Category: zerohedge

Following recent stumbles within the global banking sector, not only on the litigation front where banks have paid over a quarter trillion in legal fees and settlements in the past several years, but also due to tumbling profits and more recently, compensation and staffing cuts, many speculated that recent generations of college and MBA grads would pick other career options over Wall Street. They were wrong.

According to the FT, Goldman Sachs attracted more than a quarter of a million applications from students and graduates for jobs this summer, “suggesting fears of a ‘brain drain’ in the sector may be exaggerated as banks introduce more employee-friendly policies.” The number of applications from students and graduates globally have risen more than 40% since 2012, the paper adds. This means there is greater demand to get a job at Goldman than there is even in China where recently 1.2 million job candidates applied for 19,000 much-desired govermment positions.

Needless to say, the numbers show Goldman Sachs is attracting far more potential workers and would-be bankers than they could ever employ. It was not immediately clear how many of the 250,000 applicants Goldman – which in recent weeks have been firing bankers for the first time since the crisis – will end up hiring. Goldman’s 2016 applicants include 223,849 undergraduates applying for summer jobs and new analyst positions, as well as 30,542 MBAs looking for summer jobs and new associate positions. Undergraduate applications are up 46 per cent from 2012 while those holding MBAs are up 15 per cent.

The trend is mirrored at several other large banks such as JPMorgan, which said it was hiring only 2% or graduate applicants to its investment banking division, and Citigroup, where the proportion of would-be analysts and associates hired in its global investment banking division was 2.7% . JPMorgan said it got 40% more graduate applications for investment banking this year than in 2014, but would not give an absolute figure. Morgan Stanley said its North American investment banking division was now attracting about 8,000 applications a year, up from “6,000 plus” in 2006-07. Those candidates are competing for slightly more than 100 spots, the same number as in 2006-07.

Elsewhere, Bank of America Merrill Lynch said it only offered jobs to 3% of its investment banking applicants — and that 90 per cent of those offered jobs accept them. Even chronic criminal recidivist Deutsche Bank said its investment bank had a 14% increase in intern applications across the globe this year, and hired 9 per cent more interns than a year ago.

Other banks also say they are seeing higher application levels and improved retention rates despite the battering the industry’s reputation has taken for everything from long hours to causing a crisis that inflicted poverty on a generation.  In fact, the worse the global banking industry appears to be, the more job applicants it seems to get.

“The idea that suddenly people don’t want to go into banking — or if they do go into banking that they stay for a bit and leave immediately — a lot of that has been exaggerated,” said Sam Dean, Barclays’ co-head of Emea banking who has special responsibility for talent.

Ironically, the higher number of applications partly reflects the fact that there are fewer investment banks now, after the collapse of Bear Stearns and Lehman Brothers during the financial crisis: after the next crisis which may see only Goldman left standing, the bank may have a right of first refusal on every qualified job candidate, and certainly those who can fudge non-GAAP EPS and “adjust EBITDA.”

Recruitment companies also said investment banking was rebounding as a desirable profession partly because of banks’ concerted effort to end their workaholic culture, such as introducing more balanced work-life structures. Last week UBS, Credit Suisse and Morgan Stanley said they had introduced more employee-friendly measures, including hours off for personal matters, free Friday nights and sabbaticals.

“They are trying to replicate the Google model,” said Bernie Toole, who heads the investment banking unit at recruitment group Selby Jennings. “Before they used to churn analysts, now they are trying to attract and retain them by introducing a more positive culture, with perks and more flexible working practises.”

Goldman said it does not have comparable application figures for before the financial crisis and will not provide figures for how many jobs are on offer to graduates and interns, saying only that it hired 9,700 at all levels last year. Assuming all 9,700 spots are filled with outside job applicants, that would mean Goldman has an acceptance ratio of 3.9%, well below that of Harvard or any of the world’s most famous universiries.

via http://ift.tt/1OacmSB Tyler Durden

Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

 

The International Monetary Fund’s (IMF) World Economic Outlook (April 2016) forecasts inflation to rise to 720 percent by the end of 2016. This number, which is nothing more than a guestimate, is now carved in stone. The media, from Bloomberg, the New York Times, the Washington Post, the Wall Street Journal, to countless other ostensibly credible sources, repeats that guestimate ad nauseam.

Instead of reporting pie-in-the-sky estimates for future inflation rates in Venezuela, the press should stop worshiping at the IMF’s altar and, instead, stick to reporting current inflation rate. These are updated regularly and are available from the Johns Hopkins-Cato Institute Troubled Currencies Project. The current implied annual inflation rate is 153 percent; while it is currently the world’s highest, it is well below the IMF’s oft-reported forecast of 720 percent.

via http://ift.tt/25HcehZ Steve H. Hanke

The drumbeat of negative sellside macro research reports continued over the weekend, when following virtually every other investment bank, Morgan Stanly was the latest to share “four charts you can’t miss”, key of which perhaps was the well-known fishhooks chart showing sliding forward EPS estimate every year (with 2014, 2015 and 2016 earnings all now virtually identical), as well as the observation that PE ratios are far higher currently than where they should be based on real TSY yields…

… but what we found most interesting was the bank’s forecast matrix. While MS has a year end “base case” S&P500 target of 2,050 – about 50 points lower from where the market will open – it also present its bull and bear case, which are 2,200 and 1,525 respectively, or 5% of potential upside vs 27% of potential downside.

In any other investing climate this unattractive Upside/Downside would be sufficient to pull money from the market, however in this day and age, bad news for the market is implicitly good news for the market as it means even more doubling (tripling, quadrupling) down by central banks to keep it propped up. It may also explain why the S&P is set to open up well above 2,100 on the day after the US economy reported its worst jobs number since 2010.

via http://ift.tt/25Ivhf6 Tyler Durden

• Yellen faces fine balance on Fed rate hike after job growth tumbles (Reuters)
• Oil Advances as Abu Dhabi Sees $60 Crude on Shrinking Surplus (BBG)
• China to submit ‘negative list’ for U.S. investment treaty talks next week (Reuters)
• Buoyed by attacks on Trump, Clinton heads into pivotal week (Reuters)
• Clinton’s IT aide keeps email server shrouded in mystery (The Hill)
• Senior Republicans criticize Trump’s remarks on Hispanic judge (Reuters)
• Pound Falls, Volatility Jumps as Polls Show Momentum for Brexit (BBG)
• U.S.-backed force in Syria closes in on Islamic State-held city (Reuters)
• The Land Below Zero: Where Negative Interest Rates Are Normal (BBG)
• ‘Niger Delta Avengers’ Sabotage Oil Output (WSJ)
• Global Yields Fall to Record as U.S. Jobs, Brexit to Hamper Fed (BBG)
• NY Fed first rejected cyber-heist transfers, then moved $81 million (Reuters)
• Winning With Unloved Europe Stocks When All Others Fall Flat (BBG)
• Ukraine says detained man planned attacks on Euro soccer championship in France (Reuters)
• China to submit ‘negative list’ for U.S. investment treaty talks next week (Reuters)
• Rosengren flags jobs report, yet says Fed rate hikes coming (Reuters)
• U.S. Navy slaps drinking ban on 18,600 sailors in Japan (Reuters)

 

Overnight Media Digest

WSJ

– U.S. officials appear poised to make history by approving the first private space mission to go beyond Earth’s orbit, according to people familiar with the details. (http://on.wsj.com/1U3aB9d)

– The U.S. Federal Reserve’s plans for raising short-term interest rates went on hold after Friday’s dismal jobs report, with officials now wanting to wait and see whether the economy remains on track before they make a move. (http://on.wsj.com/1U39Rkh)

– Hillary Clinton won the Puerto Rico Democratic primary on Sunday, moving her a step closer to prevailing over her rival, Bernie Sanders, in the fight for her party’s presidential nomination. (http://on.wsj.com/1U39Wo5)

– SoftBank Group Corp is set to sell most of its stake in GungHo Online Entertainment in a deal valued about 73 billion yen, or roughly $685 million. (http://on.wsj.com/1U3bq1H)

 

FT

Private equity firm AnaCap Financial Partners raised 595 million euros ($675.09 million) for its AnaCap Credit Opportunities III fund to buy credit assets from European banks.

Mike Ashley, the founder of Sports Direct International Plc , will answer questions in Britain’s parliament about practices at the sports goods retailer on Tuesday, his spokesman said, signalling an end to a standoff between the billionaire and lawmakers.

