The Stunning Chart Showing Why BofA Remains A Seller Until “A Coordinated, Aggressive Global Policy Response”

While market volatility remains so high it leaves many trading desks speechless by “brutal” if obvious unwinds, and both institutional and retail traders clueless and at best hoping to ride the momentum wave in any direction before it violently reverses, one person who is a steadfast seller into any and every rally is BofA’s chief investment strategist Michael Hartnett who in a note titled “Fed, dollar & the end of splendid isolation” explains just why with one simple chart, and further notes that he will continue to sell “at least until a coordinated and aggressive global policy response” emerges.

NIRP in Eurozone and Japan crushing bank stocks (Quantitative Failure); Fed now admits dollar appreciation could have “significant consequences” for the economy; and thus weaker US non-manufacturing data signals end of US “splendid isolation” and unwind of trades based on “higher US growth/rates” (US dollar & FANG the last of the dominoes to drop).

 

US dollar-reversal sparking bear market rally in humiliated EM/commodities/resources; note even retail sales in HK down 8.5% YoY; should China FX reserves beat expectations on Sunday, we think a tactical rally is likely to be vicious.

 

We remain sellers 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 (currently heading sharply south – Chart 1) and credit conditions.

 

And so we are back to square one, where global economic growth is so weak that the Fed’s relent is back in play, corporate earnings are collapsing, where 30% of global GDP is now produced in “NIRP” nations, and where more than half the global markets remain mired in a bear market, that the only thing that can “save us” is precisely the same thing that has brought us here: coordinated, global central bank intervention.

We eagerly await to see just how the Fed’s “renormalization” plan works out.


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Closing In: Russia, Iran, Assad “Encircle” Syria’s Largest City As Peace Talks Collapse In Geneva

Back in October, we previewed the “promised” battle for Aleppo, Syria’s largest city prior to the war.

By the time Russia began constructing an air base at Latakia, the city – which is immensely important both from a strategic and psychological perspective – was controlled by a hodgepodge of rebels and militants including al-Qaeda, the Free Syrian Army, and ISIS.

As we noted four months ago, if Russia and Hezbollah manage to recapture the city, it would effectively restore the Assad government in Syria even if the east of the country is still controlled by Islamic State.

In many ways, the city is emblematic of the wider conflict. Here are a few visuals which underscore the extent of the desolation and utter sorrow that plague this once thriving urban center.

And for anyone who might have missed it, here’s a look at nighttime light emissions in the city along with a few visuals from “a night in Aleppo“:

Despite the fact that the city – like many others across the country – has been reduced to a smoldering pile of rubble, it’s key to Russia and Iran’s plans to consolidate Assad’s power in the west of the country.

As noted above, if the SAA can retake Aleppo, Assad will have control of most of the country’s major urban centers, effectively restoring his grip on power. 

So critical is the city, that when the SAA, Hezbollah, and a variety of Shiite militas were gearing up for the push north, Quds commander Qassem Soleimani himself showed up to rally the troops (he was later injured on the frontlines).

Fast forward four months and it appears that after a protracted fight, Russia and Hezbollah are indeed poised to recapture the city where militants are now surrounded. Critically, Russia and Iran have now cut off supply lines from Turkey. 

Backed by Russian firepower and Hezbollah militants, Syrian government troops have cut off rebel supply lines between the northern city of Aleppo and Turkey,” Bloomberg writes. “Taking Aleppo, Syria’s former commercial hub, would give Russia, Iran and Assad more bargaining power at any future settlement talks and more say in how the region will be redefined.”

Speaking of settlement talks, negotiations in Geneva brokered in part by John Kerry were suspended on Wednesday as a Saudi-backed rebel coalition voiced anger over Russia’s airstrikes near Aleppo. On Thursday, Kerry demanded that Moscow halt the offensive so peace talks could resume. Although America’s top diplomat swears his phone call with his Russian counterpart Sergei Lavrov was “robust” Lavrov said on Wednesday The Kremlin doesn’t see why the campaign against “the terrorists” should stop. “I can’t see any reason why we should halt our aerial operations until the terrorists shall be defeated”, Lavrov said, flatly.

