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“Crash” is the new normal in FX markets it would appear. As the following charts show, first we had AUD turbulence, then EUR crashed, and now JPY is continuing its cataclysmic carry-trade-driven push for hyperinflation as it pushes to 114 – a stunning 6 handles collapse since the FOMC statement…
First AUD then EUR plunge…
Then JPY keeps sliding against everything…
AS USDJPY continues to collapse – now 6 handles since FOMC
Source: Nanex @NanexLLC
via Zero Hedge http://ift.tt/13zcPaI Tyler Durden
Tomorrow voters in Alaska,
Oregon, and Washington, D.C., will decide whether to
legalize marijuana. If they look for guidance to the two states
that took that step in 2012, says Jacob Sullum, they will see a
situation in Colorado that falls far short of the
cannabis catastrophe predicted by prohibitionists. The legal
industry is thriving, although it has not entirely displaced
the black market yet, and marijuana-related problems are
minimal so far, although controversy swirls around issues such
as regulation of edibles and restrictions on
consumption. If voters contemplating legalization turn their
attention to Washington, Sullum says, there are lessons to be
learned there too, but they mostly concern what not to do.
from Hit & Run http://ift.tt/1umnaCD
via IFTTT
Three weeks ago, Carl Icahn did what he does best (and lately, pretty much the only thing he does): urged Apple to buy some more stock back from him, when he said that he sees AAPL stock hitting $200/share (or well over $1 trillion in market cap), even though he himself has no plans to buy more stock. Nothing surprising about that.
There was just one problem: as we highlighted in Apple’s earnings release from October 20, despite another impressive earnings quarter, the company had not only burned through over $9 billion in global cash in the quarter…
… but its net cash, when adjusting for total debt and the company’s recent issuance of commercial paper, slumped to the lowest since early 2012.
Worse, as its recent 10-K confirmed, AAPL’s domestic cash – the amount of cash available for such corporate transactions as dividends and buybacks – had dropped to just $18.1 billion (and that is including the several billion in commercial paper issued in fiscal Q4), the lowest domestic cash hoard since March 2010, a time when AAPL’s offshore cash was a tiny $24 billion compared to the near record $137 billion last quarter!
So knowing full well that a buyback a day keep the Icahnator away, AAPL, urgently looking to refill its domestic cash since its offshore cash remains untouchable (absent being taxed on its repatriation), did the only thing it could do: prepare to issue more bonds, which is what we forecast would happen a few weeks ago, and what the WSJ overnight confirmed is already in progress.
Apple Inc. has its eye on the bond markets again, lining up a potential new deal that would likely build on a track record of blockbuster transactions.
Deutsche Bank and Goldman Sachs Inc. are arranging a call for the firm with investors Monday, and a deal, possibly at least partly in euros, could come as soon as this week, according to a person familiar with the matter. The iPhone maker has never issued debt in currencies other than the dollar before.
This will be AAPL’s third official bond issuance, following an inaugural record $17 billion issue in 2013, and a smaller, $12 billion deal in April.
WSJ also reports that analysts at research firm CreditSights in April said Apple may issue as much as $5 billion in nondollar bonds this year. Actually, considering the pace of domestic cash burn, and the already creeping leverage, AAPL will likely see to issue at least $15 billion (market permitting), unless it wants to access the market on a monthly if not weekly basis going forward.
Then again, that should hardly be problematic. Per the WSJ, U.S. firms have ramped up bond sales in Europe this year to take advantage of the region’s record low borrowing costs. U.S. companies have sold €51.5 billion ($64.5 billion) of euro-denominated debt so far this year, the most at this point in the calendar since 2008, Dealogic data show.
But the real punchline is that in October, over $103 billion in Investment Grade bonds were sold according to Bloomberg, the bulk of which went to fund stock buybacks. Wondering who picked up the Fed QE baton? It’s not the BOJ, as much as it would like: it is corporations themselves, buying back roughly the same $85 billion in stock as the Fed did every month in 2013. And now Apple is preparing to do its duty to add to the “market” levitation, as the S&P 500 is now one slow Management Buyout, courtesy of ZIRP, FOMO and an epic yield chasing scramble.
via Zero Hedge http://ift.tt/1DRmXGS Tyler Durden
Overnight Media Digest
WSJ
* Preliminary data suggest some type of violent structural failure, rather than an engine explosion, might be the likely cause of the crash of Virgin Galactic’s experimental rocket ship on Friday. (http://on.wsj.com/10MfCw0)
* Exxon Mobil Corp, Royal Dutch Shell Plc and Chevron Corp have lower profit margins than a decade ago, according to a Wall Street Journal analysis, prompting them to shelve expansion plans and shed operations. (http://on.wsj.com/1vC9L44)
* Publicis Groupe SA is in talks to buy Sapient Corp, as the French advertising firm seeks to speed up its transformation into a digital-technology company. (http://on.wsj.com/1GcHJEE)
* Five days after the first U.S. Ebola case was confirmed, Massachusetts General Hospital deployed a new Ebola application made by QPID Health Inc that automatically matches a patient’s travel and family history with medical symptoms. (http://on.wsj.com/1zqVdL8)
* Investors who bet on strong growth at Alibaba Group Holding Ltd when it went public in September, will soon get their first look at how well the Chinese e-commerce giant is meeting their expectations when it will report quarterly earnings on Tuesday for the first time since its record $25 billion debut on the New York Stock Exchange. (http://on.wsj.com/1GcYtvw)
* Diageo Plc is nearing an asset-swap deal with Jose Cuervo that would give the British liquor giant full ownership of a fast-growing tequila brand in exchange for its Bushmills Irish whiskey. (http://on.wsj.com/1yPj4Bh)
* Investors seeking higher returns are finding them in an unexpected place: the market for debt sold by states, cities and government-related entities. Municipal bonds have posted their longest string of monthly gains in more than two decades, outpacing gains this year in blue-chip U.S. stocks and corporate debt. (http://on.wsj.com/1pgwJkA)
FT
Sir Richard Branson’s ambitious project to put tourists into space, Virgin Galactic, has come under scrutiny after accusations came out that the company had ignored safety warnings. George Whitesides, head of the company, denied accusations that the company had taken risks with a new rocket propulsion system and added that it could have a new spacecraft ready by the next year.
French advertising group Publicis Groupe SA is in talks to buy U.S. based consultancy-firm Sapient Corp to enter into the world’s largest market, months after a merger deal with counterpart Omnicom Group Inc fell through.
A “contractual problem” has derailed one of the largest initial public offerings in Europe this year – the flotation of Spain’s state-owned airport operator Aena. According to government estimates, the IPO, which was scheduled for Nov. 12, could be worth as much as 8 billion euros ($10.01 billion).
Despite an economy that is stagnating, an increasing number of European companies are reshoring their operations to the eurozone, a research by consultancy firm PwC suggests. About two-thirds of 381 non-financial companies in the eurozone said they had reshored some of their operations in the past one year.