High-street banks are training their staff on how to reassuringly answer queries from confused customers ahead of Britain’s June 23 European Union referendum.

 

NYT

– Prevention, a health and wellness magazine that is published by the family-owned Rodale company, will become ad-free starting with its July issue, which will hit shelves next week. (http://nyti.ms/1VGS5Wy)

– The Treasury’s schedule of financing this week includes Monday’s regular weekly auction of new three- and six-month bills and an auction of four-week bills on Tuesday. At the close of the New York cash market on Friday, the rate on the outstanding three-month bill was 0.30 percent. The rate on the six-month issue was 0.43 percent, and the rate on the four-week issue was 0.19 percent. (http://nyti.ms/1Usvc3K)

– The Obama administration plans to use annual talks with leaders in Beijing to push for cuts in excess Chinese industrial output, which has inundated foreign markets with discounted steel, aluminum and other products, Treasury Secretary Jacob J. Lew said in Beijing on Sunday ahead of the meeting. (http://nyti.ms/1UCq1ky)

– As news outlets round the world continued to publish revelations from the Panama Papers, the non-profit organization that coordinated the project was preparing to move out of its offices here in an effort to cut costs. The organization, called the International Consortium of Investigative Journalists, was already forced to part with three contract journalists who had helped its small staff shepherd the project. (http://nyti.ms/1t0ibZ5)

 

Britain

The Times

Martin Sorrell is facing a shareholder rebellion over his 70 million pounds ($100.72 million) pay package as chief executive of WPP Plc. Two proxy advisory firms, Pirc and ShareSoc, are advising investors to oppose the advertising group’s remuneration report on Wednesday, while another, ISS, is recommending only “qualified support” for the report. (http://bit.ly/1PdCkjc)

John Kingman, the most senior civil servant in the Treasury, is being lined up to take on the chairmanship of Legal & General Group Plc in one of the most eye-catching moves from Whitehall to the City in years. (http://bit.ly/1PdCnLR)

The Guardian

The Bank of England is stepping up its preparations for a possible decision by Britain to leave the European Union on June 23. The first of three special funding operations by Threadneedle Street will be launched on June 14 to ensure UK’s commercial banks have the necessary cash to cope with any turmoil caused by the uncertainty surrounding a Brexit vote. (http://bit.ly/1PdCRBB)

Retail Acquisitions, the former owner of BHS, pledged to keep all funds in the business and plough any proceeds from the sale of the group’s properties into its day-to-day running until a deal had been struck on the future of the BHS pension scheme, the Guardian understands. (http://bit.ly/1PdD87D)

The Telegraph

The Bank of Scotland has warned that nearly a third of companies are planning further job cuts to survive the slow recovery from sub-$30 a barrel oil prices seen earlier this year. The bank’s annual oil sector survey shows that 43 percent of companies are planning cost cutting. (http://bit.ly/1PdD9Zl)

Deliveroo, the London-based food delivery network, is due to hit revenue of 130 million pounds this year, solidifying its position as one of UK’s most-promising technology companies. (http://bit.ly/1PdCPtl)

Sky News

HouseSimple, an online estate agent backed by Charles Dunstone, has raised 13 million pounds to fund its growth plans, Sky News understands. (http://bit.ly/1PdCCX6)

The Independent

Sports Direct International Plc boss Mike Ashley has said he will now appear before MPs to defend his firm’s “good name”. Ashley has backed down after months of refusing to give evidence to the Business, Innovation and Skills (BIS) select committee about working conditions at his sporting goods chain. (http://ind.pn/1PdCCq9)

 

via http://ift.tt/1VHuBAo Tyler Durden

Not only is support growing in the United States for candidates that are perceived to be ‘outside of the establishment’, and recently and very notably in Austria, Germany and France, but as of today, in countries such as Italy.

Millions of Italians went to the polls on Sunday to vote in local elections for new mayors and town councils in more than 1,300 cities, the results of which could shake up Italy’s political landscape. The elections include Italy’s biggest cities such as Rome and Milan, and come at a difficult time for Prime Minister Matteo Renzi, as the country faces weak economic growth, a banking sector on the verge of yet another major crisis, and an uptick in migration.

In the main battleground of Rome, the anti-establishment Euroskeptic 5-Star Movement candidate won the largest share of the votes in the first round of its mayoral election. Virginia Raggi, a 37-year old lawyer running as the upstart euroskeptic 5-Star Movement won 35.6% of the vote cast Sunday in Rome, while Roberto Giachetti, the candidate for Renzi’s Democratic party received just 24.7%. The two candidates will face a runoff on June 19 the WSJ reports. Locals are seeking new leadership that can pull the Italian capital out of a state of turmoil, as it has endured corruption allegations, poor management and political upheaval. Rome has been under special administration since former Mayor Ignazio Marino, a member of Renzi’s Democratic party, resigned last October over accusations of expense irregularities – the Democratic party has been weakened in Rome by a string of political scandals and by a major criminal investigation that uncovered ties between organized crime and City Hall Officials the WSJ adds.

If Raggi wins the second round, it would give the 5-Star Movement a major opportunity to prove its ability to govern. If it can manage to tame some of Rome’s problems, that would also boost the movement’s chances in the next national election. Polls already show that the 5-Star Movement is closing in on the Democratic Party.

Further signs of trouble for Renzi appeared in Naples and Turin. In Naples, the Democratic Party didn’t make it to the runoffs, while in Turin the Democratic Party will have to face the 5-Star Movement in the second round as well.

Renzi has staked his government on a positive outcome of a constitutional referendum that has been called for October, in which there will be a vote on whether to approve a plan to simplify Italy’s legislative process, reduce the senate’s powers and ensure more stable governments – if the referendum fails, Renzi has promised to resign, which would pave the way for early elections next year.

“A negative outcome of the referendum would not only end Renzi’s tenure but also throw Italy into uncharted waters” said Wolfango Piccoli, co-president at London’s Teneo Intelligence.

* * *

We continue to get confirmation that it is not just US voters who have seemingly had enough of the politics as usual. As in Germany and Austria, there is a growing passion for citizens in Italy to do away with business as usual, for better or worse. We’ll be watching to see how this all plays out, and specifically if Renzi actually resigns should the referendum fail, as he said he would do.

via http://ift.tt/1Zr8kWJ Tyler Durden

Every ugly nonfarm payrolls has a silver lining, and sure enough following Friday’s disastrous jobs report, global mining and energy companies rallied alongside commodities after the jobs data crushed speculation the Fed would raise interest rates this month.  “The disappointing U.S. jobs report on Friday means that a summer Fed rate hike is off the table,” said Jens Pedersen, a commodities analyst at Danske Bank. “That has reversed the upwards trend in the dollar, supporting commodities on a broader basis. The market will look for confirmation in Yellen’s speech later today.” While commodities benefited from USD weakness, the pound slumped following polls that showed Britons favor exiting the European Union. European stocks and U.S. stock index futures are little changed. Asian stocks rise.

Janet Yellen is speaking today at 12:30pm in Philadelphia, the last scheduled appearance by a central bank official before the next policy meeting concludes on June 15, and hopes are again high that she will provide some additional insight into what happens next. Considering just over one week ago she pushed the hawkish Fed case which has now disintegrated before everyone’s eyes, we would be skeptical. During her May 27 appearance, the Chair strongly hinted at a June rate move, sending summer rate hike odds to their highest yet. It did not last.

Yellen will have to backtrack now after the dismal payrolls report last week led markets to doubt whether the Fed will raise rates this year, let alone this month. To be sure, she has her usual excuse: “the Fed is data dependent”, and the data just fell out of the window.

According to Bloomberg, Yellen may need to update her tone slightly in response to renewed labor market uncertainty, perhaps softening or further qualifying her May 27 statement that an increase will probably be appropriate “in coming months.” Still, economists and strategists say it’s unlikely that she’ll give a more definitive timeline on when to expect the second hike in a decade. “We’re going to get a vague promise of future rate hikes that does not specify a date,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who expects a September increase. “You can’t claim data dependence, have the most recent data be what it was, and still take upward rate action.”

