Month: February 2016

There’s been no shortage of coverage both in these pages and elsewhere of the impact falling oil prices have had on the American and Canadian oil patches.

Take Texas, for instance, where a year of crude carnage has wreaked havoc upon what, until last year anyway, was the engine driving the “robust” US labor market.  As we showed in November, layoffs in Lone Star land far outrun job losses in any other state. In Houston (which was already staring down a worsening pension crisis), vacant office space is “piling up.” As WSJ wrote last week, “the amount of sublease space on the market in the Houston area hit 7.6 million square feet, or the size of more than two Empire State Buildings.” “The unemployment rate in Texas rose sharply to 9.2% in 1986, an all-time high for the state,” Goldman wrote recently, recalling a previous period of low oil prices in a note entitled “How Bad Can Texas Get?”

“Real house prices fell 30% peak to trough, and the number of bankruptcy filings (including both business and non-business filings) more than doubled from 1984 to 1986,” the bank added.

North of the border, things are even worse. As regular readers are no doubt aware, Alberta is a veritable nightmare as suicide rates rise, the number of jobless multiplies, food bank usage soars, and property crime in Calgary spikes.

But with all of the focus on oil, not much attention has been paid to the impact the commodities downturn has had on other things people pull out of the ground in North America.

Courtesy of the Washington Post, we get an in-depth look at the dramatic effect slumping demand and acute overcapacity in China has had on one corner of America’s Heartland: Minnesota’s “iron ridge.”

“Over the last 30 years, the bad times last longer and the good times are shorter,” Minnesota lawmaker Tom Anzelc, whose House district includes the city of Iron Junction, says. “This particular time is the worst I have ever seen.”

“The source of the turbulence is China, where famously breakneck growth is coming to an end and no one is sure how painful that will be,” WaPo writes, before noting that China’s hard landing has had an adverse impact on everything from soybean farms in the Midwest to California home buyers to Caterpillar employees bracing for “massive” layoffs. “Whether these pockets of distress can tip the rest of the [US] back into recession remains an open question,” WaPo continues, “but in [America’s Iron Range], the worst-case scenario is already a reality.” Here’s more:

Three of the six iron ore mines here have been idled, forcing roughly 2,000 workers out of a job. Unemployment in Itasca County, in the heart of the range, has shot up to 8 percent over the past year. Many miners will run out of health and unemployment insurance this month.

 

Booms and busts are part of the circle of life here in these frozen northlands, but never before has the cycle started half a world away. And never before have the residents here felt so helpless to stop it.

 

“We’re wounded,” said Dan Hill, 35, a miner who was laid off six months ago. “And you can’t stitch us up.”

 

The Iron Range used to be an economic island.

 

 

Workers excavated iron ore in craggy open pits along this two-billion-year-old ridge that cuts across northeastern Minnesota. Then they crushed, cleaned, heated and separated the rocks to make taconite pellets that are rich in iron and small as buckshot.

 

The pellets are the region’s signature innovation — its creator is celebrated in an annual festival here — designed for maximum efficiency in the blast furnaces of U.S. steel mills. The biggest steelmakers also owned some of the mines and their processing plants, creating a closed circle of supply and demand.

 

Then the Chinese tsunami hit.

 

From 2001 to 2011, the international price of iron ore skyrocketed from just about $13 a ton to nearly $200 a ton amid surging demand from developing countries. While America grappled with a severe financial crisis, China in particular was booming. Apartments, factories, railways and roads — its appetite seemed endless. And feeding it required massive quantities of natural resources.

 

When the mines run full tilt, they employ about 4,000 workers and produce nearly 40 million tons of iron pellets. The mostly union jobs paid premium for overtime and came with full health-care coverage and a pension. It was enough to ensconce the region in America’s middle class for decades, and China’s rise seemed to guarantee that would continue for another generation.

 

Hill began putting down roots. He and his wife, Heather, and their two children, Riley and Anna, moved into their house a year after Hill began working in the mines. Their third child, Jacob, was born in 2014. Hill drew up plans to put a screened-in porch on the back of the house, maybe even with a hot tub.

 

But then China slammed on the brakes. Behind Hill’s house, there are still only cement posts.

 

“You can’t ride a wave forever,” he said. “That’s the easiest way I can say it.”

 

(Hill, center, with his father and father-in-law)

 

Hill saw the layoffs coming.

