Category: zerohedge

While we are laughing at Yellen burying what little credibility the Fed may have had left both with her statement and her answers to press Q&A, here is Goldman.

BOTTOM LINE: Fed officials indicated a cautious approach in today’s statement and economic projections. In the Summary of Economic Projections, the number of participants anticipating only one rate hike this year rose to six from one, although the median remained at two. The number of projected hikes for 2017 and 2018 were also lowered to just three per year.

 

MAIN POINTS:

 

1. The FOMC left rates unchanged at today’s meeting, and hinted that the latest pause may continue a while longer. The statement indicated that “economic activity appears to have picked up”, even as labor market activity slowed. In figures submitted for the Summary of Economic Projections (SEP), Fed officials estimated that GDP growth will run at 2.0% this year and beyond, and that core PCE inflation would rise to +1.7% by the end of this year.

 

2. However, the statement and SEP were more dovish than expected in several respects. First, the number of participants anticipating only one rate increase this year rose to six from just one in March—more than we had expected. Second, funds rate projections for 2017 and 2018 declined more than we expected: the median estimate for 2017 fell by 25bp to 1.6%, and for 2018 by 63bp to 2.4%. Third, the statement expressed slightly more concern about developments in inflation expectations, noting that market-based measures “declined” (instead of “remained low”), and that only “most” survey-based measures were little changed. Lastly, Kansas City Fed President Esther George voted in favor of holding policy rates unchanged—another indication of a more cautious mood about the committee.

 

3. In the Summary of Economic Projections (SEP), GDP forecasts were lowered slightly for 2016 and 2017, while projections for the unemployment rate were little changed.

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Back in April, an Argentine prosecutor requested that former President Cristina Fernandez de Kirchner be investigated in a wide-ranging money laundering probe that allegedly involved a prominent government contractor and associate.

Members of Kirchner's Victory Front party claimed the request had no legal basis, with Congressman Hector Recalde saying "This move has no legal basis, it was rushed and we don't have any details because the investigation is sealed."

However, things started to get a bit dicey for Kirchner when a prominent businessman named Lazaro Baez was arrested. Baez was the owner of leading construction firms and partner of hotel and property businesses with Kirchner and her late husband the WSJ reported at the time. In a further tangled web of potential corruption, an imprisoned former associate of Baez named Leonardo Farina implicated Kirchner, her late husband, and Baez as part of a plea bargain. According to reports, Farina testified to the laundering of hundreds of millions of dollars out of Argentina through offshore companies in Panama, Belize and the Seychelles to a Swiss bank.

Prosecutors allege that Baez, who set up his construction company just days before Kirchner took office in 2003 and has made millions through public projects, was the one who transferred the money abroad through an intricate network of shell companies.

The Judge in the case labeled Baez a flight risk and a "suspect in a conspiracy to launder $5.1 million using bags filled with cash."

We provide the background above because it brings us to more recent news. On Tuesday, the former public works secretary under Kirchner, Jose Lopez, was arrested after he was caught burying bags containing an estimated $8.5 million in cash in the grounds of a convent near Buenos Aires.

Police were tipped off by a neighbor who saw Lopez taking bags out of his car in the middle of the night. Lopez, who currently serves as a lawmaker in the Mercosur parliament, was found with an assault rifle and six bags containing dollars, euros, yen, and Qatari riyal Bloomberg reports.

During an interview in April, Lopez said that he had overseen more than 40,000 infrastructure projects during his tenure, ironically adding "we never gave any benefits to any businessmen and all the projects were done through public tender and were awarded at the lowest cost."

"Being transparent will move us away from embarrassing situations like the one we woke up to today, an event we are all embarrassed by. We are changing and it's good that we uncover everything we want to change in Argentina" President Mauricio Macri said upon learning of the arrest on Tuesday.

* * *

It's safe to say that this arrest probably won't help matters for Kirchner as the former President battles the money laundering charges. Ah the webs the corrupt powerful elites weave for themselves – in the end, the truth will eventually find its way out.