Meanwhile, markets are being pulled in different directions, with worries over a slowing U.S. economy and British polls weighing on some assets, while a weaker dollar and chances the Fed will keep interest rates lower for longer supporting others. Materials producers were the biggest gainers in both Europe and Asia as the Bloomberg Commodity Index headed for the highest close since October, with Brent crude above $50 a barrel and zinc extending its longest rally since 2013. Indonesia’s rupiah and Malaysia’s ringgit were the best performers among 31 major currencies after Friday’s U.S. payrolls report caused the Bloomberg Dollar Spot Index to tumble. The pound sank to a three-week low and Brexit concern also infected Spanish and Italian bonds and U.K. homebuilders.

“Stocks are flattish today because people are interpreting there won’t be a rate hike after the jobs report Friday and for me that’s very complacent because we shouldn’t forget the longer-term trend,” said Michael Woischneck, who oversees about 300 million euros ($341 million) at Lampe Asset Management in Dusseldorf, Germany. “Oil and commodities are better again and that’s also helping stocks, but it will be a very volatile week with the Brexit vote coming closer and closer.”

The Stoxx Europe 600 Index added 0.2 percent. Rio Tinto Group and Glencore Plc led a gauge of mining companies to the best performance of the 19 industry groups on the gauge as commodities surged. BP Plc pushed oil stocks higher as crude rebounded. The U.K.’s FTSE 100 Index climbed the most among major western-European markets, gaining 1 percent, as miners jumped and the pound weakened after the Brexit polls. Futures on the S&P 500 were little changed. Shares fell Friday after the disappointing U.S. jobs data cast doubt on the strength of the world’s biggest economy and on whether the Fed will raise rates at its next meeting. The MSCI Emerging Markets Index rose as much as 1 percent to a one-month high, advancing for a third day and climbing above its 50-day moving average. Benchmark gauges in Russia and the Philippines jumped over 1 percent. South Korea’s market is shut for a holiday.

Aside from the abovementioned Yellen speech, there is no macro data in the traditional post-payrolls weekly lull.

Market Snapshot

• S&P 500 futures up less than 0.1% to 2099
• Stoxx 600 up less than 0.1% to 341
• FTSE 100 up 0.8% to 6256
• DAX up 0.2% to 10128
• S&P GSCI Index up 0.9% to 377.4
• MSCI Asia Pacific up 0.3% to 130
• Nikkei 225 down 0.4% to 16580
• Hang Seng up 0.4% to 21030
• Shanghai Composite down 0.2% to 2934
• S&P/ASX 200 up 0.8% to 5360
• US 10-yr yield up 1bp to 1.71%
• German 10Yr yield up 1bp to 0.08%
• Italian 10Yr yield up 14bps to 1.47%
• Spanish 10Yr yield up 5bps to 1.52%
• Dollar Index up 0.09% to 94.11
• WTI Crude futures up 1.1% to $49.16
• Brent Futures up 1.1% to $50.21
• Gold spot down 0.3% to $1,241

  Silver spot up less than 0.1% to $16.42

Top Global News

• China Must Get ‘More Adept’ on Monetary-Policy Signals: Lew; China must improve monetary policy communication as it takes on an increasingly large role in the global economy, U.S. Treasury Secretary Jacob J. Lew said
• Fed’s Rosengren Says Important to See If Weak Jobs Were Anomaly: Boston Fed head says May payrolls contrast with other data; FOMC voter still expects sufficient growth for gradual hikes
• Fed’s Yellen speaks in Philadelphia at 12:30pm
• Pound Tumbles, Volatility Jumps After Polls Show Brexit Momentum: ITV poll shows Brexit ahead 45% to 41%; TNS has 43% to 41%; one-month volatility at 7-year high before June 23 vote
• U.S. Economy Projected to Expand This Year by Least Since 2012: uncertainty on the presidential election weighs on outlook, according to a survey of forecasters by the National Association for Business Economics
• Clinton Wins Puerto Rico Democratic Primary, Nears Nomination: Democratic front-runner widens lead on rival Bernie Sanders
• ASCO WEEKEND WRAP: AbbVie, Bristol, Lilly, Stemline May Move
• Tesla Challenger in China Plans to Debut $106,000 E- Roadster: Qiantu Motor plans to start production in Suzhou by year-end; Tesla May Purchase Batteries From Samsung SDI, Nikkei Says
• Paramount’s ‘Ninja Turtles’ Opens to Slow Sales Over Weekend: movie opened to disappointing weekend sales in N. American theaters
• Apple May Get Breather on Sourcing Rules in India: Times
• McKinsey Said to Have Built $5b Internal Investment Arm: FT

Looking at regional markets, Asia stocks traded mixed as the region digested Friday’s dismal NFP data and its implications for Fed policy. Nikkei 225 (-0.4%) significantly underperformed as the aforementioned data saw JPY strengthen firmly against the USD with USD/JPY briefly below 107.00. Conversely, material names elevated the ASX 200 (+0.8%) into positive territory as the softer greenback underpinned commodity prices. Hang Seng (+0.4%) and Shanghai Comp (-0.2%) saw choppy trade with sentiment clouded following a lacklustre CNY 40bIn liquidity injection, although downside across the Asia region was stemmed as the poor jobs data also dampened prospects of a sooner Fed hike. 10yr JGBs traded in positive territory as the lack of risk-appetite in Japanese equities fuels safe haven inflows benefiting bond prices.

Asian Top News

• China’s Opening Bond Market a Threat to Hong Kong Connect Plans: HKEx bond link one of many ways to access China, says Haitong
• Negative-Rate Job Half Done as Japan Banks Cut Bonds, Keep Cash: Banks’ JGB holdings drop 5.5% in April, as reserves rise 3.4%
• Line Plans Year’s Biggest Tech IPO With Pitch to U.S. Investors: Japan’s messaging app to split IPO between Tokyo and New York
• Temasek Unit Said to Plan Debt Tied to Private Equity Stakes: Astrea III plans to issue about $500 million notes in 4 parts
• Lotte $4.9 Billion IPO Faces Fresh Setback on Bribery Probe: Korean prosecutors raid Hotel Lotte last week as part of probe
• Stay or Go? Rajan’s Future Becomes Focus of India Rates Meeting: All 19 economists see RBI leaving rates unchanged Tuesday

European equities have also benefitted in the wake of Friday’s eventful NFP release, with indices spending most of the session higher, although coming off best levels as we move into mid-morning (Euro Stoxx: +0.1%), with material and energy names among the best performers. As such, FTSE is the best performing index, led higher by Anglo American, Rio Tinto and BHP Billiton. Fixed income markets have sustained the upside seen last week, with Bunds continuing to trade near all-time highs, albeit relatively contained on the day given the lack of European supply or data and with net supply relatively steady this week.

European Top News

• German Factory Orders Declined in April on Weak Export Demand: orders fell 2% on month compared with estimated 0.5% drop
• Rothschild & Co. Buying Martin Maurel to Expand in France: deal creates bank with EU34b under management; Rothschild & Co should keep CET1 capital ratio above 18%
• Nestle Seeks China Turnaround Online as Competitors Abound: E-commerce business more profitable than other retail channels
• Swisscom Gains as Swiss Vote Against Pay Cap for Top Management: country votes against new rules for government- owned companies
• EON Can’t Please Everyone as Shareholders Meet for Spinoff Vote: utility needs 75% shareholder approval for Uniper listing

In commodities, the Bloomberg Commodity Index rose 1.1% putting it on course for the highest close since Oct. 22, as oil and metals advanced. Brent crude added 1.2 percent to $50.25 a barrel, after falling 0.7 percent last week as OPEC refrained from freezing output at a meeting in Vienna. The global oil surplus is shrinking faster than expected and has the potential to send prices as high as $60 a barrel this year, according to Ali Majed Al Mansoori, chairman of the Abu Dhabi Department of Economic Development. Saudi Arabia, the world’s largest exporter, raised pricing on most oil grades in July. Zinc climbed as much as 1.9 percent in London, rising for an eighth day to its highest level since July 2015, buoyed by speculation that mine supply cuts will lead to a worsening deficit. Nickel gained 2.3 percent and copper rose 0.9 percent. Iron-ore futures in Dalian jumped 2.7 percent after the first decline in Chinese port inventories in three weeks. Stockpiles fell 0.4 percent last week to 100.25 million metric tons, according to data compiled by Shanghai Steelhome Information Technology Co

