While anybody even remotely familiar with the Epstein story knows that his actions were irredeemably heinous, there are other characters in Epstein’s orbit – characters who may have participated in what appears to be a global sex-trafficking ring – who are more complicated.
One of those characters is a 32-year-old model named Nadia Marcinko. Marcinko, who was once described in court documents as Epstein’s “in-house sex slave” was ferried out of Slovakia on Epstein’s private jet when she was just 15, and lived with the billionaire for years after, Wired reports.
Now working as a commercial pilot, Marcinko is clearly hoping the media will gloss over her involvement with Epstein. She refuses to talk to reporters, and even uses a slightly modified version of her last name (she was once known as Nadia Marcinkova).
A reporter at Wired tried to look into Marcinko’s past to parse whether she was a willing, or unwilling, participant in Epstein’s crimes, and whether she was also one of his youngest victims. Some of Epstein’s other victims told police that Marcinko pressured them to sleep with both her and Epstein. Though her history of flying with Epstein is harder to pin down due to Epstein’s record-keeping practices (he only recorded the first names of underage girls in flight logs, if at all), but it’s become clear that during her first decade in the country, from roughly 2000 to the beginning of Epstein’s prison sentence, she frequently flew between Epstein’s properties in New York, Palm Beach, Monterey, Columbus, Ohio and the Azores. A pilot who once worked for Epstein testified that she had flown with him hundreds of times.
Marcinko’s relationship with Epstein presumably ended when she was given immunity from prosecution in 2008 after being named an accomplice. It’s still not entirely clear how she came to live with Epstein. Was she ‘sold’ to him by family members in Bratislava? Or did she run away with him willingly, hoping for a more glamorous life?
Whatever happened, as Wired claims, Marcinko is part of a small group of people who are both victims of Epstein and possible abusers.
Her testimony could again be useful. That is, if she ultimately avoids being implicated as a ‘rape facilitator’.
via ZeroHedge News https://ift.tt/2OlgTHU Tyler Durden
I’m often asked if recession is coming, and for quite different reasons. Some people worry about their investments. Others are worried about their employment or their kids. Political types wonder if and how recession could affect the next election.
To all those people, for quite some time now, my answer has been: “Yes, but not just yet.” That’s still what I think today, but more of the early warning signals I have used in the past are beginning to flash again.
Looking at the data, I see some good news but also some leading indicators weakening. I see smart people like Dave Rosenberg argue we may already be in recession today. And I see Wall Street not really caring either way, so long as it gets enough rate cuts to prop up asset prices. None of that is comforting.
Today we’ll look around and see what is happening. Because I try to be aware of my own biases, we’ll consider some more optimistic views, too. They may not be convincing, but it’s important to confront them.
As you’ll see, the storm clouds are gathering. Someone is likely to get hit. It might be you.
Let’s begin by reviewing where we are. I think we all agree this recovery cycle has been both longer and weaker than in the past. Any growth is good, of course, and certainly better than the alternative. But the last decade wasn’t a “boom” except in stock and real estate prices.
(Quickly, let’s put to rest the myth that the longer a recovery goes, the greater the likelihood of a recession. That’s a tautology. Recoveries don’t stop because of length. Back to the main point…)
I like this Lance Roberts chart because it shows long-term (5-year) rates of change, over a long period (since 1973) in three key indicators: Productivity, wage growth, and GDP growth. You can see all three are now tepid at best compared to their historical averages.
These measures have been generally declining since the early 2000s, suggesting that whatever caused our current problems preceded the financial crisis. But we don’t need to know the cause in order to see the effects which, while not catastrophic (at least yet), are worrisome. And, as Lance points out, a decade of bailouts and dovish monetary policy didn’t revive previous trends.
The growth deceleration is also visible if we zoom into the recent past, via the Goldman Sachs Current Activity Indicator. It peaked in early 2018 (not coincidentally, at least in my opinion, about the time Trump started imposing tariffs on China) and slid further this year. Much of it is due to a manufacturing slowdown, but the consumer and housing segments contributed as well.
Source: Goldman Sachs via The Daily Shot
Again, this doesn’t say recession is imminent. The US economy is still growing by most measures. But the growth is slowing and, unless something restores it, will eventually become a contraction.
My friend Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) makes the extraordinarily valid point: Recessions don’t happen from solid growth cycles. Economies generally move into what he calls a “vulnerable stage” before something pushes them into recession. We all pretty much agree that the US economy, not to mention the global economy, is in a vulnerable stage. It won’t take much of a shock to push it into recession.
That’s bad news for many reasons, but one is that we have a lot of catching-up to do. My friend Philippa Dunne recently highlighted some IMF research on lingering damage from the financial crisis. Per capita real GDP since 1970 is now running about $10,000 per person below where the pre-crisis trend would now have it. Philippa calculated that at current rates, the economy won’t be where it “should” be until the year 2048.
A recession will push us even further below that 1970–2007 trend line. And all the zero interest rate policies (ZIRP) and quantitative easing in the world will not get us back on trend, just as it did not after 2008. No matter how fast we try to run, it will get even harder to catch up with that trendline.
