firm’s resolution capital and liquidity execution needs.” 

According to the Office of the Comptroller of the Currency’s (OCC) derivatives report as of December 31, 2015, JPMorgan Chase is only centrally clearing 37 percent of its derivatives while a whopping 63 percent of its derivatives remain in over-the-counter contracts between itself and unnamed counterparties. The Dodd-Frank reform legislation had promised the public that derivatives would all become exchange traded or centrally cleared. Indeed, on March 7 President Obama falsely stated at a press conference that when it comes to derivatives “you have clearinghouses that account for the vast majority of trades taking place.”

But the OCC has now released four separate reports for each quarter of 2015 showing just the opposite of what the President told the press and the public on March 7. In its most recent report the OCC, the regulator of national banks, states that “In the fourth quarter of 2015, 36.9 percent of the derivatives market was centrally cleared.”

Equally disturbing, the most dangerous area of derivatives, the credit derivatives that blew up AIG and necessitated a $185 billion taxpayer bailout, remain predominately over the counter. According to the latest OCC report, only 16.8 percent of credit derivatives are being centrally cleared. At JPMorgan Chase, more than 80 percent of its credit derivatives are still over-the-counter.

 

Three of the five largest U.S. banks (JPMorgan Chase, Bank of America and Wells Fargo) have now had their wind-down plans rejected by the Federal agency insuring bank deposits (FDIC) and the Federal agency (Federal Reserve) that secretly sluiced $13 trillion in rollover loans to the insolvent or teetering banks in the last epic crisis that continues to cripple the country’s economic growth prospects. Maybe it’s time for the major newspapers of this country to start accurately reporting on the scale of today’s banking problem.

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The Fed is “one and done” for rate hikes.

 

We called this back in mid-2015. The US economy is far too weak for the Fed to engage in anything resembling a series of rate hikes. Corporate leverage, household leverage, even the national debt stand at levels that limit the Fed from hiking rates.

 

The Central Banking insiders know this. Which is why Former Fed Chair Ben Bernanke admitted in private luncheons with hedge fund managers that rates would not “normalize” in his “lifetime.”

 

The Fed is not interested in the economy. It is interested in the bond bubble. All of the talk regarding Main Street, employment, etc. is just that “talk.” The Fed will not, under any circumstances permit the bond bubble to burst because doing so would implode its true owners: the private banks.

 

The Fed is a privately held institution. The US does not own the Fed. And while Fed Chairs might take some marching orders from sitting Presidents (just as Janet Yellen was recently told by Obama to not raise rates again until after the election), the large banks are the TRUE controllers of the Fed.

 

Bonds, particularly sovereign bonds, are the senior most collateral sitting on the big banks balance sheets.

 

These bonds are what backstops the $700 trillion derivatives market. $1 in your typical Treasury is likely backstopping over $300 worth of trades in over the counter markets that are completely unregulated.

 

The vast bulk of these derivatives are based on interest rates or bond yields.

 

What are the odds the Fed would risk blowing up the derivatives market, thereby imploding the very banks that own the Fed?

 

Absolutely ZERO.

 

The Fed is “one and done” for rate hikes. It was a symbolic move brought about by political pressure after seven years of ZIRP. The Fed raised rates a mere 0.25% and the financial markets entered a free fall. That’s the end of that. Anyone who argues otherwise based on “data” or the “state of the economy” is ignoring the facts of how the financial system operates.

 

So what does this mean?

 

The bubble will continue to grow until it bursts. The world has added $57 trillion in new debt since 2007. The fastest growing segment of the debt markets has been government debt, which has grown at an annualized rate of over 9%.

 

This bubble will burst as all bubbles do. Given the ongoing revolt by Japan and Europe against negative interest rates, it’s only a matter of time before it does.

 

And this time around, unlike in 2008, when the Crisis hits, it will be ENTIRE countries that go bust, NOT just individual banks.

The time to prepare for this is now, BEFORE it hits.

If you’ve yet to prepare for a bear market in stocks we just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 100 copies for FREE to the public.

 

To pick up yours, swing by:

http://ift.tt/1HW1LSz

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

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The New York Fed’s ‘decidedly-more-optimistic-than-Atlanta-Fed’s-GDPNow-model’ NowCast model for GDP growth just tumbled back to reality after a week of dismal data finally forced its hand. Treasury bond yields are extending their tumble as NYFed slashes Q1 growth to just 0.8% (from 1.5% in Feb) and collapsed Q2 growth to 1.2% from 1.9% last week. This cuts the entire H1 estimate from 1.5% to 1.0%… shamed down to GDPNow’s reality.