In FX, the most notable mover as noted last night was the pound which tumbled to to $1.4390, near session lows, on an ITV opinion poll that found 45 percent of Britons backed the ‘Leave’ campaign, compared with the 41 percent who were for ‘Remain.’ The numbers were 43 percent for ‘Leave’ and 41 percent for ‘Remain’ in a TNS survey. “If there’s any one other currency investors may want to go short on besides paring long dollar positions that would be sterling,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “There’s a binary event risk of much greater proportions than just a policy move.” The Bloomberg Dollar Spot Index was up 0.2 percent, after tumbling 1.5 percent in the last session following the U.S. jobs report. Payrolls climbed by 38,000 in May, less than the most pessimistic estimate in a Bloomberg survey. The yen weakened 0.6 percent to 107.19 per dollar, after a 2.2 percent surge on Friday that marked its biggest gain since April. The euro fell 0.2 percent, after a 1.9 percent gain on Friday that was biggest jump of the year. The MSCI Emerging Markets Currency Index rose 0.9 percent. Indonesia’s rupiah climbed 1.6 percent, and Malaysia’s ringgit strengthened 1.2 percent. China’s yuan fell to its lowest level against a basket of peers since November 2014 after the central bank strengthened the fixing by less than expected following a slump in the dollar.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade modestly higher as participants await direction from the US in the wake of Friday’s NFP release and ahead of Yellen’s upcoming speech
• Despite recovering throughout the European session, GBP was dealt a blow overnight as the latest batch of polls lean in favour of the leave camp
• The rest of the session is light in terms of data, and will see all focus on the much anticipated speech from Fed’s Yellen this afternoon, which will garner even more attention in the wake of Friday’s jobs release

US Event Calendar

• 10am: Labor Market Conditions Index Change, May, est. 0 (prior -0.9)
• 12:30pm: Fed’s Yellen speaks in Philadelphia

DB’s Jim Reid concludes the overnight wrap

Just in case you haven’t seen the numbers from Friday payrolls were only 38k (vs. 160k expected and the lowest since September 2010) and were revised down 59k across the prior two months. Suddenly the  3-month average has fallen to 116k from 181k. As DB’s Joe LaVorgna points out this is the weakest growth since July 2012, a couple of months before QE3 started. The good news is that the unemployment rate fell to 4.7% from 5.0% (vs. 4.9% expected) but perhaps there’s an element that it’s getting more difficult to hire. We should also acknowledge that the Verizon strike would have impacted these numbers so June’s report will be important to see the impact reversed.

The weak report makes for an interesting appearance from Yellen tonight (5.30pm BST) as surely she can’t confidently signal a summer hike now? However she was relatively hawkish when she spoke 10 days ago at Harvard so will one number knock her back to her normal dovish leanings. The market has certainly voiced its opinion. We’ve had a big round trip in June and July hike expectations over the last month. Only 4 weeks ago the probabilities were 4% and 17%. They then climbed to a peak of 34% and 54% on May 24th before landing at 4% and 27% this morning.

Interestingly risk assets in the US actually held up relatively OK by the end of play on Friday. The initial knee jerk reaction for the S&P 500 was to tumble -0.90% only to then steadily rise over the remainder of the session before finishing the day ‘just’ -0.29% lower. It was a similar story in credit where CDX IG was a couple of basis points wider initially before rallying back to finish pretty much flat. There was no such rebound for the US Dollar though with the Dollar index eventually ending -1.61%, the biggest one-day decline this year. It was one-way traffic for Treasuries too. 10y yields ended up at 1.700% and 10bps lower on the day, while 2y yields were down over 11bps to 0.774% and to the lowest level since mid-way through last month. Gold (+2.74%) snapped out of its recent funk in style for its strongest day since the 11th February.

This morning in Asia it’s fairly mixed for most regional bourses with the standout mover being in Japan again where a big rally for the Yen on Friday (+2.15%) has resulted in the Nikkei (-1.14%) and Topix (-1.17%) taking a steep leg lower this morning. Meanwhile the Hang Seng (-0.31%) is also lower this morning, while markets in China and Korea are little changed. The ASX (+0.85%) is the big outperformer this morning while US equity index futures are little changed.

Also attracting some headlines is over in the FX market where Sterling (-0.90%) has tumbled following further referendum polls over the weekend showing voters favouring leaving the EU. The poll run by YouGov for ITV had 45% voting to leave versus just 41% at remain, while a survey run by TNS had the split at 43% versus 41% in favour of leave. It’s worth noting that tomorrow evening we will see PM David Cameron and UKIP leader Nigel Farage take part in a live debate on Brexit with another debate (with speakers to be announced) scheduled for Thursday. Such has been the recent swings of late in polls that implied 1-month volatility in the GBP/USD pair has jumped to 21.5% this morning which is the highest now since February 2009.

Most of the other weekend newsflow has been a continuation of the fallout from Friday’s data, although one event worth highlighting is yesterday’s referendum in Switzerland on the unconditional basic income plan for all residents. The final results showed that 77% voted against the plan with just 23% favouring the introduction of a minimum income for all. The result won’t come as much of a surprise with the idea gaining little support amongst Swiss politicians or parties, but nonetheless the vote was closely watched internationally with the FT suggesting that local and national governments in Brazil, Canada, Finland, Netherlands and India are said to be debating the idea of a similar sort of basic income.

Switching back to Friday’s data and quickly recapping the rest of the May employment report. Average hourly earnings rose +0.2% mom in May which has had the effect of keeping the YoY rate unchanged at +2.5%. Average weekly hours were unchanged at 34.4hrs which was slightly disappointing given expectations were for a modest rise to 34.5hrs. The labour force participation rate dipped to 62.6% which was a decline of two-tenths and marks the second consecutive decline. Finally the broader U-6 measure of unemployment printed unchanged at 9.7% which is essentially where it has been for four months now.

Also contributing to the disappointing batch of releases on Friday was the ISM services reading which fell more than expected in May (-2.8pts to 52.9; 55.3 expected) with the reading now at the lowest level since February 2014. The employment component in particular (-3.3pts to 49.7) confirmed the weakness in the May payrolls number, while new orders (-5.7pts to 54.2) and business activity (-3.7pts to 55.1) components also softened. Elsewhere, there was a modest upward revision to the final services PMI (+0.1pts to 51.3), while the April trade deficit widened to $37.4bn from a revised $35.5bn.

We did get some initial reactions to Friday’s data from the Fed. Governor Brainard, a notable dove, was unsurprisingly the most cautious, saying that the report was ‘sobering’ and that ‘in this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals’. Brainard also made further comments on the upcoming UK EU referendum vote, warning that while the economic effects are difficult to quantify for Brexit ‘we cannot rule out a significant adverse reaction to such an outcome in the near term, such as a substantial jump in financial risk premiums’.

Meanwhile, Cleveland Fed President Mester was a bit more upbeat in her post-payrolls comments on Friday. A more hawkish leaner usually, Mester said that she still believes a gradual upward pace of rate hikes is appropriate although that ‘when the rate hikes will occur and the slope of that gradual path is data dependent’. Mester added that the weak employment number had not changed her economic outlook.

Over in Europe on Friday, the main take away from the price action was the reasonable underperformance for risk assets in the region. Indeed, unlike the rebound in the US the Stoxx 600 ended -0.89% as financials names dragged the index lower. It also capped what was a rough five days for European equities (-2.39%) following three straight weekly gains. Sovereign bonds were the big winners on Friday however. 10y Bund yields ended up nearly 5bps lower at 0.067% which is the lowest closing yield on record. That 0.049% intraday low struck back in April last year is suddenly well within sight again. Meanwhile 5y Bund yields tumbled even further into negative territory at -0.415%, while 8y (-0.202%) and 9y (-0.079%) yields all struck all time record lows.

Before we turn to the week ahead, there was actually some data in Europe to highlight on Friday which eventually got overshadowed by those across the pond. It was positive too with the final May composite PMI for the Euro area revised up 0.2pts to 53.1 following similar upward revisions for the manufacturing and services data. That composite level has been relatively stable for a few months now and our European economists noted that it is consistent with Euro area GDP growth of between +0.3% and +0.4% qoq in Q2.

