Category: zerohedge

Authored by Charles Hugh Smith via OfTwoMinds blog,

The decline phase of the S-Curve is just beginning…

Globalization and Imperial Pretensions have been decaying for years; now the tide has turned definitively against them. The Covid-19 pandemic didn’t cause the demise of globalization and Imperial Pretensions; it merely pushed the rickety structures over the edge.

It’s human nature to reckon the current trend will continue running more or less forever, and that temporal, contingent structures are permanent. Globalization flourished because a unique set of conditions created fertile ground for the transfer of production to China and other emerging economies and the global expansion of the magic elixir of skyrocketing consumption, credit.

Credit-starved economies which are suddenly flooded with credit (for example, China) experience an explosion of investment in production, infrastructure and in business and household consumption.

In this boost phase of globalization, capital flows from stagnant developed economies to emerging economies to earn higher returns, and production moves to these low-cost economies to take advantage of low labor costs and lax environmental standards.

It’s a win-win dynamic for credit-starved emerging economies and stagnant developed economies, as the emerging economies get investment capital, jobs and technology transfers while the developed economies get higher profits due to the lower production costs and lower-priced goods and services.

Put another way: globalization is simply one manifestation of the financialization of the global economy. Developed-world central and private banks create trillions of dollars in fiat currencies that then slosh around the world, seeking the highest return. Whatever can be exploited in the short-term is exploited and then capital moves on, leaving environmental destruction and distorted economies in its wake.

Alas, the virtuous-cycle boost phase financialization soon burns through all the easy gains and then speculative gains replace productive gains: since over-investment in production has led to over-capacity and near-zero profits, capital flows into speculative gambles and money-pit bridges to nowhere that do little to actually boost the productivity of the real-world economy.

This transition from investing in higher productivity to pouring money into speculative bets is so gradual that few even recognize the transition until it’s too late. All too quickly the economy becomes dependent not on gains in productivity–the only enduring source of wealth creation– but on speculative gambles paying off.

Once the economy becomes dependent on speculative bets paying off, central banks and governments rig the roulette wheel to insure the big gamblers always win. This rigging of speculative markets further distorts the economy and society by destroying price discovery and exacerbating soaring wealth inequality.

As the financial elites become accustomed to “winning” the rigged games, they increase their high-risk gambling, confident that even the highest-risk bets will always pay off. In this universe of moral hazard, it makes sense to borrow as much as possible to plow into the highest-risk bets. Why not maximize one’s gains at the rigged tables?

This institutionalization of financial folly created an extremely risky structure that is now breaking down. Bets placed with borrowed money are no longer paying off, and so whatever collateral remains must be liquidated to meet margin calls and pay down debt.

In the boost phase of globalization, it made sense to maximize profits by optimizing the global supply chain for the lowest cost of production and shipping via distant production and just-in-time delivery. The risks of this extreme optimization for profits above all else is now apparent as dependence on production in distant lands is not within our control.

The apparently risk-free paradise of globalization is actually riddled with potentially catastrophic risks. Every node in this complex network is a potential point of failure, and since redundancy and less tightly bound systems were sacrificed to maximize profits, there is no way to restore the supply chain with a few nips and tucks.

As for the Imperial Pretensions of both China and the U.S.–these were as dependent on financialization and globalization as global supply chains. China’s Belt and Road Initiative (BRI) exemplifies an era that has already turned to dust, and American pretensions of being able to afford large-scale global meddling are equally embedded in a zeitgeist that has lost its coherence and relevancy.

The decline phase of the S-Curve is just beginning. Much of what we’ve taken as permanent will melt into air, and that’s far from a negative development.

My COVID-19 Pandemic Posts

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War-torn regions of the Middle East remain hugely vulnerable for the spread of Covid-19 due to hundreds of thousands of families packed into often filthy temporary settlements already running low on basic staples for survival. 

And now a nightmare scenario is unfolding in Iraq as the United Nations has recorded the first suspected coronavirus cases inside an Internally Displaced Persons (IDP) camp.

The UN Office for the Coordination of Humanitarian Affairs (OCHA) issued an alert in its latest humanitarian report this week, noting also the World Health Organization (WHO) has dispatched additional supplies and medical devices to Iraq amid broader closures of public spaces after at least 71 confirmed cases nationwide.

