Tag: news

Sears Chairman Eddie Lampert has come through with an 11th hour takeover bid for the bankrupt retailer, according to Reuters, preventing what would have been an immediate liquidation of the iconic company.

Lampert has offered a roughly $4.6 billion package backed by existing lenders Bank of America and Citigroup, along with new participant Royal Bank of Canada – which came together to provide a $950 million asset-backed loan and a $350 million revolving line of credit to back Lampert’s bid. 

Lampert’s bid would preserve about 425 stores that Sears has yet to close, and secure the jobs of 50,000 workers out of the 68,000 employed by the retailer, the sources said.

Some of Lampert’s bid relies on $1.8 billion of Sears debt that his hedge fund ESL Investments Inc already holds and Lampert plans to forgive to back his offer, the sources said. The bid also has about $400 million in financing from non-bank lenders, according to the sources.

It is possible that Lampert’s bid for Sears will be rejected or otherwise fall through, the sources cautioned, asking not to be identified because the matter is confidential. –Reuters

While the bid could eventually prevent liquidation, there are hurdles: Sears’ advisors have until Jan. 4 to decide whether ESL is a “qualified bidder.” Only then, could ESL take part in an auction against liquidation bids on Jan. 14. They will weigh the value of Lampert’s bid against offers to liquidate the company.

If the bid is not accepted – which is a potential risk – or falls through without another buyer, Sears would be liquidated, putting around 68,000 people out of work. 

The 125-year-old store filed for bankruptcy on October 15, after which it announced the closure of nearly 200 unprofitable locations. On Friday it added 80 more stores to that list. 

The reason why Lampert’s offer may not be the panacea some expect is that earlier this month unsecured Sears creditors declared that they will object to a credit bid (more below), with some asserting that there may be legal claims against the company over transactions which Lampert oversaw, such as Sears’ spinoff of Lands’ End as well as various transactions with Seritage Growth Properties, going so far as to accuse Lampert of funneling $2.6 billion out of the company.

Furthermore, as CNBC adds, the terms or structure of Lampert’s bid could not immediately be determined. If it is similar to the $4.6 billion proposal Lampert outlined earlier this month, it is likely to face push-back from the company’s unsecured creditors. As part of the initial bid, which regulators required Lampert to make public, financing would in part stem from $1.8 billion in debt that Lampert would forgive through a so-called “credit bid.”

Previously the nation’s largest retailer, Sears touted itself as the first “everything store,” carrying everything from jewelry to clothing to pre-fabricated homes – and amassing a tremendous commercial real estate portfolio in the process. 

The only other bids received have been from suitors who want various segments of the company and liquidators who want to run going-out-of-business sales according to Reuters. 

via RSS http://bit.ly/2AmlTmi Tyler Durden

Authored by Alasdair Macleod via GoldMoney.com,

Those of us who closely follow the credit cycle should not be surprised by the current slide in equity markets. It was going to happen anyway. The timing had recently become apparent as well, and in early August I was able to write the following:

“The timing for the onset of the credit crisis looks like being any time from during the last quarter of 2018, only a few months away, to no later than mid-2019.”

The crisis is arriving on cue and can be expected to evolve into something far nastier in the coming months. Corporate bond markets have seized up, giving us a signal it has indeed arrived. It is now time to consider how the credit crisis is likely to develop. It involves some guesswork, so we cannot do this with precision, but we can extrapolate from known basics to support some important conclusions.

If it was only down to America without further feed-back loops, we can now suggest the following developments are likely for the US economy. Warnings about an economic slowdown are persuading the Fed to soften monetary policy, a process recently set in motion and foreshadowed by US Treasury yields backing off. However, price inflation, which is being temporarily suppressed by falling oil prices, will probably begin to increase from Q2 in 2019. This is due to a combination of the legacy of earlier monetary expansion, and the consequences of President Trump’s tariffs on consumer prices.

After a brief pause, induced mainly by the threat of an unstoppable collapse in equity prices, the Fed will be forced to continue to raise interest rates to counter price inflation pressures, which will take the rise in the heavily suppressed CPI towards and then through 4%, probably by mid-year. The recent seizure in commercial bond markets and the withdrawal of bank lending for working capital purposes sets in motion a classic unwinding of malinvestments. Unemployment begins to rise sharply, and consumer confidence goes into reverse.

Equity prices continue to fall, as liquidity is drained from financial markets by worried investors, but price inflation remains stubbornly high. Consequently, bond prices continue to weaken under a lethal combination of foreign-owned dollars being sold, increasing budget deficits, and falling investor confidence in the future purchasing power of the dollar.