NYT
* Italian bank Monte dei Paschi di Siena said it would ask investors to help it raise the money it needed to satisfy demands from the European Central Bank that it bolster its ability to survive an economic downturn or other crises. (http://nyti.ms/1ttLGy0)
* Monster Worldwide Inc, which revolutionized online job hunting in the 1990s, is trying to reinvent itself for the era of Twitter and Facebook with new products that capitalize on social media. (http://nyti.ms/1rPClwP)
* Product placement in a novel might strike some as unseemly, but “Find Me I’m Yours” is not like most novels. It is an ebook, a series of websites and web TV shows, and a vehicle for content sponsored by companies. And if it succeeds, it could usher in a new business model for publishers, one that blurs the lines between art and commerce in ways that are routine in TV shows and movies but rare in books. (http://nyti.ms/1ttH0Z3)
* A year after a grueling fight with the investor Carl Icahn, Michael Dell says he is very happy to have the computer company Dell Inc that bears his name back to himself. On Tuesday, Dell will show what he has been up to since the seven-month struggle with Icahn ended last year. (http://nyti.ms/1ufzwfd)
* Macy’s Inc flagship Herald Square store has long tried to be everything to everyone. But in a $400 million renovation, it is taking sharper aim at millennials and free-spending tourists. (http://nyti.ms/1yPaWRk)
* More than a year before the first legal dose of marijuana will be dispensed in New York, a group of entrepreneurs gathered at the Marriott Marquis hotel in Times Square in late October to discuss strategy with an influential state lawmaker. (http://nyti.ms/1vC9Sg2)
* Public Broadcasting Service’s “Masterpiece”, the 43-year-old English drama franchise, is capitalizing on the runaway success of “Downton Abbey” by adding new shows and more airtime early next year. (http://nyti.ms/1s6cn9e)
* Americans are expected to buy a record $89 billion worth of gifts online this holiday season, according to a new report from Forrester Research. That’s a 13 percent jump over last year, when hundreds of millions of gifts and bad weather overtaxed United Parcel Service Inc and FedEx Corp leading to shipping delays. (http://nyti.ms/1xR0KGE)
Canada
THE GLOBE AND MAIL
** Canada has made its mark on the battlefield in Iraq with CF-18 warplanes dropping their first bombs in Canada’s combat mission there. Canadian fighter jets attacked Islamic State militant targets near the city of Fallujah on Sunday, Ottawa said. It’s not clear how much damage the CF-18s caused. The military says it requires two days, until Tuesday, before it can tell Canadians what was achieved. (http://bit.ly/1qlZpDT)
** Canadian Prime Minister Stephen Harper heads to Beijing this week to try and set the China-Canada relationship on a more even keel after a rough couple of years. Harper, who has alternated as prime minister between a hawk on China who wouldn’t sell out to “the almighty dollar” and a pragmatist calling for deeper economic ties, will now try to strike a rapport with Chinese President Xi Jinping. (http://bit.ly/1qm0DPn)
** Chevron Corp has welcomed the British Columbia government’s plan to lighten the tax load on liquefied natural gas projects as the U.S. energy giant seeks Asian customers for Canadian LNG. (http://bit.ly/1qlZc3n)
NATIONAL POST
** Lawyers are openly questioning the Canadian Conservative Party, Tories over a provision in new victim’s rights legislation that could allow witnesses to testify without identifying themselves in a broad range of criminal trials – including national security cases – warning that the measures are “unprecedented” and likely to be found unconstitutional. (http://bit.ly/1wWLRpN)
** Skyreader Media Inc, a Toronto-based interactive production studio and software provider, has inked a deal with Marvel and parent company Walt Disney Co to make its official interactive e-magazines for its film releases for the next two years – starting with its summer blockbuster “Guardians of the Galaxy”. (http://bit.ly/1GetTBO)
China
PEOPLE’S DAILY
– The municipal government of Beijing has taken a slew of steps to ensure clean air during the Asia-Pacific Economic Cooperation (APEC) summit to be held in the city on Nov. 10 and 11 among other APEC activities around that time.
CHINA SECURITIES JOURNAL
– The Chinese government is expected to continue taking targeted easing steps to support the economy after an unexpected low reading in the official manufacturing Purchasing Managers’ Index for October, economists say.
– Regulators will step up efforts to require listed firms to enhance their governance, including better corporate information disclosure, Zhuang Xinyi, vice chairman of the China Securities Regulatory Commission, told a forum over the weekend.
CHINA DAILY
– China’s media watchdog has strengthened regulations for foreign television shows available on online streaming sites, saying such shows must be reviewed by the watchdog before being made available and have permits.
– China’s box office revenues are forecast to hit 30 billion yuan ($4.9 billion) in 2014, according to the country’s film association.
SHANGHAI SECURITIES NEWS
– China’s pioneering experiment in financial reforms for the private sector kicked off in the eastern city of Wenzhou two-and-a-half years ago, has accumulated experiences to be copied to other regions and will benefit the development of the sector in the long term.
– Fresh funds are pouring into China’s stock market after its recent strong technical rebound and analysts believe that the main Shanghai Composite Index may continue rallying in the near term as a result.
Britain
The Times
* Bosses on edge over holiday pay rulings
Businesses are facing a bill running to billions of pounds from employment law rulings this week in which workers claim they have been underpaid for annual statutory leave for years. (http://thetim.es/1yOVQLF)
* Terry Leahy offers reminder of what Tesco did best
Tesco Plc’s lauded former chief executive has claimed that the supermarket chain ran into trouble because it forgot its sense of purpose. Addressing analysts in a private call last week, Terry Leahy said that the group had “focused too much on what it isn’t, rather than remembering what it is and working with that”. (http://thetim.es/1ueEYPo)
The Guardian
* Virgin Galactic was warned about potential instability of new fuel, experts say
Fifteen federal U.S. investigators have begun combing over the fatal crash site of the Virgin Galactic space plane in California’s Mojave desert, as questions surfaced about the unconventional fuel propulsion system used to blast the craft up to space. (http://bit.ly/1tQtdx6)
* Alistair Darling to stand down at next year’s general election
Alistair Darling, Labour’s former chancellor, has revealed he will step down as an MP at the next election, warning that the issue of an EU referendum is a “boil that has to be lanced.” (http://bit.ly/1o6LMfU)
The Telegraph
* Tesco eyes 1 bln pounds from bank sale
Tesco Plc has begun exploring the possible sale of a stake in its banking arm as it speeds up plans to raise billions of pounds in much-needed additional capital. (http://bit.ly/1zYhG3w)
* Britain blocking VAT red tape from Europe
Plans to impose a standard VAT return on all European companies have hit a brick wall after the UK and other countries refused to introduce extra paperwork for businesses. EU officials are expected to tell finance ministers this week that the reforms cannot go ahead in their current form, after a year of wrangling between the member states. (http://bit.ly/1yOXa0P)
Sky News
* ‘Take Politics Out Of Child Abuse Inquiry’
Home Secretary Theresa May has been urged to look beyond Westminster to find someone to lead an inquiry into historical sexual abuse. It has also been suggested she establishes a forum made up of abuse survivors to run alongside the child abuse inquiry. (http://bit.ly/13wOHWh)
* New law plans to tackle mobile phone blackspots
Culture Secretary Sajid Javid wants to change the law to force networks to allow customers to switch providers when their phones cannot find a signal. The Government is expected to start a consultation process on the reforms this week. (http://bit.ly/1twTq3Z)
Fly On The Wall Pre-Market Buzz
ECONOMIC REPORTS
Domestic economic reports scheduled for today include:
Markit manufacturing PMI for October at 9:45–consensus 56.1
ISM manufacturing index for October at 10:00–consensus 56.0
ANALYST RESEARCH
Upgrades
AngloGold (AU) upgraded to Buy from Hold at Deutsche Bank
Arista Networks (ANET) upgraded to Buy from Hold at Stifel
BlackRock (BLK) upgraded to Buy from Neutral at Citigroup
Crown Castle (CCI) upgraded to Buy from Neutral at Goldman
Eastman Chemical (EMN) upgraded to Buy from Hold at Jefferies
Ellie Mae (ELLI) upgraded to Outperform from Market Perform at JMP Securities
Eni SpA (E) upgraded to Hold from Underperform at Jefferies
Heritage-Crystal Clean (HCCI) upgraded to Buy from Hold at Stifel
Legacy Reserves (LGCY) upgraded to Buy from Neutral at BofA/Merrill
NVIDIA (NVDA) upgraded to Sector Perform from Underperform at Pacific Crest
RealPage (RP) upgraded to Outperform from Market Perform at JMP Securities
Rockwell Collins (COL) upgraded to Outperform from Market Perform at Wells Fargo
Royal Gold (RGLD) upgraded to Buy from Neutral at Goldman
SPX Corp. (SPW) upgraded to Outperform from Neutral at Wedbush
Spirit AeroSystems (SPR) upgraded to Overweight from Neutral at JPMorgan
Statoil (STO) upgraded to Hold from Underperform at Jefferies
TD Ameritrade (AMTD) upgraded to Buy from Neutral at Citigroup
TJX (TJX) upgraded to Outperform from Neutral at Wedbush
WisdomTree (WETF) upgraded to Buy from Neutral at Citigroup
Downgrades
ATK (ATK) downgraded to Sector Perform from Outperform at RBC Capital