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Charles Biderman, founder of the research firm TrimTabs speaks up against monetary interventionism and spots a concerning development in the US stock market. In an excellent interview with Finanz und Wirthschaft's Christoph Gisiger, Biderman explains that despite recent market action having dragged the S&P 500 back to near-record levels; something else is going on beneath the surface: US companies are announcing fewer stock buybacks. That’s a reason for concern since buybacks have been at the center of this bull market. The outspoken American is also concerned about the lack of growth in the United States and warns that in Europe and Japan negative interest rates could end up causing a disaster.

Mr. Biderman, tensions in the financial markets are rising. What’s your take of the situation?

The stock market in the United States has been run by companies adding money through stock buybacks and cash-takeovers. But ever since the Federal Reserve hiked interest rates and started to talk about further moves we have seen a slowdown in buyback announcements. For the first five months of this year the volume of announced stock buybacks is around 30% lower at $280 Bn. That’s a significant decline. There are two reasons for this slowdown: First, earnings are down and free cash flow is down. Second, it’s harder to borrow money to do buybacks for companies with a junk rating. So less leverage is possible. Also, there is a lot more scrutiny of companies doing buybacks and why they’re doing them. The companies that are being punished are those which are doing buybacks with leverage.

What does this mean for the outlook?

Since the end of 2011 there has been zero new money going into the US stock market if you add up mutual funds flows and ETF flows. But at the same time there has been $2.1 trio. of float shrink, meaning cash takeovers and stock buybacks minus all new share sales of companies from insiders, IPOs and  secondary issuances. So obviously leverage from the float shrink is what has boosted share prices and if there is less float shrink going to happen that’s a concern for the market.

Could this even be a sign that the bull market is over?

What we’re also seeing now is a big pickup in companies selling stocks. There are lots of new shares coming out of the woodwork hitting the market. Especially energy companies have been crazy to issue shares. And not only are there more new share sales. One thing we are noticing as well are lots of very big cash takeovers of public companies. The $26 Bn. takeover of LinkedIn by Microsoft is a perfect example. On the one hand you would think that’s bullish because it reduces the share count. On the other hand, the confidence level to do this type of very expensive deals usually occurs at tops.

And what’s going on when you look at the fundamentals?

Real-time tax data indicates that US economic growth has not accelerated this spring. That’s why I predict that within twelve months we will see rates for long term US mortgages under 2% and under 1% for ten year treasuries. Despite the economy keeps slowing most economists still think it’s going to grow. But these guys are the best contrary indicator ever. They have been predicting rising interest rates for 30 years now and they have been wrong all the way. Yet, people still keep listening to them. How many Wall Street morons still say that we are going into a bond bear market? Really? If they had bet on that trade with their own money they would have been broke a long time ago.

Also, it also looks like the job market is cooling down as the most recent numbers from the Bureau of Labor Statistics suggest.

Those numbers are basically random generated. They are based on a small survey. So we’re just getting the small statistical sample they use to come up with the monthly job market report. They poll around 100’000 employers each month and the highest percentage of respondents are public sector enterprises and big companies. Small companies don’t really participate in this survey. So there is no reliability. In addition to that they seasonally adjust the numbers. Because of that, the monthly numbers can be off by 100 000 jobs either way. So what’s the value of those numbers, other than they give traders something to trade against?

What’s really going on in the job market?

You have to consider that in the US every month 5 million jobs are lost and around the same amount of jobs is newly created. On the balance, for the ninth consecutive month now net employment growth was below 200’000 jobs in May, according to estimates based on real-time income tax withholdings. Also, it appears that the old jobs people are losing pay more than the new jobs that are being created. So in essence, we’re having more jobs but no income growth. That makes sense because how do companies make more money in a no-growth world? They pay their workers less.

This summer, it will be seven years since the Great Recession officially has been declared to be over. Why is the economy still stumbling?

The economy is growing slower than people have been expecting because of what I call the politics of fairness. With politics of fairness I mean basically that people think they should be entitled to get free education, free healthcare, not to lose their jobs because that’s only fair. Since President Obama has taken office he has increased food stamps, increased free loans to college kids and increased phony disability claims. Also, he has introduced all these add-on regulations that help his consistency. More people are on the doll than ever before and economic growth is as slow as it has ever been – and that’s related.

Why?