“On the ground, nearly 40,000 people have fled an offensive this week by President Bashar al-Assad’s regime north of the city of Aleppo,” AFP said on Thursday, citing the Syrian Observatory for Human Rights (or in other words, “citing one guy in London”). “Assad’s forces also entered two Shiite villages that were under siege by rebels, prompting what state news agency SANA called ‘mass celebrations’ in the streets of Nubol and Zahraa.”

For their part, the Turks are of course blaming the Russians for the stalled peace talks. 

“Russia continues to kill people in Syria. Could there be such a peace gathering? Could there be such peace talks?” President Tayyip Erdogan asked in a speech in Peru.”In an environment where children are still being killed, such attempts do not have any function apart from making things easier for the tyrant,” he said.

And trust us, Erdogan knows something about what makes “things easier for a tyrant.”

In any event, the urgency expressed by the US, Saudi Arabia, and Turkey shouldn’t be mistaken for some kind of benevolent regard for the lives are lost each and every day the war drags on. Rather, Washington, Riyadh, and Ankara know that if Aleppo falls, that’s it for the “moderate” opposition.

Sure there will still be elements of the FSA and other groups explicitly backed by the West and its regional allies, and they’ll undoubtedly wage a long war of attrition against the SAA. But once the urban centers are secured, Assad can begin the slow process of rebuilding his security apparatus and restablishing some semblance of normalcy in the country’s west.

As for eastern Syria, the fate of Raqqa and Der al-Zour still hangs in the balance.

Once the west is solidified, the question will be: can the US, France, and Britian swallow their pride and coordinate with Russia and Iran to oust Islamic State? 

Or perhaps the more important question is this: what will Russia and Iran discover if they manage to liberate Raqqa before the West has time to bury the bodies (figuratively speaking) and burn all the evidence?


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Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas

Greece was fixed for a few months, when the so-called “anti-austerity” government of PM Tsipras which came to power just over a year ago did what each on its predecessors did by kicking the can and trading off what little sovereignty Greece has left for promises of more cash from Europe, but it is broken once again.

Earlier today, services across Greece ground to a halt Thursday as workers joined in a massive general strike that cancelled flights, ferries and public transport, shut down schools, courts and pharmacies, and left public hospitals with emergency staff. Even the undertakers are striking.

Thursday’s general strike is the most significant the coalition government of Prime Minister Alexis Tsipras has faced since he initially came to power about a year ago. As an opposition party, Tsipras’ radical left Syriza party had led opposition to pension reforms, but he was forced into a dramatic policy U-turn last year when he faced the stark choice of signing up to a third bailout or the country being kicked out of the eurozone.

The strike comes as the government negotiates with Greece’s international debt inspectors, who returned to Athens this week to review progress on the country’s bailout obligations. The central Athens hotel where the inspectors were staying was heavily guarded by police.

As CBC reports, well over 20,000 supporters of a Communist party-backed union were marching through central Athens, while around 10,000 more people — including about 1,000 lawyers in suits and ties — were gathering for a separate demonstration. A heavy police presence was deployed in the capital, as previous protests have often degenerated into riots.

Unions are angry at pension reforms that are part of Greece’s third international bailout. The left-led government is trying to overhaul the country’s ailing pension system by increasing social security contributions to avoid pension cuts, but critics say the reforms will lead many to lose two-thirds of their income to contributions and taxes.

Opposition to the reform has been vociferous, uniting a disparate group of professions, including farmers, artists, taxi drivers, lawyers, doctors, engineers and seamen among others.

Demonstrations were also planned in Thessaloniki — where about 200 taxi drivers drove through the city centre honking their horns in protest Thursday — and other Greek cities.

Proving just how messed up things in Greece are, Syriza has even issued a statement backing Thursday’s strike: a strike aimed at Syriza!

The sentiment on the ground is back to square minus one: Athens pensioner Yannis Kouvalakis said Tsipras’ government “fooled” Greeks by promising to reverse austerity cuts.

“Because they are from the left, what happened? Was the situation saved? Things got worse. They’d said they’d give some money to pensioners or the unemployed, increase the minimum wage to 750 euros (per month),” he said. “They cut five euros from my pension … What can they give? Forget it.”

Ferries between Greece’s islands and the mainland remained tied up in port as part of the strike, while only limited public transport was operating in Athens for a few hours in the day and taxis also stayed off the streets. More than a dozen domestic flights were cancelled, while farmers maintained their blockades of highways that have forced motorists into lengthy detours.