American Tower (AMT) downgraded to Neutral from Buy at Goldman
Barrick Gold (ABX) downgraded to Hold from Buy at Deutsche Bank
Digital Realty (DLR) downgraded to Sell from Hold at Cantor
Embraer (ERJ) downgraded to Sector Perform from Outperform at RBC Capital
Essex Property Trust (ESS) downgraded to Neutral from Buy at Mizuho
Francesca’s (FRAN) downgraded to Neutral from Outperform at Wedbush
Home Depot (HD) downgraded to Market Perform from Outperform at Raymond James
ITC Holdings (ITC) downgraded to Hold from Buy at Deutsche Bank
Lincoln National (LNC) downgraded to Hold from Buy at Deutsche Bank
MB Financial (MBFI) downgraded to Neutral from Buy at Sterne Agee
MWI Veterinary Supply (MWIV) downgraded to Neutral from Buy at UBS
Matson (MATX) downgraded to Market Perform from Outperform at FBR Capital
MoneyGram (MGI) downgraded to Market Perform from Outperform at Wells Fargo
National Oilwell (NOV) downgraded to Neutral from Outperform at Credit Suisse
Newmont Mining (NEM) downgraded to Hold from Buy at BB&T
Sonic (SONC) downgraded to Neutral from Buy at Longbow
Tilly’s (TLYS) downgraded to Hold from Buy at Stifel
TriCo Bancshares (TCBK) downgraded to Outperform from Strong Buy at Raymond James
WSFS Financial (WSFS) downgraded to Market Perform from Outperform at Keefe Bruyette
Yamana Gold (AUY) downgraded to Neutral from Buy at Goldman
Initiations
AES Corp. (AES) initiated with an Outperform at RBC Capital
CONSOL (CNX) initiated with a Buy at SunTrust
Citizens Financial (CFG) initiated with a Buy at Deutsche Bank
Citizens Financial (CFG) initiated with a Buy at Evercore
Citizens Financial (CFG) initiated with a Market Perform at Wells Fargo
Citizens Financial (CFG) initiated with a Neutral at Citigroup
Citizens Financial (CFG) initiated with a Neutral at Goldman
Citizens Financial (CFG) initiated with an Outperform at Keefe Bruyette
Citizens Financial (CFG) initiated with an Overweight at JPMorgan
Citizens Financial (CFG) initiated with an Overweight at Morgan Stanley
Contango Oil & Gas (MCF) initiated with an Accumulate at Global Hunter
Facebook (FB) initiated with an Overweight at Morgan Stanley
Google initiated with an Equal Weight at Morgan Stanley
HubSpot (HUBS) initiated with a Buy at UBS
HubSpot (HUBS) initiated with a Neutral at JPMorgan
HubSpot (HUBS) initiated with an Equal Weight at Morgan Stanley
HubSpot (HUBS) initiated with an Outperform at Pacific Crest
Israel Chemicals (ICL) initiated with an Overweight at Barclays
Keysight Technologies (KEYS) initiated with a Buy at Jefferies
Keysight Technologies (KEYS) initiated with a Neutral at Goldman
Nationstar (NSM) initiated with a Buy at UBS
New Residential (NRZ) initiated with a Buy at UBS
PGT, Inc. (PGTI) initiated with a Buy at KeyBanc
Smart & Final Stores (SFS) initiated with a Buy at Deutsche Bank
Smart & Final Stores (SFS) initiated with an Equal Weight at Barclays
Twitter (TWTR) initiated with an Equal Weight at Morgan Stanley
USD Partners (USDP) initiated with a Buy at Citigroup
USD Partners (USDP) initiated with an Overweight at Barclays
COMPANY NEWS
Publicis (PUBGY) said it would acquire Sapient (SAPE) for $25.00 per share, or $3.7B, in all-cash transaction
LabCorp (LH) is set to acquire Covance (CVD) for approximately $5.6B
Altice made a EUR 7.025B offer for Portugal Telecom (PT, OIBR)
Diageo (DEO) to take control of Don Julio brand from Cuervo. In return, Diageo reached an agreement to sell Bushmills to Jose Cuervo Overseas. The transaction will result in a net payment of $408M to Diageo upon completion, which is expected in early 2015 subject to certain approvals
HSBC (HSBC) said it took a $378M provision for foreign exchange investigation in Q3
Herbalife (HLF) entered into a settlement agreement regarding a class action lawsuit; the company denied any liability
EARNINGS
Companies that beat consensus earnings expectations last night and today include:
Orbotech (ORBK), Haemonetics (HAE), Sohu.com (SOHU), Changyou.com (CYOU), First Bancshares (FBMS)
Companies that missed consensus earnings expectations include:
PDI, Inc. (PDII), Loews (L), Enbridge Energy (EEP), Furmanite (FRM), Costamare (CMRE)
Companies that matched consensus earnings expectations include:
Boardwalk Pipeline (BWP), Covance (CVD)
NEWSPAPERS/WEBSITES
Apple (AAPL) may be planning bond offering, could hold investor call, WSJ reports
Argentina suspends P&G (PG) operations, accuses company of tax fraud, Reuters reports
Apple (AAPL) is reportedly planning a 12-inch “iPad Pro,” Apple Insider reports
UPS (UPS), FedEx (FDX) taking steps to avoid shipping delays during holidays, NY Times says
Mining tycoon Mick Davis eyes Anglo American (AAUKY) assets, Sunday Times reports
Kimberly Clark (KMB) accused of misleading FDA over gown safety, LA Times reports
Visa (V), MasterCard (MA) could both climb 15% higher, Barron’s says
Stanley Black & Decker (SWK) looks ready to rise, Barron’s says
Rocket Fuel (FUEL) could be Facebook (FB) takeover target, Barron’s says
SYNDICATE
American DG Energy (ADGE)files to sell 1.88M shares for holders
Calavo Growers (CVGW) files to sell 1.397M shares for holders
Hilton (HLT) commences 90M share offering for The Blackstone Group LP
Prana (PRAN) files to sell $50M in ordinary shares, units and warrants
via Zero Hedge http://ift.tt/1o9C7VW Tyler Durden
There is an assumption that health care workers
returning from Ebola zones are too irresponsible to avoid infecting
others. But groups that work in these areas know better than anyone
how to avoid getting or giving the disease.
Ebola has been around since 1976, and Doctors Without Borders
(which goes by the French acronym MSF) has a lot of experience on
the front lines. Until this year’s outbreak, the biggest ever, it
had never had an international staff member infected. Only three
have contracted the virus this time. None has spread it to other
people.
Nor is any likely to, writes Steve Chapman.
from Hit & Run http://ift.tt/1EcM4Ws
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While it is unclear whether it is due to the rare event that no central bank stepped in overnight with a massive liquidity injection or because the USDJPY tracking algo hasn’t been activated (moments ago Abe’s deathwish for the Japanese economy made some more progress with the USDJPY hitting new mult-year highs over 113.6, on its way to 120 and a completely devastated Japanese economy), but European equities have traded in the red from the get-go, with investor sentiment cautious as a result of a disappointing the Chinese manufacturing report. More specifically, Chinese Manufacturing PMI printed a 5-month low (50.8 vs. Exp. 51.2 (Prev. 51.1)), with new orders down to 51.6 from 52.2, new export orders at 49.9 from 50.2 in September. Furthermore, this morning’s batch of Eurozone PMIs have failed to impress with both the Eurozone and German readings falling short of expectations (51.4 vs Exp. 51.8, Last 51.8), with France still residing in contractionary territory (48.5, vs Exp and Last 47.3).
Regarding Europe’s final September PMI print, Goldman comments as follows: “The Euro area Final manufacturing PMI printed at 50.6 in September, 0.1pt below the Flash estimate (and the Consensus expectation). This implies that the Euro area manufacturing PMI rose 0.3pt in October, the first increase since April. The German Final manufacturing PMI for October was revised down 0.4pt while the French manufacturing PMI was revised up substantially by 1.2pt. The Spanish manufacturing PMI surprised slightly to the upside by remaining unchanged at 52.6 (Cons: 52.2). The Italian manufacturing PMI fell notably by 1.7pt to 49.0 (Cons: 50.6). This suggests some implicit downward revisions outside Germany/France.”
The breakdown in October was mixed. Both new orders and stocks improved marginally, the former increased by 0.3pt to 49.5, while the latter increased by 0.4pt to 50.0, leaving the forward-looking order-to-stock ratio slightly lower in October; following gradual declines during 2014, this ratio now stands at the lowest level since April 2013. Production and employment improved by 0.5pt and 0.3pt in October, respectively.
With today’s Final print, the Euro area manufacturing PMI is now estimated to have risen slightly in October (0.3pt), the first increase since April. Between April and September, the Euro area manufacturing PMI eased by about 3pt. Prior to that, the Euro area manufacturing PMI rose sharply by around 10pt between July 2012 and early 2014 (and remained broadly unchanged in the spring).
On an index specific basis, the MIB leads the way lower for Europe with Snam (-6.7%) and Terna (-11.5%) sharply lower following Mediobanca cutting rating on both companies in reaction to the Italian energy regulator’s gas storage remuneration decision. Italy’s Monte Paschi continues to be halted first down, then up, after tumbling again earlier today, then surging, but in any event is now 40% lower since the stress test results were announced. Elsewhere, HSBC (-0.3%) reported this morning and trade with modest losses after they fell short of expectations and set aside USD 378mln in provisions for FX investigations. Furthermore, Ryanair (+9.1%) have lifted UK airliners after their pre-market update where they lifted their forecast, with easyJet and IAG leading the FTSE 100. With macro newsflow relatively light over the weekend, fixed income products have seen a flight to quality and have traded in the green throughout the session.
Of course, by now everyone knows that the traditional pattern is weakness at the US open, ramping into Europe close, then ramping some orem to preserve faith in central planning. Today should be no different.
Looking at today’s economic calendar, we have U.S. manufacturing PMI, ISM manufacturing, construction spending, vehicle sales due later.