The US enters a severe recession, which is similar in character to the 1930-33 period. The notable difference is in an unbacked pure fiat dollar, which being comprised of swollen deposits (currently 67% of GDP versus 36% in 2007), triggers an attempted reversal of deposit accumulation. The purchasing power of the dollar declines, not least because over $4 trillion of these deposits are owned by foreigners through correspondent banks.

One bit of good news is the US banking system is better capitalised than during the last crisis and is unlikely to be taken by surprise as much it was by the Lehman crisis. Consequently, US banks are likely act more promptly and decisively to protect their capital, driving the non-financial economy into a slump more rapidly by calling in loans. Price inflation will not subside, because that requires sufficient contraction of credit to offset the declining preference for holding money relative to goods. Any credit contraction will be discouraged by the Fed, seeking to avert a deepening slump by following established monetary remedies.

The Fed’s room for manoeuvre will be severely restricted by rising price inflation, which it can only combat with higher interest rates. Higher interest rates will become a debt trap springing tightly shut on government finances, forcing the Fed to buy US Treasuries under cover of monetary stimulation. The true reason for QE will be that with a rapidly escalating budget deficit exceeding $1.5 trillion and more, the Fed will want to suppress borrowing costs compared with what the market will demand. Economic conditions will be diagnosed as a severe case of stagflation. In reality, the US will be ensnared in a debt trap from which the line of least resistance will be accelerating monetary inflation.

It will prove difficult for neo-Keynesian central bankers to understand the seeming contradiction that an economy can suffer a slump and escalating price inflation at the same time. It is, however, the condition of all monetary inflations and hyperinflations suffered by economies with unbacked fiat currencies. The choice will be to rewrite the textbooks, discarding current groupthink, or to soldier on. We can be certain the neo-Keynesians will soldier on, because they are intellectually unable to reform existing monetary policy in a manner acceptable to them.

That would be the likely outcome of the developing credit crisis if it wasn’t for external factors. There is precedent for it, and we can expect it from a purely theoretical analysis. It would be a rolling crisis, becoming progressively worse, taking six months to a year to unfold, followed by a period of economic recovery. But there is a major snag with this analysis for the US economy, and that is US monetary policy has long been coordinated with the monetary policies of other major central banks through forums such as the Bank for International settlements, G20 and G7 meetings.

The surprise election of President Trump upset this apple-cart with his untimely budget stimulus and the havoc he is wreaking on international trade. The result is the Fed is no longer on the same page as the other major central banks, particularly the Bank of Japan and the European Central Bank. Therefore, unlike crisis phases of previous credit cycles, the Eurozone enters it with negative interest rates, as does Japan, which are creating enormous currency and banking tensions. We will put Japan to one side in our search for knock-on systemic and economic effects triggered by the Fed’s increase in interest rates, and instead focus on the Eurozone, the heart of the European Union.

The Eurozone is irretrievably bust

It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, whatever it takes.

There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion Asset Purchase Programme. That programme ends this month, making it the likely turning point, whereby it all starts to go wrong.

Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro-system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840bn, just one third of that government debt.

It never takes newly-elected Italian politicians long to understand why they must remain in the euro system, and that the ECB will guarantee to keep interest rates significantly lower than they would otherwise be. Yet the ECB is now giving up its asset purchases, so won’t be buying Italian debt or any other for that matter. The rigging of the Eurozone’s sovereign debt market is at a turning point. The ending of this source of finance for the PIGS is a very serious matter indeed.

A side effect of the ECB’s asset purchase programme has been the reduction of Eurozone bank lending to the private sector, which has been crowded out by the focus on government debt. This is illustrated in the following chart.

Following the Lehman crisis, the banks were forced to increase their lending to private sector companies, whose cash flow had taken a bad hit. Early in 2012 this began to reverse, and today total non-financial bank assets are even lower than they were in the aftermath of the Lehman crisis. Regulatory pressure is a large part of the reason for this trend, because under the EU’s version of the Basel Committee rules, government debt in euros does not require a risk weighting, while commercial debt does. So our first danger sign is the Eurozone banking system has ensured that banks load up on government debt at the expense of non-financial commercial borrowers.

The fact that banks are not serving the private sector helps explain why the Eurozone’s nominal GDP has stagnated, declining by 12% in the six largest Eurozone economies over the ten years to 2017. Meanwhile, the Eurozone’s M3 money increased by 39.2%. With both the ECB’s asset purchasing programmes and the application of new commercial bank credit bypassing the real economy, it is hardly surprising that interest rates are now out of line with those of the US, whose economy has returned to full employment under strong fiscal stimulus. The result has been banks can borrow in the euro LIBOR market at negative rates, sell euros for dollars and invest in US Government Treasury Bills for a round trip gain of between 25%-30% when geared up on a bank’s base capital.