State-run hospitals were functioning on emergency staff, while state schools, many shops and gas stations were shut.

Meanwhile, the mood earlier today reverted to one seen years ago, when violence among a small group of people, engaging in exchanges of Molotov cocktails and tear gas with riot police, was the daily norm.

Some visual examples:

 

As AP’s Derek Gatopoulos summarizes it best, “Doctor friend leaving general strike rally: “It felt more like a wake than a protest rally” “

 


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Shkreli Declares War On Congress: Moments After Pleading The Fifth, He Calls Reps “Imbeciles”

While many have observed that instead of pleading the Fifth, Martin Shkreli should have at least commented on his pricing practices which have been the cause of much consternation, one thing is clear: the young indicted CEO just declared war on Congress by tweeting that it is “Hard to accept that these imbeciles represent the people in our government.”

As a reminder…

While Shrekli’s curt assessment may be spot on, he certainly could not have aimed any higher in picking his next, and biggest yet, enemy. Then again, if his intention was to create another media circus, he certainly has achieved his goal.


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Republicans Vow to Hunt Down Flint Emergency Manager Responsible for ‘Government-Made Catastrophe’

Justin AmashAt a Congressional hearing on the Flint water crisis, Republican Rep, Jason Chaffetz vowed to “hunt down” emergency manager Darnell Earley and drag him to Washington, D.C. to explain why he did nothing while citizens drank poisoned water for months.

“We’re calling on the U.S. Marshals to hunt him down and give him that subpoena,” said Chaffetz.

Rep. Justin Amash was equally critical of Earley, as well as the emergency financial manager law—which allowed Republican Gov. Rick Snyder to install unelected administrators in positions of extreme power in failing cities like Flint.

“It’s outrageous that this sort of government-mad catastrophe would happen anywhere in the United States,” said Amash, who maintained that the state of Michigan and not the federal government should cough up the money to fix the problem.

Two bureaucrats testified at the hearing: Keith Creagh, the new head of the Michigan Department of Environmental Quality, and the EPA’s Joel Beauvais, who blamed each other’s agencies for myriad failures that created the disaster. LeeAnne Walters, a former resident of Flint, and Marc Edwards, a Virginia Tech engineering professor who helped uncover the truth about Flint’s water, also testified.

Edwards was unfailingly critical of the manner in which the government oversaw the crisis. He repeatedly claimed that the DEQ and EPA simply refused to follow the law and obey their own standards, and are directly responsible for the damage they caused.

Edwards expanded on those thoughts in a recent interview with The Chronicle of Higher Education in which he accused government agencies of stifling dissent. Scientists and experts have every incentive not to criticize the government, he said, because they rely on government funding for their research:

In Flint the agencies paid to protect these people weren’t solving the problem. They were the problem. What faculty person out there is going to take on their state, the Michigan Department of Environmental Quality, and the U.S. Environmental Protection Agency?

I don’t blame anyone, because I know the culture of academia. You are your funding network as a professor. You can destroy that network that took you 25 years to build with one word. I’ve done it. When was the last time you heard anyone in academia publicly criticize a funding agency, no matter how outrageous their behavior? We just don’t do these things.

If an environmental injustice is occurring, someone in a government agency is not doing their job. Everyone we wanted to partner said, Well, this sounds really cool, but we want to work with the government. We want to work with the city. And I’m like, You’re living in a fantasy land, because these people are the problem.

In summary, Flint’s environmental regulators were asleep at the wheel, but nobody wanted to call them out, because bad things happen to people who criticize the government. The horribly mismanaged water system was the result of government planning born of economic ignorance. So far, relief has come in the form of private corporations donating millions of bottles of water.

Has there ever been a more compelling case for privatization of publicly-run government services?

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US Factory Orders Plunge As Inventories Ratio Soars To Recession Cycle Highs

With the Services economy now catching down to Manufacturing's demise (in its lagged – not decoupled – manner), this morning's news that US Factory Orders tumbled 2.9% in December (worse than expected and the biggest MoM drop since Dec 2014) offers little hope for any bounce anytime soon. This is the 14th monthly drop in YoY factory orders – something has not happened outside of a broad US economic recession. Even more concerning is the surge in inventories-to-shipments to cycle highs seen in 2000 and 2008.

 

 

And inventories soar to cycle highs…

 

Still the excuses pile up… weather… foreign not domestic… services will save us (oh wait!)


