Foreign Central Banks Liquidate Record $405 Billion In US Paper As China Sells Most Treasuries Since 2011

The wholesale liquidation of US Treasuries continued in November, when according to the just released TIC data, foreign central banks sold another $936 million in US paper in November 2016, which due to an offset of $892 million in buying one year ago, means that for the 12 month period ended November, foreign central banks have now sold a new all time high of $405 million in the past 12 months, up from a record $403 million in LTM sales as of one month ago.

Where did the selling come from?

While Japan sold about $23 billion in November, its fourth month of consecutive selling, it was China which drove the selloff, dumping a whopping $66.4 billion in US Treasuries in its 6th consecutive monthly sale of US paper, and the biggest monthly selloff since December 2011. The monthly sale also brings China’s total Treasury holdings to the lowest level since early 2010.

 

When combining with the Belgian holdings, an offshore center used by China to mask its purchases, and over the past two years sales, the correlation between combined Treasury holdings and China’s total reserves is quite

Curiously, reversing its recent trend, Saudi Arabia bought just over $3 billion in Treasury, and has added $10.7 billion in US paper in the past 2 months, the most since July 2006. And considering the reduction in reserves has continued into December, it is safe to assume that China continued to sell US paper to match the reduction of its foreign reserves which as a reminder declined, officially, by another $41 billion last month.

But most troubling was neither Japan’s, nor China’s selling, but all foreign holders of US Treasurys combined, which sold $70.8 billion, the most in one month ever, bringing their total holdings to 3.771 trillion, far below the $4.117 trillion held one year ago. On an annual basis, the drop was -8.4%, the biggest decline on record.

* * *

As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a troubling pace, something which in light of the recent surge in yields, appears to have been a prudent move.

In some cases, like China, this is to offset devaluation pressure; in others such as various petroleum exporting nations – but curiously not Saudi Arabia in the past 2 months –  it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country’s soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.

Who are they selling to? The answer, at least until August, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, “private investors” both foreign and domestic are soaking up hundreds of billions in central bank holdings. As we said two months ago when we observed this great rotation in Treasuries out of official holders into private hands, “we wonder if they would [keep buying] knowing who is selling to them.” Well, last month this changed, and after private investors had been happily snapping up bonds for 4 straight months, in September “other foreign investors” sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record. In October, while foreign official entities sold another $45 billion, at least the pace of selling by private entities moderated somewhat, to “only” $18.3 billion. However, in November the trend appears to have flopped again, and private foreign buyers picked up some $731 million.

Meanwhile, while just five months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are once again rising on concerns that not only could the ECB and the BOJ soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it, now that the Fed is again hiking rates.

While it is unclear under what conditions foreign buyers may come back – after all TSY rates have already jumped high enough to where US paper should be more than attractive to foreign official institutions – one thing is clear: as of this moment the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will soon have to plan how to not only abort the current rate experiment which continues to pressure yields higher around the globe, but to start thinking how to soak up all the excess supply instead.

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Angela Merkel’s EU Army Poses the Greatest Threat to World Peace in 2017

This article was orignally posted at http://ift.tt/2joxaf2
Abstract

German Chancellor Angela Merkel and other Europhile politicians have pushed forward with an aggressive campaign to militarize the European Union. These plans have at times been kept from European citizens in certain states. The new EU Army appears to be supplied at least in part by NATO which is currently being affected by corruption scandals and the death of its Chief Auditor under suspicious circumstances.

Germany has been responsible for a recent spike in anti-American and UK rhetoric. Their combative stance, and desperate attempts to prevent sovereign nations from deciding if they will continue to be members of the EU raise questions about the true purpose of the new EU Army.

I. The EU Army

Calls for an EU Army pre-exist current trends among Europeans and Americans to reject international institutionalism for a more nationalistic, sovereign state oriented model of governance. The Guardian was reporting in 2015 that European Commission President Jean-Claude Juncker was calling for an EU Army to show Russia that the bloc was “serious about defending its values.” The shock result of Brexit merely accelerated plans within the EU that were already in progress.

There are some indications that the EU Army’s formation has occurred far more rapidly than the public realizes, and in some cases is actively concealed. In 2015 European People’s Party president Joseph Daul told journalists that “We are going to move towards an EU army much faster than people believe.” The Times reported on May 27, 2016 that news of plans for the acceleration of the EU Army formation had been kept from voters in the UK until the day after the Brexit referendum.