But with millions of refugees in the region, especially along the Turkish-Syrian border, and after Erdogan has effectively ‘opened the gates’ on waves of migrants headed to Europe, the spark that could erupt an explosion of outbreaks in camps across the Middle East may have started. 

NEW: #Iraq has detected its first possible IDP camp #Coronavirus cases — a nightmare development.

There are ~1 million displaced people in #Iraq; camps are overpopulated & lacking in healthcare, sanitation etc. pic.twitter.com/ilqBAgCeHl

— Charles Lister (@Charles_Lister) March 12, 2020

The alarming new OCHA report reads: 

The first suspected cases of COVID-19 were documented in an IDP camp in Ninewa; the affected persons were transported to hospital, and a makeshift isolation unit was put in place. Sterilization activities are under way.

Crucially, this region lies along the Syrian border in Iraq’s northwest, and is near Turkey in a broader border area which has over the past years witnessed entire ‘refugee cities’ erected. 

Surrounding countries like Kuwait have taken proactive measures for heightened testing along their borders and points of entry, but other regional governments have lagged behind: 

Kuwait is testing for #COVID19 every single expat who arrived in the country since 27th Feb 2020.

Look at the enormous size of this operation 👇 https://t.co/AOH40qd11k

— Jenan Moussa (@jenanmoussa) March 12, 2020

The WHO previously said it’s especially concerned of an outbreak among refugee populations in war-torn regions of Iraq and Syria. 

“Refugees and internally displaced populations across Iraq and Syria have been identified as the most vulnerable groups in the region, should the spread of the virus become a pandemic,” The Guardian reported of recent statements. 

“Health officials in both countries remain under-equipped to deal with such a a reality that seems more possible with each passing day,” the report added.

And as Turkey continues to allow and even actively facilitate the passage of refugees and migrants into Greece and other EU states, the Covid-19 crisis currently shutting down entire countries in Europe is set to explode further.

Authored by Mike Shedlock via MishTalk,

Michael Pettis at China Financial Markets has an interesting chain of Tweets on China’s unsolvable interest rate mess.

Preemptive Steps Needed to Contain CPI

China Daily reports Preemptive Steps Needed to Contain CPI

China’s consumer price index (CPI), the main gauge of inflation, grew 5.2 percent year-on-year in February, the National Bureau of Statistics said on Tuesday. The growth, in line with market expectations, was slightly lower than 5.4 percent in January. On a monthly basis, consumer prices edged up 0.8 percent.

Food prices, which account for nearly one-third of weighting in China’s CPI, went up 21.9 percent year-on-year in February, contributing 4.45 percentage points to the rise in the index as the novel coronavirus outbreak disrupted market supplies and demands.

That the CPI has been above 5 percent for two consecutive months has raised fears that China could face high inflation in the long run, which could have a negative impact on people’s livelihoods that have already been affected by the novel coronavirus epidemic.

Bank of China Faces a Real Dilemma with Interest Rates

Hiking rates in the midst of shocks like this are out of the question. There are no preemptive steps to take.

CPI Inflation is at 5% but bank interest rates are only 1.5%.

Food production has collapsed, but lower interest rates to stimulate will stimulate the wrong things while hurting consumer savings.

Lower spreads will hurt bank profits and the Chinese banking system is a basket of nonperforming SOE loans.

Pettis Tweet Thread on China’s Dilemma

1. It seems to me that the PBoC faces a real dilemma with interest rates. Thanks to still-soaring food costs CPI inflation in February remained above 5%, well above the deposit rate, with 1-year deposits at 1.50% and average deposits much lower. This means…

2. …that the value of household savings is being eroded by rising food costs, and this effectively represents a wealth transfer away from households, with poorer households being hit harder (both because of limited savings opportunities and because food is a larger share of…

3. …their consumption basket). This is exactly the opposite of what Beijing needs if it is to reduce its over-reliance on spurious investment to generate growth. If households have to increase their savings rate in order to make up for the inflation tax, they must spend less…