The inverted yield curve is one of the more reliable recession indicators, as I discussed at length last December in The Misunderstood Flattening Yield Curve. At that point, we had not yet seen a full inversion. Now we have, and it appears in hindsight perhaps the curve was “inverted” back then, and we just didn’t know it.
You may recall that the Powell Fed spent 2018 gradually raising rates and reducing the balance sheet assets it had accumulated in the QE years. This amounted to an additional tightening. I said it was a mistake but alas, the Fed didn’t listen to me. In fact, I repeatedly argued that the Fed was running an unwise two-variable experiment by doing both at the same time. Many serious observers wonder which is more problematic for the economy. I think the balance sheet reduction has had more impact than lower rates.
If you assume, as Morgan Stanley does below (and I have seen variations of this from numerous other analysts) every $200B balance sheet reduction is equivalent to another 0.25% rate increase, which I think is reasonable, then the curve effectively inverted months earlier than most now think. Worse, the tightening from peak QE back in 2015 was far more aggressive and faster than we realized.
Let’s go to the chart below. The light blue line is an adjusted yield curve based on the assumptions just described.
Source: Morgan Stanley
But even the nominal yield curve shows a disturbingly high recession probability. Earlier this month, the New York Fed’s model showed a 33% chance of recession in the next year.
Their next update should show those odds somewhat lower as the Fed seems intent on cutting short-term rates while other concerns raise long-term rates. But it’s still too high for comfort, in my view.
But note that whenever the probability reached the 33% range (the only exception was 1968), we were either already in a recession or about to enter one. For what it’s worth, I think Fed officials look at their own chart above and worry. That’s why more rate cuts won’t be surprising. And frankly, and I know this is out of consensus, I would not rule out “preemptive quantitative easing” if the economy looks soft ahead of the election next year. Just saying…
But that’s not everyone’s view. Gavekal gives us this handy chart showing inversions don’t always lead to recession right away. (I noted 1968 above and I think 1998 is a separate issue. But then again, that’s me.)
Fair enough; brief inversions don’t always signal recession. But as noted, when you consider the balance sheet tightening, this one hasn’t been brief. Note also that an end to the inversion isn’t an all-clear signal. The yield curve is often steepening even as recession unfolds.
One thing seems certain: While the yield curve may not signal recession, it isn’t signaling higher growth, either. The best you can say is that the mild expansion will continue as it has. That’s maybe better than the alternative, but doesn’t make me want to pop any champagne corks.
Rob Arnott of Research Affiliates is simply one of the finest market analysts anywhere. He has won more awards and accolades than almost anyone I know. I am honored to call him friend and frequently get the benefit of his commentary about my letters or in this case, a note I used in my Over My Shoulder service from a former Fed economist. I’ll let Rob speak for himself:
I’m fascinated that there are so many economists and pundits who think that cutting rates is a bad idea, when many (sometimes the same people!) thought ZIRP was fine for a half-dozen years.
I was struck by Yellen’s recent comments that it’s “very difficult” to bring long rates down. This would seem to lend credence to Bianco’s assertion that yield curve inversion doesn’t “predict” a recession; it “causes” a recession. The “causality” is a controversial idea. My argument: The long end is set by the markets, not regulators. It is high when inflation and/or growth expectations are strong, and low when inflation/growth expectations are low. When the long end falls below the short end (or the short end rises above the long end), the long end is telling us that people are happy to lend long-term at rates lower than the short-term cost of capital and are disinclined to borrow at rates at or above the short-term cost of capital. This probably means some blend of risk aversion and pessimism. The Fed waits until it sees signs of weakness, so it’s always behind the curve. By the time there is objective evidence of weakness, it’s too late for the Fed to do a thing.
This is also why critics are wrong to criticize Steve Moore or Judy Shelton for wanting higher rates before Trump’s election, and lower rates today. The graph below suggests that the long bond was begging the Fed to normalize, within months after the Global Financial Crisis had passed. And is now saying “we’re running out of time to ease.”
Source: Research Affiliates
For what it’s worth, I think an inverted yield curve is similar to a fever. It simply tells us something is wrong in our economic body. And sadly, at least historically, Rob is right. The Fed has always been behind the curve. To Powell’s credit, he may be trying to get in front of it, at least this time. I am less hopeful about the results, for different reasons I will describe in another letter someday.
The yield curve and other financial indicators are, while interesting, somewhat disconnected from the “real” economy. What’s happening on Main Street, where real people buy and sell real products used in everyday life? The news isn’t reassuring there, either.
The physical goods we buy—food, clothing, furniture, houses, and most everything else—have one thing in common. They (or their components) travel long distances to reach us. Sometimes it’s from overseas, sometimes domestic, but none of us live in close proximity to all the things we need. The market economy brings them to us.
People have aptly compared the economy’s transportation sector to the body’s circulatory system. It’s a good metaphor. Blood delivers nutrients to your organ just as trucks deliver products to your home. Problems begin when those deliveries slow… and they are.
The Cass Freight Index (which I have followed for more than a decade) measures shipment volume (by quantity, not cost) across the economy: truck, rail, air, ship, everything. The chart below shows its year-over-year percentage change.
You can see shipment growth picked up in 2016 following an extended weak stretch. This continued into early 2018 then a steep slide ensued. (Note that this is about the same time as the manufacturing contraction shown in the Goldman Sachs chart above and coincides with the first Trump tariffs.) Annual growth went below zero in December 2018 and has been there ever since—now seven consecutive months.