Q1 cut…

 

And Q2 slashed…

 

And what drove the drastic cut…

Source: NYFed

This means the US has to grow 3.4% in the second half to hit the Fed’s target!

It appears the shaming of their ‘optimism’ has worked. And the reaction in bonds is clear…

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There has been some confusion in recent weeks about one unexplained aspect of the rising market: just who is buying?

The reason for the confusion is not only the previously documented buyer strike by the smart money (hedge funds, institutions and private clients), which as we reported a few days have sold stocks for 11 consecutive weeks.

 

Then last night, citing the latest EPFR data, BofA reported that retail equity investors are now also “risk-off” following $6.2 billion in equity outflows from all regions.

So retail is selling, insiders are selling… who is buying?

Here is the answer courtesy of Goldman’s David Kostin:

Corporations purchased $561 billion of US equities during 2015, 40% higher than during 2014 ($401 billion) and the second highest level since at least 1952 ($721 billion in 2007). Managements remained committed to share repurchases (net of issuance) last year amidst modest US GDP growth of 2.4% and extended valuations. Outside of the Great Recession, corporates have been the primary source of US equity demand.

 

We already know that in a world of declining cash flows, the primary source of funds to facilitated this behavior was debt issuance. In fact, as SocGen showed in a stunning chart last year, the only reason for the increase of net debt in the 21st century has been to fund buybacks.

 

That explains who bought. But what about who is buying and who will keep on buying? The answer: even more corporate buybacks.

Buybacks will remain the key source of equity inflow in 2016

 

We expect corporations will purchase $450 billion of US equities in 2016 and will remain the largest source of US equity demand. With the US economy expected to grow at a modest 2% pace and cash balances at high levels, firms are likely to continue to pursue buybacks as a means of generating shareholder value. We forecast S&P 500 EPS will rise by 9% to $110 this year from $100 in 2015 (see US Equity Views, March 14, 2016), which should also benefit allocation to buybacks.

This means that without corporate buybacks, suddenly the S&P has a gaping $225 billion shorfall in net equity flow to fill. Which is also why it is so critical for the Fed to make sure that there are no disruptions to the bond market: should the issuance train slow down, and if corporations can’t raise the much needed half a trillion in debt proceeds which will be used to buyback stock, a big problem emerges.

It also explains why the ECB last month scrambled to backstop investment grade corporate bond issuance for the first time: in effect Draghi gave his blessing to Europe’s companies to raise debt and to use every last EUR of proceeds to buyback their own stock.

We expect something similar to be unviled in the US soon.

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When China reported its economic data dump last night which was modestly better than expected (one has to marvel at China’s phenomenal ability to calculate its GDP just two weeks after the quarter ended – not even the Bureau of Economic Analysis is that fast), the investing community could finally exhale: after all, the biggest source of “global” instability for the Fed appears to have been neutralized.

But what was the reason for this seeming halt to China’s incipient hard landing? The answer was in the secondary data that was reported alongside the primary economic numbers: the March new loan and Total Social Financing report.

As the PBOC reported last night, Chinese banks made 1.37 trillion yuan ($211.23 billion) in new local-currency loans in March, well above analyst expectations, as the central bank scrambled to keep the economy engorged with new loans “to keep policy accomodative to underpin the slowing economy” as Reuters put it. This was up from February’s 726.6 billion yuan but off a record of 2.51 trillion yuan extended in January. Outstanding yuan loans grew 14.7 percent by month-end on an annual basis, versus expectations of 14.5 percent.

But it wasn’t the total loan tally that is the key figure tracking China’s credit largesse: for that one has to look at the total social financing, which in just the month of March rose to 2.34 trillion yuan, the equivalent of more than a third of a trillion in dollars!

And there is your answer, because if one adds up the Total Social Financing injected in the first quarter, one gets a stunning $1 trillion dollars in new credit, or $1,001,000,000,000 to be precise, shoved down China’s economic throat. As shown on the chart below, this was an all time high in dollar terms, and puts to rest any naive suggestion that China may be pursuing “debt reform.” Quite the contrary, China has once again resorted to the old “growth” model where GDP is to be saved at any cost, even if it means flooding the economy with record amount of debt.

 

And to put it all together, the PBOC also reported that the broad M2 money supply measure grew 13.4% in March from a year earlier, or precisely double the rate of growth of GDP. This means that it took two dollars in new loans to create one dollar of GDP growth.

 

With China’s debt/GDP already estimate at 350%, how much longer can China sustain this stunning debt (and by definition, deposit) growth continue?

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We were wrong: several minutes ago when we documented the collapse in the Gallup Economic confidence, we said that “we look forward to the UMich confidence report to beat expectations when it is released in just a few minutes.” Moments ago the official print came out and it was not pretty: sliding from 91 to 89.7, not only did the print miss expectations of a rebound to 92.0, but was the lowest print since September 2015, as well as the fourth consecutive drop.