Market Wrap
In short: European shares remain lower with the utilities and health care sectors underperforming and travel & leisure, basic resources outperforming. Euro-area October manufacturing PMI was below estimates, U.K. PMI above. Companies including HSBC, Holcim Ryanair issued results. The Italian and Spanish markets are the worst-performing larger bourses, the Dutch the best. The euro is weaker against the dollar. Spanish 10yr bond yields rise; Greek yields increase. Commodities gain, with soybeans, corn underperforming and natural gas outperforming.
Bulletin Headline Summary
FX
FX markets, remain relatively tentative, with price action in EUR/USD muted after tumbling to Aug’12 levels overnight after tripping sell stops at the 1.2500 handle to break below Friday’s lows at 1.2585. However, moving forward, price action for the pair may be largely dictated by a raft of option expiries with 3bln due to roll-off for EUR/USD at 1.2500 tomorrow. GBP/USD has been one of the sessions other notable movers following the better than expected UK manufacturing report (53.2 vs. Exp. 51.4) which came in at its highest level since July and pushed the pair back above the 1.6000 handle. USD/JPY trades at its highest level in 7 years after breaking above the overnight high of 112.99 and tripping stops to the upside at 113.00. The move saw USD/JPY take out an option barrier at 113.00, with the next one said to be placed at 113.50 and stops also said to be placed at 113.20.
COMMODITIES
Heading into the North American open WTI crude futures have moved back into positive territory, shrugging off overnight losses following the weak Chinese data, which has placed weight on the precious metals sector. Overnight, precious metals weakened again as the USD resumed its recent rally following the surprise BoJ announcement, with gold (-0.31%) initially falling to near the four-year low it hit on Friday. Silver prices fell in tandem and declined for a fourth successive session to their lowest since February 2010.
Venezuela and Ecuador are working on a joint proposal to defend oil prices that the two countries will present at the next OPEC meeting, according to the Venezuelan PM. (RTRS) As a guide, the next OPEC meeting is scheduled for Nov. 27th
Pro-Russian rebels have voted to set up a separatist leadership in eastern Ukraine, taking the region closer to Russia and defying Kiev and the West, as shelling continues across the country. (RTRS)
* * *
DB’s Jim Reid concludes the overnight recap
After one of the mildest Octobers on record in the UK it seems a shame to welcome in November and what will most likely soon be a cold spell to shock the system. As part of our seemingly endless house renovations we’ve just had one of those new heating systems installed that are zoned and controlled by an app and hopefully will save us money over the medium term. I’ve been waiting for a cold spell to check on my wife’s heating consumption when I’m not there as I can see it all at the touch of a button on my phone. So far its been too warm to need it but things will change soon no doubt. Its fair to say that I tend to put the heating on as late in the year as I possibly can whereas my wife is not impartial to a little boost in August if the weather is unkind. During this mild autumn there have been no arguments. I fear it won’t be long before tensions start though but I at least now have the technology to override from wherever I am in the world. I suspect it will be a brave move to use this veto though.
As its now November we produce our regular cross asset class performance review at the end with all the usual charts and tables in the pdf. Its clearly been a fascinating month and one where the hint of future central bank action (and then on the last day actual action from the BoJ) was enough to see huge swings from the lows.
Central banks continue to be the main story in financial markets and this week attention will move firmly towards the ECB. A few people asked me on Friday as to whether the BoJ surprise move on Friday took the pressure off the ECB or put it firmly back on them. Overall I would say the latter as although the BoJ’s increase in purchases aren’t huge, it does send a message that they are determined to carry on printing money if needed and are clearly prepared to use the currency to help meet their inflation goal of 2%. They’re now buying JPY80tln of paper per month which is getting to within 15-20% of what the Fed were doing at their peak despite being an economy less than a third of the size. Even with that you still don’t get the impression that the BoJ will stop until they’ve succeeded or the policy spectacularly fails. In the meantime if Europe stands still the risk is a repeat of the domestic inflation dip that originated from the last big Yen devaluation from the middle of 2012 to the start of 2014 when EURJPY moved from around 95 to nearly 145 (around 141 currently). Indeed we think the BoJ’s move and likely ECB future move still makes QE4 in the US a realistic possibility when the next US growth slowdown occurs. If there is a global currency war, a stronger dollar will mean the US is unlikely to be able to get rates high enough in this cycle to be able to avoid unconventional policy again in the future. So we still think central banks are trapped into years of money printing ahead.
As for this week, DB’s Mark Wall thinks that if the ECB simply repeat the line that the Council “remains unanimous in its commitment to other unconventional policies if necessary” then it will disappoint the market. So as a minimum they probably need to hint at more accommodation at their December meeting. Its perhaps pretty unrealistic to expect a BoJ-style surprise initiative this week though. Public QE is likely coming but it feels like more of a 2015 story as consensus will take time to build on the council.
Looking at news over the weekend, the main headline was China’s official manufacturing PMI which printed below expectations at 50.8 (51.2 exp.), down from 51.1 in September and marking a five month low. The new orders index didn’t fare much better, 0.6pts lower at 51.6 whilst the input prices index declined 2.3pts to 45.1. This has been followed up this morning with further data in China including a fairly subdued non-manufacturing PMI (53.8 vs. 54 in September) and an HSBC manufacturing PMI of 50.4, unchanged on the reading earlier in the month. Markets are fairly mixed overnight with bourses in Hong Kong, Korea and Australia -0.3%, -0.8% and -0.4% respectively as we type whilst Chinese equities are firmer (+0.3%) despite the softer prints. Japan is closed for a public holiday.
Just recapping a busy day of price action on Friday, the Nikkei closed just shy of intra-day highs at +4.8% whilst the S&P rallied 1.2% and CDX IG tightened 2bps. Treasuries were unsurprisingly weaker given the risk on sentiment with the 10y 3bps wider. The Dollar index rallied 1% including a 2.3% gain versus the Yen whilst Gold declined 2.1%. With the focus on Japan, the data prints went almost unnoticed on Friday with a solid October University of Michigan consumer sentiment reading (86.9 vs. 86.4 in September) and a 5.7 point rise in Chicago PMI offset by softer September personal spending (-0.2% mom vs.0.1% mom expected). The September personal income print (0.2% mom vs. 0.1% expected) and the PCE deflator (0.1% vs. 0.1% expected) rounded off the readings.
On this side of the Atlantic the Stoxx 600 finished +1.8% on Friday to close out a strong week. The soft European inflation prints helped support calls for future ECB stimulus with the core inflation reading marginally lower at 0.7% yoy (0.8% yoy expected) and unemployment unchanged at 11.5%. There were further disappointing prints in France with consumer spending declining 0.8% mom (-0.3% expected) and German retail sales -3.2% mom (-0.9% mom expected) although the numbers were perhaps impacted by holiday timings.
Closer to home, UK banks rallied following news from the Bank of England on Friday that the rules around leverage would be less stringent than widely expected. The BoE have stated that important lenders will face a basic leverage ratio of 4.05% from 2019 with a further buffer of 0.9% for excessive lending, following expectations that the basic ratio could be set at around 5%. Barclays shares surged over 8% on Friday following the news after previous worries that the bank was most at risk whilst RBS, HSBC and Lloyds all rallied on the day. UK Bank credit, especially AT1s, also benefited.
Away from the core markets, Brazil was back in the headlines as it reported its largest monthly deficit on record. The overall public sector deficit of R$69.4bn was the worst since records began in 2001 and comes following a heightened election process and surprising rate hike last week. The BRL depreciated 2.5% versus the Dollar on the back of the print whilst our Emerging Markets colleagues noted the considerable uncertainties around government fiscal plans for next year.
Before we run through the main highlights this week, one thing to note on the agenda are the midterm elections in the US with the result due on Wednesday. The view is largely that Republicans will take control of the Senate, however a result whereby the Senate becomes divided could add some volatility to markets.
As for the rest of the week ahead before we get to ECB Thursday we have a pretty full calendar and then payrolls finishing off the week the day after. Today we kick off with the ISM reading in the US as well as construction spending and motor vehicle sales whilst across the pond we’ll first see PMI prints for the Eurozone as well as regionally in France, Germany and Spain. Tuesday will see Eurozone PPI and we will keep an eye for any interesting comments to come out of ECB’s Costa speaking on the Portuguese economy the same day. We’ll also see the mid-term elections in the US which will be interesting. There will be a lot to digest on Wednesday as we await ADP, the non-manufacturing ISM print in the US along with services PMI in China and retail sales readings in Europe and various composite and services PMI prints across the continent. This all comes at the same time as various members of the Fed are speaking, in particular we’ve got Kocherlakota commenting on monetary policy and Lacker speaking on financial stability. At the back end of the week it’s time for claims data in the US on Thursday along with the remaining PMI prints in Europe. We round out the week with industrial production in Germany and the ever important payrolls data on Friday in the US. Our US colleagues expect a print of 225k. In case that wasn’t enough to digest, we’ve got earnings reports from 84 S&P500 companies and 101 Stoxx 600 companies for us analyze. The standout names include Walt-Disney and Time Warner in the US and closer to home HSBC, Santander and Astra-Zeneca will be reporting.
via Zero Hedge http://ift.tt/1rR79Ny Tyler Durden
Parents of some
students at St. Mary’s Church of England Primary School in
Kidderminster are upset their children were excluded from a
taxpayer-funded field trip to a petting zoo because
they speak
English. The parents say school officials told them the trip
was designed to help students who don’t speak English learn the
language.
from Hit & Run http://ift.tt/10itWLU
via IFTTT
by Keith Weiner
Woe unto the gold speculators, and a curse laid upon the house of silver.