The politics of fairness have created the economics of hopelessness. We’re following the European model which is to maintain the status quo: Don’t let competition damage or disrupt existing businesses. The politics of fairness create anti competitiveness because if you are guaranteeing workers a job for a lifetime you want to make sure the company they work for doesn’t go out of business. Therefore, you can’t allow new competition to come in. So you install tests, regulations, rules and barriers to block market entry.

So what should be done to revive the economy?

What we really need is the politics of hope: Let’s figure out how to make it easier to start a business. Let’s remove anti-competitive rules and restrictions. Let’s have communities get together and look at how can we help this economy. Unless we do that, the economy is going down the toilette. I’m not advocating sweatshops. I say: make it easier for people to start something new. Growth occurs only when more new happens than existing shuts down. Right now it’s the opposite. There are more businesses shutting down than starting up in the western world. For example, 80% of Greek businesses say they wish that they could leave Greece.

In the meantime, the central banks keep printing money. What are the consequences of these super easy monetary policies?

Cutting interest rates and printing money won’t solve our problems. What the central banks are supposed to do is basically to provide a stable money supply and not to try to be the engine of growth for the world.  It’s not working. Free money is the fairness method of handling economic problems created by the politics of fairness. Because if you have below market interest rates you’re giving money away – and you create asset bubbles. But asset bubbles don’t create real growth. That’s the one thing central banks can’t do. They can create assets bubbles, they can slow the economy, they can prick asset bubbles, but they can’t grow the economy. Zero interest rates only raise the market value of financial assets. But they don’t raise incomes. So it’s basically welfare for rich people.

And what about negative interest rates?

Negative interest rates are a total disaster. They don’t prompt people to spend more, they prompt people to save more because they’re fearful about the future. People can’t earn anything, they lose money on their savings. And if you push negative rates far enough down what happens is that people just hoard physical currency. You can see that already to some extent in Japan: People buy safes and they put currency away. Ultimately, if you push interest rates far enough into negative territory, people take money out of the banking system and the banking system could collapse. So far, negative rates are not very negative but if you start having negative interest rates of one, two or three percent, that’s when the banking system really gets exposed.

So far the Federal Reserve seems to dismiss negative interest rates. What’s next for monetary policy in the United States?

If the economy is as weak is I have been saying than I would expect a new form of Helicopter Money coming to the US. I’m not sure exactly what it will look like. But given that the economy is slowing and our wage and salary numbers say that there is no growth in income I would expect Helicopter Money. And since what really runs the market is the Federal Reserve and other central banks this would then levitate stock prices once again. Therefore, I expect market volatility on both sides to be rather severe.

How should investors prepare for that?

As a long term investor you should buy stocks of companies which generate strong free cash flow. Don’t worry about the market volatility because longer term the design purpose of businesses is to growth cash. In a fiat currency world, companies that are growing rapidly are a good store of value. Also, historically, if you had only bought companies growing free cash flow you would have outperformed the market. So if you buy free cash flow companies in a volatile time you will do better than the market and you will sleep better. That’s also why I wouldn’t touch stocks like Tesla for example.

What stocks do you own personally then?

Around 10% of my portfolio consists of gold because it’s a store of value, too. With respect to stocks, I recently sold my position in Apple. But other than that, I have owned the same stocks for three or four years now. I still own Facebook, Amazon, Salesforce.com and Google. So in essence, my portfolio consists of gold and companies that are growing rapidly, even if it doesn’t look like it sometimes. Salesforce.com for instance doesn’t have earnings but their cash is growging a lot. Amazon invests its cash flow in growth. [info 3R]Not every venture they do works out but they’re very successful in creating rapidly growing new sectors and Mr. Bezos is a brilliant entrepreneur. Also, Google is creating demand in areas that didn’t exist before.

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“Hope” is now an official policy of The Fed it seems as they say – unequivocally – that the labor market “will strengthen.” Never mind the uselessness of considering labor force in units of headcount in today’s part-time, lower wage, gig economy. Taking the ax to growth and rate-hike-trajectory expectations, once again crushing their overly-optimistic hockey-stick expectations back to what the market already thinks. Yield curves, Fed funds futures, and Eurodollar options – as well as gold – all signal a Federal Reserve that has lost credibility and therefore its ability to ‘manage’ anything. Grab your popcorn and watch as we see if the press corps can do their job?