In September 2016, German newspaper Süddeutsche Zeitung published a paper which had been jointly authored by French and German Defense Ministers Jean-Yves Le Drian and Ursula von der Leyen. The document called for the establishment of a “common and permanent” European military headquarters, in addition to the creation of EU military structures, including an EU Logistics Command and an EU Medical Command. That same month the BBC carried public comments by Jean-Claude Jucker calling for the establishment of a headquarters for the EU to operate out of. These calls for an established chain of command and control structures would seem odd if the EU Army had not been already formed and equipped to some extent. Citing the victory of Euroskeptic Donald Trump in the 2016 U.S. Presidential Election, Germany has stated their desire to accelerate plans for the EU Army even more so than before.

II. NATO Arms/Vehicles May Be Being Used to Covertly Equip the EU Army

A. Buildup of Arms and Equipment in NATO Member States

Quite a bit of media attention has been given to recent NATO efforts to posture itself militarily for the purpose of standing up to “Russian aggression.” A great deal of weaponry and heavily machinery has been moved into the EU and Eastern Europe/the V4 (Visegrad Group). These movements are part of Operation Atlantic Resolve, which was initiated by the U.S. in an effort to reassure NATO allies in the wake of Russian interference in Ukraine. Here are a number of news articles outlining shipments of NATO heavy vehicles and equipment to various states in Europe:

Russia Today on March 9, 2015 reporting the shipment of 120 armored units, including M1A2 Abrams tanks and M2A3 Bradley armored vehicles, to Latvia.

CBS News on June 23, 2015 carried statements from Secretary of Defense Ash Carter announcing plans to station tanks and heavy weapons in new NATO member states for the first time since the end of the Cold War. 

Daily Mail and CNN both reported in February 2016 that the United States was to deploy tanks and other equipment within a Cold War era cave system in Norway. The six-cave facility is classified but was used by the United States as an arms depot in 1981 during the Cold War. The cave system was reported to contain enough equipment to support more than 15,000 Marines. A portion of the equipment was used in last year’s Cold Response 16 exercises.

BBC News reported on January 6, 2017 that 120+ tanks and heavy vehicles were being moved through Germany along with 3,500 troops for deployment on Europe’s eastern frontier.

B. NATO Secretary General Jens Stoltenberg’s Ties to Corruption

There is some indication that NATO’s shipments of weapons and vehicles to Europe are not being sent for the purpose of providing deterrence against Russia. Disobedient Media has already reported that the current Secretary General of NATO, Jens Stoltenberg, may have been appointed to the position after a series of scandals where it was revealed that under his tenure as Prime Minister from 2005 to 2013 Norway sent over 584 million Kroner over a period of years to the Clinton Foundation. Stoltenberg was appointed as the Secretary General of NATO after retiring as head of the Norwegian Labor Party.

Given his ties to corruption and the Clinton Foundation, it is plausible that Stoltenberg would have been willing to collaborate with Angela Merkel, another ally of the Clintons. He is responsible for massively increasing NATO’s budget over the last few years.

C. Suspicious Death of NATO Chief Auditor and its Significance

Yves Chandelon, the Chief Auditor at NATO, was found dead in the city of Andenne in the Belgian Ardennes on December 16, 2016. His death appears to have been first reported by French newspaper La MeuseIt was picked up the next day by Luxembourgian paper Tageblatt.

On December 22nd, Russian publication Pravda ran the story in English, reporting that Chandelon’s body was detected 140km (87 miles) away from his work, and 100km (62 miles) away from his home in the city of Lens.  The article stated that he owned three registered weapons, but that the gun used in the suicide was not registered.  It also noted that he had been receiving strange phone calls.  The same day, LaMeuse carried two reports with additional facts about Chandelon’s death. The first stated that a “farewell letter” was found in Chandelon’s car. The second stated that the gun used in the apparent suicide was found in his right hand, despite the fact that Chandelon was left-handed.

Also emerging on December 22nd was a report by Flemish newspaper De Morgen. De Morgen wrote that the family of Chandelon contested the verdict of a suicide. The family said that Chandelon had told them he felt he was being followed, and that he was receiving strange phone calls prior to his death.  The family stated that he was a happy individual and had made several plans for the New Year. Even more strangely, on December 26th, The Express reported that the gun which caused Chandelon’s death as actually found in his glove box. The story has received no coverage by mainstream media outlets in the United States whatsoever.