The ECB’s monetary policy has been to ignore this interest rate arbitrage in order to support an extreme overvaluation in the whole gamut of euro-denominated bonds. It cannot go on for ever. Fortunately for Mario Draghi, the pressure to change tack has lessened slightly as signs of a US economic slowdown appear to be increasing, and with it, further dollar interest rate rises deferred.

TARGET2

Our second danger sign is the massive TARGET2 interbank imbalances, which have not mattered so long as everyone has faith that it does not matter. This faith is the glue that holds a disparate group of national central banks together. Again, it comes down to the maintenance of asset values, because even though assets are not formally designated as collateral, their values underwrite confidence in the TARGET2 system.

Massive imbalances have accumulated between the intra-regional central banks, as shown in our next chart, starting from the time of the Lehman crisis.

Germany’s Bundesbank, at just under €900bn is due the most, and Italy, at just under €490bn owes the most. These imbalances reflect accumulating trade imbalances between member states and non-trade movements of capital, reflecting capital flight. Additionally, imbalances arise when the ECB instructs a regional central bank to purchase bonds issued by its government and local corporate entities. This accounts for a TARGET2 deficit of €251bn at the ECB, and surpluses to balance this deficit are spread round the regional central banks. This offsets other deficits, so the Bank of Italy owes more to the other regional banks than the €490bn headline suggests.

Trust in the system is crucial for the regional central banks owed money, principally Germany, Luxembourg, Netherlands and Finland. If there is a general deterioration in Eurozone collateral values, then TARGET2 imbalances will begin to matter to these creditors.

Eurozone banks

Commercial banks in the Eurozone face a number of problems. The best way of illustrating them is by way of a brief list:

• Share prices of systemically important banks have performed badly following the Lehman crisis. In Germany, Commerzbank and Deutsche Bank have fallen 85% from their post-Lehman highs, Santander in Spain by 66%, and Unicredit in Italy by 88%. Share prices in the banking sector are usually a reliable barometer of systemic risks.

• The principal function of a Eurozone bank has always been to ensure its respective national government’s debt requirement is financed. This has become a particularly acute systemic problem in the PIGS.

• Basel II and upcoming Basel III regulations do not require banks to take a risk haircut on government debt, thereby encouraging them to overweight government debt on their balance sheets, and underweight equivalent corporate debt. Banks no longer serve the private sector, except reluctantly.

• Eurozone banks tend to have higher balance sheet gearing than those in other jurisdictions. A relatively small fall in government bond prices puts some of them at immediate risk, and if bond prices decline it is the weakest banks that will bring down the whole banking system.

• Eurozone banks are connected to the global banking system through interbank exposure and derivative markets, so systemic risks in the Eurozone are transmitted to other banking systems.

This list is not exhaustive, but it can be readily seen that an environment of declining asset prices and higher euro bond yields increases systemic threats to the entire banking system. As was the case with Austria’s Credit-Anstalt failure in 1931, one falling domino in the EU can easily topple the rest.

The ECB itself is a risk

As stated above, the ECB through its various asset purchase programmes has caused the accumulation of some €2.5 trillion of debt, mostly in government bonds. The euro system’s central banks now have a balance sheet total of €4.64 trillion, for which the ECB is the ringmaster. Most of this debt is parked on the NCBs’ balance sheets, reflected in the TARGET2 imbalances.

The ECB’s subscribed equity capital is €7.74bn and its own balance sheet total is €414bn. This gives an operational gearing on core capital of 53 times. Securities held for monetary purposes (the portion of government debt purchased under various asset purchase programmes shown on the balance sheet) is shown at €231bn (it will have increased further in the current year). This means a fall in the value of these securities of only 3% will wipe out all the ECB’s capital.

If the ECB is to avoid an embarrassing recapitalisation when, as now seems certain, bond yields rise, it must continue to rig euro bond markets. Therefore, the reintroduction of its asset purchase programmes to stop bond yields rising becomes the last fling of the dice. The debt trap Eurozone governments find themselves in has also become a trap for the ECB.

Conclusion

We can see that the global credit crisis has now been triggered. It always happens at some point anyway. The proximate triggers have been non-monetary, being the combination of President Trump’s fiscal reflation late in the credit cycle, and his imposition of tariffs on imported goods. The weakening of other economies from Trump’s tariff war is an additional factor undermining the global economic outlook.

Given these fiscal developments, the Fed had no option but to seek to urgently normalise interest rates, bringing on the credit crisis.

Inaction by the Fed would have undoubtedly seen price inflation accelerate, even allowing for the confines of a heavily suppressed consumer price index. The slowing of the US economy has, at least for the short-term, reduced price inflation factors. But as argued in this article they are unlikely to last.