July rate hike odds have collapsed to just 11% and September just 16%…

Live Feed:

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Stocks are fading after their standard initial spike, but as the USD dollar gets hit on what was basically an admission of over-optimism on everything by The Fed, so the bid for safe-havens like bonds and gold continues…

Stocks and USDollar down, bonds and bullion up…

Gold and Bonds lead…

and July and September rate hike odds are sliding…

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Since everyone is focused on the dot plot, here it is, and while Kocherlakota is gone, he has been replaced with a new Kocherla-Dota as someone is dragging on the new low 2017 and 2018 dots: it appears a new Fed uberdove has emerged…

Here is the comparison between the June and March Dots:

Of note: while the median forecast of 17 policy makers remained at two quarter-point hikes this year, the number of officials who see just one increase rose to six from one in the previous forecasting round in March, according to the latest Fed projections. Expect the “two” to drop to “one” when the Fed finds more data that does not allow it to hike over the next 6 months.

Also of note: in the otherwise boring projections, someone also has capitulated on the long-term unemployment rate:

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With bonds and bullion remainig bid post payrolls, post May Minutes, post April FOMC, and post December's Fed rate-hike, it is clear that the market is losing faith in The Fed… and we suspect The Fed is losing faith in itself as it takes the ax (once again) to its growth and rate forecasts (the dot-plot).

• *FED SAYS IT EXPECTS LABOR MARKET INDICATORS `WILL STRENGTHEN'
• *FED: MEDIAN FED FUNDS EST. 1.6% END-2017 VS 1.9% IN MARCH
• *FED SAYS PACE OF LABOR MARKET IMPROVEMENT HAS SLOWED

July rate-hike odds are at 18% (and Sept at 19%). Pre-Fed: S&P Futs 2082, 10Y 1.61%, EUR 1.1240, Gold $1285

*  *  *

Here is the key paragraphs with changes:

Information received since the Federal Open Market Committee met in March April indicates that the pace of improvement in the labor market conditions have improved further even as has slowed while growth in economic activity appears to have slowed.picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. strengthened. Since the beginning of the year, the housing sector has improved further continued to improve and the drag from net exports appears to have lessened, but business fixed investment and net exports have has been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and fallingin prices of non-energy imports. Market-based measures of inflation compensation remain low;declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

* * *

Some context for her actions today… Macro has collapsed…

As has Micro…

The Fed Minutes in May shifted the market's tone…

But since payrolls, everything has changed…

But since The Fed first hiked rates (now 6 months ago!), things have not worked out how Yellen hoped…

Rate-hike odds have been falling across all maturities…

As we suspect The Fed will have to adjust its overly optimstic forecasts down once again…

*  *  *

Additional headlines:

• *FED: MEDIAN FED FUNDS EST. 1.6% END-2017 VS 1.9% IN MARCH
• *FED MEDIAN 2016 GDP GROWTH FORECAST 2% VS 2.2% IN MARCH EST.
• *FED MEDIAN ESTIMATE CONTINUES TO FORECAST TWO 2016 RATE HIKES

Full Redline Below:

Charts: Bloomberg

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A few months ago we pointed out that mass layoffs were coming for bankers due to declining revenues and more difficult market conditions, and now we're seeing the first major wave of that come to fruition.

Bank of America has announced that it will fire as many as 8,000 employees within its consumer division the FT reports.The core reason given for the headcount reduction in this instance is that digital banking is picking up the pace, and has reduced the need for "back office staff" and bank tellers.

This is a trend that BofA highlighted in its In its Q1 earnings press release, as the bank showed that mobile banking users had shot up 15% y/y.

The bank has already slashed headcount by more than 10,000 in 2015, and has cut almost 40,000 from its consumer division alone since 2009 (bringing the total at the end of Q1 to 68,400). The layoffs are in line with what has been happening to its retail branch count, which has fallen by about 1,400 over the past seven years. Thong Nguyen, president of retail banking told a conference in New York this week that the numbers would "probably go down to the low 60s", implying as many as 8,000 layoffs are on the horizon.

The division is critical for BofA, accounting for roughly 66% of the bank's Q1 net income.