At least, that’s how it may feel. In more clinical terms, the gold price fell from $1,230.90 to $1,172.59, or $58.31. The drop this week was 4.7%. The price closed the week below the level set after the crash of 2013, which was $1180 (by the way, an intraday dip). The gold price has never closed a day below $1188 since 2010.
The silver price fell from $17.17 to $16.13. $1.04 is 6.1%. It’s never been lower in years, except briefly in 2010.
On April 9, we said:
“The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.”
We got hate mail.
In the first place, one would hope that people don’t shoot at messengers. We are of the firm belief that gold and silver are money, and the paper issued by the Fed is not. At the same time, we argue that this view is not a trading strategy. For trading, we look to market data.
Second, we were right. While other analysts called every blip with renewed forecasts of $50 and $250, the silver price has spoken. It had a false breakout in June, and has been falling steadily since then. It has traded with a 15 handle this week. Incredibly, the fundamental price we calculate for silver is still below the market price.
To see the fundamentals, read on…
First, here is the graph of the metals’ prices.
The Prices of Gold and Silver
We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production can be measured in months. The world just does not keep much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every ounce of those
massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose a full point, or 1.4%. Our original call back in 2013 (when the ratio was around 52, and most analysts were calling for it to fall) was 60 and maybe 70. We later updated that to 70 and maybe higher. Most recently, we updated it to 75 and maybe 80. Early Friday morning, the ratio hit 73.96.
The Ratio of the Gold Price to the Silver Price
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide terse commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
Look at that run up in the dollar. It’s impressive!
As recently as Oct 20, the price of the dollar was under 25mg gold. Now it’s over 26.5mg.
Along with this rise in the dollar price (which most people think of as the fall in the gold price), has been a rise in the scarcity of gold. We now have a substantial positive cobasis—i.e. backwardation—in gold.
We calculate a fundamental price of gold some $48 over the market price. This does not mean that the price couldn’t drop further, but it does tend to apply an upward pressure to prices.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
The dollar rose even more sharply in silver. It was 1.81g silver at the end of last week, and now 1.93g. In July, it was 1.45g.
The cobasis is up sharply, and December silver is now also quite backwardated. There are some key differences between silver and gold, which we shall not elaborate here. Thus we calculate the fundamental price in silver at $0.77 below the market price.
In most of the little price moves in the past few years—do we dare assume it’s the new
normal?—the cobasis (scarcity) has moved proportionally with the dollar price (opposite of the metal price, measured in dollars). In other words, at lower prices the metal becomes scarcer and at higher prices it becomes more abundant.
This week, the metal became a little scarcer but the price fell more than a little. Don’t be fooled that the price drop was caused by high frequency trading, low integrity manipulation, or zero clothing shorting of futures. It was caused by selling of futures and, just as importantly, physical metal.
© 2014 Monetary Metals
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Nikkei 225 futures are up over 1600 points since QE ended and topped 17,000 in a quiet Asian holiday session. USDJPY topped 113, up a stunning 5 big figures since QE ended. But it's not all hyperinflationary ponies and rainbows as The Wall Street Journal stuns its readership by admitting "although economic theory says a falling yen should make Japanese goods more competitive overseas and boost exports, that didn’t happen." Of course, that merely means moar is needed and therein lies the problem as opposition (internal and external) to Kuroda's policies are growing.
"Opposition within the BOJ looks likely to continue,” said a former board member who has close ties to some current members. Another person familiar with the board’s views said the gap between Mr. Kuroda and other members was growing and represented the “biggest problem” for the central-bank chief.
What a joke!! 1600 points and 5 big figures… NKY tops 17,000 and USDJPY tops 113
But as The Wall Street Journal notes, the vote for moar QQE was close (5-4) with, rather worringly obvious for the ivory tower academics, of the four dissenters, two are former private-sector economists and the other two are former business executives.
According to minutes of a BOJ board meeting in September, one member said “additional measures to stimulate demand carry the risk of growing financial imbalances or weakening the public’s recognition of the need for structural reform.”
Critics have said the BOJ’s dominant role buying government debt has distorted financial markets, pointing to negative interest rates on some short-term debt.
What came as a surprise were the no votes cast by the two members from the business community. Both Yoshihisa Morimoto, a former power-company executive, and former Sumitomo Bank executive Koji Ishida have generally voted with the majority, and BOJ officials have said Mr. Kuroda respects their hands-on experience. The two didn’t explain their votes, but Japan’s leading business lobby, Keidanren, has warned recently against an overly weak yen. Business leaders have said a weak currency may discourage consumption because people have to pay more for imported goods.
And finally, Kuroda and Abe face pressure politically…
On Saturday, the head of the opposition Democratic Party of Japan said the BOJ’s latest action would hurt average Japanese. “It should not do things that hurt the value of the yen,” Banri Kaieda told a gathering.
And it's only going to get tougher for him…
The road ahead for Mr. Kuroda could get rockier because one of his backers on the board, academic Ryuzo Miyao, finishes his term in March.
Which perhaps explains the massive size of this bazooka (and suggests its over for moar stimulus hopers)… Which is exactly what China did tonight:
Which was swiftly followed by the PBOC's biggest weakening of the CNY fix since March 20th to its weakest in over a month(as the CNY trend chase drove the Yuan to its strongest against the fix since early Feb.
Get back to work Mr Draghi. (but EURUSD's eery plunge has already been met BTFD'ers)
* * *
Normal markets… nothing to see here
Charts: Bloomberg
via Zero Hedge http://ift.tt/1xQPABG Tyler Durden
Authored by Michael Sauga, originally posted at Der Spiegel,
Six years after the Lehman disaster, the industrialized world is suffering from Japan Syndrome. Growth is minimal, another crash may be brewing and the gulf between rich and poor continues to widen. Can the global economy reinvent itself?
A new buzzword is circulating in the world's convention centers and auditoriums. It can be heard at the World Economic Forum in Davos, Switzerland, and at the annual meeting of the International Monetary Fund. Bankers sprinkle it into the presentations; politicians use it leave an impression on discussion panels.
The buzzword is "inclusion" and it refers to a trait that Western industrialized nations seem to be on the verge of losing: the ability to allow as many layers of society as possible to benefit from economic advancement and participate in political life.
The term is now even being used at meetings of a more exclusive character, as was the case in London in May. Some 250 wealthy and extremely wealthy individuals, from Google Chairman Eric Schmidt to Unilever CEO Paul Polman, gathered in a venerable castle on the Thames River to lament the fact that in today's capitalism, there is too little left over for the lower income classes. Former US President Bill Clinton found fault with the "uneven distribution of opportunity," while IMF Managing Director Christine Lagarde was critical of the numerous financial scandals. The hostess of the meeting, investor and bank heir Lynn Forester de Rothschild, said she was concerned about social cohesion, noting that citizens had "lost confidence in their governments."
It isn't necessary, of course, to attend the London conference on "inclusive capitalism" to realize that industrialized countries have a problem. When the Berlin Wall came down 25 years ago, the West's liberal economic and social order seemed on the verge of an unstoppable march of triumph. Communism had failed, politicians worldwide were singing the praises of deregulated markets and US political scientist Francis Fukuyama was invoking the "end of history."
Today, no one talks anymore about the beneficial effects of unimpeded capital movement. Today's issue is "secular stagnation," as former US Treasury Secretary Larry Summers puts it. The American economy isn't growing even half as quickly as did in the 1990s. Japan has become the sick man of Asia. And Europe is sinking into a recession that has begun to slow down the German export machine and threaten prosperity.
Capitalism in the 21st century is a capitalism of uncertainty, as became evident once again last week. All it took were a few disappointing US trade figures and suddenly markets plunged worldwide, from the American bond market to crude oil trading. It seemed only fitting that the turbulence also affected the bonds of the country that has long been seen as an indicator of jitters: Greece. The financial papers called it a "flash crash."
Running Out of Ammunition
Politicians and business leaders everywhere are now calling for new growth initiatives, but the governments' arsenals are empty. The billions spent on economic stimulus packages following the financial crisis have created mountains of debt in most industrialized countries and they now lack funds for new spending programs.
Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn't making its way into the economy.