“What’s the big deal?” you may ask. Look how long that 2014–2016 contraction lasted. It didn’t signal a recession. Two points on that…
First, that retreat sprang from an oil price collapse that began in November 2014 and quickly affected US shale production. This greatly reduced freight volumes.
Second, while it didn’t spark a generalized recession, that particular part of the economy had its very own recession, and it was a nasty one. Ask anybody in the energy business and energy-producing regions how fondly they remember those years.
The current shipment contraction is potentially far worse. We can’t blame it on a sudden event like OPEC opening the spigots, nor is it focused on a particular sector. The Cass data shows declines everywhere, in everything.
Do I blame this on Trump’s trade war? Partially, yes, but I think more is happening. Years of flat wages forced many households to take on more debt. This has a cumulative effect; you can handle the payments for a while, but eventually things happen. Rising interest rates didn’t help. (In casual conversation, a friend told me his American Airlines Citibank card is now charging him 22% even though his credit score is over 800.)
This would once have been a normal pattern, not good but also not alarming. The economy had cycles and we dealt with them. But the long duration and weak magnitude of this growth phase is making the inevitable downturn potentially “feel” worse to many. The pain adds up and eventually becomes a recession.
via ZeroHedge News https://ift.tt/2GqOKc0 Tyler Durden
Starting with a medicore 2Y auction, progressing through one of the ugliest 5Y auctions in years, and concluding with today’s lackluster 7Y, this week’s treasury auctions – coming at a time when the Fed is about to push interest rates even lower – were unexpectedly weak.
Moments ago, the US Treasury sold $32 billion in 7Y paper at a yield of 1.967%, higher than last month’s 1.889% and a surprisingly big 1.4bps above the 1.953% when issued on a day when the rate market has generally whipsawed aggressively.
The bid to cover tumbled from 2.44 in June to just 2.274 today, which was not only below the 2.48 six auction average, but the lowest in two and a half years, since February 2016.
At least the internals were not terrible, with Indirects rebounding from last month’s 55.5% to 59.4%, just above the 58.7% recent average, however it was the Directs’ turn to slump, and with just $5.1BN of the bids tendered and accepted, the Direct takedown dropped to 15.8% from 24.23% last month, leaving 24.8% for dealers, slightly above the 19.9% recent average.
Overall, a poor, tailing auction concluding a week of dismal, disappointing Treasury sales, yet even despite the subpar demand, the Treasury still had little problem in finding buyers for another $110+ billion in US paper.
via ZeroHedge News https://ift.tt/2SF9eTu Tyler Durden
Meanwhile, in July 2019 no less than The New York Times editorial board laments that Trump-Kremlin relations are not close enough, as Trump’s “approach has been ham-handed” – the ‘paper of record’ now tells us.
Is this some kind of mea culpa? Not quite, perhaps more like being shamelessly self-unaware.
The above Times statement from this week is certainly real— absurd and astoundingly hypocritical as it all is (given the NY Times for years led the way with Russophobic and fear-mongering headlines, effectively undermining the ability of the US to establish a sounder relationship with Moscow, which it now calls for without an inkling of shame over its recent record) — but the below, unfortunately, is not…
via ZeroHedge News https://ift.tt/2OgWpA5 Tyler Durden
We believe there is an opportunity to capitalize on a material downturn in the business cycle based on the composite of timing and imbalance indicators in Crescat’s 16-factor macro model.
US Equity Markets
The downturn could be particularly brutal for US stocks because we are record late in a fading economic expansion and at historical high valuations relative to underlying fundamentals across a broad composite of eight measures that we follow at Crescat.
We hear two opposing valuation arguments from bulls today:
1. P/E ratios are reasonable; and
2. Valuations remain attractive relative to interest rates.
Let’s address them both.
First off, P/Es often appear reasonable at business cycle peaks because that’s when earnings are their strongest. For instance, back in mid-1929, prior to the stock market crash and Great Depression, S&P 500 real earnings per share (on a GAAP standard) had been growing at a unsustainably high 20% year-over-year rate, almost as high as the fleeting 21% growth we just had in 2018. Similarly, profit margins are cyclical. They top out at the peak of an expansion, making P/Es appear artificially low. US corporate profit margins in 2018 were the highest they have been since 1929. P/Es are always a potential value trap at the peak of a cycle. But today, P/Es are not even that cheap. Going all the way back to 1871, today we would have potentially the second highest P/E ratio ever for the S&P 500 at a market top prior to a recession, worse than 1929 and the housing bubble.
Tackling the second bull argument that low interest rates justify today’s high valuations, the flaw in this thinking is just as pronounced. The reality is that stocks have never been this expensive for how low the 10-year Treasury yield is today. It’s true that all else equal, low interest rates justify higher valuations. However, the lowest interest rates historically haven’t corresponded to the highest P/E markets because extremely depressed yields also signal fundamental problems in the economy. Ultra-low rate environments are often marked by highly leveraged economies where future growth is likely to be weak. Growth must also be discounted in the valuation formula.