4. …on consumption, in which case China needs more investment to generate the same amount of growth. This is why the PBoC doesn’t want to lower the deposit rate. But it cannot raise rates either. Unlike in 2000-11, when banks and corporate/government borrowers were the huge…

5. …beneficiaries from extremely negative real interest rates, they aren’t this time around. With negative PPI inflation, and a 1-year loan prime rate of 4.05%, manufacturers may in fact be borrowing at very high real rates, especially given that all the inflation is showing…

6. …up in food prices, whereas the prices of the manufactured goods they produce are stable or even trending down. This probably just means that last year’s collapse in meat production – which is the main source of CPI inflation – is being paid for in part by households, in…

7. …the form of an erosion in the value of their savings, in part by businesses, in the form of high real borrowing costs, and of course in part by farmers. This makes it very difficult for the PBoC either to raise lending rates or lower deposit rates, and of course it can’t…

8. …narrow the spread because that would effectively force already-undercapitalized banks to absorb the cost. Once food prices drop we might see a very sharp reversal of wealth transfers from the household sector, but until then the PBoC doesn’t have much space for maneuver.

Here is the Lead Tweet if you want to see it all on Twitter.

Inflation or Deflation?

This was the subject of a debate on Twitter. Many see a round of inflation but I generally see it differently.

The collapse in demand will take care of shortages except for critical things like food.

China has a unique problem. Low food production and a soaring CPI in response.

Unless there is a food production problem in the US, the Fed will not face the same dilemma.

Exporters Hit Hardest

The global export powerhouses will get hit the hardest by this.

China and Germany are at the top of the list.

Deflationary US Outcome

I believe a Very Deflationary Outcome Has Begun.

Prepare for another round of debt deflation, possibly accompanied by a lower CPI especially if one accurately includes home prices instead of rents in the CPI calculation.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse

I am not blaming the Fed for the coronavirus and these shocks.

However, I am blaming the Fed for its erroneous inflationary tactics that blew three of the biggest economic bubble in succession: 2000, 2007, 2020.

Bubbles are inherently deflationary. It’s asset asset bubble deflation that is damaging, not routine price deflation

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated a BIS study.

For a discussion of the BIS deflation study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Supply Shock and a Demand Shock Coming Up

A Supply Shock and a Demand Shock are Coming Up.

Worth Repeating

Well – Not Me
I have been calling for lower and lower yields

People do not understand debt deflation https://t.co/lzrOAq3BPl

— Mike “Mish” Shedlock (@MishGEA) February 27, 2020

Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

75% of Companies Suffer From Coronavirus Supply Chain Disruptions

The ISM says 75% of Companies Suffer From Coronavirus Supply Chain Disruptions

Don’t expect inflation out of this except in medical supplies and related items.

Q. Why?

A: The demand shock over stock market decline and lost wages has not been felt yet. It soon will.

Coronavirus isn’t just causing humans to fight in the aisles of Target over toilet paper. Today in “signs of the apocalypse”, hungry monkey gangs are also swarming and fighting – for food – on the streets of Thailand. 

Monkeys in the country are usually well fed by tourists who visit Central Thailand, but visitors have plummeted as a result of the coronavirus outbreak, which has hit the Asian region hard. 

The animals shown in a video are reported to be two separate “rival gangs” that dwell in the city, according to the Daily Mail. 

Half of the monkeys are said to live in the temple areas, while the others live in the city. The two groups don’t usually meet but ended up doing so this past week.

The animals are shown wandering separately looking for food, but once one monkey finds a banana, the chase is on. 

The ferocity of the animals shocked even locals, who are used to seeing the monkeys on a daily basis. One onlooker, who captured video, said: “They looked more like wild dogs than monkeys. They went crazy for the single piece of food. I’ve never seen them this aggressive.”

The onlooker explained: “I think the monkeys were very, very hungry. There’s normally a lot of tourists here to feed the monkeys but now there are not as many, because of the coronavirus.”