 

Taconite pellets began piling up last spring on the docks on Lake Superior. Hill could see the iron mountain from the interstate in Duluth. One resident estimated that it reached 20 stories high. All the miners knew what such a vast backlog meant for their jobs.

 

The pink slips took effect Aug. 21.

 

“Right now, the docks aren’t empty,” Hill said. “They need to be empty for us to be making pellets.”

 

The simple reason the pellets weren’t moving is that China’s building boom had gone bust.

 

China’s state-controlled steel mills didn’t slow down even when its economy did, as government officials kept the plants running to boost growth. The overproduction has created a worldwide glut of steel. In the mid-1990s, China manufactured just 93 million tons. Last year, it produced more than eight times that amount, though officials have said they plan to taper off this year.

 

“That type of overcapacity is going to wreak economic turmoil,” said Scott Paul, head of the Alliance for American Manufacturing. “The longer it takes to address it, the more painful it’s going to be for everybody.”

 

Any fix — more stringent enforcement of tariffs or resolution of the trade cases — could take years. At night, after their kids are tucked into their bunk beds, Hill and his wife debate what it would take for the U.S. government to stop the shipments.

 

“If they really wanted to turn those boats [of Chinese steel] around, they got a steering wheel on ’em,” Hill said.

 

His wife agreed: “If we are the most powerful nation in the world, why are you killing an industry?”

Unfortunately for Hill – and anyone else who was laid off amid the global deflationary supply glut that’s driven commodity prices to their lowest levels of the twenty-first century – there’s no quick fix for China’s acute overcapacity problem.

Even as the National Development and Reform Commission promises to eliminate “zombie companies,” alleviating excess capacity comes with risks if you’re Beijing. Not the least of which is sparking a rebellion among the hundreds of thousands of Chinese who will invariably lose their jobs as creative destruction is allowed to take its toll on the way to purging misallocated capital. 

And so, barring the type of tariffs mentioned above, the Dan Hills of the world are likely out of luck.

Now if only there were a presidential candidate with a great head of hair who would pledge to slap a 35% tax on foreign goods entering the country…

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“It’s a supply issue“, “No, it’s a demand issue” – when it comes to the cause for plunging oil prices, the two camps will surely never agree on just what is causing it.

Luckily, Obama may provide just the tiebreaker.

Moments ago, Politico reported that in his final budget, Obama is set to unveil an ambitious plan for a “21st century clean transportation system.” which will be funded by a $10/barrel tax on oil.

Punishment for evil oil companies, you say? Not so fast: any government tax would be immediately passed on to those US consumers who recently had to take out a second-lien subprime loan to finish funding the purchase of that brand new Ford F-150 truck.

From Politico:

Obama aides told POLITICO that when he releases his final budget request next week, the president will propose more than $300 billion worth of investments over the next decade in mass transit, high-speed rail, self-driving cars, and other transportation approaches designed to reduce carbon emissions and congestion. To pay for it all, Obama will call for a $10 “fee” on every barrel of oil, a surcharge that would be paid by oil companies but would presumably be passed along to consumers.

In other words, while there may be excess supply of about 3 million barrels daily according to Saudi Arabia, suddenly demand is about to fall off a cliff as the price of oil surges thanks to Obama’s latest brilliant intervention in the “free market”, one which would result in a roughly 30% tax to E&P companies and a 25 cent jump in the price of a gallon of gas.

The good news: it won’t pass…

There is no real chance that the Republican-controlled Congress will embrace Obama’s grand vision of climate-friendly mobility in an election year—especially after passing a long-stalled bipartisan highway bill just last year—and his aides acknowledge it’s mostly an effort to jump-start a conversation about the future of transportation. 

… at least not in the current Congress. But what about next time?

By raising the specter of new taxes on fossil fuels, it could create a political quandary for Democrats. The fee could add as much as 25 cents a gallon to the cost of gasoline, and even with petroleum prices at historic lows, the proposal could be particularly awkward for Hillary Clinton, who has embraced most of Obama’s policies but has also vowed to oppose any tax hikes on families earning less than $250,000 a year.

And there you have it: what so many had expected for so long, was just proposed by the president who hopes to fill the price gap resulting from Saudi efforts to crush US shale producers, by yet another government surcharge, one which will lead to a dramatic drop in demand, and unless something drastically changes on the supply side, lead to an even greater glut in what is already record oil inventory.