While many US equity indices have marginally broken out to new highs recently, they have done so in the face of weakening market internals. Equity indices are being propped up by a narrowing group of leaders. The deteriorating breadth is most evident in the NASDAQ Composite, home to today’s leading growth stocks. While the overall index has reached record levels, the number of declining stocks has significantly outpaced the number of advancing stocks since last September. The collapsing internals point to an exhausted bull market.
Stocks are also rising in defiance of extremely low volume. On July 16th, the SPDR S&P 500 ETF (SPY) had its lowest daily volume in almost 2 years. In a 15-daily average terms, volume is now as low as it was at the peak of the housing bubble and prior to the last two selloffs in 2018. Unusual calmness and breadth deterioration are not a good set up for record overvalued stocks.
The following chart is yet another illustration of how this recent rally in equities is running on empty, and again lacking substance. On July 15th, S&P 500 reached record levels, but only three sectors were at all-time highs. Market breadth today is faltering just as much as it did ahead of the last two recessions. In 2015, this was also the case, but back then only 20% of the yield curve was inverted. Now it’s close to 60%!
As we previously said, the unemployment rate has been one the most reliable contrarian indicators throughout history. It reaches a cyclical low prior to every recession since the 1970s. The year-over-year change, however, is what tends to confirm the turning points in the economy. Most of the times this rate shifted to positive, a market downturn followed. In this business cycle, the YoY change likely bottomed in late 2014 and it has now been flirting with the positive camp since then. However, other labor market indicators are already showing signs of weakening economic conditions. The Conference Board’s Jobs Hard to Get Index is one of them. It has recently spiked and is yet another classic late-cycle development in the economy.
Consumer surveys are also critical to identify the stage of the economy we are in today. It’s another great contrarian indicator as strong consumer confidence has an uncanny relationship with market tops. We’ve noted this before, but since the 1960s, every time the Conference Board index surpassed the 135 level, it coincided with the peak of the economic cycle. The same source also reports two components of this survey that differentiate between consumer’s present situation and future expectations. As John Hussman originally pointed out, the spread between these two sub-indices tends to reach an extreme prior to a recession. That’s usually caused by consumers’ future expectations starting to fall first. The University of Michigan also publishes a survey on consumer sentiment. That compared with the Conference Board index forms another important indicator. All previous declines from cyclical highs in the spread between these two indices led to recessions. This time, the spread is plunging after reaching record levels.
Crescat’s robust calculation of percentage of inversions in the US yield curve remains at recession-signaling levels. Over 55% of all 44 spreads are now inverted, being just as much as it was at the peak of the tech and housing bubbles. Nevertheless, another important development in credit markets occurred in the first week of July. As show below, the US 30-year yield dropped below the upper bound of the federal funds rate (FFR) for the first time since the global financial crisis. It’s one more bearish signal that adds to Crescat’s fire hose of cycle-ending macro data. The same warning occurred ahead of the GFC, tech bust, Asian crisis, S&L crisis, and 1980’s double dip recessions. The only false signal was in 1986, but one could argue that it did ultimately lead to the 1987 crash. Above all, as of July 2nd, we had the entire US Treasury curve below the Fed overnight rate. Perhaps the bond market is trying to tell us something.
Cracks in the market are spreading and it could be pointing to a market meltdown. Copper, for instance, is now diverging from the S&P 500 by over 35% since September of 2017. Last time this separation reached similar extremes was at the September 2018 market peak. Dr. Copper is reputed to have a Ph.D. in economics because of its ability to help predict turning points in the global economy. Because of copper’s widespread applications — from homes and factories to electronics and power generation and transmission — strengthening or weakening demand for the red metal can be a leading indicator for the economy at large. The decline of the industrial metal itself doesn’t necessarily tell us enough to call for a downturn in the economic cycle. However, its deterioration versus other risk assets in combination with a litany of macro indicators adds conviction to our overall bearish thesis.
The US is the only equity market in the world to make new highs recently in US dollar terms. Every other G-20 index already peaked a long time ago, a troubling divergence. We believe the US stock market is likely to be the one to catch up to the downside.
The US market is fundamentally and technically overvalued to an extreme. But, how much should we expect it to be down in a coming bear market? Just to get to mean historical valuations, it could be a 50% plunge. The problem is, a 50% decline would equate to the highest ever valuation at the depth of a bear market and recession in the US, so it could be a best-case scenario. That is how over-valued the US equity market is today! The downside in the market today is perhaps easiest to visualize in a logged version of the longest running US stock index, the Dow Jones Industrial Average.
Conventional wisdom is that the first Fed rate cut is bullish, but this was not true with the last two business cycles as we clearly show in the chart below. It will likely not be true in this one either because we are record late into the expansion at historic high valuations. It’s true that all else equal, monetary easing is fundamentally bullish for stocks and the economy, while tightening is bearish. The problem is that central bank policy works with a lag. The delayed reaction to Fed interest rate policy is why our macro model uses the 24-month trailing rate-of-change in the federal funds rate as one of our factors to forecast the economy and the stock market.
The interest rate hikes and quantitative tightening of the last three years, are the substantial bearish macro drivers that have only now started to transmit into economic weakening in the US. Meanwhile, the Fed has also just acknowledged the deterioration in the overall global economy. We think the truth of the economic weakening matters more than the hope from imminent Fed easing. Only at the depths of the recession, when everyone else is panicking and dumping stocks that are already down substantially, should we get excited about Fed easing transmitting to a new bull market.
