Month: March 2016

In the latest revelation of just how far China, and its central bank, are willing to go to prop up its ailing local stock market, on Thursday the official Shanghai Securities News reported that China’s foreign exchange regulator has bought mainland stocks worth over 27 billion yuan ($4.18 billion) via three low-profile investment firms it controls.

According to Reuters, Buttonwood Investment Platform Ltd, 100 percent owned by the State Administration of Foreign Exchange or SAFE (which in turn is directly controlled by the central bank, the People’s Bank Of China) and Buttonwood’s two fully-owned subsidiaries, have bought shares in a total of 13 listed companies, the newspaper reported, citing top 10 shareholder lists in the companies latest earnings reports.

The name of this special purpose entity refers to the Buttonwood Agreement, which took place on May 17, 1792, and started the New York Stock Exchange. This agreement was signed by 24 stockbrokers outside of 68 Wall Street New York under a buttonwood tree.

As Shanghai Securities News reported, the investments are part of SAFE’s strategy to diversify investment channels for the country’s massive foreign exchange reserves. Recent earnings filings show Buttonwood is among the top 10 shareholders of Bank of China, Bank of Communications, Shanghai Pudong Development Bank , Everbright Securities and Industrial and Commercial Bank of China.

In other words, the PBOC is now directly (as opposed to previously, when its interventions were indirect at best) propping up the stock market itself. The government also uses Central Huijin Investment Ltd, and China Securities Finance Corp, the state margin lender, to buy A shares. This makes China the second prominent central bank to be directly involved in stock purchases after the BOJ which has been buying ETFs and REITs for years, and the SNB of course, which as is well-known has an equity portfolio worth nearly $100 billion.

The Chinese official publication adds that Buttonwood was the vehicle SAFE used to invest in China’s Silk Road Fund, which was launched in December 2014, according to the fund’s official website. Buttonwood is a new platform China’s government uses to buy domestic shares, according to Shanghai Securities News.

Why is this above a big surprise? After all, in the aftermath of last year’s stock market crash it is well known that the government has been propping up the stock market. As Bank of America explains “it is a big surprise to us that SAFE bought stocks directly in 4Q. This broke at least two conventions for central banks: 1) central banks do not normally buy stocks directly (as they are supposed to manage their balance sheet conservatively); and 2) FX reserves, presumably what SAFE had used to buy A-shares, should not be used to purchase domestic assets.”

As BofA’s David Cui further explains, “by now, the three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally” and warns that “while many may view this as supportive of the market, we believe that allowing “referees” to become “players” is a slippery slope that could do damage to the market in the long run.”

Then again, if every other central banks is doing it…

Here is David Cui’s full note:

SAFE’s A-share purchase, a step in the wrong direction

Key takeaways

• SAFE became a top 10 shareholder in at least 10 A-share companies in 4Q, a big surprise to us.
  
• By now, policy makers (PBoC, MoF and CSRC) all own stocks via vehicles controlled by them. Policies could become compromised.
  
• PBoC’s direct buying is particularly worrying, as its action has monetary implications (albeit on small scale at this stage).
  

Many government arms now have stakes in A-shares, literally

Shanghai Securities News reported today that SAFE (under PBoC), through its three investment arms, became a top 10 shareholder in at least 10 A-share companies in 4Q15. On March 29, Securities Times reported that Huijin (a subsidiary of CIC, which is under the State Council and has a close tie to the MoF) was among the top 10 shareholders in five ETFs at the end of 2015. We also know that CSFC (under CSRC) bought heavily in the market last year (Government A-share stabilization program: the price may be too heavy, Nov 13). So, by now, the three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally. While many may view this as supportive of the market, we believe that allowing “referees” to become “players” is a slippery slope that could do damage to the market in the long run.

What and how much SAFE has bought

The 10 stocks identified by the paper belong to a broad spectrum of sectors: banks, brokers, port operators, telecom, machinery, defense, and a local government investment holding company. SAFE’s stakes in these ten companies are worth some Rmb27bn. We don’t know how much in total SAFE has spent, as many A-share companies are yet to report. In addition, if SAFE’s stake is less than 5% or not big enough for it to be among the top 10 shareholders, companies are not obliged to disclose it. That said, the size of the purchases appears moderate so far.