But the biggest irony, of course, is that while there clearly is oversupply, what the Fed and other central banks are doing is now enabling their governments to capture every last possible “externality” and collect even more revenue on the back of disastrous monetary policy, policy which created bubbles and provided generous funding to create massive excess capacity and production of record amounts of commodities, such as in this case, oil.

So if by some miracle this tax does pass, and the price of a gallon suddenly spikes by 25 cents even as the world is literally drowning in oil, it’s not just Obama’s fault: thank Bernanke, and of course Janet, and all their peers who share dinner once every two months at the BIS tower in Basel,

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Submitted by Simon Black via SovereignMan.com,

It’s news that seems ripped from the pages of The Onion. Or perhaps Atlas Shrugged.

But incredibly enough it’s actually true: earlier this week, Congress proposed a new law authorizing the US Postal Service to provide banking and financial services.

It’s called the “Providing Opportunities for Savings, Transactions, and Lending” Act, abbreviated as… wait for it… the POSTAL Act.

And it provides explicit authorization for them to provide banking services including checking and savings accounts, money transfers, and “other basic financial services as the Postal Service deems appropriate in the public interest.”

Bank of the Post Office. It’s incredible when you think about it.

The US Postal Service hasn’t turned a profit in a decade.

As a matter of fact, its total accumulated losses now exceed $51 billion, easily ranking it among the least successful companies in history.

And the only way USPS can continue to maintain its operations is with regular bailouts from the American taxpayer.

The statistics are just horrendous. Mail volume is down dramatically, which means that revenue continues to fall.

Yet the Postal Service’s expenses and pension costs keep growing, along with its debt.

Just like the US government, the US Postal Service has its own debt ceiling that’s set by Congress.

USPS reached this debt ceiling back in 2012 and has remained at that level for years.

The only way they survive is by moving liabilities off-balance sheet and regularly going back to Congress with hat in hand.

Wow, talk about a responsible financial partner– this sounds like EXACTLY the place we should want to deposit our hard-earned savings!

Seriously, why would these people even consider an idea so absurd as to let an organization with a history of failed operations take over people’s savings?

Simple. It’s a cheap source of capital.

The Postal Service desperately needs cash. So what better way to raise capital than to sucker unsuspecting Americans into opening up Postal bank accounts?

When you deposit money in a bank, you are effectively loaning the bank your money.

In exchange, they pay you a whopping 0.01% interest.

This is what almost all banks do– they borrow money from depositors and (hopefully) make credible investments and loans with other people’s money.

Except in this case, the Postal Service needs to ‘borrow’ depositors’ savings to cover losses from its other operations.

There’s a term for this. It’s called a Ponzi Scheme.

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We’ve written quite a bit about US O&G producers’ dependence on capital markets to plug funding gaps.

In short, the entire space is free cash flow negative, which means without access to liquidity, the whole thing falls apart. That, Citi wrote last September, is shale oil’s “dirty little secret.”

Only it’s not really a secret or if it is, it’s the worst kept secret in the world. David Einhorn shouted it from the rooftops last summer (too bad bets against the “motherfrackers” couldn’t save Greenlight’s performance), and as we put it last month, “everyone knows that at $35/barrel oil, virtually every US shale company is cash flow negative and is therefore burning through cash and other forms of liquidity such as bank revolvers and term loans, just as everyone knows that should oil remain at these prices, the US shale sector is facing an avalanche of defaults.”

Underscoring the extent of the problem, we noted last month that America’s 80 cash flow negative energy companies are saddled with $325 billion in debt. We also reported that 25 deeply distressed energy companies had their credit facilities cut recently in a preview of what’s likely to be another round of revolver raids in April.

What happens, you ask, when capital markets become less forgiving and banks shrink credit facility borrowing bases amid deteriorating fundamentals?

Defaults.

Lots of them.

On Thursday, BofA is out flagging a worrisome trend: on net, banks have tightened their lending standards for two consecutive quarters. That has never happened “without it ultimately leading to a recession.” We showed this earlier today in “How The Fed Unwittingly Confirmed A Recession And A Default Cycle Are Now Inevitable.”

Read below to find out what that means for HY and specifically for America’s heavily indebted, cash flow negative producers (spoiler alert: “widespread defaults” may be just around the corner). “Companies don’t default because of impending maturities,” the bank writes. “Issuers default because at some point in the credit cycle their access to funding dries up.”

Right. In other words, sooner or later banks are going to have to come to terms with the reality that things aren’t going back to normal any time soon and Dallas Fed decrees or no, there will eventually have to be a mark-to-market, come-to-Jesus moment.