Be it in Japan, Europe or the United States, companies are hardly investing in new machinery or factories anymore. Instead, prices are exploding on the global stock, real estate and bond markets, a dangerous boom driven by cheap money, not by sustainable growth. Experts with the Bank for International Settlements have already identified "worrisome signs" of an impending crash in many areas. In addition to creating new risks, the West's crisis policy is also exacerbating conflicts in the industrialized nations themselves. While workers' wages are stagnating and traditional savings accounts are yielding almost nothing, the wealthier classes — those that derive most of their income by allowing their money to work for them — are profiting handsomely.
According to the latest Global Wealth Report by the Boston Consulting Group, worldwide private wealth grew by about 15 percent last year, almost twice as fast as in the 12 months previous.
The data expose a dangerous malfunction in capitalism's engine room. Banks, mutual funds and investment firms used to ensure that citizens' savings were transformed into technical advances, growth and new jobs. Today they organize the redistribution of social wealth from the bottom to the top. The middle class has also been negatively affected: For years, many average earners have seen their prosperity shrinking instead of growing.
Harvard economist Larry Katz rails that US society has come to resemble a deformed and unstable apartment building: The penthouse at the top is getting bigger and bigger, the lower levels are overcrowded, the middle levels are full of empty apartments and the elevator has stopped working.
'Wider and Wider'
It's no wonder, then, that people can no longer get much out of the system. According to polls by the Allensbach Institute, only one in five Germans believes economic conditions in Germany are "fair." Almost 90 percent feel that the gap between rich and poor is "getting wider and wider."
In this sense, the crisis of capitalism has turned into a crisis of democracy. Many feel that their countries are no longer being governed by parliaments and legislatures, but by bank lobbyists, which apply the logic of suicide bombers to secure their privileges: Either they are rescued or they drag the entire sector to its death.
It isn't surprising that this situation reinforces the arguments of leftist economists like distribution critic Thomas Piketty. But even market liberals have begun using terms like the "one-percent society" and "plutocracy." The chief commentator of the Financial Times, Martin Wolf, calls the unleashing of the capital markets a "pact with the devil."
They aren't alone. Even the system's insiders are filled with doubt. There is the bank analyst in New York who has become exasperated with banks; the business owner in Switzerland who is calling for higher taxes; the conservative Washington politician who has lost faith in the conservatives; and the private banker in Frankfurt who is at odds with Europe's supreme monetary authority.
They all convey a deep sense of unease, and some even show a touch of rebellion.
If there is a rock star among global bank analysts, it's Mike Mayo. The wiry financial expert loves loud ties and tightly cut suits, he can do 35 pull-ups at a time, and he likes it when people call him the "CEO killer."
The weapons Mayo takes into battle are neatly lined up in his small office on the 15th floor of a New York skyscraper: number-heavy studies about the US banking industry, some as thick as a shoebox and often so revealing that they have enraged industry giants like former Citigroup CEO Sandy Weill, or Stan O'Neal in his days as the head of Merrill Lynch. Words of praise from Mayo are met with cheers on the exchanges, but when he says sell, it can send prices tumbling.
Mayo isn't interested in a particular sector but rather the core of the Western economic system. Karl Marx called banks "the most artificial and most developed product turned out by the capitalist mode of production." For Austrian economist Joseph Schumpeter, they were guarantors of progress, which he described as "creative destruction."
But financial institutions haven't performed this function in a long time. Before the financial crisis, they were the drivers of the untenable expansion of debt that caused the crash. Now, focused as they are on repairing the damage done, they are inhibiting the recovery. The amount of credit ought to be "six times faster than it has been," says Mayo. "Banks now aren't the engines of growth anymore."
Mayo's words reflect the experience of his 25 years in the industry, a career that sometimes sounds like a plot thought up by John Grisham: the young hero faces off against a mafia-like system.
He was in his late 20s when he arrived on Wall Street, a place he saw as symbolic of both the economic and the moral superiority of capitalism. "I always had this impression," says Mayo, "that the head of a bank would be the most ethical person and upstanding citizen possible."
The Blackest of Boxes
But when Mayo, a lending expert, worked for well-known players like UBS and Prudential Securities, he quickly learned that the glittering facades of the American financial industry concealed an abyss of lies and corruption. Mayo met people who recommended buying shares in technology companies in which they themselves held stakes. He saw how top executives diverted funds into their own pockets during mergers. And he met a bank director who only merged his bank with a lender in Florida because he liked boating in the Keys.
What bothered Mayo most of all was that his employers penalized him for doing his job: writing critical analyses of banks. He lost his job at Lehman Brothers because he had downgraded a financial institution with which the Lehman investment department wanted to do business. Credit Suisse fired him because he recommended selling most US bank stocks.
Only when the real estate bubble burst did the industry remember the defiant banking analyst, who already saw the approaching disaster even as then-Deutsche Bank CEO Josef Ackermann issued a yield projection of 25 percent. Fortune called him "one of eight people who saw the crisis coming." The US Congress called on him to testify about the crisis.
Today Mayo writes his analyses for the Asian brokerage group CLSA and they still read like reports from a crisis zone. Central banks have kept lenders alive with low interest rates, and governments have forced them to take up additional capital and comply with thousands of pages of new regulations. Nevertheless, Mayo is convinced that "the incentives that drove the problems … are still in place today."
Top bank executives are once again making as much as they did before the crisis, even though the government had to bail out a large share of banks. The biggest major banks did not shrink, as was intended, but instead have become even larger.
Incalculable Risks
New accounting rules were passed, but financial managers can still hide the value of their receivables and collateral behind nebulous terms like "transaction" or "customer order." Bank balance sheets, British central banker Andrew Haldane said caustically, are still "the blackest of boxes."
Before the crash, investment banks gambled with derivatives known by acronyms like CDO and CDS. Today Wall Street institutions try to get the upper hand with high-frequency trading, with their Dark Pools and millisecond algorithms. Regulators fear that high-frequency trading, also known as flash trading, could create incalculable risks for the global financial system.
When analyst Mayo thinks about the modern banking world, he imagines a character in the Roman Polanski film "Chinatown," California detective Jake Gittes. The man solves one corruption case after another, and yet the crime level in Los Angeles doesn't go down. "Why is that?" he finally asks another character, who merely replies: "Forget it, Jake. It's Chinatown."
It's the same with the banking industry, says the analyst. Individual institutions aren't the problem, he explains. The problem is the system. "The banks are Chinatown," says Mayo, "and it is still the situation today."
The little village of Wimmis lies in an area of Switzerland that still looks quintessentially Swiss, the Bernese Oberland, or Highlands, where Swiss flags flutter in front yards. The local tanning salon is called the "Sunne Stübli" (little sun room) and under "item five" of the latest edition of the town's "Placard Ordinance," posted outside the town administration building, organizations must secure their public notices "with thumbtacks" and "not with staples." Everything has its place in Wimmis, as it does in Markus Wenger's window factory. The business owner, with his thinning hair and crafty eyes, is the embodiment of the old saying, "time is money." He walks briskly through his production building, the size of a football field, passing energy-saving transom windows, energy-saving patio doors and energy-saving skylights, which can be installed between solar panels, also to save energy, a system Wenger developed. "We constantly have to think of new things," he says, "otherwise the Czechs will overtake us."
Wenger could pass for a model businessman from the regional chamber of commerce were it not for his support for a political initiative that's about as un-Swiss as banning cheese production in the Emmental region. Wenger advocates raising the inheritance tax.
For decades, Switzerland was based on a unique form of popular capitalism, which promised small craftsmen as many benefits as those who worked in high finance. Switzerland was the discreet tax haven for the world's rich, while simultaneously laying claim to Europe's highest wage levels — a Rolex model of the social welfare state.
But the country's established class consensus was shattered by the excesses of the financial crisis — the $60 billion bailout of its biggest bank, UBS, and the millions in golden parachutes paid out to executives so that they wouldn't go to the competition after being jettisoned by their companies.
Since then, a hint of class struggle pervades Swiss Alpine valleys. A series of popular initiatives have been launched, initiatives the financial newspapers have labeled "anti-business." To begin with, the Swiss voted on and approved a cap on so-called "rip-off salaries." Another referendum sought to impose a ceiling on executive compensation, but it failed. A proposal by Social Democrats, Greens and the socially conservative EVP, to support government pensions with a new tax on large inheritances, will be put to a referendum soon.
'The Wealth of Medieval Princes'
Income isn't the problem in Switzerland, where the gap between rich and poor is no wider than in Germany or France. The problem is assets. No other country has as many major shareholders, financiers and investors, and in no country is as much capital concentrated in so few hands. The assets of the 100 wealthiest Swiss citizens have increased almost fivefold in the last 25 years. In the Canton of Zürich, the 10 richest residents own as much as the poorest 500,000. When a Swiss business owner died recently, his two heirs inherited an estate worth as much as all single-family homes and owner-occupied flats in the Canton of Appenzell Innerrhoden. Wealth has become so concentrated in Switzerland, says the former head of the Zürich statistics office, that it "rivals the wealth of medieval princes."