Hundreds of monkeys are shown in this Daily Mail video fighting over a single banana:

Hundreds of hungry monkeys swarm across Thai street as ‘rival gangs’ fight over food after tourists who normally feed them stay away because of coronavirus https://t.co/lQZ0sOzwDF pic.twitter.com/8TgrCTBrQ8

— Daily Mail Online (@MailOnline) March 12, 2020

Chelsea Manning was ordered on Thursday to be released from jail, after a federal judge ruled that her testimony against WikiLeaks founder Julian Assange was no longer necessary. The decision comes one day after Manning reportedly attempted to commit suicide while in federal custody in Alexandria, VA. 

Judge Anthony Trenga of the Eastern District of Virginia said that because the grand jury was finished deliberating, Manning’s testimony was no longer necessary – ending the former Army analyst’s incarceration which began last May after refusing to appear before the panel and testify against Assange.

Manning was convicted in 2013 of leaking US military secrets and sentenced to 35 years in military prison at Fort Leavenworth before her sentence was commuted in 2017. Assange, meanwhile, was indicted in 2018 on a federal charge of conspiring with Manning to assist in the transmission of U.S. state secrets to WikiLeaks.

For refusing to comply with the order to testify, Manning was hit with a $256,000 fine according to The Hill.

Manning’s publicist, Andy Stepanian, said on Wednesday that his client was recovering in a hospital after the suicide attempt.

Last month, Manning’s lawyers argued for her release on the grounds that detention was unlawfully punitive and served no purpose.

US and Israeli hawks are worried Iran could use coronavirus pandemic fears and Western governments’ preoccupation with staving off the accompanying economic disaster to evade nuclear monitors and quickly ramp up weapons-grade uranium development. 

International Atomic Energy Agency (IAEA) officials are already talking about dramatically increasing the UN nuclear watchdog’s remote monitoring capabilities, such as cameras and data monitors placed at key sites connected with Iranian nuclear power. Crucially the IAEA has online enrichment monitoring installed at some key nuclear locations throughout the country, such as at Natanz.

Some of these remote monitoring powers were established under the 2015 nuclear deal, but as coronavirus inside the Islamic Republic has begun impacting inspection teams directly, and also in many cases thwarting ability to inspect sites, officials want to see remote monitoring hugely increased. 

Bloomberg reports on Thursday, “There’s concern that contact with carriers of the virus in Iran, where senior officials have been infected, could deplete the International Atomic Energy Agency’s roster of inspectors by forcing some into quarantine, according to two diplomats briefed on the matter who asked not to be identified.”

Andreas Persbo, a nuclear-verification specialist at the think tank European Leadership Network told Bloomberg: “At a time when the prevalence of coronavirus in Iran potentially makes life for inspectors more difficult, the redundancies built into the JCPOA become more valuable.” He added, “That’s particularly the case for online enrichment monitoring.”

The IAEA in conjunction with the US’ Oak Ridge National Laboratory previously developed unique online enrichment monitoring technology specifically for Iran as part of the JCPOA.

However, it’s still in somewhat early usage and development, given that, “The gear was tested in July at Iran’s biggest uranium-enrichment facility in Natanz, after Iran raised uranium enrichment levels to 4.5% in response to renewed U.S. sanctions,” according to the Bloomberg report.

Officials confirmed the system worked exactly as expected and detected the breach. And now it’s seen as more urgent inside the country as ever, also given anti-Iran hawks in the West are growing increasingly anxious over further violations as the globe is distracted by the more immediately pressing pandemic. 

Four days after Italy’s former (and most likely future) prime minister, Matteo Salvini called for a short selling ban (referencing none other than George Soros who “built his fortune betting against Italy”) on Italian stocks, Italy’s market regulator, Consob, announced that short-selling would indeed be banned on Friday, March 13, with the temporary ban applying to 85 companies listed on Milan stock exchange.

Ironically, just two days ago, the head of Italy’s bourse, Raffaele Jerusalmi, said that a ban on short selling to deal with market reactions to the coronavirus outbreak would be useful only if applied at a European or broader level and for specific sectors.

“If there were sectors particularly at risk, an intervention by the regulatory authorities could be useful,” Raffaele Jerusalmi said in a streamed interview with Il Sole 24 Ore.

And to think all it took to change his mind was a 20% drop in the Italian stock market in the next two days.