That’s likely to be a painful experience especially considering that, as we wrote last month, it looks like at least 18% of some banks’ commercial loan books are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums. That, in turn, means that the paltry provisions the likes of Wells and JP Morgan have set aside to cover losses on their energy books are likely to prove hoplessly inadequate. Consider that, and then consider what BofAML says below: “The amount of direct exposure US banks have to energy companies through bilateral loans currently stands at $80bn which on average represents 5% of total loans on banks’ books [but] indirect exposure is even more as there is a discernable spillover effect to banks’ non-energy portfolios too.”

In other words, if banks haven’t set aside nearly enough to cover their direct exposure to energy, you can bet they haven’t set aside anything to cover the “discernable spillover” to their non-energy books. 

*  *  *

From BofAML

We have said in the past that companies don’t default because of impending maturities- in fact in 2001 and 2007, the maturity wall was just as benign as it is today. Issuers default because at some point in the credit cycle their access to funding dries up; case in point, the two best leading indicators of future default rates are C&I lending (Chart 1) and CCC issuer access to the primary markets. Troubling, we’ve written about how CCC access to the HY primary market has been in a cyclical decline since 2013 and breached an ominous threshold last year. Perhaps even more worrisome is the data coming out of the C&I lending survey which polls regional banks on their lending standards to small and medium enterprises. The Q3 survey showed that for the first time since the recession, a net higher number of regional banks are tightening their lending standards vs loosening them. A fresh update released by the Fed on Monday confirmed our fears that we are in the throes of a trend, as regional banks yanked the leash tighter in what now amounts to be two quarters of tightening in a row. Never before have we had two consecutive quarters where banks increasingly tightened lending standards without it ultimately leading to a recession.

Mounting default losses in the Oil & Gas sector is likely forcing banks to increase loss provisions against their exposure. The amount of direct exposure US banks have to energy companies through bilateral loans currently stands at $80bn which on average represents 5% of total loans on banks’ books. Indirect exposure is even more as there is a discernable spillover effect to banks’ non-energy portfolios too (e.g. real estate and business loans in energy dependent markets). And if history is any indication, we are only in the early phases of loss provisioning for the sector.  

Stress in financial markets leads to general risk aversion. Just as capital markets temper down during volatile times, it’s reasonable to assume banks responding the same way. Sure enough, C&I lending data show a very strong correlation to equity volatility. Since we expect to be living in a VUCA world for some time, there is no catalyst in sight that could flip this downward momentum. Combined with an already high regulatory hurdle for lending in the post- Volcker era, more and more banks could be forced to freeze credit going forward.

HY primary markets are all but shut except for very high quality issuers. And if this trend continues for a while (the probability of which in our opinion is very high), we could envision a world where enterprises, big and small, find it harder to acquire financing across all industries, leading to widespread defaults, even outside of commodities.

*  *  *

Too bad BofA won’t disclose how large its provisions are against losses on its $21.3 billion in exposure to “utilized energy.”

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Submitted by Ingrid Carlqvist via The Gatestone Institute,

Mass immigration is continuing to claim victims in Sweden. Murder, assaults and rape have become everyday occurrences in this small country, with a population just short of ten million, which last year opened its doors to almost 163,000 immigrants. The latest victim is 22-year-old Alexandra Mezher. She was stabbed to death last week by a so-called unaccompanied refugee child at the asylum house where she worked.

Although the massive influx of asylum seekers has decreased drastically since January 4, when Sweden implemented border controls on the Swedish/Danish border, the people who are already here pose a giant problem to municipalities, police and citizens. The police are fighting a losing battle against street crime, as well as daily incidents at asylum houses – general disturbances that include fights, rapes and threats.

The asylum houses are in a state of anarchy. On January 27, police were dispatched to a home for teenagers in Lindås, where a riot had erupted. Policeman Johan Nilsson told the local paper, Barometern:

"One [of the youths] was refused when he tried to buy candy, and got angry with the staff. He gathered some 15 friends, and the staff was forced to lock themselves in while the mob smashed windows and other things. The instigator, supposedly 16 years old, is suspected of having started the riot, and another one is suspected of making unlawful threats and of violent rioting."

That suspect was later released, after producing a document that stated he was under 15, and thus not criminally responsible.