The reason for the drop? Consumers reported a slowdown in expected wage gains, weakening inflation-adjusted income expectations, and growing concerns that slowing economic growth would reduce the pace of job creation.

And as UMich calculates, “the data now indicate that inflation-adjusted personal consumption expenditures will grow by 2.5% in 2016.” Hardly a glowing endorsement of the 2.7% quarterly GDP growth needed to hit the Fed’s optimistic forecast.

This is what the report said:

Consumer confidence continued its slow overall decline in early April, marking the fourth consecutive monthly decline. To be sure, the sizes of the recent losses have been quite small, with the Sentiment Index falling just 2.9 Index-points since December 2015, although it was down 6.2 Index-points from a year ago and 8.4 points below the peak in January 2015. None of these declines indicate an impending recession, although concerns have risen about the resilience of consumers in the months ahead.

 

Consumers reported a slowdown in expected wage gains, weakening inflation-adjusted income expectations, and growing concerns that slowing economic growth would reduce the pace of job creation. These apprehensions should ease as the economy rebounds from its dismal start in the first quarter of 2016. Overall, the data now indicate that inflation-adjusted personal consumption expenditures will grow by 2.5% in 2016.

Add to this the concern about rising gas prices that was voiced by Gallup and suddenly you have a very troubling picture of the US economy.

But perhaps most troubling for the Fed is that while 1 year inflation expectations remained unchanged at 2.7%, the 5 year forward forecast dropped from 2.7% to 2.5%, implying that whatever the Fed is doing to boost expectations of rising prices is not working.

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According to the latest Weekly Economic Confidence poll released by Gallup, Americans’ confidence in the US economy is getting worse. The poll asks people to rate the economy as of today, and whether or not the economy as a whole is getting better or worse.

It turns out that ordinary people are not as excited about the US economy as those who are cheerleading minimum wage job creation and market levels being close to all time highs, and certainly not as excited as that group of people called each month by either the Conference Board or UMich, the two far more closely tracked confidence indicators.

The Economic Confidence Index for the week ending April 10th came in at -14. Down from the prior week, and hitting a low not seen since the first week of November last year.

 

Digging a little deeper into the detail, Gallup reveals that people are viewing the economic outlook to be much worse than current conditions. While both components are getting worse, the economic outlook plummeted. The score of -22 reflects 37% of US adults saying the economy is “getting better”, while 59% say it’s “getting worse.“

This is how Gallup concludes:

Americans’ views of the national economy have been somewhat turbulent over the last several weeks, with confidence improving one week only to fall the following week. From a broad perspective, economic confidence so far this year has neither moved into a sustained period of positivity nor entered into a steady decline. Americans are confronted with presidential candidates using the economy as one of their talking points, mixed signals from national economic reports, volatility in the stock market and an apparent end of sub-$2 gas prices nationally — all of which may be affecting their economic assessments.

 

Americans’ cautiousness in their assessments of the economy may not be far off from those of economic leaders, however. Federal Reserve Board Chair Janet Yellen has been slow to raise interest rates, with some economists arguing Yellen has been overly cautious and has underestimated the economy’s actual strength. Yellen’s critics say the slow pace of raising rates will put the Fed at a disadvantage, with the possibility of increased inflation as the economy reaches its employment targets.

The disconnect in sentiment between everyday people and financial pundits must just be the result of a communications issue. And of course, we look forward to the UMich confidence report to beat expectations when it is released in just a few minutes.

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The US economy has never – ever – seen Industrial Production drop YoY for seven months in a row without being in a recession. Down 2.0% YoY in March, the weakest since December and down 0.6% MoM (weakest since Feb 2015) the decline in factory output is driven a 1.6% plunge in vehicle production (2.8% collapse in motor vehicles specifcally) in March.

 

 

As The Fed details,

Manufacturing output decreased 0.3 percent in March. The production of durables moved down 0.4 percent. The largest declines, about 1 1/2 percent, were registered both by motor vehicles and parts and by electrical equipment, appliances, and components. Several industries posted increases, with the largest, nearly 1 percent, for computer and electronic products. After increasing 0.9 percent in January and decreasing 0.5 percent in February, the output of nondurable manufacturing edged down in March, as gains in the production of petroleum and coal products and of chemicals nearly offset declines for most other industries. The output of other manufacturing (publishing and logging) fell almost 1 percent. 