These monetary developments have come at a time when two important central banks, the ECB and the Bank of Japan, are still applying negative interest rates. The disparity between these policies and that of the Fed, besides creating monetary and currency strains, will almost certainly lead to them both revising monetary policies. Only this month, quantitative easing in the Eurozone ceases, and bond prices are likely to fall significantly without it. A rise in the ECB’s deposit rate from minus 0.4% will surely follow, and it is hard to see how a developing systemic crisis in the region can then be prevented.

Since the Lehman crisis, inflation has been mostly bottled up in the financial sector, while being statistically suppressed in the productive economy. That is now about to change, leading to excess deposits at the banks trying to escape the consequences of their deployment for mainly financial speculation. It will not provide a boost in consumption, because consumers are maxed out and unemployment is rising. It will simply undermine the purchasing power of an increasingly unwanted, unbacked fiat currency.

via RSS http://bit.ly/2QW3Ddx Tyler Durden

In what appears to be another symbolic gesture with little real-world potential to reduce the gaping US-China trade deficit, Beijing has opened the Chinese economy to imports of US-grown rice for the first time ever, Reuters reported, citing a statement published to the website of China’s customs authority.

Like China’s move to roll back retaliatory auto tariffs – which President Trump heralded as vindication of his meeting with Chinese President Xi Jinping – the lifting of Beijing’s de facto ban on US rice imports likely won’t lead to a surge in rice imports from the US: China already sources most of its rice from Asia, where it can be bought much more cheaply. But the decision, which is the culmination of years of talks, according to Reuters, is tantamount to China fulfilling its promise to further open US trade.

It wasn’t immediately clear how much rice China, which sources rice imports from within Asia, might seek to buy from the United States. But the move, which comes after years of talks on the matter, follows pledges from China’s commerce ministry of further U.S. trade openings earlier this week.

[…]

Officials at a government-affiliated think-tank in Beijing said the price of U.S. rice is not competitive, compared with imports from South Asia, and said the move to formally permit import should be interpreted as a goodwill gesture.

As of Thursday, rice imports from the US will be allowed in China – as long as they meet inspection standards.

As of Dec. 27, imports of brown rice, polished rice and crushed rice from the United States are now permitted, as long as cargoes meet China’s inspection standards and are registered with the United States Department of Agriculture.

“The permission for U.S. rice suggests an improving U.S. and China relationship,” said Cherry Zhang, an agriculture analyst with consultancy JCI. Zhang said she expected any imports would likely be ordered by state-owned companies.

Technically, China opened its rice market when it joined the WTO in 2001. But it never established a phytosanitary protocol with the US, which effectively prohibited all US imports. Still, that didn’t stop China from slapping 25% tariffs on US rice when it retaliated against the US earlier this year.

With a US trade delegation preparing to travel to Beijing early next month, China will likely need to offer more substantive concessions if it wants to strike a deal with the US before the March deadline.

via RSS http://bit.ly/2CExEpx Tyler Durden

Authored by James Howard Kunstler via Kunstler.com,

You had to love the narrative that the financial media put over about the 1000-plus point zoom in the DJIA on Wednesday: that pension funds were “rebalancing” their portfolios. It dredged up the image of a drowning man at the bottom of the deep blue sea with an anchor in one hand and an anvil in the other, switching hands.

Thursday’s last minute 900-point turnaround was another marvelous stunt to behold. Somebody gave the drowned man a pair of swim fins to kick himself furiously to the surface for a gulp of air. The truth, of course, is that pension funds are sunk, however you balance their investment loads while they’re underwater. They over-bought stocks out of sheer desperation during ten years of near-ZIRP bond yields, and started rotating back into bonds as they crept above the ZIRP handle, and now with bond yields retreating, they’re loading up again on still-overpriced stocks that pretend to be “bargains.” Everybody knows that this will not end well for pension funds. Glug Glug.

The financial press and their red-headed step-siblings in the regular news media seem to think that getting rid of Mr. Trump will power the perpetual bull market into an Elon Musk nirvana of Martian vacations, hyperloops, and another chapter of US world domination — with Wonder Woman running the Joint Chiefs of Staff, spearheading an army of eunuchs. The New York Timesmade yet another pitch for impeachment today (Friday) in an editorial by the revered swamp fossil Elizabeth Drew, 83, who laid out everything but a credible case against the Golden Golem of Greatness. The newspaper makes itself more ridiculous each day in its furious gyno-narcissistic hysteria.

What The Times and its media compadres fail to notice is that the nation has entered an irreversible transition out of our familiar techno-industrial arrangements into the uncharted territory of deferred fantasies and real hard times. Financialization of the economy was the last ploy to keep this boat floating. It allowed political and business leaders to pretend that asset-stripping the interior of the country — so that coastal moralizers could enjoy micro-green lunches and sex-change surgery — would promote the general welfare. The banking traumas of 2008 should have put an end to that gambit, but the players rotating between the DC Swamp and Wall Street only tripled down on that action — basically borrowing more and more from the future in the form of bonded debt that cannot possibly be repaid.