Another, more serious incident occurred at the asylum house Signalisten in Västerås on January 20. Ten policemen arrived at the facility due to reports of the repeated rape of a 10-year-old boy. The policemen were met by a large mob standing in a corridor, shouting and shaking their fists. The situation escalated to the point where the police were forced to flee for their lives. One of the officers later wrote in his report that it was only due to the presence of a police dog handler that he and his colleagues were able to escape:

"Even more people appeared behind us. I was mentally prepared to fight for my life. We were 10 police officers in a narrow corridor. And I heard someone yell that there is an emergency exit. I felt that we could easily have been outmaneuvered, considering the environment and the number of counterparties."

The policeman also wrote in his report that he hoped for more training in the future, on "how to handle crowds in confined spaces."

That the Swedish police are no longer able to do their duty is evident. National Police Commissioner Dan Eliasson recently demanded 2,500 more officers and 1,600 more civilian employees for the police, to handle the heightened terror threat and the increased influx of refugees. Considering the length of time needed to train policemen, it will probably be a while before the police can increase its numbers. Eliasson also demanded a budget increase of between 1.8 and 2.8 billion kronor ($214 million – $332 million), because the "migrant situation means a significantly higher workload for the police."

He identified at border controls and asylum houses as especially in need of greater resources, all over the country: "We need to be there often, there are fights and disturbances."

On January 26, what everyone had been dreading finally happened. The police arrived at an asylum house for "unaccompanied refugee children" in Mölndal early in the morning, after reports of a knife fight. By the time they arrived, it was too late. Asylum house employee Alexandra Mezher lay bleeding on the floor, stabbed by one of the "children" she cared for. She died in hospital a few hours later.

The police arrested a person claiming to be a 15-year-old from Somalia on suspicion of murder, as well as the attempted murder of one of the youths who allegedly tried to intervene. He was later remanded. According to the local daily, GT, the staff had previously warned on several occasions that the suspect had psychiatric problems.

The Mezher family are Lebanese Christians who fled the violence in Lebanon 25 years ago. Alexandra's mother, Chimene Mezher, told the British paper, The Daily Mail:

"We left Lebanon to escape the civil war, the violence and the danger. We came to Sweden where it was safe, to start our family. But it is not safe any more. … And I just want to know why… why Alexandra? She wanted to help them, but they did this. I just want answers."

Chimene Mezher now accuses Swedish politicians of murdering her daughter. The dramatic recent population increase in Mölndal, a suburb of Gothenburg, has scared many of the 60,000 residents. In less than a year, 8,000 asylum seekers have moved in — half of whom are so-called "unaccompanied refugee children."

It has now emerged that staff at the asylum house where Alexandra Mezher was murdered had repeatedly complained about unreasonable conditions. A year ago, employees warned about being understaffed and working alone: "So far, nothing serious has happened, but it will," said a desperate employee who called the Health and Social Care Inspectorate ("Inspektionen för vård och omsorg" or IVO). IVO inspected the asylum house, but found everything was in order. When Mezher was murdered, she was alone in the residence with ten asylum seekers. So far, no motive for the murder has emerged.

When the National Police Commissioner appeared on the "Good Morning Sweden" TV show, the day after Mezher's murder, he expressed sympathy for the murderer, but barely mentioned the victim. This sparked frenzied outrage on social media. Eliasson said:

"Well, you are of course distraught on behalf of everyone involved. Naturally, for the person killed and her family, but also for a lone young boy who commits such a heinous incident. What has that person been through? Under what circumstances has he grown up? What is the trauma he carries? This entire migration crisis shows how unfair life is in many parts of the world. We have to try to help solve this best we can."

The atmosphere on social media is now almost revolutionary. People are posting videos of themselves accusing the government of murder, of filling Sweden with violent people and completely ignoring Swedes.

Alexandra Mezher (left) was murdered in the home for "unaccompanied refugee children" where she worked. She was stabbed to death by a resident who claims to be 15 years old and from Somalia. When National Police Commissioner Dan Eliasson (right) spoke on television about the murder, he expressed sympathy for the murderer, but barely mentioned the victim.

What does the Swedish government really think? Does it maintain that the right of asylum is more important than everything else — even the safety of its own people?

Gatestone Institute called Sofia Häggmark, a non-partisan official at the Department of Justice unit for migration rights. Here is the Q & A:

Should everyone get to seek asylum in Sweden, even if it leads to Sweden's undoing?

"The right of asylum is very strong. We have international rules and EU rules that say that if a person comes to an EU country, that person has a right to seek asylum."