The Fed’s polices of near-zero interest rates and quantitative easing since the global financial crisis have created enormous asset bubbles in stocks and corporate credit. Investors’ speculative behavior is a natural reaction to cheap money and has played an integral role in inflating these bubbles. Just as asset prices rise in a positive feedback loop of easy credit, investor speculative behavior, consumer and business spending, so they decline in the opposite self-reinforcing fashion: credit defaults, credit tightness, investor risk aversion, and business and consumer retrenchment. Such is the natural ebb and flow of the business cycle.
The property market in the US is also richly valued, in our view, though home prices are not as frothy relative to income and household debt as they were in the housing bubble. The big housing bubbles in the world today by these measures are in China, Hong Kong, Canada, and Australia.
Because the US dollar is the largest fiat reserve currency, the Fed’s past accommodative policies has allowed other countries to pursue their own easy money schemes and accumulate record levels of debt. Across the globe, these levels are higher on average than they were prior to all major credit busts of the last 30 years.
China
We have written extensively about China’s currency and credit bubble in past letters. China was responsible for over 60% of global GDP growth since the global financial crisis. The country’s massive investments in non-productive infrastructure assets was financed on credit and created high GDP growth but failed to add wealth or debt-servicing capacity. China has created an enormous currency and credit bubble in the process. The problem is that its central planners accomplished this incredible economic growth through an unsustainable growth in fractional reserve bank credit. Since 2008, China’s banking system assets have grown 400% to USD 40 trillion!
This insane level of expansion for a large economy was made possible because China’s communist leaders mandated high lending growth from its state-owned banks. At same time, they ignored the true write-down of non-performing loans.
As a result, we believe the value of China’s banking system today is grossly mismarked. The Chinese financial system in our view is a Ponzi scheme poised to unravel and is likely to be a major contributor to the coming global economic downturn. The Chinese citizens are the primary creditors who could be on the line, but the rest of the world that has invested in China will almost certainly suffer with them.
We believe the Chinese government will be forced to print money to recapitalize its banks and bail out its citizens to attempt to quell social unrest. The massive monetary dilution could lead to a currency crisis which is the lesson of almost every emerging market credit bubble in history from Latin America to Asia. Currency crisis is also the ultimate consequence of economic failure of centrally planned communism as we have learned from the Soviet Union to Venezuela.
Our outlook for both the Chinese yuan and Hong Kong dollar is extremely bearish and we are positioned accordingly in our global macro fund. The warning signs of the coming Chinese crisis are everywhere from the Trump administration’s year-long hardball on Chinese trade, to the recent Chinese government seizure of failed Baoshang Bank, to the current mass anti-Chinese Communist Party protests in Hong Kong.
Precious Metals
Precious metals are one of the few pockets of this market offering tremendous value to hedge against extreme monetary policies, bursting asset bubbles, and record global leverage. We see this opportunity playing out across gold, silver and related mining stocks. Gold is the ultimate form of money with a long history of storing value for investors and outperforming risk assets during market downturns. In our view, a new wave of global fiat currency debasement polices is now in its early stages. Gold should become a core asset for those who believe in this macro development, but it is still widely under-owned today.
With the Fed shifting back to easing mode as the global economy is faltering, new fuel has ignited a precious metals fire. It is still very early in the game in our analysis. Rate cuts point to a new trend of declining real yields to drive precious metals higher even before inflation returns. Below we show seven-year trends in real rates and gold that have just reversed.
Credit markets tend to serve as a bellwether for stocks and the economy, and rising yield curve inversions happen to be great times to buy gold and sell stocks. For instance, 3 and 5-year yields have recently dipped below Fed funds rate for the first time since the global financial crisis and the tech bust. As history has shown, this is bullish for the gold-to-S&P 500 ratio.
Another way to see how incredibly undervalued precious metals are relative to other risk assets is by looking at the relative performance. The commodities-to-S&P 500 ratio has just reached a fresh 50-year low. The last times we had such historic imbalances we were at the peak of the 2000 tech and the 1972 “Nifty Fifty” stock bubbles. If one uses a simpler version of this relationship, using the Dow Jones Industrial Average index, the ratio is well below the cyclical 1929 lows that lead to the Great Depression.
Silver, a more speculative version of gold, also looks historically cheap. One way to see this is by comparing it against the total return for broad US stocks. The Russell 3000-to-silver ratio is still near all-time highs. This puts into perspective the incredible opportunity likely ahead of us today and how truly early and undervalued it is. In technical terms, look at the double top formation after a retest of peak tech bubble levels.
We also feel very strongly that gold and silver mining stocks are undervalued as the current macro set up seems largely optimistic for precious metals. This entire industry has been through and eight-year bear market with some of these stocks down by over 80% since 2011.
via ZeroHedge News https://ift.tt/30UZRSo Tyler Durden
After spending nearly a month in a Swedish jail, where he was denied bail for being a “flight risk”, American grammy-nominated rapper A$AP Rocky has been officially charged by prosecutors with Assault Causing Actual Bodily Harm. If convicted, Rocky could be sentenced to up to 2 years in a Swedish prison.