The true rebalancing of pension funds, and everything else in American life, will come with the recognition that we are tapped out and bumping up against actual limits. Alas, economies don’t de-grow, at least not in an orderly way. They reach a certain complete efflorescence and then they wilt, or collapse. Survival becomes a matter of how human beings adapt to new conditions. Attempts at mitigation — propping up the status quo — add up to a mug’s game, whether it’s stock markets, agri-biz, political parties, weather systems, or influence over people in distant lands.

The argument will come down to the Mitigationists versus the Adapters.

The problem for the Mitigators is that most of what they can do is based on pretending: e.g. that some energy miracle is at hand… that we’ll soon be mining asteroids… that we’ll build dikes around Miami Beach… that Modern Monetary Theory (the “science” of getting something for nothing) can negate the physical laws of the universe. The Mitigationists will be disappointed as they “consume” their last images of iPhone porn, waiting for Elon Musk to save the world.

The Adapters will be out there working with the changes that reality serves up, probably with hand tools. There may be a lot fewer of them, living in a more austere everyday economy, but they will remain onstage when the Mitigationists depart this earth in tears for a mysterious realm that turns out not to be a golf course subdivision on Mars with a Tesla in every driveway. Something’s coming and the wild algo instability in the markets is yet another sign that anybody can read. Even if it quiets down for a few weeks in early 2019, as I think it may, the fireworks are only beginning.

Which side are you on?

via RSS http://bit.ly/2RpRm0o Tyler Durden

With polls showing that more American adults are blaming President Trump for the Wall over Democrats (this could have something to do with President Trump’s comment that he would “take responsibility” for the shutdown during a contentious meeting with Nancy Pelosi and Chuck Schumer), numerous political pundits are wondering if this will hurt the president’s chances of winning reelection in 2020.

The answer, at least according to those who are willing to back their opinions with money, is not a chance.

Because while some “scientific” polls are showing that a Biden candidacy could create problems for Trump, betting markets (which have traditionally proven far more reliable than the supposedly professional polls) are still projecting a Trump victory, drama be damned.

According to a Reuters/Ipsos poll conducted after the shutdown began, 47% of adults believe Trump is responsible for the partial shutdown (now in its 7th day), while 33% blame Democrats in Congress. Meanwhile, 7% blamed Republicans in Congress.

Has that actually hurt Trump? Nope: the latest betting odds out of PredictIt, an online betting site, have traders pricing in roughly 2:1 that Trump prevails over either Biden or Beto in 2020, with odds rising to 3:1 if Trump is competing against Kamala Harris or Bernie Sanders.

This despite Trump’s threats Friday morning to close the southern border and cut off aid to Central America if the Democrats persist in withholding the $5 billion that Trump is seeking to continue construction on his promised border wall. The takeaway: Voters don’t care who is responsible for the shutdown. They do seem to care whether Trump can secure funding for his wall (and keep the strong economy from sliding into a recession, supposedly).

via RSS http://bit.ly/2EQ4PrE Tyler Durden

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

And you won’t get actual markets back until that power is wrestled from their cold dead zombie fingers. Even then, the damage will be hard to oversee, and it will take decades. The bankers and investors their free and easy trillions were bestowed upon will be just fine, thank you, but everyone else will definitely not be.

Central banks don’t serve societies, they serve banks. They fool everyone, politicians first of all, into believing that societies automatically do well if only the demands of banks are met first, and as obviously stupid as that sounds, nary a squeak of protest can be heard. Least of all from ‘market participants’ who have done nothing for the better part of this millennium except feast at the teat of main street largesse.

In the past few days we’ve had both -stock- market rallies and plunges of 5% or so, and people have started to realize that is not normal, and it scares them. So you get Tyler posting DataTrek’s Nicolas Colas saying “Healthy” Markets Don’t Rally 1,086 Points On The Dow. Well, he’s kinda right, but there hasn’t been a healthy market in 10+ years, and he’s missed that last bit. Like most people have who work in those so-called ‘markets’.

Here’s why Colas is right, but doesn’t understand why. Price discovery is the flipside of the coin that is a functional market, because it allows for people to see why something is valued at the level it is, by a large(r) number of participants. Take that away and it is obvious that violent price swings may start occurring as soon as the comforting money teat stutters, or even just threatens to do so; a rumor is enough.

In physics terms, price discovery, and therefore markets themselves -provided they’re ‘healthy’ and ‘functioning’- delivers negative feedback to the system, i.e. it injects self-correcting measures. Take away price discovery, in other words kill the market, and you get positive feedback, where -simplified- changes tend to lead to ever bigger changes until something breaks.