Turning over now to this week’s calendar. It’s a quiet start to proceedings today with just Euro area investor confidence data and German factory orders this morning, while over in the US the usual post-payrolls lull is in effect with the labour market conditions index reading the only data of note. Tuesday morning during the Asia session we’ll have the usual focus on the China foreign reserves data, while the RBA cash rate decision is also due out (no change expected). In Europe on Tuesday the main data of note is the final revision for Q1 GDP in the Euro area (+0.5% qoq expected), while French trade data and German industrial production data is also due. Over in the US on Tuesday consumer credit, Q1 nonfarm productivity and unit labour costs and the IBD/TIPP economic optimism reading are the main releases of note. It’s set to be a busy morning in Asia on Wednesday where we’ll get China trade data for May (a slowdown in exports is expected) and the final revision for Q1 GDP in Japan. Over in Europe UK industrial production and French business sentiment data are due, while in the US the April JOLTS job opening report is the sole release on Wednesday. We’re in China again on Thursday when the May CPI (no change to +2.3% yoy expected) and PPI reports are due out. During the European session on Thursday the main data of note due out is the German and UK trade numbers for April. Over in the US meanwhile we’ll get the latest initial jobless claims print as well as the April wholesale inventories and trade sales report. In Europe on Friday we’ll get French industrial production and German CPI. We finish in the US on Friday with the May Monthly Budget Statement and a first take on the June University of Michigan consumer sentiment survey.

Away from the data, the big focus from a Fedspeak perspective will be on the comments from Fed Chair Yellen early this evening (5.30pm) BST when she is due to speak in Philadelphia addressing the World Affairs Council. Rosengren is also scheduled to speak sometime today or tomorrow in Helsinki. Over at the ECB meanwhile we are due to hear from Coeure (today), Nouy (Wednesday) and Draghi (on Thursday) – the latter of which is speaking at the Economic Forum in Brussels. Also worth mentioning this week are the various US presidential primaries on Tuesday including California, the release of the World Bank’s Global Economic Prospects 2016 report and an ITV televised debate between UK PM Cameron and UK Independence Party leader Farage on the UK EU referendum vote. The latter two events are also scheduled for Tuesday.

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Submitted by Eric Zuesse, Investigative historian and author of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

What Most Syrians See of Their War

Here is a video of what most Syrians are seeing and experiencing of the war, and it’s titled “Living in the crosshairs, May 29th 2016 ENG SUBS” (the “ENG SUBS” means “English subtitles”).

Aleppo. Living in the crosshairs May 29th 2016 by frontinfo-info

It refers to attackers being the “Free Syrian Army” (who were founded by Riad al-Asaad, no relation to Bashar al-Assad — and spelled and pronounced differently — and he was a proponent of a fundamentalist Sunni Syrian constitution). It also refers to (and shows victims of) the “canisters” which the FSA is firing westward, from the Aleppo city area that the FSA controls, into the city’s “Midan District,” which is controlled by the Syrian government.

The FSA is America’s chosen group of fighters (Barack Obama’s terms for them are ‘the moderate opposition’ and ‘moderate rebels’, but they’re just the people that the U.S. government overtly back — not back covertly like Syria’s branch of Al Qaeda and some other groups). All these groups are trying to overthrow the Syrian government, and, though they often cooperate with one-another, like with Al Qaeda in Syria (called “Al Nusra”), and ISIS (also called “ISIL” and “Daesh”), the groups also occasionally attack each other, because each of the groups is trying to increase its territory and wants to emerge victorious to control all of Syria, or of as much of Syria as possible, in the final settlement.

Virtually all members of each one of these groups are jihadists, but different foreign countries are backing different ones of these groups, and America’s preferred group happens to be the FSA — the group that’s firing these “canisters.”

At 1:46 in the video, the flag of the “Sultan Murad Faction” is being flown; at 1:50  it’s the flag of Al Nusra. So, this time the groups are all working together, because of their shared goal of conquering the Syrian government in the Midan District, which they’ve apparently just done here, at least for the time being. The Sultan Murad group are backed by Turkey (which, under Erdogan, has become a fundamentalist-Sunni country, like the Arab monarchies are, but without the oil). Al Qaeda is mainly backed by the Sauds, U.S. allies against Assad.

Each of these groups is bankrolled by somewhat different financial interests, but all of those interests are united in their desire to overthrow the non-sectarian government that has been ruling in Syria, and that the U.S. CIA has been trying, ever since 1949, to overthrow and replace by a fundamentalist Sunni government (which will favor the fundamentalist-Sunni Sauds, our allies). Though the majority of Syrians have always supported a non-sectarian Syria, various factions of Sunni Islam in fundamentalist-Sunni foreign countries have (especially after the severe 2007-2010 drought in Syria, and the consequent intense “Arab Spring” anti-government movement in Syria during 2011) supplied weapons and fighters to jihadists to overthrow Assad, and they also finance propaganda to recruit jihadists from all around the world, to fight in Syria and maybe become heavenly martyrs in this ‘holy war’ or jihad, against the ‘infidel’ non-sectarian Syrian government, which, moreover, is led by the Shiite Bashar al-Assad — and all Shiites should be killed, according to such fundamentalist Sunni teachings (which originate in, and are led by, Saudi Arabia).

The United States is allied here actually with the Saud family who own Saudi Arabia, and with their friends the Thani family who own Qatar, and also with their friends the Sabah family who own Kuwait, and also with the six royal families who own UAE; and all of these fundamentalist-Sunni royal families are aiming to supply their oil and gas, and pipelines for oil and gas, selling into the world’s largest energy-market, Europe. Those pipelines would be built through Syria, which is the reason why the U.S. and its Gulf-state allies want to take Syria over, or at least to conquer enough of a strip through what today is Syria, so as to enable construction of these pipelines into Europe.

Whereas America’s goal in this is mainly to strangle Russia, which is the biggest current supplier of oil and gas into the European market, the main goal of the royal Arab families is to expand their markets, to grab a bigger share of Europe’s energy sales. Pipelined oil and gas tends to be cheaper and therefore more cost-competitive than trucked or shipped oil and gas; so, this is a “pipeline war,” to expand markets.
That’s what the Syrian war is all about. Whereas for America it’s to conquer Russia; for the Arab royals, it’s to supply a bigger share of Europe’s energy-imports. For Turkey, it’s to grab a share of the oil-sales stolen by these jihadists, oil from Iraq and Syria, and also to serve within NATO as the agents of royal Arab families, a bridge between NATO and the Gulf Cooperation Council. That bridge is a valuable and profitable function to fulfill.

The millions of refugees that are being produced by this war, many of whom are fleeing to Europe, are just the results, basically, of this land-clearing operation in Syria, to get rid of the people who are supporting the current Syrian government, which is allied with Russia, instead of with the U.S. and its allies.

So: those “canisters” are intended to terrify enough Syrians to flee, so that (it’s hoped) enough land can be cleared of population, in order for the desired pipelines to be built.

And Syrians know this. Consequently, not only are the various jihadist groups despised by from two-thirds to around 80% of the Syrian public, but at least 55% of Syrians would vote for Bashar al-Assad to be the country’s leader, in any free and fair election — and Obama knows this, which is the reason why he has strenuously opposed democracy in Syria, and even Ban ki-Moon has (though very quietly) condemned Obama’s position that rejects democracy in Syria. Furthermore, the Syrian people overwhelmingly (by 82%, to be exact) cite the U.S. as being the main source of the immense suffering they face.

In other words: terrorizing the population is good, not bad, from the standpoint of the U.S. and its allies — and many Syrians know this. But the few anti-Assad fighters who loathe ISIS and who have been praised by the U.S. government don’t necessarily know or understand this. The few anti-Assad fighters who, for whatever reason (be it that they’re competing against ISIS, or maybe even that they genuinely detest ISIS) have tried to help the U.S. CIA against ISIS, have even been stunned to find the U.S. government uninterested. It doesn’t make sense to them.

To clear the land, terror is good, not bad; the CIA mustn’t get in the way, and they don’t. It’s one reason why those FSA fighters who had taken seriously the U.S. government’s anti-ISIS rhetoric, have, in many cases, subsequently become disillusioned, and cooperate now with al-Nusra and other such groups, which are only marginally less extremist than ISIS is. At least ISIS isn’t lying to them, like the U.S. government does.

Since the European governments are allied with the U.S., those governments are torn about what to do with the refugees that the U.S.-and-allied operation is producing (and is intended to produce). At least up till now, far more Europeans hate the refugees than hate the U.S. government, and so the problem is merely a political annoyance to EU leaders, not yet a cause for breakup of the Western Alliance (European countries’ alliance with the U.S. government), which still seems strong, and which is still strongly supported by Europeans (including even by the ones who hate these refugees — refugees who are result of that very alliance, which they support).