And with Italy getting increasingly sensitive about its crashing market, there was an amusing development earlier, when the country’s Economic Development Minister Stefano Patuanelli said in an interview that ECB President Christine Lagarde caused the biggest stock market drop in Italy with her comments at the ECB press conference.

The minister added that he hopes her words were an accident referring to Lagarde’s comment that the ECB is “not here to close spreads”, because apparently so used are the Italians to central banks that do close spreads (especially when they are headed by other Italians-cum-former Goldmanites), that if anyone refuses to explicitly backstop Italy’s risk assets, they are an enemy of the state. 

And it’s not just Italy: late on Thursday, Spain’s Regulator also set a one-day short-sale ban on 69 stocks that fell more than certain amounts Thursday.

Finally, what none of the regulators appear to know is that banning short sales in a time of crisis does two things: i) it makes the liquidation period more painful and more drawn out, and ii) it results in an even greater drawdown when all is said and done, something the US learned in the depths of the financial crisis when the SEC did exactly the same thing, only to unleash another 30% of selling before the market stabilized around a “generational” low of 666. And come to think of it, it is now another generation’s turn to retest said low.

 

 

 

After earlier in the day President Trump authorized the Pentagon to “do what we need to do” in terms of a military response against Iran-backed militias believed responsible for Wednesday’s rocket attacks on Camp Taji, which killed one British and two American soldiers, and wounded at least a dozen more, there are widespread reports the US has initiated massive airstrikes over southern Iraq late Thursday night. 

A BBC correspondent in the region is describing “multiple strikes across Iran-backed groups’ facilities” which include “logistics and drone warehouses.”

Early reports suggest the attack includes “large amounts of munitions” on multiple Iraqi Shia militia targets. Moments after initial reports on social media US defense offcials confirmed that “airstrikes are underway against Iran-backed militia group that hit Iraq base,” according to the Associated Press. 

Bombing #Iran-backed paramilitary group positions around #Karbala and #Salahaddin is significant. This is the largest amount of force I’ve seen against Hashd (#PMF) so far. These areas are considered “No fly zones” for #Coalition. Jets may have come from #UAE or #Kuwait

— Nafiseh Kohnavard (@nafisehkBBC) March 12, 2020

As if the Mideast region and the world for that matter needs another crisis to worry about, this could be the start of the kind of tit-for-tat between the US and Iran which paved the way for the US killing by drone of IRGC Quds Force chief Qassem Soleimani on January 3rd. Since then, the two have been on a war footing. 

Defense Secretary Mark Esper hours ago warned the US would hold the groups behind Wednesday’s attack on Taji base accountable. “You don’t get to shoot at our bases and kill and wound Americans and get away with it,” he said earlier.

According to Fox News security correspondent Jennifer Griffin:

The US response will be “proportional” targeting multiple locations used by Iranian backed Shia militias across Iraq and along Syrian border.

Will be limited to airstrikes: source. Will degrade Shia militia/ Kata’eb Hezbollah ability to strike: US military source.

#BREAKING
-U.S. military confirming airstrikes
-Iraqi activists reporting warplanes flying over multiple provinces of Iraq, including Salahadin, Baghdad, Anbar, Babil, Karbala
-Video of Jurf Sakharpic.twitter.com/xCDZsR2DSL

— Heshmat Alavi (@HeshmatAlavi) March 12, 2020

The US has said Kata’eb Hezbollah is responsible, given it’s “the only group known to have previously conducted an indirect fire attack of this scale against U.S. and coalition forces in Iraq.” The major attack had utilized at least 15 Soviet-era rocket artillery and further left a dozen wounded.

A top Pentagon general also said earlier the Iran-backed militias were to blame and that the US can identify the culprit with a “high degree of certainty”. 

The threat of Covid-19 hate crimes across the country is surging this week as Asian Americans in San Gabriel Valley, a region east of Los Angeles, are loading up on weapons as concerns they could be targeted. 

CBS Los Angeles reported this week that gun sales among Asians are rising in San Gabriel Valley as they believe the pandemic could trigger hate crimes against them. 

David Liu, the owner of Arcadia Firearm & Safety, said gun sales have jumped in the last two weeks as the virus crisis worsens in California. 

“Because of coronavirus, a lot of people start to worry,” Liu said.