It really should be no surprise that Auto production is hitting the wall, as we have been discussing, inventories are extreme…price and sales weakness is occurring amid a mal-investment-driven excess inventory-to-sales at levels only seen once before in 24 years…

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Less than six months after we pointed out that the BoJ owns 52% of the entire Japanese ETF market, Reuters reports that the Kuroda’s Peter Pan fairy tale, aka the Bank of Japan, is thinking about buying even more. The BoJ is said to be currently buying $30 billion of ETF’s a year under its current policy, however since the Nikkei is down over 10% this year, that figure is apparently not enough to keep the market propped up.

Here’s how the BoJ’s holdings in the Japanese ETF market looked visually in recent months:

 

“Increasing ETF buying in huge amounts, combined with a modest increase in bond buying and an interest rate cut, could be the only way left to surprise markets,” said a former BOJ executive who retains close contact with incumbent policymakers.

The reason for the BOJ’s desperation shift to monopolizing the equity market next is that as we have warned since 2014, it is running out of bonds to purchase: “the BOJ’s huge bond purchases are also drying up market liquidity, which further limits the scope for a large increase.”

“They are crossing off a list of things that aren’t possible, and the only thing that’s left is buying ETFs,” said Richard Jerram, economist at Bank of Singapore.

Japan’s ETF market is just 15.8 trillion yen, of which the BOJ already holds about half, but ETFs can be easily cobbled together by brokerages, so there is scope for plenty more, given Japan’s TOPIX stock market weighs in at 500 trillion yen.

Recall that the Bank of Japan’s purchasing of ETF’s does in fact lift the market, but questions remain around how much losses the bank will incur after the euphoria wares off, and how they can ever exit their position without collapsing prices.

“The BoJ will not easily be able to retract this liquidity in the future without destabilizing markets“, said Andrew Meredith, co-managing director at Tyton Capital Advisors

What “retraction”? The BOJ will never be able to “retract” as at this point this is the all in gamble; Kuroda knows very well that should the Nikkei drop a few more percent, he and Abe are out. Even the BOJ itself realizes this:

There are doubts raised within the BOJ, too, but those voices are in retreat as Kuroda stretches the limits of monetary policy, and dissenters to his radical money-printing policies are being replaced by supporters, the sources say.

 

“I don’t think worries about an exit are high on the list of the BOJ’s priorities,” said another source familiar with the BOJ’s thinking.

Worse, increasingly every BOJ proposal is being seen as a joke by even the “serious” members of the analyst community.

Jerram at Bank of Singapore said he was not convinced buying ETFs would help much with the BOJ’s principal goals, however, as there wasn’t a clear transmission into economic performance.

 

“They do something for the sake of doing something, and people see through that pretty quickly,” he said.

With the only tangible success of NIRP being that the BoJ has broken the money market, it will now embark on a journey to push on the string from the other direction, ultimately from the boardroom.

As we said back in October, “buying individual issues would allow the BoJ to effectively control corporate management teams on the way to dictating decisions about wage hikes and capex. In other words, when Abenomics fails, the BoJ will simply take over the boardroom and mandate higher pay in an effort to fix this.”

Which brings up another question: why is it that central banks have no qualms about reporting their purchases f ETFs but, with the exception of the SNB, are yet when it comes to purchases of single name stocks (or, gasp, crude oil) during key inflection points, it is still considered a taboo? After all, there are no markets left that are isolated from central bank intervention anymore.

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Janet – you have a problem. Following the all-clear from China, soaring stock prices, and ‘stability’ in oil, Chicago Fed business conditions just hit a 17-month high. In other words, The Fed is gonna need some bigger ‘turmoil’ excuses or defending “no rate hikes” is going to look a whole lot more political than their independence would suggest.

Everything is awesome in Chicago too…

 

As The Chicago Fed notes:

Business activity expanded for New York manufacturing firms for the first time in over a year, according to the April 2016 survey. After remaining in negative territory for seven months, the general business conditions index rose to a reading slightly above zero last month, and climbed nine more points to reach 9.6 in April. Thirty-one percent of respondents reported that conditions had improved over the month, while 22 percent reported that conditions had worsened. After a steep gain last month, the new orders index edged up two points to 11.1, pointing to an increase in orders. The shipments index edged lower but, at 10.2, still signaled a modest increase in shipments. The unfilled orders and delivery time indexes both came in close to zero. The inventories index was -4.8, indicating that inventory levels were slightly lower.

 

The prices paid index rose sixteen points to 19.2, suggesting that input prices increased at a significantly faster pace than last month. The prices received index, up nine points to 2.9, showed a small increase in selling prices. The index for number of employees edged up to 2.0, indicating that employment levels remained fairly steady, and the average workweek index was unchanged at 2.0, a sign that hours worked remained largely the same.

Sp surging prices, better jobs, no global turmoil – what are you waiting for Janet?

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