Though this land-clearing operation creates a nuisance in Europe, it’s far more than that, a life-and-death matter, in Syria. For Arab aristocracies, it’s being done mainly for business (it’s not about ideology, except Sunni versus Shia); but for America’s aristocracy, it’s mainly for power: conquering Russia, by getting rid of Russia’s allies, surrounding Russia, then going in for the kill — unless the Russian government first submits and posts a white flag of surrender (in which case the West will take over Russia’s oil and gas etc., ‘peacefully’).

Perhaps the Western Alliance will continue as it is. But maybe it won’t. For the millions of Syrians in the midst of the hell that Washington and its allies are causing there, a lot might depend on whether it will continue as it is. Without the Western Alliance, the foreign jihadists who are destroying their country would have to leave. Those jihadists are utterly dependent upon the support of Barack Obama, King Saud, Tayyip Erdogan, Angela Merkel, and the other leaders of the Western Alliance. None of those leaders can continue this ongoing invasion of Syria, without the continuing support of their Western comrades. The destruction of Syria is a team-effort. But maybe the team will fall apart before it can achieve the type of victory that’s required for real ‘success’. Which side will give up this war first?

One thing’s for sure: What Syrians see of their war is not going to endear them to The West. And this also means: it’s not going to endear them to Turkey, Saudi Arabia, Qatar, and the United States. Will it endear them to the EU? Certainly not if the EU turns them away as refugees. However, if the EU separates from the U.S., then maybe, just maybe, there can emerge favorable relations between Europe and the secular Arabs who have long constituted the majority of Syrians. The problem for them has been the U.S. government and the fundamentalist Sunni Arab royal families. The question then is: Will Europeans continue to be allied with them? Or, if not, then how soon will the Western Alliance break up?

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When it comes to China’s new credit creation, at least the country is not shy about exposing how much it is. To find the credit tsunami flooding China at any given moment, one just has to look up the latest monthly Total Social Financing number which include both new bank loans as well as some shadow banking loans. As we reported in April this amount had soared to a record $1 trillion for the first quarter …

 

… although as we followed up last month, it tumbled in April as suddenly Beijing slammed the brakes on uncontrolled credit expansion. It is unclear why, although the following chart may have had something to do with it: increasingly less of credit created is making its way into the broader economy.

No matter the reason for these sharp swings in credit creation, one thing that was taken for granted by all is that unlike China’s GDP, or most of its “hard” macroeconomic data, at least its credit creation metrics were somewhat reliable, and as such provided the best glimpse into Chinese economic inflection points.

That appears to no longer be the case.

In an analysis conducted by Goldman’s MK Tang, the strategist notes that a frequent inquiry from investors in recent months is how much credit has actually been extended to Chinese households and corporates. He explains that this arises from debates about the accuracy of the commonly used credit data (i.e., total social financing (TSF)) in light of an apparent rise in financial institutions’ (FI) shadow lending activity (as well as due to the ongoing municipal bond swap program).

Tang adds that while it is clear that banks’ investment assets and claims on other FIs have surged, it is unclear how much of that reflects opaque loans, and also how much such loans and off-balance sheet credit are not included in TSF. By the very nature of shadow lending, it is almost impossible to reach a conclusion on these issues based on FIs’ asset information.

Goldman circumvents these data complications by instead focusing on the “money” concept, a mirror image to credit on FIs’ funding side. The idea is that money is created largely only when credit is extended—hence an effective gauge of “money” can give a good sense of the size of credit. We construct our own money flow measure, specifically following and quantifying the money flow from households/corporates.

Goldman finds something stunning: true credit creation in China was vastly greater than even the comprehensive Total Social Financing series. To wit: “a substantial amount of money was created last year, evidencing a very large supply of credit, to the tune of RMB 25tn (36% of 2015 GDP). This is about RMB 6tn (or 9pp of GDP) higher than implied by TSF data (even after adjusting for municipal bond swaps). Divergence from TSF has been particularly notable since Q2 last year after a major dovish shift in policy stance.”

As Goldman concludes, its finding suggests that the Chinese economy’s reliance on credit has deepened significantly, and adds that “our projection of China’s debt/GDP ratio for coming years has turned more unfavorable as a result.“

* * *

For those curious about the details, here’s more from Goldman:

How much credit has really been extended? 

 

Total social financing (TSF) statistics are supposed to be a comprehensive measure of this but their accuracy has been affected by recent events—in particular, the ongoing municipal bond swap program and an apparent rise in “opaque loans” and/or off-balance sheet lending by financial institutions (we will generally call such lending “shadow lending” in this report). Recent official comments suggesting scope for a more systematic compilation process for TSF also point to potential quality issues with the statistics.

 

The first data issue, i.e., municipal bond swap program, is relatively easy to address. It is mostly related to the different treatment of LGFV debt and municipal bonds in TSF statistics.[2] We have been adjusting for this factor by adding the municipal bond issuance for the swap program to the reported TSF to arrive at our measure of adjusted TSF, although the adjustment is not precise given uncertainty about the exact usage of the proceeds from the municipal bond swap issuance.

 

But the second issue, i.e., shadow lending by financial institutions, presents a much greater data challenge. In listed banks’ balance sheets, investment assets have been rising rapidly. Media reports (e.g., here and here) and disclosures by individual banks indicate that banks have embedded some of their loans to corporates in these assets, driven by regulatory arbitrage (our Banks research team has discussed these developments in recent notes).[3] In part reflecting this phenomenon, macro monetary data published by the PBOC has also clearly shown that the banking sector’s “claims on non-bank financial institutions (NBFIs)” (and also banks’ “equity and other investment”) have been rising rapidly in the last several quarters (for the PBOC data on these items, see this and this). 

 

These observations have raised questions and triggered debates, often revolving around the following issues:

 

• How large is the system-wide size of “opaque loans” or, put another way, how much of banks’ NBFI claims is a result of opaque loans? In our view, it is not likely that all NBFI claims are opaque loans; they may be related to “financial round-tripping”—i.e., banks lend money to NBFIs (e.g., investment funds) that invest in financial markets and this money just circulates in the financial system and eventually comes back to banks without being “leaked” to the real economy. The “round-tripping” idea is indeed consistent with the corresponding very rapid increase in banks’ liabilities to NBFIs (Exhibit 1). It also dovetails with banks’ increasing tendency to allocate part of their capital to outside asset managers for financial investment in the secondary market (in what is called “entrusted investment” from banks), with the intention of boosting investment returns.

• Besides the “opaque loans” held on banks’ balance sheet as part of investment assets, how much additional credit is extended off banks’ balance sheets?
• To what extent is shadow lending (i.e., the on-balance sheet opaque loans plus off-balance sheet credit) already captured in TSF data?

These issues lead to the ultimate macro question of how much credit has in fact been extended to the economy. It is naturally almost impossible to conclude by looking at the asset composition of FIs, as by design it is hard to tell what assets represent opaque loans and (to a lesser degree) how much off balance sheet exposure there is. Increasing interconnectedness amongst FIs via various evolving “channel” set ups certainly makes the task no easier.

As the second chart from the top shows, M2 has become disconnected from loan creation in China. This has important consequences:

We adopt another line of attack at the question: Namely, we look at the mirror image of credit (which is on FIs’ asset side) and focus on “money”, a metric related to FIs’ funding side. The basic idea is that credit generation is effectively a money creation process. Without credit creation, the amount of money would normally be unchanged no matter what happens in the real economy and vice versa (see Box 1 for more discussion on the general credit-money relationship).[5] With this linkage extended, it is possible to come to a reasonable estimate of the true pace credit flow (at least from banks) to the real economy by looking at growth of broad money, or M2, as we did a couple of years ago.

 

There is a problem though with this simple proxy, i.e., China has been becoming much less banks-centric. M2, which is essentially banks’ deposits, is no longer broad enough to reflect all key funding elements as the financial system diversifies. In fact, recognition of the growing diversity of the financial system already led the PBOC to expand the coverage of M2 in late 2011 to also include NBFI deposits (vs. only household and corporate deposits previously), partly intended to account for the increasing importance of WMPs at that time. But even with that expansion, M2 does not sufficiently capture FIs’ funding sources nowadays for two related reasons: i) banks have been drawing a significant amount of funding from non-deposit sources such as money market mutual funds’ purchase of NCDs, which is not included in the current measure of M2 (Exhibit 2); and ii) NBFIs (e.g., investment funds, insurance asset managers) have been rising in popularity amongst households/corporates as saving and investment intermediaries, and their financial activity may not be fully reflected on banks’ balance sheet (i.e., conducted off banks’ balance sheet).