Why SAFE’s buying is particularly problematic

The moderate size notwithstanding, it is a big surprise to us that SAFE bought stocks directly in 4Q. This broke at least two conventions for central banks: 1) central banks do not normally buy stocks directly (as they are supposed to manage their balance sheet conservatively); and 2) FX reserves, presumably what SAFE had used to buy A-shares, should not be used to purchase domestic assets. When the FX reserves were created, the equivalent amount of local currency was already issued on the back of the FX; using FX to buy domestic assets means that more local currency is created with the same FX backing.

A more transparent way to handle this, and with the same result, is for PBoC to simply expand its balance sheet and take on these stocks without going through SAFE. PBoC’s loaning to CSFC and brokers to buy stocks was controversial enough, buying stocks directly is a step further, in our view. It is difficult for us to gauge the reasons behind SAFE’s move. But this cannot be enhancing public confidence in the PBoC and, by extension, in RMB, in our view (What may trigger financial instability, Jan 3).

Macro policies may become compromised

Macro policies should be about healthy economic growth, which underpins the attractiveness of a country’s stock market in the long term. Many of the government’s A-share market interventions, including its direct stock buying, are undermining China’s growth prospects, in our opinion, due to unnecessarily fast money growth and potentially crowding out of private investment, among other things. Now that the key macro policy makers own stocks themselves, there is a risk that their policies may become more pro-market than necessary, in our view (especially if their market positions continue to expand).

* * *

Now if only we knew how much crude oil the PBOC – which is now clearly coordinating with the Fed in global plunge prevention – was also buying, all our questions for the past quarter would have been answered.

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"Stock whisperer" Janet Yellen has a major problem. Despite the world's central banks' coordinated easing-driven surge in stocks off the mid-Feb lows, consumer comfort in America has collapsed to its lowest since Dec 2015. The "wealth creation" engine is not transmitting to animal spirits and exuberance among average joes… despite Jim Cramer's exposition that "Yellen is speaking for the common person."

 

The Fed policy Death Cross…

 

When extreme monetary experimentation fails.

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Just one week ago, when the US dollar was surging when one after another Fed president were making hawkish statements (who can forget Bullard’s forecast that a rate hike may occur as soon as April), one of the speeches which surprised the market the most, was that by Chicago Fed’s permadove Chuck Evans, who on March 22 met with reporters and was asked how comfortable he felt about the likelihood of two interest rate hikes this year.

Evans had pointed out that the median of the projections was for two rate hikes and that he was “comfortable” with that prediction — on the condition that gross domestic product grows by 2 percent to 2.5 percent and that unemployment falls from its current 4.9 percent to a range of 4.7 to 4.8 percent.

“Fundamentals are good for the economy,” he said during his speech. He noted, however, that past recoveries saw GDP growth of 3.5 percent.

“Currently, given my assessment, two rate increases is not at all unreasonable,” Evans said after his speech. “My projection would have two more this year on the basis of the outlook.”

And then, everything mysteriously changed less than two weeks later, when in the aftermath of Yellen’s superdovish speech, Evans talked back all of his hawkish commentary: cited by Reuters, Evans said that the Federal Reserve “should have more clarity by the end of the summer whether recent strength in U.S. inflation data is a lasting reality or merely a temporary blip due to winter-related irregularities in the surveys, a top Fed official said on Wednesday.”

“If we see the monthly numbers continue to come in more strongly and they begin to pile up I think you’d have to take that seriously. If it’s a residual seasonalities story we ought to see it waning at some point,” said Chicago Fed President Charles Evans.

But wait, it’s not over, because as we draft this, Evans is once again talking live, and making the following statements, which suggest the hawkish Evans from March 18 may be back:

• EVANS: GREATER RISKS SUPPORTED SHALLOWER PATH AT MAR FOMC MTG
• EVANS: STILL COMFORTABLE WITH TWO RATE HIKES THIS YEAR
• EVANS: SEES ONE RATE HIKE IN MID-YEAR, ONE LATER IN YEAR
• EVANS: WANT TO AVOID SITUATION WHERE NEGATIVE RATES NEEDED

As a reminder, the Fed Funds futures now imply a negligible chance of a June rate hikes, with at most one rate hike by the end of the year, so Evans saying 2 hikes means hawkishness is back.

Markets? Confused.

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Presented with little comment aside to say… fundamentals…

 

 

It appears 2% insta-swings are the new normal!