Also, different markets, like stocks, bonds, housing, will keep a check on each other, so nothing will reach insane valuations. If they tend to, people stop buying and will shift their money somewhere else. But when everything has an insane value, how would people know what’s insane anymore, and where could they shift that is not insane?

It doesn’t matter much for ‘market participants’, or ‘investors’ as they prefer to label themselves, they shift trillions around on a daily basis just to justify their paychecks, but for mom and pop it’s a whole different story. In between the two you have pension funds, whose rapid forced move from AAA assets to risk will strangle mom and pop’s old-age plans no matter what.

People inevitably talk about the chances of a recession happening, but maybe they should first ask what exactly a recession, or a bear market, is or means when it occurs in a zombie (or just plain dead) market.

If asset ‘values’ have increased by 50% because central banks and companies themselves have bought stocks, it would seem logical that a 10% drop doesn’t have the same meaning as it would in a marketplace where no such manipulation has taken place. Maybe a 50% drop would make more sense then.

The inevitable future is that people are going to get tired of borrowing as soon as it becomes too expensive, hence unattractive, to do so. Central banks can still do more QE, and keep rates low for longer, but that’s not an infinity and beyond move. It a simple question of the longer it lasts the higher will be the price that has to be paid. One more, one last, simple question: who’s going to pay? We all know, don’t we?

That’s where the Fed is now. You can let interest rates rise, as Powell et al are indicating they want to do, but that will cut off debt growth, and since debt is exclusively what keeps the economy going, it will cut into economic growth as well. Or you can keep interest rates low (and lower), but then people have less and less idea of the actual value of assets, which can, and eventually necessarily will, cause people to flee from these assets.

Powell’s rate hikes schedule looks nice from a normalizing point of view, and g-d knows what normal is anymore, but it would massacre the zombie markets the Fed itself created when it decided to kill the actual markets. You can get back to normal, but only if the Fed retreats into the Eccles Building and stays there until 2050 or so (or is abolished).

They won’t, the banks whose interests they protect will soon be in far too dire straits, and bailouts have become much harder to come by since 2008. It’ll be a long time before markets actually function again, and we won’t get there without a world of pain. Which will be felt by those who never participated in the so-called markets to begin with. Beware of yellow vests.

To top off the perversity of zombie markets, one more thing. Zombie markets build overcapacity. One of the best things price discovery brings to an economy is that it lets zombies die, that bankrupt companies and bankrupt ideas go the way of the dodo.

That, again, is negative feedback. Take that away, as low rates and free money do, and you end up with positive feedback, which makes zombies appear alive, and distorts the valuation of everything.

Most of what the ‘popular’ financial press discusses is about stocks, what the Dow and S&P have done for the day. But the bond markets are much bigger. So what are we to think when the two are completely out of sync -and whack-?

Oh well, those are just ‘the markets’, and we already know that they are living dead. Where that may be less obvious, if only because nobody wants it to be true, is in housing markets. Which, though this is being kept from you with much effort, are what’s keeping the entire US, and most of Europe’s, economies going. And guess what?

The Fed and Draghi have just about hit the max on home prices (check 2019 for the sequel). Prices have gotten too high, Jay Powell wants higher interest rates, Draghi can’t be left too far behind him because EU money would all flow to the US, and it’s all well on its way to inevitability.

And anyway, the only thing that’s being achieved with ever higher home prices is ever more debt for the people who buy them, and who will all be on the hook if those prices are subject to the negative feedback loops healthy markets must be subject too, or else.

The only parties who have profited from rising home prices are the banks who dole out the mortgages and the zombie economy that relies on them creating the money society runs on that way. We have all come to rely on a bunch of zombies to keep ourselves from debt slavery, and no, zombies are not actually alive. Nor are the financial markets, and the economies, that prop them up.

Among the first things in 2019 you will see enormous amounts of junk rated debt getting rated ever -and faster- lower , and the pace at which ever more debt that is not yet junk, downgraded to(wards) junk, accelerating. It looks like the zombies can never totally take over, but that is little comfort to those neck deep in debt even before we start falling.

And as for the ‘players’, the economic model will allow again for them to shove the losses of their braindead ventures onto the destiny of those with ever lower paying jobs, who if they’re lucky enough to be young enough, start their careers in those jobs with ever higher student debts.

You’d think that at some point they should be happy they were never sufficiently credit-worthy to afford one of the grossly overpriced properties that are swung like so many carrots before their eyes, but that’s not how the system works. The system will always find a way to keep pushing them deeper into the financial swamp somehow.

The last remaining growth industry our societies have left is inequality, and that’s what our central banks and governments are all betting on to keep Jack Sparrow’s Flying Dutchman afloat for a while longer. Where the poor get squeezed more so the 1% or 10% get to look good a little longer.