CBS Los Angeles said there’s a high concentration of Asians near the Arcadia gun store. Liu said many of his customers are stocking up on weapons because they fear they might be targeted because of their ethnicity if a local virus outbreak is to occur.

“I do worry,” said Daniel Lim, who recently bought a gun and ammo for his wife at Arcadia. 

Lim said he bought the gun to defend his family amid fears the virus could crash the stock market and economy and lead to massive social unrest where Asians would be targeted. “I hope and pray it never happens,” he said.

Lim isn’t the only Asian American in the community, thinking that a purge is coming if the virus crisis gets out of hand. “We think it’s the perfect time to get a weapon for ourselves,” said another Arcadia customer, Dirk Zhang, adding that his wife would never allow a gun in the house until now. 

“She’s a little afraid of the outbreak of the virus,” he said.

We noted on Monday that the first possible coronavirus-related hate crime in America, where an Asian man was stabbed numerous times, all caught on camera, occurred on a Brooklyn, New York street. 

As confirmed virus cases are expected to be in the thousands in the weeks ahead, coronavirus anxiety is sweeping the country and could lead to social destabilization. Asians in California are preparing for a purge, and they’re now loading up on weapons as hate crime fears increase.

We were right again.

On Jan 24, we wrote an article titled “The Debate Is Over: In Two Months “Not QE” Officially Becomes QE 4,” in which we wrote that by the March 18 FOMC meeting, “the Fed will need to reduce its “demand burden” on the bill market, i.e., there won’t be enough Bills available for the Fed to monetize without it distorting the market, and will extend the purchase program to include short coupons in the process officially ending any debate whether the Fed’s manipulation of the market under the guise of saving repo, is “Not QE”, because it is limited to Bills and thus no duration is taken out of the market, or is “QE 4″, in which the Fed purchases at least some coupon securities in addition to Bills.”

Not only were we right, but the transformation from Not QE to QE-4 (or QE-5, depending on how one counts), took place one week ahead of the FOMC meeting, when today as part of its massive, $1.5 trillion (with a maximum capacity of $5 trillion per month) bazooka in response to the bizarro moves in the Treasury market, the Fed announced that it would – as we predicted – expand its POMO from just Bills to all securities across the fixed income spectrum, including Treasury Inflation-Protected Securities, Floating Rate Notes and, you guessed it, nominal coupons.

And just like that Not QE has become QE-4, as even JPMorgan – which for the longest time was arguing to anyone who bothered to listen that Not QE is not QE 4 and would not become QE 4 – was forced to admit today.

Here is JPM’s Michael Feroli admitting “since today’s announcement moves those purchases further out the curve one could perhaps pedantically argue that this is QE.” Those damn pedants.

This afternoon the Fed took two liquidity measures to support financial market functioning. The first was to redistribute its current $60 billion a month reserve management purchases of T-bills across the curve (including TIPS and FRNs) over the next month. The second was to conduct three $500 billion tranches of term repos (two for 3-months, one for 1-month) today and tomorrow. These actions were taken to address dislocations in funding markets that were impairing Treasury market functioning.

These actions are not designed to provide further economic stimulus. If the Fed wanted to provide such stimulus then it would have lowered the federal funds rate from its current 1.0%-1.25% target range. Whereas the Fed’s bill purchases were clearly not QE, since today’s announcement moves those purchases further out the curve one could perhaps pedantically argue that this is QE. Even if one bought this argument, the total size of purchases—$60 billion—is trivial compared to each of the Fed’s large-scale asset purchases.

Moreover, it would be inaccurate to describe the $1.5 trillion in repo operations as “money pumped into the system” as it is a temporary swap of reserves for government securities which will be unwound in one or three months’ time. We may well be approaching the point when the Fed turns to genuine QE (or large-scale asset purchases), but that won’t happen until the Fed sets the funds rate to zero, which should be next Wednesday at the latest.

Transaltion – the head JPM economist was wrong again, but we will give him some credit: Feroli – whose firm was pushing his clients into stocks as recently as two days ago – is right about one thing: genuine QE, or whatever the “non-pedants” want to call it, is coming as soon as next week, and if Yellen has her way and she will, – it will also include stocks and ETFs.