 

On the other hand, though, including all elements of FIs’ funding side would not be ideal either, in our view, as that would overstate the pace of money created from lending to households/corporates, because of possible “financial round-tripping” (as discussed above) and double counting.

 

Therefore, to deduce the size of credit flow to households/corporates, we construct our own measure of adjusted “money”, which is intended to be broad enough to capture increasing financial diversification but targeted enough to cover only funding that comes from and is owned by households/corporates.

Goldman then proceeds to explain how it comes up with its own, adjusted, version of a comprehensive debt creation number in China, aka following the money trail. This process, while complex, can be summarized as follows:

 

And quantitatively boils down to the following:

This is how Goldman explains the variation:

The broad trend of our measure seems clear, showing a significant jump in 2012 vs. 2011 and another, even bigger, jump last year vs. 2014. In comparison, M2 increased by only about RMB 16tn last year—a main reason for the difference is that a lot of “money” going into non-deposit financial channels is not included in M2. But in trying to follow the money flow more systematically as in our exercise, it seems clear that there was a lot of money created and circulating around amongst households and corporates relative to what the TSF shows, and this evidences that a very large relative amount of credit (as a % of GDP) was extended last year.

 

How does our measure compare with the TSF data? To allow apples-to-apples comparison, we need a couple of additional adjustments:

• We take out the FX loan portion of TSF (to match our RMB money concept), and also adjust that for the municipal bond swap program since mid 2015 as we discussed in the opening section
• We add entrusted loans that are included in TSF to our adjusted money flow measure (as the money flow measure does not capture company-to-company lending

Credit flow to households/corporates as indicated by our measure is not entirely aligned with what is implied by TSF data, but the two metrics are fairly close in 2011-2014 (Exhibit 5). However, there is a large gap of some RMB 6-7tn for 2015, suggesting that TSF data (even after adjusting for the municipal bond swap) misses a significant chunk of credit extended to households/corporates last year. 

 

Our money flow measure points to much larger credit extended in 2015 than implied by TSF

 

 

We next extend our money flow measure to quarterly frequency—we can only go back to 2013 when relevant information is available quarterly and can allow the quarterly series to be consistent with the annual one. The quarterly comparison shows that credit indicated by our measure and adjusted TSF began to diverge meaningfully in Q2 2015 and continued to widen in Q3-Q4 2015 (Exhibit 6). It is probably not a coincidence that the divergence happened amid a clear dovish shift in monetary policy stance (7-day repo interest rate fell about 200bps between Q1 ’15 and Q2 ’15; Exhibit 7), the general accommodative stance in Beijing following the major growth slowdown in early 2015, and policymakers’ encouragement for more financial diversification and innovation to relieve corporate financing constraints.

 

Credit indicated by our measure started to diverge notably from adjusted TSF since Q2 2015…

What about in 2016?

It is not feasible to construct our adjusted money flow measure for Q1 ’16 yet given data limitations, but judging from the continued ytd increase in banks’ “equity and other investment” assets (which has been statistically correlated with the gap between our implied credit measure and adjusted TSF), it seems that as sizable as adjusted TSF was in Q1 (at about RMB 7.5tn), it might still understate the underlying credit flow to the real economy. In recent weeks, the regulator has announced some prudential tightening to discourage shadow lending activity, but how aggressively the regulator will implement the rules and the how effective the tightening will be remain to be seen.

Goldman’s conclusion, which probably does not need much explanation because it is simple enough: China’s debt is far greater than anyone expected, is the following:

An uncomfortable trend that has gotten more discomforting

 

The results of our analysis have a few implications for our macro outlook:

 

• In terms of short-term growth, our implied credit metric suggests that credit impulse to growth may be greater than that based on adjusted TSF, although the difference in magnitude may not be very significant.
• For monetary policy, given that lower wholesale interest rates tend to give rise to more shadow lending, to the extent that the authorities intend to contain the latter, the scope for a meaningful fall in 7-day repo interest rate seems more limited in coming months unless growth sharply slows, in our view.
• More worryingly, our implied credit metric indicates that the trend of China’s leverage has probably deteriorated faster than we previously thought, even though we had already expected the ratio to continue rising in the next few years. Compared to our previous estimates, the experience in 2015 suggests that the economy’s dependence on credit has deepened significantly and that it likely needs sizeable flow of credit on a persistent basis to maintain a stable level of growth. The chart below shows how much more unfavorable our baseline debt/GDP projection is now after incorporating our implied credit metric for 2015 vs. what it was based on data only until 2014.
• Such a scale of deterioration certainly increases our concerns about China’s underlying credit problems and sustainability risk. The possibility that there is such a large amount of shadow lending going on in the system that is not captured in official statistics also points to regulatory gap, and underscores the lack of visibility on where potential financial stress points may lie and how a possible contagion may play out.

Surge in shadow lending implies faster growth in debt-to-GDP ratio 

In other words, not only was China lying about everything else, it was also fabricating its broadest credit creation aggregate, with the underlying “new credit” number turning out to be far greater than anyone had expected (or believed). And for someone as traditionally conservative and Goldman to warn that “that the trend of China’s leverage has probably deteriorated “, that “that the economy’s dependence on credit has deepened significantly and that it likely needs sizeable flow of credit on a persistent basis to maintain a stable level of growth” and that “such a scale of deterioration certainly increases our concerns about China’s underlying credit problems and sustainability risk“, must mean that China’s economy is about to fall off a cliff.

Because once the rest of Wall Street catches up to Goldman’s most striking observation that “the possibility that there is such a large amount of shadow lending going on in the system that is not captured in official statistics also points to regulatory gap, and underscores the lack of visibility on where potential financial stress points may lie and how a possible contagion may play out”, then all those concerns about Chinese credit (and FX, and economic, and bubble) contagion will promptly return front and center to the global arena.

* * *

One final point: in recent days it almost seems that Goldman has been doing all in its power to precipitate a mini Chinese meltdown, whether short or long-term (recall “Goldman Unveils The FX Doom Loop: Turns “Outright Negative” On Yuan Due To “Weak Link“” from Thursday night).

To be sure, the narrative over the past 6 months from everyone, has been “how stable” China has been. Well, Goldman just broke away from that very fragile game theoretical equilibrium in which everyone was desperately lying to preserve asset prices, by actually telling the truth and precipitating what will be the next crash.

Why, we don’t know. However, with China now the fulcrum in any local or global central bank decision, and also the underlying catalyst for any marketwide risk-off bout, we do know that what Goldman “discovers” and warns about, soon everyone else on Wall Street will do too, until it becomes common knowledge and risk assets reprice correspondingly. Trade accordingly.

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Edward Snowden's story is one that most know by now – the NSA contractor who went rogue and instead of going through available channels to voice his concerns, leaked sensitive government documents that revealed how the US surveillance state operates for all the world to see.

Or at least, that's what the government's version of the story is.

In a Vice News exclusive, based on over 800 pages of newly released documents from the NSA and countless interviews, Vice News finds that there is much more to the story that the public isn't being told. Snowden, according to Vice News, did have both email and face-to-face contact with compliance over concerns, and the available options for Snowden may not have been adequate during the time Snowden was actually working as a contractor at the NSA.

At a bare minimum, Vice News provides valuable insight into the fact that while the NSA and other government agencies put on a public face that they were "sure" only a single email sent by Snowden, the investigation missed a lot of correspondence over time, and even a critical face-to-face interaction that wasn't documented until much later.

The following helps walk through what Vice News found, however we encourage readers to read the full piece at Vice News.

We'll start by pointing out a quick aside, and that is that Vice News also found as it received the FOIA documents, that the NSA admitted that it altered emails related to its discussions about Snowden – "unavoidably" of course.

In a letter disclosed to VICE News Friday morning, Justice Department attorney Brigham Bowen said, "Due to a technical flaw in an operating system, some timestamps in email headers were unavoidably altered. Another artifact from this technical flaw is that the organizational designators for records from that system have been unavoidably altered to show the current organizations for the individuals in the To/From/CC lines of the header for the overall email, instead of the organizational designators correct at the time the email was sent."

* * *

The single email theory that the government trotted out is a bit more complex, as it involved multiple people from different departments as an answer was formulated. Everything was set in motion when Snowden clicked the "email us" link on the internal website of the NSA's Office of General Counsel (OGC) to ask his question on April 5, 2013.