 

Is it all right to say no if there are groups in your country that are being threatened by the asylum seekers — minority populations such as Roma, Jews and Sami [Lapp]? Or that Sweden cannot afford it?

"No, if a person has grounds for asylum or risks the death penalty or torture in their home country, you cannot deny them asylum."

 

Is it not the Swedish government's primary task to protect Sweden and the Swedish people?

"We need to abide by international rules; we are obliged to do that. We can be dragged before the Court of Justice of the European Union if we do not allow people to seek asylum."

 

Which is more important – Swedish lives, or the risk that you might end up before the Court of Justice of the European Union?

"I cannot answer that question; I can only tell you what the rules are."

 

So you are saying that if 30 million people come here to kill us, we have no defense, we cannot stop it?

"I can only tell you that the right of asylum gives very strong protection."

 

But not for the Swedes?

"If a person kills someone here in Sweden, the criminal justice system handles that and tries them. We need to look at every individual asylum case."

 

Do you think it has ever happened at any time in the history of the world that a country cared more for the citizens of other countries than its own?

"I cannot answer that. But there is no rule that sets a limit for how many [asylum seekers] Sweden can accept."

 

So there is no plan for what to do when the country is full and the citizens are scared?

"No, there is not."

 

Do you personally think that feels okay?

"I cannot answer that. That is not my job."

 

If several millions of Muslims come here and implement Sharia law, then the right of asylum has effectively contributed to abolishing the democracy in our country, replacing the Swedish people and annihilating the whole concept of Sweden. Have none of you pondered these fateful issues?

"I understand your thoughts."

The measures taken by the government on January 4 were a way to stop immigration without compromising the almighty "right of asylum," because only those who actually set foot on Swedish soil have the right to seek asylum. The government imposed carriers' liability for the train and ferry companies operating on the route between Denmark and Sweden, which means that those companies had to hire guards to refuse passage to anyone that cannot show a passport or other valid ID. This is the first time people cannot travel freely between the Nordic countries since the Nordic Passport Union was introduced in 1952.

The new identity checks have created a problem for Denmark, which was not at all keen to get stuck with all the asylum seekers headed for Sweden. Thus, Denmark introduced its own controls on the German border.

Otherwise, Denmark has chosen a different path from Sweden. Instead of preventing people from seeking asylum, the Danish Parliament adopted a new law on January 26, which includes sharp austerity measures towards asylum seekers – measures that the government hopes will discourage migrants from coming to Denmark. The new rules include:

• Shorter residence permits
• Postponement of the right to bring in relatives
• The right of the state to seize a migrant's assets to cover asylum costs
• Stricter qualifications to get permanent residency
• An easing of the process for revoking the residency of refugees
• A 10% cut in cash benefits for asylum seekers

Even the Danish Social Democrats supported the law. In 2010, the party demanded that Europe "make way for Islam," but now it has apparently made a complete U-turn. Social Democratic Faction Chairman Henrik Sass Larsen wrote in an opinion piece in the daily, Politiken:

"We will do all we can to limit the number of non-Western refugees and immigrants to this country. That is why we have gone far – much farther – than we ever dreamed of. We do this because we do not want to sacrifice the welfare state in the name of humanism. Because the welfare state is … the political project of the Social Democrats. It is a society built on the principles of freedom, equality and solidarity. Mass immigration – look at Sweden for example – will undermine the economic and social foundation of the welfare state."

But protecting the welfare state that generations of Swedes have built, does not seem to be a priority for the Swedish Social Democrats. Some have long claimed that the Social Democratic affinity for immigration has to do with the party's desire to fill the country with "election cattle," and fuel has now been added to that fire. Muslims most often seem to vote for the left, studies show. For example, 93% of French Muslims voted for Socialist President François Hollande, and almost 90% of American Muslims voted for President Obama.

Judging by recent polls, Swedish Prime Minister Stefan Löfven will indeed need the Muslim votes in order to remain in power. The respected polling institute, Sifo, recently presented a report on party sympathies for the month of January. The Social Democrats got a pitiful 23.2% – the worst result since polling started in 1967. The party got 31% in the general election of 2014, and that was considered a rotten result.

Meanwhile, after the new border controls were implemented in January, and the number of asylum seekers arriving in Sweden decreased from a peak of over 10,000 a week, to 820 (during the third week of January), no one could tell if this was due to the border controls or the wintry weather.