The death of Mr. Chandelon, and the apparently strange circumstances in which it occurred is significant because of his position in NATO. As Chief Auditor, one of Mr. Chandelon’s duties would have been to make sure goods are actually delivered to their destination. Revenue cannot be recognized until service is performed, so it would have been necessary to ensure that shipments of munitions, weapons and vehicles were actually being delivered. Mr. Chandelon’s death raises the question of whether or not his untimely demise had any relation to the recent increase in shipments of arms and vehicles to NATO states and the acceleration of efforts to form the EU Army.

III. The Three Pronged PR Campaign to Sell the EU Army to Europe

The EU Army is being sold to Europe using what appears to be a three pronged Public Relations approach: stoking fears of internal threats, making the EU Army synonymous with calls for European unity, and lashing out the US as unable to protect Europe from external threats. In some cases, public figures have struck out at nations attempting to hold referendums on EU membership in 2017 which might result in more member states leaving the Union along with Britain. Such combative rhetoric is concerning when the militarization of the European Union is taken into consideration.

A. Internal Threats

Part of Merkel’s incentive to whip up fear among the populace is personal – her public advocacy of Germany’s policy towards migrants fleeing the Middle East has landed her in political hot water after Germany was hit by a series of intelligence and anti-terror failures resulting in the deaths of German citizens and infiltration of German intelligence.  Merkel was trying to justify her pro immigrant policy to Germany as late as August 2016:

“The phenomenon of the Islamist terrorism of ISIS is not a phenomenon that has come to us through refugees but rather one which we’ve already had here before” – Angela Merkel, August 18, 2016, Washington Post

After the string of terror attacks and intelligence failures in 2016, Merkel has been forced to alter her lenient views on migrants and terror in Germany in the face of public criticism. Pundits were speculating within days of the Berlin tragedy that Merkel’s enemies on the political right would capitalize on the failures of her lenient policies. Merkel’s response to growing pressure from her opponents has largely been to double down on stern rhetoric by calling for a ban on burkhas and finally declaring on December 31, 2016 that Islamic terror was Germany’s greatest threat.

At the same time that Germany has tried to downplay the threat of Islamic extremism and the effect that the migrant crisis has on its prevalence in 2016, they have been engaged in efforts to keep the public’s attention on “far right extremist groups” who pose an increasing political threat to Merkel. Russian news source Sputnik has highlighted Germany’s efforts to crack down on far right groups, especially those who have been seeking to acquire weapons to defend themselves against perceived threats from migrants. German media has a history of labeling growing politically right groups such as Alternative füer Deutscheland (AfD) as having neo-Nazi inclinations in an attempt to discredit them.

Internal threats, both real and perceived, provide Angela Merkel with an ideal way to sow fear amongst the population and encourage demand for the EU Army and European unification.

B. Calls for EU Unity

With the shock result of Brexit, EU leadership has been scrambling to discourage other states from holding similar referendums on continuing their membership in the European Union. Jean-Claude Juncker has branded attempts to hold “in-out” referendums as “unwise” due to the likelihood that more votes to leave the EU would severely weaken the Union. He has also threatened Britain with “consequences” for Brexit. Leaders of smaller EU member states have similarly urged that countries no longer hold referendums, since this would likely cause economic damage to weaker members. Rather than taking steps to slow the accelerated interconnectivity of the EU which has bothered European citizens, politicians in Brussels have gone the opposite direction and made the formation of the EU Army central to their efforts to promote closer European unity. American news outlets such as the New York Times have expressed confusion at such efforts given that voters appear to be far more concerned about internal threats posed by groups such as ISIS.

By making the EU military an indispensable element of future plans for the European Union, Angela Merkel leaves citizens who are uncertain about a future without the Union no choice but to accept plans for militarization.

C. Claiming the US/NATO is Ineffective Compared to the European Union and its Army

The most concerning development to come out of the European Union over the past several years has been a recent rise in rampant anti-American rhetoric from Angela Merkel. Merkel, a staunch supporter of Hillary Clinton was perhaps hoping that her EU Army buildup would have been less complex had her friend won the executive office of the United States. Reports indicate that Donald Trump’s transition team may have already been in contact with EU leadership to express their desire that states wishing to leave the Union be allowed to do so. The incoming U.S. Ambassador to the EU has warned that Mr. Trump will not stand for an EU Army during his Presidency, as the financial strains it would place on European states would interfere with their pre-existing financial obligations to NATO.