As the FT points out, BofA is especially exposed to monetary policy as it has a significant domestic retail presence. Due to central planning around the globe, rates have plummeted, leaving banks to find other measures to put a floor under profitability. Said another way, banks need to cut costs and cut them quickly in order to mitigate the squeeze on NII.

"We're not waiting for the rates to come up to keep driving the increase in profitability" Nguyen said.

Alas, although the Fed did hike in December, BAC has under performed its peers since that date – meaning the bank has a lot of catching up to do in order to soothe investor concerns, and these cost cutting measures play a part in that effort.

On another note, as global yields continue to plunge and the UST curve continues to flatten as investors chase any yield that's left out there, the entire financial sector will continue to get squeezed, no matter how much cost is driven out of the business.

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Submitted by Simon Black via SovereignMan.com,

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

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Following the recent escalation by China when it announced it is ready to impose an Air Defense Identification Zone to target US spy flights above the South China Sea and “thwart US provocations”, China has decided to return the favor and as Reuters reports a Chinese observation ship shadowed the U.S. aircraft carrier John C. Stennis in the Western Pacific on Wednesday, the carrier’s commander said, as it joined warships from Japan and India for drills in waters which Beijing considers its backyard.

The Nimitz-class aircraft carrier USS John C. Stennis

As usual one can ask who was responsible for the initial provocation: the show of U.S. naval power comes as Japan and the United States worry China is extending its influence into the Western Pacific with submarines and surface vessels as it pushes territorial claims in the neighboring South China Sea, expanding and building on islands. China has repeatedly announced it has been angered by what it views as provocative U.S. military patrols close to the islands. The United States says the patrols are to protect freedom of navigation.

This wasn’t the first recent flexing of Chinese naval muscle. Tokyo on Wednesday said a separate Chinese navy observation ship entered its territorial waters south of its southern Kyushu island. China said it was acting within the law and following the principle of freedom of navigation.

“There is a Chinese vessel about seven to ten miles away,” Captain Gregory C. Huffman, commander of the Stennis, told reporters aboard the carrier after it recovered its F-18 jet fighters taking part in the exercise. The Chinese ship had followed the U.S. vessel from the South China Sea, he added.

Chinese Foreign Ministry spokesman Lu Kang said he was unaware of the situation. Beijing views access to the Pacific as vital both as a supply line to the rest of the world’s oceans and for the projection of its naval power.

The 100,000-ton Stennis joined nine other naval ships including a Japanese helicopter carrier and Indian frigates in seas off the Okinawan island chain. Sub-hunting patrol planes launched from bases in Japan are also participating in the joint annual exercise dubbed Malabar.

As Reuters adds, the Stennis will sail apart from the other ships, acting as a “decoy” to draw it away from the eight-day naval exercise, a Japanese Maritime Self Defense Force officer said.

The concern here is that now that the South China Sea has become a hotbed of contention over who owns what, now the East China Sea appears to be also falling squarely in focus, a repeat of events from late 2013 when China and Japan engaged in an agry back and forth over territorial claims over the Senkaku islands.

Blocking China’s unfettered access to the Western Pacific are the 200 islands stretching from Japan’s main islands through the East China Sea to within 100 km (60 miles) of Taiwan. Japan is fortifying those islands with radar stations and anti-ship missile batteries.

 

By joining the drill, Japan is deepening alliances it hopes will help counter growing Chinese power. Tensions between Beijing and Tokyo recently jumped after a Chinese warship for the first time sailed within 24 miles (38 km) of contested islands in the East China Sea.

 

The outcrops known as the Senkaku in Japan and the Diaoyu in China lie 220 km (137 miles) northeast of Taiwan.

 

Wary of China’s more assertive maritime role in the region, the U.S. Navy’s Third Fleet plans to send more ships to East Asia to work alongside the Japan-based Seventh Fleet, a U.S. official said on Tuesday.

 

For India, the gathering is an chance to put on a show of force close to China’s eastern seaboard and signal its displeasure at increased Chinese naval activity in the Indian Ocean. India sent its naval contingent of four ships on a tour through the South China Sea with stops in the Philippines and Vietnam on their way to the exercise.

China claims most of the energy-rich South China Sea through which about $5 trillion in ship-borne trade passes every year. Neighbors Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims. 

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