The charges suggest that President Trump’s attempts to intervene in the case have been mostly ignored by the Swedes, who have insisted that their judicial system shouldn’t be tampered with. President Trump said on Twitter last Friday that he personally pledged to secure A$AP Rocky’s bail, and that he decided to personally reach out to the Prime Minister of Sweden on Rocky’s behalf after discussing the case with Kanye West.
However, prosecutors said Thursday that Rocky will be held in jail until his trial, a date for which has not yet been set. The trial will likely be held within the next two weeks, and could last for as long as three days. Two members of Rocky’s crew have also been charged with the same crime following a brawl outside a venue where Rocky was et to perform. They have also been held pending trial, TMZ reports.
Prosecutors reportedly told TMZ Thursday morning that they will not recommend the full 2-year sentence…but Rocky could still be hit with the maximum sentence if the sentencing judge decides it.
Videos that have circulated online show a man tailing Rocky and his crew despite being asked several times to leave them alone. In the beginning, A$AP can be heard telling his associates to calm down saying that nobody wants to go to jail. But the man – who was not charged – continued to instigate, and Rocky eventually lost his cool, and threw him to the ground in dramatic fashion.
Rocky’s antagonist was not charged with a crime by Swedish police.
Many of Rocky’s supporters in the US have accused the Swedish legal system of racism for prosecuting Rocky and his associates, but not the other man who was involved in the brawl. Rocky’s mother said in an interview with TMZ that she “don’t want to pull the race card…but that’s what it’s looking like.”
However, Sweden has refused to budge, and has insisted that Rocky will be prosecuted just like anybody else.
via ZeroHedge News https://ift.tt/2LHYB1y Tyler Durden
This past week, Trump announced he had reached an agreement with Congress to pass a continuing resolution which will suspend the debt ceiling until July 2021.
The good news is that it will ONLY increase spending by just $320 billion.
What a bargain, right?
It’s a lie.
That is just the “starting point” of proposed spending. Without a “debt ceiling” to constrain spending, the actual spending will be substantially higher.
However, the $320 billion is also deceiving because that is on top of the spending we have already committed. As I noted just recently:
“In 2018, the Federal Government spent $4.48 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.5 Trillion was financed by Federal revenues, and $986 billion was financed through debt.
In other words, if 75% of all expenditures is social welfare and interest on the debt, those payments required $3.36 Trillion of the $3.5 Trillion (or 96%) of revenue coming in.”
Do some math here.
The U.S. spent $986 billion more than it received in revenue in 2018, which is the overall “deficit.” If you just add the $320 billion to that number you are now running a $1.3 Trillion deficit.
Sure enough, this is precisely where I forecast we would be in December of 2017.
“Of course, the real question is how are you going to ‘pay for it?’ On the ‘fiscal’ side of the tax reform bill, without achieving accelerated rates of economic growth – ‘the debt will balloon.’
The reality, of course, is that is what will happen because there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.”
More importantly, Federal Tax Revenue is DECLINING. Such was NOT supposed to be the case, as the whole “corporate tax cut” bill was supposed to lift tax revenues due to rising incomes.
More spending, less revenue, equals bigger deficits, which equates to slower economic growth.
“Increases in the national debt have long been squandered on increases in social welfare programs, and ultimately higher debt service, which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is bydiverting an ever growing amount of dollars away from productive investments to service payments.
The relevance of debt versus economic growth is all too evident, as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.”
“The irony is that debt driven economic growth, consistently requires more debt to fund a diminishing rate of return of future growth. It now requires $3.02 of debt to create $1 of real economic growth.”
Over the next 12-18 months, spending will expand, and the deficit will quickly approach $2 Trillion.
But, here’s the worse part: The projected budget deficits over the next couple of years are coming at the end of a decade-long growth cycle with the economy essentially at full employment. This is significant because, while budget deficits can be helpful in recessions by providing an economic stimulus, there are good reasons we should be retrenching during good economic times, including the one we are in now.
As William Gale stated:
“As President Kennedy once said, ‘the time to repair the roof is when the sun is shining.’ Instead, we are punching more holes in the fiscal roof. The fact that debt and deficits are rising under conditions of full employment suggests a deeper underlying fiscal problem.”
During the next recession, revenue will drop sharply, deficits will explode, and the Government will be forced into another round of bailouts.
“An April 2016 Moody’s analysis pegged the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion. That’s the amount not covered by current fund assets, or future expected contributions, or investment returns at assumed rates ranging from 3.7% to 4.1%. Another calculation from the American Enterprise Institute comes up with $5.2 trillion, presuming that long-term bond yields average 2.6%.
Since then, we have gotten some updated estimates. Surely, after 3-years of surging stock market returns things have gotten markedly better, right?
“Moody’s Investor Service estimated last year that the total pension funding gap in the US is $4.4 trillion. A few months ago the American Legislative Exchange Council estimated it at nearly $6 trillion.”
“The real crisis comes when there is a ‘run on pensions.’ With a large number of pensioners already eligible for their pension, the next decline in the markets will likely spur the ‘fear’ that benefits will be lost entirely. The combined run on the system, which is grossly underfunded, at a time when asset prices are declining will cause a debacle of mass proportions. It will require a massive government bailout to resolve it.”