In an apparent response to Trump’s moves to consolidate European defense spending on NATO rather than the EU Army, Angela Merkel made a January 13, 2017 speech where she railed against the United States and UK as having become “weak” and called for the remaining states of the EU to move ahead even more rapidly towards what she described as a “Defense Union.” This new, confrontational style of rhetoric is concerning from a nation at the forefront of a Union pushing militarization whilst simultaneously keeping certain voter blocs ignorant about the exact progress of those efforts.

Just what a “Defense Union” is needed to guard against is unclear, though the most likely justification is the ever present Russian menace touted by bureaucrats throughout Europe. The Russian narrative is often used as a cover story for whatever political purpose the actor who pushes it supports. Whether it is to discredit Wikileaks, delegitimize Donald Trump’s victory in the U.S. Presidential election or, bizarrely, accuse Russia of planting child porn on American government computers, the supposed threat of Russia has been pushed to exhaustion by different leadership figures for a plethora of reasons. In the case of the EU, the Russia narrative is used to justify the formation and equipping of the EU Army. Just this week, EU supporting European leaders were attempting to frame Donald Trump’s comments about the need to reform NATO as a sign that he would abandon important US allies in the theoretical event of military conflict with Russia.

How a European Union military force will be more efficient or desirable than the current arrangement with NATO is unclear. Given the recent rise of Islamic extremism in Europe and increasing numbers of states seeking to leave the European Union, it appears far more likely that Merkel’s new army would be deployed domestically. With Germany feeling the political and economic squeeze of the UK’s Brexit vote and likely several more “Leave” results in EU membership referendums Angela Merkel becomes more desperate and isolated by the day. Throwing additional military power into the mix seems unnecessary at best and incredibly dangerous at worst. Her decision to begin lashing out at the US and Euroskeptic European states indicates that the latter possibility may be more likely.

IV. The Danger of European Union Internal Incidents to the United States

 

A potential conflict anywhere within the EU should cause great concern in the United States. Given the many military installations the United States has throughout Europe, which are now more numerous given NATO’s recent shift to posture against Russia with Operation Atlantic Resolve there is a real risk that the U.S. could be drawn militarily into a European conflict, whether caused by state on state disputes or large scale Islamic terror events. The map below shows just a few of the American military installations currently found in Europe:

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What Can Americans Learn from Chinese Government Propaganda?

Under the relentless thrust of accelerating over-population and increasing over-organization, and by means of ever more effective methods of mind-manipulation, the democracies will change their nature; the quaint old forms—elections, parliaments, Supreme Courts and all the rest—will remain. The underlying substance will be a new kind of non-violent totalitarianism. All the traditional names, all the hallowed slogans will remain exactly what they were in the good old days. Democracy and freedom will be the theme of every broadcast and editorial—but Democracy and freedom in a strictly Pickwickian sense. Meanwhile the ruling oligarchy and its highly trained elite of soldiers, policemen, thought-manufacturers and mind-manipulators will quietly run the show as they see fit.

– From Aldous Huxley’s, Brave New World Revisited, published 1958

We live in a world like no other in human history. We’re mercilessly bombarded by intense and sophisticated propaganda virtually 24/7, whether it be from government officials, media outlets or multi-national corporations with endless budgets. The barrage is relentless, and unless you feel like ditching it all and moving into a cave, pretty much inescapable. For those of us dedicated to living on the outside, the only offense is a good defense, and a good defense requires understanding.

Most of us assume that for propaganda to be most effective it must remain undetected by its intended victims. While this is true on some level, it’s also an unsophisticated understanding of how this stuff really works here in the U.S. on a far more clever and pernicious level.

To get a deeper understanding, I want to highlight a few passages from an excellent article published at CounterPunch titled, Why Ridiculous Official Propaganda Still Works:

continue reading

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Netflix Soars Despite Slashing Domestic Subscriber Outlook & Record Cash-Burn

Forget the negative cash-flow, forget the ongoing and rising cost of content, and forget the fact that Netflix slashed its domestic subscriber growth expectations; buy-the-f##king-record-high because earnings and revenues met expectations but international subscriber growth soared.

 

 

Summary:

  • *NETFLIX 4Q INTL NET STREAMING ADDS 5.12M, EST. 3.78M
  • *NETFLIX SEES 1Q INTL NET STREAMING ADDS 3.7M, EST. 3.5M
  • Q4 EPS (GAAP): $0.15, to Wall Street forecasts of $0.13, which were inline with Netflix guidance of $0.13.
  • Q4 Revenue: $2.48 billion, to Wall Street estimates of $2.47 billion, up 36% year-over-year.