But in the end it’s all zombies all the way down, like the turtles, and some equivalent of the yellow vests will pop up in unexpected places. My prediction for next year.

It doesn’t look to me that a year from now we’ll see 2019 as a particular peaceful year, not at all like 2018. I called it from Chaos to Mayhem earlier, and I’m sticking with that. We’re done borrowing from the future, it’s getting time to pay back those loans from that future.

And that ain’t going to happen when there are no functioning markets; after all, how does anyone know what to pay back when the only thing they do know is everything is way overvalued? How wrong can I be when I say debts will only be paid back at fair value?

2019, guys, big year.

via RSS http://bit.ly/2ETE9qT Tyler Durden

The FCC has launched a federal investigation into telecommunications company CenturyLink after a failure of the company’s systems in Louisiana led to 911 outages across the US on Thursday. Customers in several markets were left without Internet, and vital services like 911 were down temporarily, with local police departments urging residents to call their local numbers with emergencies.

FCC Chairman Ajit Pai has ordered the investigation, calling the outage “completely unacceptable, and its breadth and duration are particularly troubling.”

The nationwide @CenturyLink service outage and the delay in restoring critical 911 capabilities is unacceptable. I have spoken to CenturyLink to express my concerns and have directed the @FCC’s public safety staff to launch an investigation. My statement below. #publicsafety pic.twitter.com/HgQas1xtyB

— Ajit Pai (@AjitPaiFCC) December 28, 2018

Here’s a breakdown of the affected areas and a map of the outages:

>>4502768
>https://t.co/MGhTKFXIVx

States involved in 911 outage.
Washington
Colorado
California
Texas
Arkansas
Louisiana
Indiana
Kentucky
West Virginia
Virginia
Pennsylvania
Florida
Maryland
(Washington D.C.) pic.twitter.com/wjBZ1nkehM

— Psalm2:1 ⭐⭐⭐ (@graceandblood) December 28, 2018

CenturyLink tweeted Thursday that its engineers had identified the problem and are working to fix it.

CenturyLink engineers have identified a network element that was impacting customer services and are addressing the issue in order to fully restore services. We estimate services will be fully restored within 4 hours. We apologize for any inconvenience this caused our customers.

— CenturyLink (@CenturyLink) December 28, 2018

According to the Boston Globe, people calling 911 might hear a busy signal or a recording saying “all circuits are busy.” Callers may also get connected to an emergency call center that they weren’t expecting. In addition to 911, Gizmodo reported that phone services at the Department of Correction and the Department of Education in Idaho were offline as well.

via RSS http://bit.ly/2SotJTl Tyler Durden

Swedish state broadcaster SVT has outraged viewers after they ran an article claiming that the gruesome ISIS-inspired murder of two Scandinavian girls in Morocco “had nothing to do with Islam,” before warning Swedes that sharing a graphic beheading video of the incident could result in up to four years of imprisonment. 

Maren Ueland, 28, of Norway and Louisa Vesterager Jespersen, 24, of Denmark were murdered while backpacking in the High Atlas mountains of Morocco. Both girls were stabbed multiple times, while one of them was beheaded on video. The culprits can then be seen pledging allegiance to the Islamic State leader Abu Bakr Al-Baghdadi. 

The ISIS fanatics gloated about the killing – while images of the killing were posted to the Facebook page of Ueland’s mother, and the video was sent via Private Message to Ms. Jesperson’s friends, according to the Daily Mail. 

The clip, in which a suspected ISIS terrorist shouts ‘it’s Allah’s will’, was also sent to friends of Ms Jespersen via ‘private messenger’, it has been claimed.

It has since been revealed that horrific images of the slain tourists have been posted on the Facebook page of Ms Ueland’s mother Irene. Some Moroccans bizarrely posted the images in a misguided bid to express sympathy along with calls for the killers to be executed. 

Earlier, it was claimed that footage itself had been sent to friends of Ms Jespersen. While it is not clear exactly who sent them the footage, there will be strong suspicions it would have been from warped ISIS sympathisers. –Daily Mail

A total of 19 people have been arrested in connection with the murders, according to The Washington Post, after the hikers’ bodies were discovered in their tent in a remote area of the Atlas mountains. 

During a Christmas Eve report on the murders SVT made no mention of the fact that one of the women was beheaded, nor the ISIS link, called their injuries “knife damage,” yet warned viewers of the legal risks of sharing the video of the incident. 

“We have got very good legislation in place called unlawful infringement. This law is aimed at just this kind of case when someone spreads information or images of somebody in a vulnerable position,” said former prosecutor Sven-Erik Alhem to SVT. 

A subsequent written version of the murders on SVT‘s website does mention a link to Islamic terrorism. 