Fortunately, Congress has made some movement to get ahead of the problem with the Rehabilitation for Multiemployer Pensions Act. The legislation, if passed, is an attempt to address the multi-trillion dollar problem of unfunded pension plans in America.
By the way, this isn’t JUST an American problem, it is a $70-Trillion global problem, as noted recently by Visual Capitalist.
“According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies…
The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.”
This is why Central Banks globally are terrified of a global downturn. The pension crisis IS the “weapon of mass destruction” to the global financial system, and it has started ticking.
While pension plans in the United States are guaranteed by a quasi-government agency called the Pension Benefit Guarantee Corporation (PBGC), the reality is the PBGC is already nearly bust from taking over plans following the financial crisis. The PBGC is slated to run out of money in 2025. Moreover, its balance sheet is trivial compared to the multi-trillion dollar pension problem.
The proposal from Congress is simply to use more debt. According to the new legislation, whenever a pension plan runs out of funds, Congress wants the pension plan to borrow money in order to keep making payments to beneficiaries.
Think about that for a moment.
Who would loan money to an insolvent pension fund?
Oh, that would be you, the taxpayer.
In other words, the Government wants you to bail out your own retirement fund.
Genius.
But it’s going to get far worse.
We Are Out Of Time
Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached or will reach retirement age between 2011 and 2030. And many of them are public-sector employees. In a 2015 study of public-sector organizations, nearly half of the responding organizations stated that they could lose 20% or more of their employees to retirement within the next five years. Local governments are particularly vulnerable: a full 37% of local-government employees were at least 50 years of age in 2015.
The vast majority of these individuals, when they retire, will depend on their pension (if they are in the 15% of the population that has one, and Social Security for a bulk of their living expenses in retirement.
The problem is that pension funds aren’t going to be able to keep their promises. Social Security, according to its own annual report, will run out of money in 15 years. Medicare has a massive underfunded problem as well.
But yet, the current Administration believes our outcome will be different.
More debt, and lack of any budgetary controls, will somehow lead to surging levels of economic growth despite no historical evidence of that being the case.
The reality is that the U.S. is now caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs. Combine this with:
A decline in savings rates to extremely low levels which depletes productive investments
An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
A heavily indebted economy with debt/GDP ratios above 100%.
A decline in exports due to a weak global economic environment.
Slowing domestic economic growth rates.
An underemployed younger demographic.
An inelastic supply-demand curve
Weak industrial production
Dependence on productivity increases to offset reduced employment
The combined issues of debt, deflation, and demographics will continue to push the U.S. closer to the “point of no return.”
As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.
It’s an unsolvable problem.
It will happen.
It will devastate many Americans.
It is just a function of time.
“Demography, however, is destiny for entitlements, so arithmetic will do the meddling.” – George Will
But here is the real question that needs to be answered:
“Who is going to buy all the debt?”
via ZeroHedge News https://ift.tt/2SCfOtT Tyler Durden
While the western world (and much of the eastern) has been preoccupied with predicting the consequences of Trump’s accelerating global trade/tech war and whether the Fed will launch QE before or after it sends rates back to zero, Beijing has quietly had its hands full with avoiding a bank run in the aftermath of Baoshang Bank’s failure and keeping the interbank market – which has been on the verge of freezing – alive.
Unfortunately for the PBOC, Beijing was racing against time to prevent a widespread panic after it opened the Pandora’s box when it seized Baoshang Bank, the first official bank failure in an odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar.
And with domino #1 down, the question turned to who is next, and could it be China’s Lehman.
As a reminder, back in May, shortly after the shocking failure of China’s Baoshang Bank (BSB), and its subsequent seizure by the government – the first takeover of a commercial bank since the Hainan Development Bank 20 years ago – the PBOC panicked and injected a whopping 250 billion yuan via an open-market operation, the largest since January. Alas, as we said at the time, it was too little to late, and with the interbank market roiling, with Negotiable Certificates of Deposit (NCD) and repo rates soaring (in some occult cases as high as 1000%) we said that it’s just a matter of time before another major Chinese bank collapses.
And, in order to present the list of the most likely candidates, will picked those names that – just like Baoshang – had delayed publishing their latest annual reports, the biggest red flag suggesting an upcoming solvency “event.” The list is below.
We were right, because not even two months later, the second biggest bank on the list, Bank of Jinzhou has crawled in Baoshang’s foosteps and is about to be seized by the government.
According to Reuters and Bloomberg, Bank of Jinzhou recently met financial institutions in its home Liaoning province to discuss measures to deal with liquidity problems, and in a parallel bailout to that of Baoshang, the bank was in talks to “introduce strategic investors” after a report that China’s financial regulators are seeking to resolve its liquidity problems sent its dollar-denominated debt plunging.
Officials including those from the People’s Bank of China and China Banking and Insurance Regulatory Commission recently held a meeting with financial institutions in Bank of Jinzhou’s home province of Liaoning to discuss measures to resolve the lender’s liquidity issues, Reuters reported Wednesday.