And then there's this…

Slashing domestic subscriber growth expectations…

  • *NETFLIX SEES 1Q DOMESTIC NET STREAMING ADDS 1.5M, EST. 1.72M

And the only chart that really matters…

Record Cash burn…

Q4 free cash flow totaled -$639 million vs. -$276 million last Q4 and -$506 million in Q3’16. The sequential increase was largely due to the timing of content payments, including our growing slate of self-produced originals. Producing more owned content creates some lumpiness in our working capital needs. We expect our FCF to be around -$2 billion in 2017 vs. -$1.7 billion in 2016, with FCF loss improving sequentially in Q1’17.
 

And it's set to get worse…

  • *NETFLIX SEES FCF AROUND -$2B IN 2017

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Dow Drops As Dollar, Bond Yields Spike Most Since Election

For Goldman bulls today…

 

The Dollar Index surged higher today rebounding from its biggest drop since July with its biggest spike since the election today following Trump/Ross comments on NAFTA and extended by Yellen's comments late on regharding rate hikes… (and we suspect with Xi leaving Davos, China currency strength was unwound)

 

The Dow dropped… (The Dow is down 4 shocking days in a row – the longest losing streak since the election)

 

As not even Goldman Sachs could rescue bank stocks… (the last two days were the worst for Goldman since Brexit)

 

And Bond yields spiked most since the election…(30Y perfectly tagging 3.00%)

 

*  *  *

While The Dow ended red, Trannies and Small Caps were panic-bid into the close as USDJPY went bananas…

 

On the week however, all major US indices remain red…

 

VIX spiked to 2-week highs at the open but was quickly slammed lower…

 

The entire curve is now higher in yield on the week (led by the belly underperforming)…

 

The Dollar Index rallied back into the green for the week (led by a collapse in the loonie)…

 

As the dollar soared so NAFTA partners currencies plunged…

 

And it makes one wonder if Yuan strength yesterday was all about face-saving for Xi…

 

Gold broke its 7 day winning streak and dropped most in over a month…

 

Crude also tumbled to a $51 handle (ahead of tonight's API data)

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A Huge Potential Tailwind For Bonds?

Via Dana Lyons' Tumblr,

A record Speculator short position in 10-Year futures could fuel a substantial short-covering rally.

One of the most significant developments in the financial markets over the past 6 months is the potential major reversal in the bond market. After 3 and a half decades of falling yields, we may be witnessing the long-awaited bottom in the cycle. Now, obviously that is a very heady statement to make considering we may not have an answer for many, many years. And if the long-term turn higher in yields is indeed upon us, it is still going to unfold in baby steps (last week, we pointed out what to watch for now, including a major test presently underway for the 10-Year Yield). However, the seeds of such a reversal have arguably been put into place.

One of those seeds that we pointed out last June was an overwhelming consensus of bullish sentiment towards bonds. One way this was manifested was in the positioning in 30-Year Bond futures. At the time, the “smart money” Commercial Hedgers had adopted their largest net-short position in 18 years. On the flip side, Non-Commercial Speculators, often considered the “dumb money”, were sitting on one of their longest net positions in decades. As is typically the case, that position did not work in the Speculators’ favor as bonds have spent most of the last 6 months in a free fall.

As one might imagine, the collapse in bond prices has had quite an impact on traders’ sentiment and positioning. In fact, if we shift to the 10-Year T-Note futures market, we find that Speculators have pulled a 180 and now hold their largest net-short position of all-time – by a lot. At a net-short position of nearly 400,000 contracts, it is more than 100,000 larger than any other in history.

image

 

[ZH: Notably, it's not just 10Y – aggregate positioning across the entire Treasury futures curve has never been this short]

As we have mentioned many times, the “dumb money” moniker does not mean that Speculators are always wrong.  It is that they are typically are wrong at turning points and key junctures in the underlying contract. Indeed, most of the large rallies in the bond market since the financial crisis accelerated in 2008 were preceded by some of the most extreme Speculator net-short positions in the history of the 10-Year.  Of course, one of the challenges in this data is identifying what constitutes an extreme.  However, in our present case, I think everyone can agree that the largest Speculator net-short position in history – by a wide margin – certainly fits the “extreme” bill.