The government benefits hardly at all from this wealth. The Swiss tax authorities recently collected all of 864 million Swiss francs (€715 million) in inheritance tax, and this revenue source is unlikely to increase anytime soon. To attract wealthy individuals, the cantons have reduced their tax rates to such low levels that even estates worth billions can be left to the next generation without being subject to any taxation at all.
In the past, the Swiss were fond of their quirky high society, whose lives of luxury in places like Lugano were as spectacular as their bankruptcies. But now, a large share of the super-rich comes from the financial industry, and even an upright window manufacturer like Markus Wenger is often unsure what to make of the demands coming from his high-end customers.
A homeowner recently asked Wenger if he could gold-plate his window fittings. And when he was standing in an older couple's 500-square-meter (5,380-square-foot) apartment not long ago, he found himself wondering: How do they heat this?
A Dangerous Path
Wenger is no revolutionary. He likes the market economy and says: "Performance must be rewarded." His support for a higher inheritance tax is not as much the result of his sense of justice, but rather a cost calculation that he explains as soberly as the installation plan for his windows.
This is how Wenger's calculation works: Today he pays about €8,000 a year in social security contributions for a carpenter who makes 65,000 Swiss francs (€54,000). But the Swiss population is aging, so contributions to pension insurance threaten to increase drastically soon. Doesn't it make sense, he asks, to exact an additional, small contribution from those Swiss citizens who hardly pay any taxes at all today on their rapidly growing fortunes?
For Wenger, the answer is obvious. But he also knows that most of his fellow business owners see things differently. They are worried about an "attack by the left" and prefer to support their supposed champion, Christoph Blocher, the billionaire spiritual head of the Swiss People's Party. Only recently, Blocher convinced the Swiss to limit immigration by workers from other European countries. Now Wenger expects Blocher to launch a new campaign under the motto: "Are you trying to drive our business owners out of the country?"
There is more at stake than a few million francs for the national pension fund. The real question is whether wealthy countries like Switzerland should become playthings for their elites. Wenger sees the industrialized countries embarking on a dangerous path, the path of greed and self-indulgence, and he believes Blocher's party is the most visible expression of that. Blocher is pursuing a "policy for high finance," says Wenger. "He is fighting on behalf of money."
The entrepreneur from the Bern Highlands has no illusions over his prospects in the upcoming conflict with the country's great scaremonger. The Swiss are likely to vote on the inheritance tax initiative next year. "In the end," Wenger predicts, "the vote will be 60 to 40 against us."
The Deformation of Capitalism
He was the face of the Reagan revolution, a young man with large, horn-rimmed glasses and thick hair, wearing a suit that was too big for him as he sat next to the hero of conservative America. As former President Ronald Reagan's budget director, David Stockman was the architect of the biggest tax cut in US history and the propagandist of the "trickle-down" theory, the Republican tenet whereby profits earned by the rich eventually benefit the poorer classes.
Thirty years later, Stockman is sitting on a Chesterfield sofa in his enormous mansion in Greenwich, Connecticut, an affluent suburb of New York, where the stars of the hedge fund industry conceal their tasteless mansions behind red brick walls and jeeps owned by private security companies are parked on every street corner.
Stockman is wearing a green baseball cap and a black T-shirt. It's a sunny early fall morning, but the mood in the brightly lit rooms is strangely somber. The rooms are empty, there are boxes stacked in the corners and a servant is wrapping the silverware in the dining room.
Stockman is moving to New York, into an apartment he has already rented in Manhattan. But it isn't entirely clear whether he is only moving to be closer to TV studios and newspaper editors, or if the move signifies a departure from his previous life. It was a life that took him through the executive suites of Washington politics and the US financial industry, a life that has placed Stockman in an almost unparalleled position to recount the aberrations of American capitalism in the last three decades. "We have a financialized, central-bank dominated casino," he says, "that is undermining the fundamentals of a healthy growing capitalist economy," he says.
Ironically, Stockman was the one who wanted to reshape that society, back in the 1980s, when Reagan made him the organizer of his shift to so-called supply-side economics. Like the actor-turned-president from California, Stockman believed in free markets, low taxes and reducing the role of government.
The First Mistake
But Stockman also believed in healthy finances, which placed him at odds with the California contingent on Reagan's team who saw themselves as lobbyists for industry and the military. When Reagan's chief of staff, Donald Regan, declared the phrase "tax increase" to be taboo after the 1984 election, Stockman knew that he had lost. But it was more than a personal defeat. It was a triumph of irrationality, one that led Stockman to permanently disassociate himself from his party's fiscal policies. "The Republican concept of starving the beast is the worst thing in terms of fiscal rectitude that you can imagine," Stockman says today. "It's even worse than the Keynesian models of the Democrats."
The debt policy of the Reagan years was the first mistake of America's conservative revolutionaries, but not the only one. There is another fallacy, one that Stockman also participated in when he went to work for the investment bank Salomon Brothers and later the private equity firm Blackstone after his ouster from the White House.
It was the time when it had become politically fashionable to unfetter the financial industry; a time when then-Fed Chairman Alan Greenspan, Stockman's old acquaintance from the Reagan team, was inventing a new monetary policy: Whenever the economy and the markets showed signs of weakness, he reduced interest rates, and when a large financial institution ran into trouble, it was bailed out with the help of the central bank.
Greenspan's policy of cheap money became a sweet poison for Wall Street, the chief ingredient of the dangerous debt cocktails brewed up by the wizards at London and New York investment banks, with Stockman front and center. The former politician became a virtuoso of the leveraged buyout, a complex financial deal in which in investor buys companies with borrowed money, restructures them or carves them up, and then sells them at a profit.
The deals made Stockman rich, but they also turned him into a junkie. His projects became increasingly risky and the towers of credit he constructed became taller and taller. "I was an addict," he says. "I got caught up in the process."
A Debt Republic
Disaster struck in 2007, when one of his highly leveraged companies went bankrupt. He was indicted on fraud charges, and the bankruptcy cost him millions and damaged his reputation. It became his "road to Damascus experience," as he calls it, when the financial crisis erupted a short time later. He concluded that the same mistakes that had destroyed his company also took the United States to the brink of an abyss: cheap credit, excessively high debt and a false sense of security that everything would ultimately work out for the best.
Stockman again became the rebel he had been at the beginning of his career. He gave up his position in the financial industry, started a blog in which he settled scores with both policymakers in Washington and the financial oligarchy on Wall Street and he wrote an almost 800-page analysis of the "Great Deformation" of US capitalism.
The conservative is furious over his country's transformation into a debt republic of the sort the Western world has never before seen in times of peace. A republic in which going to college is paid for with borrowed funds, as is the next military campaign. A country which hasn't actually dismantled its gigantic pile of debt since the crisis — $60 trillion — but has merely redistributed it. While the banks were allowed to pass on a large share of their bad loans to taxpayers, the government is in more debt than ever before.
The mountain of debt appears smaller than it is because the Fed keeps interest rates low. At the same time, though, all this cheap money is driving the United States into a risky race against time, one in which no one knows what will happen first: the hoped-for economic boom or the next crash. Experts, like former Treasury Secretary Robert Rubin, believe the current rally in the markets is in fact the precursor to the next crash.
The primary beneficiaries of the market rally seen in recent months are the 10 percent of top earners who own more than 90 percent of financial assets. But for average Americans, the policies instituted in response to the crisis have been poverty inducing. After the crash, millions of US citizens first lost their homes and then their jobs — and now the social divide in the country is as big as it was in the 1920s. While wealth has grown at the top of the income scale, the median household, or the household that lies statistically at the exact middle of the scale, has become $50,000 poorer since 2007.
In the past, part of the promise of the American dream was that anyone who worked hard enough could eventually improve his or her situation. Today the wealthy enjoy most of the fruits of US capitalism and the most salient feature of the system is the fear of fear. No one knows what might happen if the Fed raises interest rates next year as planned. Will pressure from rising costs cause the government deficit to explode? Will the stock market bubble burst and will financial institutions collapse? Will the economy crash?
Only one thing is certain: In the seventh year of the financial crisis, the US economy is still addicted to debt and cheap money. Worst of all, the withdrawal phase hasn't even begun.
"There is no possibility of a soft landing (with the) markets as completely distorted and disabled as they are today," Stockman says in parting. "There will be some great conflagration. It's just the question of when."
Michael Klaus flips open his mobile phone, which he has been doing a lot of these days. He taps the screen with his finger to display the current yields on 10-year German government bonds. "Germany 10 Year: 0.80," the screen reads, using the abbreviated terminology of the Bloomberg market service. "You see," he says, "yields are down again. They were at 0.84 yesterday."