In response to market fears the bank issued a statement on Thursday that “currently, Bank of Jinzhou’s business operations are normal overall,” which however did not refer to its liquidity situation. “Recently, the bank’s board of directors and some major shareholders have been in talks with several institutions that wish to and have the ability to to become strategic investors” adding that talks have been “going smoothly.”
By strategist investors it of course meant banks, backstopped by the government, who would “absorb” the bank, effectively nationalizing it a la what happened with Baoshang. The only question is whether stakeholders would also be impaired.
As we reported in June, Jinzhou’s Hong Kong-listed shares have been suspended since April after it failed to disclose its 2018 financial statements; adding to its woes, its auditors Ernst & Young Hua Ming LLP and Ernst & Young resigned. As the bank – which first got in hot water in 2015 over its exposure to the scandal-ridden Hanergy Group – wrote in a filing on the Hong Kong Stock Exchange, E&Y was first appointed as the auditors of the Bank at the last annual general meeting of the Bank held on 29 May 2018 to hold office until the conclusion of the next annual general meeting of the Bank. That never happened, because on 31 May 2019, out of the blue, the board and its audit committee received a letter from EY tendering their resignations as the auditors of the Bank with immediate effect.
The reason for the resignation: the bank refused to provide E&Y with documents to confirm the bank’s clients were able to service loans, amid indications that the use of proceeds of certain loans granted by the Bank to its institutional customers were not consistent with the purpose stated in their loan documents.
As a result, “after numerous discussions and as at the date of this announcement, no consensus was reached between the Bank and EY on the Outstanding Matters and the proposed timetable for the completion of audit.” At this time, the bank also requested the trading in the H shares (which was frozen on April 1) on The Stock Exchange of Hong Kong Limited to be suspended until the publication of the 2018 Annual Results, which will likely never come.
There is another reason why this particular failure is notable: Bank of Jinzhou is the second-most reliant on interbank financing, particularly non-bank financial institutions’ deposits, among more than 200 local banks, according to UBS analyst Jason Bedford said when reached by phone on Thursday.
Which explains its failure: just last month we reported that China’s interbank market, especially for smaller banks, had effectively frozen. It was therefore only a matter of time before other banks reliant on it for funding threw in the towel, as Jinzhou has now done. To wit, Jinzhou’s Its dollar-denominated loss-absorbing debt instruments, known as AT1 bonds, plunged near all time low…
… while the bank’s seven negotiable certificates of deposits – which would be taken over by another, bigger bank when (if) the bank is seized and bailed out, were indicated at yields ranging from 3%-5.5% on Thursday, higher than valuations of 2.8%-3.45%.
Incidentally, back in early June when first reporting on the resignation of the bank’s auditors, we said that “the real question facing Beijing now is how quickly will Bank of Jinzhou collapse, how will Beijing and the PBOC react, and what whether the other banks on the list above now suffer a raging bank run, on which will certainly not be confined just to China’s small and medium banks.”
The answer: less than 2 months.
Unfortunately for China, it won’t stop there. As a reminder, China’s smaller lenders have been under growing scrutiny since Baoshang Bank’s failure and takeover which led to a sharp repricing of risk for much of China’s banking system which had long operated under an assumption that policy makers would support firms in trouble.
“We expect the regulators to step up their support if more financial institutions run into liquidity issues,” said Becky Liu, head of China macro strategy at Standard Chartered Plc, who declined to comment directly about Bank of Jinzhou. “Over time, the cost of funding between the stronger and weaker financial institutions will see further divergence.”
via ZeroHedge News https://ift.tt/2MkexpU Tyler Durden
Ukraine’s security services said on Thursday they had detained a Russian oil tanker that had blocked Ukrainian warships near Crimea in November, drawing reaction from Russia which vowed ‘consequences’ should Russians aboard the tanker be taken hostage.
On Thursday, Ukraine’s security service seized Russian tanker Neyma, which Ukraine believes took part in the incident in the Kerch Strait near Crimea in November 2018.
Russia seized at the end of November three Ukrainian ships near Crimea in an incident that risked spilling over into a wider conflict between the two countries, exacerbating the disputes between Moscow and Kiev over oil and gas resources and infrastructure.
Russia—which annexed Crimea in 2014, for which the U.S. and the EU imposed sanctions on Moscow—said at the time that three Ukrainian vessels had violated its state border in waters near Crimea.
Ukraine, for its part, said that it had informed Russia about the plans for the ship movements and said that the seizing of the vessels was “another act of armed aggression” by Russia.
The November 2018 incident was the first open conflict between Russian and Ukrainian militaries in recent years. Tensions had been rising over the access to the Kerch Strait, where the incident took place, and the Sea of Azov.
Today, Ukraine said that it believes that the Neyma was the same ship with a changed name that took part in the seizure of the Ukrainian ships in November. The investigation found that the Neyma tanker changed its name to Nika Spirit to conceal its involvement in the “illegal acts and an act of aggression that took place on November 25, 2018,” Ukraine said.
Russia, for its part, said there would be consequences soon “if Russians have been taken hostages.”
Russian lawmaker Vladimir Dzhabarov, who is deputy chairman of the committee on international affairs at Russia’s upper house of Parliament, said that Ukraine seizing the Russian tanker today was “absolutely illegal.”
via ZeroHedge News https://ift.tt/2LN2Xob Tyler Durden