Even so, another caveat that we must always mention when discussing this CFTC Commitment Of Traders analysis is that it is not foolproof.  A glance at the record net-long Speculator positioning going into the financial crisis is all the evidence one needs to conclude that. That said, their more recent history, as referenced above, has been much less successful. Therefore, we would not be banking on Speculators hitting the jackpot again.

So will this huge short position result in a massive short-squeeze induced bond rally?  Only time will tell, although it is not necessarily the positioning that will spark the rally.  A short-squeeze is only unleashed by rising prices.  Therefore it will take a convincing bounce in bonds in order to persuade these folks to unwind their shorts.  As we mentioned last week, a break below the current level in the 10-Year yield, near 2.33%, may indeed result in a sizable pop in bond prices and spur the aforementioned unwind. 

Thus, this 10-Year test continues to be perhaps the most compelling development across the financial markets at this time.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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Alibaba’a Jack Ma Drops a Redpill in Davos: The U.S. Wasted $14 Trillion on Wars Over the Past 30 Years

And there it is, the unvarnished, raw, truth about how everything went wrong for middle class America.
 
Since the Vietnam war, more than 45 years ago, the US has embarked on a neocon strategy of war in an effort to build a global empire. The result of that strategy has left American infrastructure second rate, its school system in shambles, and its healthcare system a complete and utter joke.
 
Just imagine what America could’ve done with $14t of investable dollars, instead of waging wars.
 
Aside from the wars, America spends more than 50% of its discretionary budget on the military, per annum, 16% of its overall budget.
IMG_6134
 
IMG_6135
 
That’s the main issue, the sordid topic that is rarely discussed in American politics, for fears of crossing the military-industrial complex.
 
Jack Ma from Alibaba doesn’t share those same fears, being a Chinese national worth $27b of zero fucks
 
In a very rare glimpse into what the Chinese really think about American imperialism and how it shaped the global economy, all the better for China might I add, Jack Ma spoke candidly today in an interview with CNBC’s Andrew Ross Sorkin.
 

“It’s not that other countries steal jobs from you guys,” Ma said. “It’s your strategy. Distribute the money and things in a proper way.”
 
He said the U.S. has wasted over $14 trillion in fighting wars over the past 30 years rather than investing in infrastructure at home.
 
To be sure, Ma is not the only critic of the costly U.S. policies of waging war against terrorism and other enemies outside the homeland. Still, Ma said this was the reason America’s economic growth had weakened, not China’s supposed theft of jobs.
 
In fact, Ma called outsourcing a “wonderful” and “perfect” strategy.
 
“The American multinational companies made millions and millions of dollars from globalization,” Ma said. “The past 30 years, IBM, Cisco, Microsoft, they’ve made tens of millions — the profits they’ve made are much more than the four Chinese banks put together. … But where did the money go?”
 
He said the U.S. is not distributing, or investing, its money properly, and that’s why many people in the country feel wracked with economic anxiety. He said too much money flows to Wall Street and Silicon Valley. Instead, the country should be helping the Midwest, and Americans “not good in schooling,” too.
 
“You’re supposed to spend money on your own people,” Ma said. “Not everybody can pass Harvard, like me.” In a previous interview, Ma said he had been rejected by Harvard 10 times.
Along those lines, Ma stressed that globalization is a good thing, but it, too, “should be inclusive,” with the spoils not just going to the wealthy few.
 
“The world needs new leadership, but the new leadership is about working together,” Ma said. “As a business person, I want the world to share the prosperity together.”

 
Here’s why your country is falling apart.
IMG_6136

The Russians didn’t do that.

Content originally generated at iBankCoin.com

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RBC On The Treasury Standoff: “Someone Is Going To Get Hurt Badly”

Following up on his note from yesterday in which he discussed the unwind of the Trumpflation trade and the beginning of the “pain trade“, and having received feedback from clients following yesterday’s sudden reversal in the US Dollar (which is fading fast following the latest hawkish comments from Janet Yellen), RBC’s Charlie McElligott writes that the general tone is “downplaying fear of a larger VaR-episode (see: last Jan / Feb in the market neutral community via an excruciating factor rotation) developing at this point beyond the “now regularly scheduled” January mean-reversion, largely due to the remarkably-tight range now built-into US rates (as they ping between 2.30 and 2.40 for 10s and 2.90 to 3.00 for 30s). 