Snowden clicked the "email us" link on the internal website of the NSA's Office of General Counsel (OGC) and wrote, "I have a question regarding the mandatory USSID 18 training."

 

United States Signals Intelligence Directive 18 (USSID 18) encompasses rules by which the NSA is supposed to abide in order to protect the privacy of the communications of people in the United States. Snowden was taking this and other training courses in Maryland while working to transition from a Sysadmin to an analyst position. Referring to a slide from the training program that seemed to indicate federal statutes and presidential Executive Orders (EOs) carry equal legal weight, Snowden wrote, "this does not seem correct, as it seems to imply Executive Orders have the same precedence as law. My understanding is that EOs may be superseded by federal statute, but EOs may not override statute."

On the morning of May 29, 2014, after Snowden had gone public, the general counsel of the Office of the Director of National Intelligence (ODNI) Robert Litt, wrote an email to high level officials with a topic saying "What to do about Edward Snowden." In it the back and forth, NSA's general counsel Rajesh De, advocated for the public release of the Snowden email because De believed it was weak enough to call Snowden's credibility into question. However, Litt disagreed – for the time being… "I'm not sure that releasing the email will necessarily prove him a liar. It is, I could argue, technically true that Snowden's email raised concerns about the NSA's interpretation of its legal authorities. As I recall, the email essentially questions a document that Snowden interpreted as claiming that Executive Orders were on par with statutes. While that is surely not raising the kind of questions that Snowden is trying to suggest he raised, neither does it seem to me that email is a home run refutation."

Of course, Litt had his mind changed, as in a recent interview with Vice News Litt said "To the extent Snowden was saying he raised his concerns internally within the NSA, no rational person could read this as being anything other than a question about an unclear single page of training."

The NSA formulated a plan early on to get ahead of an interview Snowden had conducted with Vanity Fair  by acting proactively and with certainty that Snowden's facts were't correct. However they would need absolute certainty that Snowden had not communicated his concerns, and approval from the DOJ to release the email – neither of which the NSA had at the moment Vice writes. So the NSA decided to dig further…

"We need great certainty about whether or not there is/was additional correspondence before we stake the reputation of the Agency on a counter narrative," a person from the task force replied in an email addressed to counterintelligence, the legislative affairs office, and the office of general counsel on April 9. "I am going to trigger an action for the appropriate organizations to do an e-mail search [redacted] to affirm that there is no further correspondence that could substantiate Snowden's claim."

Later, while preparing to respond to an NBC news interview fact checking inquiry, the NSA still couldn't confirm that there was 100% assurance that no further correspondence had been had by Snowden and the NSA about his questions.

"Raj, if you are looking for 100% assurance there isn't possibly any correspondence that may have been overlooked I can't give you that," an NSA official, whose name was redacted, wrote in response to De. "If you asked me if I think we've done responsible, reasonable and thoughtful searches I would say 'yes' and would put my name behind sharing the e-mail as 'the only thing we've found that has any relationship to [Snowden's] allegation. Give [sic] Snowden's track record for truth telling we should be prepared that he could produce falsified e-mails and claim he sent them. The burden then falls to us to prove he didn't (you know how that will end)."

Continued infighting between the NSA, DOJ, AND ODNI took place on whether or not to release that Snowden email, and the pressure only grew to make a decision as now Reuters was onto the single email issue.

"Reuters is now pounding the pavement over the email issue," she wrote. "[Brian] Williams clearly said multiple sources confirmed at least 1 email" that Snowden had sent raising his concerns.

However, about three hours before the NSA was to release the "single email", a special agent assigned to the NSA's counterintelligence division sent an email to other counterintelligence officials about additional Snowden emails found within divisions at the NSA Snowden had said he had contacted with his concerns. Roughly thirty emails were discovered from the security office that Snowden either sent or received, and although none were related to Snowden's concerns at the time, the fact that the NSA truly hadn't found any more emails was troubling. Especially since they had decided to go with the "one sole email" theory.

The confidence that the NSA would soon display publicly that it discovered only one email was not reflective of what was taking place behind the scenes. De was still looking for assurances that it was the only communication from Snowden — but no one could confidently say there weren't other emails that had been overlooked.

 

"I would encourage you to work with your staff to give yourself confidence that requests of your folks to check for records are/were sufficiently robust to underpin your personal level of confidence," someone at the NSA said in an email to De hours before Snowden's email was released. "l am not in any way suggesting that people did not take the requests seriously — they did, but they did so under time pressure."

 

Rogers was informed via email by someone at the NSA whose name was redacted that the plan, which was based on "dialog with the White House," called for White House press secretary Jay Carney to read a prepared statement and indicate that the one email Snowden wrote, "the same benign email that you and I discussed," would be released later in the day.

As Vice News reports, it turns out that more communications were located, but a person or people at the agency withheld these details, which contained important context about Snowden's correspondence, from the media and even from director Rogers.

About an hour after the Snowden email was finally released, and after the White House said only one piece of correspondence from Snowden had been located, other emails were found, one indicating that Snowden had a verbal communication with compliance that the NSA's counterintelligence investigation wasn't aware of. The NSA continued on the path of saying there was no further correspondence found about any concerns, although they did admit more and more information was starting to come to light that could have been missed. Senator Feinstein also piled on to that plan.

Snowden responded to the release of the email saying that it was "incomplete"

It "does not include my correspondence with the Signals Intelligence Directorate's Office of Compliance, which believed that a classified executive order could take precedence over an act of Congress, contradicting what was just published. It also did not include concerns about how indefensible collection activities — such as breaking into the back-haul communications of major US internet companies — are sometimes concealed under E.O. 12333 to avoid Congressional reporting requirements and regulations," Snowden said.

 

Snowden's statement resulted in a barrage of media inquiries to the Office of Public Affairs and dozens of FOIA requests seeking any additional material showing that he raised concerns. However, the NSA refused to entertain any additional questions, instead providing reporters with a copy of their prepared statement and the sole email.

What was further revealed, is that there were in fact other communications by Snowden. There was an in-person contact with an oversight and compliance training person that was uncovered, and although the compliance person brushed it off as complaints about trick questions on a test, however as Vice News states, it coincides with the timeframe where Snowden would have sent the email, and it was doubtful Snowden was agonizing over failing an open book test.

Then there was the in-person contact with Snowden. As the Oversight and Compliance training woman described in an email written a year later, he "appeared at the side of my desk in the Oversight and Compliance training area… shortly after lunch time." Snowden did not introduce himself, but "seemed upset and proceeded to say that he had tried to take" the basic course introducing Section 702 "and that he had failed. He then commented that he felt we had trick questions throughout the course content that made him fail." Once she gave him "canned answers" to his questions, "he seemed to have calmed down" but said "he still thought the questions tricked the students."

 

That may well have been what the exchange seemed like to the woman, though it is unlikely Snowden, who six weeks later would walk out of the NSA with thumb drives full of NSA secrets, was agonizing over failing an open-book test.

NSA records show that the OGC received complaints from Snowden about at least two different training programs within days, and that he knew they were speaking to each other about his question. However in its internal assessment of Snowden's communications, the NSA treated them as two separate incidents.

Vice makes the case that the email to the OGC and face-to-face communication could have happened the same day, however it has been difficult to confirm due to the timestamp issues in the FOIA request.

The NSA tried to make the case that Snowden should have known where to voice his concerns, due to sometimes mandatory training. However, the NSA stops short of saying that Snowden ever did complete the training.

Vice also makes the observation that the path Snowden should have followed according to the NSA may have been put in place in response to Snowden, so the available resources to Snowden may have been inadequate. And also, at the end of the day, it's not clear that the policies apply to contractors.

* * *

We'll leave it up to readers to decide what they believe, but there sure is a lot more unanswered questions than answers in this case – here is the full article at Vice News.

However, Edward Snowden, for one, feels better about the unveiling, although he remains adamant that there is much more to the story.

Wow: New documents prove I raised Constitutional concerns within the #NSA. For years, the @WhiteHouse denied this. https://t.co/EJEKJ1jW7Y

— Edward Snowden (@Snowden) June 5, 2016

Interesting that this still shows an incomplete history of the concerns I expressed. Simple incompetence, or did NSA destroy records?

— Edward Snowden (@Snowden) June 5, 2016

via http://ift.tt/1VGI0ZA Tyler Durden