According to one Twitter user (translated): “To sum up SVT’s coverage of the Muslim terrorist attack in Morocco and Daesh ‘warriors’: 1) You’ll be sent to prison if you spread the beheading film, you racist Nazi! 2) Daesh warriors have returned home to Sweden 3) They died of knife wounds, sort of 4) The murder in Morocco has nothing to do with Islam!” 

Måste ändå summera #svt ‘s utspel gällande muslimska terrordådet i Marocko & IS”krigare”.
-Du får fängelse om du sprider filmen på halshuggningen rassenasse!
-Is krigare har återvänt hem till Sve.❤
-de dog av knivskador..typ
-morden i Marocko har inget med islam att göra!#svpol

— DeMontbard (@RealLarsLarsson) December 25, 2018

 “I myself would never watch such a film, let alone share it. But now we are more upset about the crime of proliferation than the crime of beheading,” wrote another Twitter user (translated). 

Jag personligen skulle aldrig se en sådan film, än mindre dela den. Men nu är vi upprörda över spridnings-brottet och inte över huvudavskiljande-brottet. PK-folket har än en gång blandat bort korten för oss!

— Birger Nygård (@BirgerNygard) December 25, 2018

Another user ridiculed SVT, tweeting: “225 years ago Marie Antoinette suffered ‘knife damage to her neck’ during the French Revolution.”  

Journalist Ingrid Carlqvist noted (translated): “Have now seen this very strange report. A new law that has been created to protect, say, rape victims from having films of the crime spread, is now being applied to the beheading clip of the Danish and Norwegian girls in Morocco.” 

Har nu sett detta mycket märkliga inslag. En ny lag som tillkommit för att skydda exvis våldtäktsoffer från att få filmer från brottet spridda, appliceras på halshuggningsfilmen av danskan och norskan i Marocko. Skandal om lagen används för att hålla folk ovetande om islam. https://t.co/agyDqr7dI5

— Ingrid Carlqvist (@ingridcarlqvist) December 25, 2018

via RSS http://bit.ly/2RgWtQH Tyler Durden

It almost went according to plan.

In what was a relatively quiet market until 2pm suddenly the Dow Jones blasted higher, supported by a burst of massive buy programs, when as noted earlier we observed the highest TICK print on record, and at 2:39pm, the number of NYSE upticks surpassed downticks by a record 1,775…

… and not just one massive buy program, but we got no less than three 1,650+ TICK prints in a space of 10 minutes as one trader tried to fake the arrival of a pension bid as other traders scrambled to figure out if pension buying had indeed returned for the third day in a row.

There was just one problem, because whoever was desperate to pretend they were a pension fund forgot to sell bonds and with the S&P trading at session highs, treasurys remained unchanged…

…in stark contrast with yesterday’s true pension reallocation, which saw TSY yields slide as stocks jumped.

And once traders realized that this was just one giant fake out meant to force stops and squeeze shorts, they started buying… bonds, with the 10Y yield sliding as low as 2.7146%, the lowest since February 2018. And as the bond were bid, stocks tumbled losing all intraday gains, and turning negative.

Meanwhile, as it became clear that no real pension bid was coming, the selling returned, and stocks closed near session lows, with the Dow losing almost 400 points of gains and briefly dropping below 23,000 although the selloff was far more controlled than the liquidation puke observed on Monday.

Back to Treasurys, where buying across the curve was not uniform, and while 30Y yields were almost unchanged, the short end crumbled, resulting in a sharp curve steepening.

Another confirmation that there was no real pension bid today, the dollar not only did not slide as it did yesterday, but was mostly unchanged if slightly higher on the day.

Meanwhile, despite the unchanged inventory print in today’s DOE report (vs expectations of a 3+  MM drawdown) and yesterday’s API inventory build, oil rose modestly cementing December’s 11% plunge for the commodity, and the worst quarterly drop since 2014.

With the dollar going nowhere, gold and silver were mostly unchanged, and as a result have enjoyed one of the best months for the precious metals in years.

Meanwhile credit, as we noted earlier, did not buy either the Wednesday record point surge, or Thursday’s biggest intraday reversal since 2010, and instead  investment-grade bond spreads widened 3 basis points to 171bps, having widened every day since Dec. 14 and most trading sessions this quarter while junk bond also dropped as the high yield index widened 1 basis point to 531 basis points, the highest level since Aug. 4, 2016.

The average junk bond yield now above 8% for the first time since April 2016.

Finally, in what may be the biggest unspoken story of the day, the LSTA leveraged loan index tumbled to new multi-year lows: as shown below, the price of leveraged loans has been a one way train down, which together with another week of record outflows from the loan market, is the most ominous signal because should the loan market freeze up, 2019 will be nothing short of a credit disaster as billions of M&A and LBO deals lock up.

via RSS http://bit.ly/2QVYT7V Tyler Durden