That said, he notes that government bond shorts are staying firm as “leveraged funds are impressively adding to shorts last week despite the rally”, while ‘real money’ has continued to add duration, forcing a price stalemate.  His conclusion “there is no clearer example of this positioning standoff than by looking at the CFTC 5Y UST futures positioning data– somebody is going to get hurt badly

Additionally, below we present some additional commentary on other asset classes from the head of RBC’s cross-asset strategy.

* * *

As I’ve been stating over the past few weeks, there are multiple fronts with regards to answering the “what inning are we” question and the ‘reflation trade.’  Per expectations, we see the ‘slow-to-turn super tanker’ real money community having to get more cyclically-geared for a higher-rate world (recall those CIO discussions in December where many noted that they hadn’t looked at banks / energy / industrials “in years” and certainly not as anything close to overweights).  Not surprisingly and true to the YTD theme, last night’s NYSE MOC imbalances AGAIN were led by Financials (largest notional buy imbalance) and Industrials (3rd largest buy imbalance).  With bonds, language we continue to hear from overseas real money (“the” demand driver for USTs over the past 5+ years) too is that they’d be sellers of a squeeze towards the 2.20 level. 

Also, we see smart-beta ETF $$$ flows showing a “slow to get the memo” dynamic, where we see all of the back-half of 2016 equity factor themes perpetuating: ‘Value’ (dwarfing all others) and ‘Size’ (small cap focused) are dominating year-to-date ETF inflows against ‘Low Vol’ and ‘Momentum’ outflows.  Status quo upheld.

All of these flows (real money reweighting and smart beta ETFs) are helping neutralize / dampen the effect of tactical traders unwinding their “Trumpflation” bets. 

That said, I think the largest talking-point while making client rounds is that we’re clearly through the ‘easy part’ (one-way markets) of the ‘reflation trade’—and that this is now where we’re going to see the grinding / choppy moves with more frequent volatility and drawdowns. 

Frankly, the “animal spirits” component of the recent blisteringly +++ global data in my mind is what is currently keeping the trade “propped-up,” and likely into the next quarter.  PMIs and the consumer and business confidence readings portend an extension of the theme, which is why I think there are still months left to go, with a likely ‘force in’ in stocks to make new highs that will require higher rates. 

For what it’s worth too, many in the tactical / discretionary macro community are looking at re-engaging on ‘long Dollar’ and ‘long reflation’ into this recent pullback, looking for the same ‘final push’ higher in coming months as the energy base-effect keeps inflation expectations firm (which as I must remind you continue to screen as the largest macro factor input of SPX price drivers) and as perceived reflationary-boosts ‘kick-in’ (wage growth / average hourlies earnings move higher as well).

From there though (say out 3-6 months), I believe it’s possible we hit a potential ‘double whammy’: 1) higher data brings higher expectations—which set up for data disappointments (thus the mean-reverting nature of economic surprise indices) and / or 2) increasingly hawkish Fed rhetoric (as exemplified by dove Lael Brainard’s pivot hawkish yesterday) off the higher data leading to accelerated Fed action.

Let’s then look-back to the market response post the Dec 14th 2016 Fed meeting: Stocks sold off hard as real rates screamed higher upon acknowledgement of the Fed’s ‘dot plot’ (3 hikes in both ’17 and ’18).  Why?  Because at that point I think the market realized that the significant moves we’ve seen with inflation expectations could set us up for a “pick your poison” scenario, where we see either a 1) stagflationary environment (as inflation surpasses growth) or a 2) ‘Fed behind curve’ error, where we are forced to tighten faster than the economy is growing.

These two scenarios will continue to weigh in traders’ minds looking forward.  If we lose the ‘animal spirits’ and the headline data, there will be even more pressure on fiscal-policy (i.e. what NOW with the tax plan / how is it funded without a BAT?) shifts to hold risk-market at lofty levels, which could make the back-half of ’17 look like the first-half of ’16: long duration, long defensives / low vol / divvy yielders / ‘up in quality’ to the front of the pack.  “Back to the future” if you will.

POPULAR TRADE / ‘JANUARY EFFECT’ UNWINDS HITTING THEIR ZENITH YESTERDAY?:

RISK THERMOMETER EXPRESSING SAME REVERSAL:

THEMATIC EQUITIES MONITOR SHOWING LEADERS LAGGING AND VICE VERSA:

SECTOR UNWIND:

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Extrapolate At Your Own Risk

Submitted by 720Global's Michael Lebowitz via RealInvestmentAdvice.com,

As we dig through S&P 500 price forecasts for the year 2017, we discover that a majority of “Wall Street’s top strategists”, are calling for a year-end S&P 500 price in the 2,300-2,450 range. None of the forecasters expect a down year, but that’s an article for another day. Not surprisingly, a year-end index price in the aforementioned forecasted range would put growth in line with that experienced since 2012. While the strategists will claim they have extensive multi-factor models that help them arrive at their estimate, it is quite likely many of them rely on extrapolating prior price performance into the future based on the dangerous assumption that the future will be like the past.