It's Wednesday of last week. The Frankfurt banker is walking down Friedrichstrasse in Berlin on his way to a meeting with fellow members of the Confederation of German Employers' Associations. The latest labor agreement is on the agenda, but Klaus is still thinking about the number on the screen of his mobile phone, yet another reaction to the most recent plans of Mario Draghi, the president of the European Central Bank (ECB).
Such rates are almost always a reaction to Draghi, at least they have been since the euro crisis got going. According to economics textbooks, security prices are determined by supply and demand. But in the reality of the monetary union, they usually follow the rates set by the top monetary watchdog in Frankfurt. In Klaus's assessment of the situation, "to put it in somewhat exaggerated terms, we live in a central-bank-administration economy."
The ECB's Contribution
For the last quarter of a century, Klaus, a management expert, has been working for Metzler, a traditional, private bank based in Frankfurt. He is now a partner and exudes the self-confident nonchalance of a man who knows that his customers need to show up with at least €3 million to become his clients. His biggest asset is reliability. Unlike the large, powerful banks, his bank would be unable to count on government assistance in a crisis. It is not big enough to be too big to fail.
Partly for that reason, Klaus is particularly bothered by the ECB's development in recent years. He sees it as a kind of hedge fund a kind of ministerial administration. Because Europe's major banks are ailing and national governments are at odds, the ECB has developed into the most powerful bureaucracy on the Continent. It controls interest rates and the money supply, drives prices on the exchanges and financial markets, supervises financial institutions and audits governments. According to Klaus, the European Central Bank has all but "replaced" the European bond market.
It made sense at the time, because it protected the monetary union from breaking apart. But now emergency aid has turned into long-term assistance. The effects of ECB measures are subsiding, and financial experts aren't the only ones to notice that their programs have recently done more harm than good.
That was the case with Draghi's latest package last month. To stimulate lending to small and mid-sized companies, the ECB announced its intention to begin large-scale buying of special debt instruments known as asset-backed securities, or ABS. The only problem is that far too few of these securities exist in Europe.
This leads many experts to worry that lenders will simply fill the gap by transforming bad debt from their portfolios into ABSs and pass them on to the ECB. The investment effect would be next to nothing.
Draghi's plan to provide long-term funds to banks if they can demonstrate that they passed it on in the form of loans to companies or households could also prove harmful. They must only offer proof in 2016, meaning they could first invest the money in government bonds, a surer bet these days than corporate bonds.
Achieving the Opposite
Another recent Draghi measure is particularly dangerous: the "negative deposit interest rate." It means that banks no longer earn anything when they park their money with the ECB. On the contrary, they are required to pay for the privilege.
This too is meant to encourage banks to lend. In reality, however, the measure makes the situation even more difficult for financial institutions like savings banks and cooperative banks, which are dependent on customer deposits. Because of the current low interest rates, these banks already earn almost nothing from the spread between savings and lending rates. If interest rates are pushed down even further, profits will continue to decline. "Ironically, this torpedoes the business model of savings banks and cooperative banks, which have thus far managed to survive the crisis in relatively good shape," says Klaus.
Many experts are worried that with measures like these, the ECB is achieving precisely the opposite of what it wants to achieve. Instead of being strengthened, the credit sector is weakened. Instead of reducing risks, new ones are being created. Instead of liquidating ailing banks, they are kept alive artificially.
The economy has had little experience thus far with the new crisis capitalism, with its miniature growth, miniature inflation and miniature interest rates. But economists learned one thing after large credit bubbles burst in recent years, in Japan and Scandinavia, for example: After a financial and banking crisis, the first order of business is to clean up the banks, and to do it quickly and radically. Institutions that are not viable need to be shut down while the others should be provided with capital.
'Substantial Turbulence'
In Europe, however, this process has dragged on for years, under pressure from the financial lobby. The condition of the industry is now so dismal that experts are using metaphors from the world of horror films to describe it. "Zombie banks" are those that are being kept alive artificially with government bailouts and, like the zombies in Hollywood films, are wreaking havoc throughout Europe. They are too sick to lend money to the real economy but healthy enough to speculate with financial investments. Many banks today, says Bonn economist Martin Hellwig, can only "survive in the market by speculating."
What distinguishes the current situation from the wild years before the financial crisis is that speculators were once driven by greed but have since turned into speculators motivated by need.
Private banker Klaus has seen enough on his market app. He closes the phone with a worried look on his face, and then he utters a sentence in the typically convoluted idiom of the financial industry: "If Europe slips into a recession, it could lead to substantial turbulence in the financial markets."
The man who introduced the concept of "inclusion" into the political debate is sitting in his office in Boston. There are mountains of papers on the round conference table: academic papers, pages of statistics from the International Monetary Fund, and the latest issue of the Anarcho-Syndicalist Review.
Daron Acemoglu is currently considered one of the 10 most influential economists in the world, but the native of Istanbul doesn't think much of titles and formalities. He prefers the relaxed look of the web community: a plaid shirt and jeans, and a Starbucks cup in his hand.
He became famous two years ago when he and colleague James Robinson published a deeply researched study on the rise of Western industrial societies. Their central thesis was that the key to their success was not climate or religion, but the development of social institutions that included as many citizens as possible: a market economy that encourages progress and entrepreneurship, and a parliamentary democracy that serves to balance interests.
The only problem is that such institutions do not arise automatically. They have to be promoted and defended, especially against those social classes and interest groups that use power to seal themselves off from competitors, secure their own benefits and seek to influence lawmakers accordingly.
Extremely well read, Acemoglu can cite dozens of such cases. One is 14th century Venice, where a small patrician caste monopolized maritime trade. Another is Egypt under former President Hosni Mubarak, whose officer friends divided up key economic posts among themselves but were complete failures as businessmen. These are what Acemoglu calls "extractive processes," which lead to economic and social decline.
A Process of Extraction?
The question today is: Are Western industrial societies currently undergoing a similar process of extraction?
Acemoglu leans back in his chair. He isn't one to make snap judgments, and he understands the contradictions of social trends, in the United States, for example. On the one hand, the US is more inclusive today than in the 1960s, because it has abolished racial segregation. On the other hand, says Acemoglu, he has noticed the growing influence of powerful interest groups: the pharmaceutical industry, insurance companies and, most of all, Wall Street. "The problem of money in politics," says Acemoglu, "is particularly acute in the case of the financial industry."
US politicians spend up to 70 percent of their time raising money for their campaigns, and Wall Street is one of their most important sources. Experts have calculated that Bill and Hillary Clinton alone have garnered at least $300 million in donations from the financial industry since the early 1990s.
In addition, money is no longer the only factor shaping the connections between Wall Street and Washington, as Acemoglu demonstrated in a recent study about former US Treasury Secretary Timothy Geithner. The stock prices of financial firms, with which he maintained close relationships, climbed significantly after his nomination. "The fact that some companies had the ear of the Secretary of the Treasury," Acemoglu concludes, "was, at least by the market view, very valuable."
It has nothing to do with bribery, Acemoglu clarifies. Still, the process highlights the dangerous closeness between the financial industry and the political world, a phenomenon which can be seen elsewhere in the world as well. In Germany, for example, Chancellor Angela Merkel took steps to prevent a Greek insolvency at least partly out of consideration for German banks invested there. The London financial industry, to cite another example, was instrumental in blocking EU plans for the introduction of a financial transaction tax. In Switzerland, billionaire Blocher finances referendum campaigns via his political party. "The rich are extremely powerful," Acemoglu says, "and that is a concern."
Not Enough
Limiting that influence is of the utmost importance, Acemoglu believes, so that today's upper-class, high-finance capitalism can once again revert to being a capitalism of the real economy and the societal center. The necessary economic reforms are not Acemoglu's primary focus, even if the relevant proposals have existed for a long time: a fiscal policy that doesn't just benefit the rich; a monetary policy that knows its limits; a reform of the financial and banking industry that separates the traditional savings and lending business from risky investment banking.
That won't be enough, Acemoglu believes. What is needed, he argues, is a new political alliance that takes a stand against the power of the financial industry and its lobby. He sees the anti-trust movement from the beginning of the last century in the United States as a model. It was a broad coalition from the center of society and finally achieved its great victory after decades of struggle: the breakup of major corporations like Standard Oil.
Will something comparable happen with the big international banks? Acemoglu doesn't know, but he is convinced of one thing: Elitist conferences, at which bankers and fiscal policy experts hold sophisticated conversations about "inclusion," will not bring about change.
The organizers of the World Economic Forum once again sent him an invitation to Davos recently. But Acemoglu declined, as he has done several times in the past. "Solutions to the world's problems are not produced in a meeting between Bill Gates and George Soros," he says. "Renewal has to come from below."
via Zero Hedge http://ift.tt/1GcQ774 Tyler Durden