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“Recovery” Fable Unravels As BOE Cuts Growth Forecast, Eurozone Slashes Inflation Outlook

As you might have noticed, the “recovery” story is starting to fall apart.

Central banks across the globe are running out of excuses for why trillions upon trillions in global QE have been an abject failure when it comes to resuscitating global demand and trade.

Far from creating the type of robust “recovery” Ben Bernanke envisioned when he set the stage for what has become an eight-year-old foray into Keynesian insanity, round after round of monetary madness has only set the world on a race to some nightmarish Krugman “bottom” where the effective lower bound is breached only to see cash banned so PhD economists can strip citizens of their economic autonomy.

On Thursday we get the latest admissions from central bankers who are increasingly forced to admit that things aren’t going as (centrally) planned.

The Bank of England on Thursday cut its growth forecasts to 2.2% from 2.5% in its latest inflation report and also released minutes from its latest monetary policy meeting. Inflation will remain below 1% for the balance of the year, the bank says, and will not hit 2% until Q1 2018.  Or as Haruhiko Kuroda would say: “We see signs that inflation is moving towards our target.”

Growth in 2017 was also revised lower to 2.4% from 2.7%. “The softer forecasts imply tougher times ahead for chancellor George Osborne’s deficit reduction plan,” FT writes. “Weaker growth would translate into lower tax receipts, making closing the gap between expenditure and revenues harder.”

In his letter to the chancellor, Mark Carney opened the door for MOAR. “Were these downside risks to materialise, market expectations of the future path of interest rates could adjust further to reflect an even more gradual and limited path for bank rate increases than is currently priced,” he said. “The committee could also decide to extend the asset purchase facility or to cut the bank rate further towards zero from its current level of 0.5 per cent.”

“[China’s economic rebalancing, more capital flows, tighter financial conditions, and increased market volatility] pose downside risks to growth in the United Kingdom via trade, financial and confidence channels,” Carney told a news conference,” Carney told reporters on Thursday. “The outlook for trade is particularly challenging with net exports expected to drag on UK growth over the forecast period.”

The newly released minutes show that Ian McCafferty, the only voting member arguing for a hike, abandoned his dissenting view to join his compatriots in a decision to remain on hold.

So, yeah. So much for that BOE rate hike.

Meanwhile, in the deflationary paradise that is the eurozone, the EU Commission has cut its 2016 growth forecast to 1.7% from 1.8% citing worsening performances from Germany, France, and Italy. 

More worrisome was the inflation outlook. The commission slashed its outlook for inflation by half to just 0.5% this year

“Europe’s moderate growth is facing increasing headwinds, from slower growth in emerging markets such as China, to weak global trade and geopolitical tensions in Europe’s neighborhood,” Commission Vice President Valdis Dombrovskis said in a statement.

“With the assumed path of energy prices, inflation should remain very low in the first half of this year,” Pierre Moscovici said in Brussels. “It should then rise slightly in the second half when the impact from the past sharp falls in oil prices abates.”

Sure it will. That’s of course assuming oil doesn’t continue to slide. 

For his part, Mario Draghi blames a “conspiracy.” “There are forces in the global economy today that are conspiring to hold inflation down,” the former Goldmanite said in a speech in Frankfurt on Thursday. “Those forces might cause inflation to return more slowly to our objective,” he added.

That’s ok. Maybe the refugees will boost consumer spending. 

Of course you shouldn’t expect any of this to derail policy makers in their lunatic quest to “fix” what’s holding back global growth and trade and what’s keeping inflation stuck in neutral. On that note we close with comments from the ECB’s Yves Mersch:

“I cannot tell you what we will be doing because this depends on 22 other colleagues who also have their opinion.”

 

“We have further possibilities, our toolbox is not exhausted, but I will not fuel any expectations by giving you comment one instrument rather than another one.”


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European Bank Risk Soars To 3 Year Highs, US Risk Rising

We are going to need more “whatever it takes.” And with Draghi’s efforts to shove sovereign bonds down the throat of Europe’s banks, the sovereign-to-financial linkage is now systemically as worrisome as it has ever been…

 

Deutsche Bank’s CDS continues to push higher…smashing European bank risk to its highest since 2013…

 

Unicredit remains the most risky among EU banks…

 

And it is spreading to America…


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