Such a forecasting strategy may seem logical, and has worked well for the last four years, but it fails to acknowledge that earnings growth, which have repeatedly been grossly over-estimated, have been relatively flat over the same period. Since 2012, the S&P 500 has risen almost 70% while earnings are up a mere 2%. The graph below plots the S&P 500, earnings per share and their respective trend lines.

Data Courtesy: Bloomberg and Standard & Poor’s

When price increases are not accompanied by earnings increases, it indicates that multiple expansion has occurred. In other words, the ratio of price-to-earnings (P/E) is expanding almost entirely because of its numerator- price increases.

Whether or not an observed expansion of the P/E multiple makes sense depends upon the context. Such a situation may be justified when valuations are at or below the long run average, but keep in mind that current valuations are at levels that have rarely been eclipsed in history. The current P/E multiple is not just above average, it is 70% above the average of over 130 years of observations.  For those that follow the consensus expectations, we suggest that you also extrapolate expected returns for ever increasing valuations. The graph below plots the S&P 500 and expected ten-year annualized returns. The expected return is calculated from the regression of monthly Cyclically Adjusted Price to Earnings ratio (CAPE) and the associated annualized returns that occurred over the following ten years. The data encompasses 130 years’ worth of data.

Data Courtesy: Bloomberg and Standard & Poor’s

It is plausible that earnings will increase at a healthy clip and valuations will normalize. However, if we are to extrapolate prices like the so-called experts, then to be consistent, that same logic should also be applied to earnings and expected returns. Expected returns, having trended lower since 2012, are now forecasting a sub-1.00% annualized return for the next ten years.

This brief note is a simple reminder that extrapolating price without considering future earnings trends and valuations is a fool’s game. Extrapolating the past is relatively harmless for street prognosticators. Basing an investment strategy on such a plan, however, can have severe financial repercussions.

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China Housing Bubble Finally Pops: First Slowdown After 19 Months Of Acceleration

After several months of slowing price growth across China’s housing market, if mostly in the lower-tiered cities, China’s National Bureau of Statistics reported that average mothly property prices growth in December continued to slow from November across the 70 cities tracked by the NBS, and this time impacted even the formerly untouchable, “Tier 1” cities.

Housing prices in the primary market increased 0.4% month-over-month after seasonal adjustment (weighted by population) in December, lower than the growth rate in November. Out of 70 cities monitored, 61 saw housing prices increase in December from the previous month, the same number as November.

However it is on an annual, population-weighted basis, where we got the first confirmation that the latest Chinese housing bubble has finally popped, as housing prices across the 70 cities were up 12.7% Y/Y, below the 12.9% annual growth rate in November. This was the first moderation in year-over-year housing price growth after 19 months of continued acceleration.

Looking at city-level data, house price inflation decelerated across all city tiers. In tier-1 cities, December price growth was 0.5% month-over-month after seasonal adjustment, slightly lower than 0.6% in November. Tier 2/3/4 cities saw housing price growth of 0.5%, 0.4% and 0.4% respectively in December, all lower than the growth rates in November.

Goldman notes that it expects the housing market to continue cooling down this year, thus adding a headwind to activity growth, and also becoming a headwind to the recent surge in Chinese PPI, which in turn has led a brief impules of exported inflation around the globe. If and when Chinese housing overshoots to the downside, look forward to the next deflationary wave emanating from China to once again spoil the central bankers’ reflationary party.

Finally, a more practical question: now that the Chinese housing bubble has finally hit its inflection point and is headed downward, prompting the momentum chasers to flee, the question is whether the Chinese stock market is about to become the bubble choice du jour, as happened in mid to late 2014 and early 2015, when the bursting of the home bubble once again pushed all the housing speculators into the stock market with scary, if entertaining, consequences. It may not be a bade idea to buy some deep out of the money calls on the Shenzhen composite, as that is the place where the most degenerate of Chinese gamblers eventually congregate to every time the housing bubble bursts, only to be reincarnated two years down the line.

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