In total, 162,877 people sought asylum in Sweden in 2015. That is almost twice as many as the year before and many times the average during the 2000s, which was roughly 33,000 a year.

Now, Minister for Home Affairs Anders Ygeman tells the Dagens Industri business paper that he has tasked the police and the Immigration Service with the deportations of up to 80,000 of the asylum seekers who arrived last year. The government plans on using chartered planes. Anders Ygeman describes the operation as a "very big challenge."

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As noted earlier today, BofA’s chief credit strategist Michael Hartnett is anything but bullish: in his own words, he remains a seller “into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”

There is, however, one major catalyst that will take place over the weekend that could change Hartnett’s mind if only for the near term: one that could unleash a “vicious bear market rally” in his words.

As Hartnett writes, “US dollar unwind may ultimately be seen as an important inflection point for US monetary conditions…signal that “automatic stabilizers” finally coming into play; means relief for “humiliated” assets in EM, commodities, resources; markets begin to discount policy response; if China FX reserves data is better than expected, we think a bear market rally is likely to be vicious.”

As a reminder, here is why the world is so focused on China’s FX reserves, which have seen over $1 trillion in capital outflows since the summer of 2014 when China’s reserve liquidation problem began in earnest.

 

As a further reminder, it is the pace of Chinese capital outflows, the largest among the entire EM space, that has become the “Quantitative Tightening” counterpoint to the liquidity injections by such DM central banks as the ECB and the BOJ, and which according to many is the primary reason for the recent acute weakness across asset classes as Citi recently explained.

 

So what is the reported number due this coming Sunday, that could unleash a vicious rally?

It’s here that things get tricky.

According to consensus estimates, China will report that its total FX reserves declined to $3.2125 trillion from $3.33 trillion: a drop of $118 billion, or modestly higher than the massive December $108 billion outflow.

In other words, a reported number below, and certainly substantially below, $118 billion for the January outflow and it would be off to the races as a massive short squeeze will grip all the commodity and materials-linked sectors.

To be sure, BofA FX strategist Claudio Piron expects a far smaller print:

We forecast China FX reserve changes and estimate a USD37.5bn fall in January – (USD29.1bn decline adjusting for a negative FX valuation effect). Note that the standard error of the forecast is large at USD24.5bn, which would give us a downside of USD84.5bn fall. We caution that this is guidance and we attempt to be as transparent as possible so investors can gauge the odds in what is a key release for the markets. Note too this is based on onshore CNY FX volumes and our estimate maybe biased down as there are no real time volumes for offshore CNH.

 

So yes: if the number is a paltry $37.5 billion, it would mean that suddenly China’s outflows are “contained”, if only for the time being, and that the PBOC may have managed to quell the relentless exodus of domestic hot money abroad (whether it’s real or not is a different story).

However, just as a far smaller than expected number will be very bullish, so a far greater number will be very bearish. Which brings us to a post we wrote last week showing what may have been the main reason for the dramatic January market selloff. According to estimates by Goldman Sachs, not only have outflows not slowed down as dramatically as BofA believes, but they have in fact soared to an all time high $185 billion.

This is what Goldman said:

There has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)” split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.

 

Since then it only got worse: courtesy of Fasanara Capital we know that in the last few days, GS revised up the magnitude of the Chinese FX spot intervention to $197bn in January 2016, when adding a $12 billion valuation adjustment, lowering the total FX reserves to just $3.133 trillion!

As Fasanara accurately adds, “in case reserves drop more than consensus (as GS estimates) we could see further pressure on USDCNH and other Asian currencies, together with continued negative reaction by global markets.“

In other words, Fasanara lays out the opposite scenario to that of Harnett: one where if outflows surprise to the upside, what will follow is a vicious selloff.

* * *

So there is your bogey, one which will set the mood for risk over the next month: this weekend, China will announce its January reserve outflows which are expected to decline by about $120 billion. Should the number be far less (ostensibly closer to BofA’ estimate of $37.5 billion) expect a whopper of a bear market rally coupled with a huge short squeeze. If Goldman is right, however, with its record ~$200 billion in FX intervention and implied outflows, then all bets are off.

Luckily for China, its market will be closed next week due to Chinese New Year Holiday. Which means that it will be up to US and other global stock markets to cushion the surprise until China’s FX trading comes back online, and the result in this already illiquid market, could make or break many asset managers year in the span of a day.

via Zero Hedge http://ift.tt/1mgEypc Tyler Durden