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Following its demise into contraction in February, Chicago PMI jumped back to 53.6 (expansion) in March which is better than expected but remains below January's 55.5 highs. The last 12 months have seen quite unprecedented noise in this economic barometer and MNI reports respondents saying the recovery is "slow and steady… fuelled by warmer weather."

 

 

As MNI reports, The Chicago Business Barometer increased 6.0 points to 53.6 in March, the best since January, led by sharp bouncebacks in Production and Employment.

Four of the five Barometer components increased in March, with only Supplier Deliveries declining on the month. March's positive outturn, though, left the three month trend of the Barometer at the highest for just over a year and the Q1 2016 average at the highest since Q4 2014.

Production bounced back to the highest since January, reversing half of February's drop. Employment finally moved back into expansion after spending five months in contraction area, and rose to the highest level since April 2015. New Orders expanded at a faster pace and, like Production, increased to the highest since January. Also on a positive note, Backlogs contracted at the slowest pace since January 2015.

Improvement in March was telegraphed as slow and steady, fuelled by milder weather, new product demand, as well as a shift in focus towards warm weather products. Some businesses reported plans for a strong end of March into early April. However, a few purchasers expected the level of New Orders to taper in April. Other panellists cited "uncertainty surrounding the election" as reason for the added caution, with some businesses cooling plans for non-essential or large capital expenditure plans.

A special question posed in the March Chicago Business Survey showed most respondents were optimistic orders would increase over the coming three months, with 44% saying they would be higher, compared with 13.5% who thought they would be lower. Panellists, though, were less confident this year as compared with outturns of 55.6% and 8.9% respectively when the same question was asked in March 2015.

Those expecting a higher pace of ordering in Q2 2016 said milder weather and favourable seasonal factors would boost business. More importantly, purchasers reported that capital expenditures are starting to be released and work being scheduled.

Employment finally moved back into expansion after spending five months in contraction area, and rose to the highest level since April 2015

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

A system that piles debt on students in exchange for a marginal or even zero-return on their investment is morally and financially bankrupt.

Every once in a while you run across an insider's narrative of a corrupt, morally bankrupt sector that absolutely nails the sector's terminal rot. Here is that nails-it narrative for higher education: Pass, Fail: An inside look at the retail scam known as the modern university.

Here are excerpts of the article, which was published in Canada but is equally applicable to higher education in the U.S.:

A university degree, after all, is a credential crucial for economic success. At least, that’s what we’re told. But as with all such credentials—those sought for the ends they promise rather than the knowledge they represent—the trick is to get them cheaply, quickly, and with as little effort as possible. My students’ disaffection is the real face of this ambition.

 

I teach mostly bored youth who find themselves doing something they neither value nor desire—and, in some cases, are simply not equipped for—in order to achieve an outcome they are repeatedly warned is essential to their survival. What a dreadful trap.

 

One in particular matches perfectly with the type of change I’ve observed on my watch: the eradication of content from the classroom.

 

All efforts to create the illusion of academic content are acceptable so long as they are entertaining, and successful participation requires no real effort and no real accountability.

 

Remove your professor hat for a moment and students will speak frankly. They will tell you that they don’t read because they don’t have to. They can get an A without ever opening a book.

 

But don’t worry—you won’t go bust because of this failure, not in the modern university. So long as your class is popular and fun, you’ll be favoured by the administration and probably receive a teaching award. This, even though your students will leave your class in worse condition than they entered it, because you will have pandered to their basest inclinations while leaving their real intellectual and moral needs unmet.

 

There is no clearer example of administrators’ contempt for faculty. But there is also no clearer example of their contempt for students.

 

As money is siphoned from academic programs through attrition, it is channelled into a host of middle-management positions.

 

From 1979 to 2014, central administration and staff ballooned by three and a half times, while the size of the faculty merely doubled.

 

Parents, students, and governments keep supplying them with capital, assuming there will be a genuine return on investment. But since the institution no longer produces anything, no such return is forthcoming.

 

Spending on the student services sector in Canadian universities increased an incredible six-fold between 1979 and 2014.

 

The student services cabal is no longer there to support faculty in their work of educating students “but to compete with them to define the student experience.”

Insiders are quiet after they read this, because they know it's true.

The financial burden created by the higher education cartel is immense and expanding:

To mask the enormity of the sums squandered on "education" that has little measurable results, the federal government has purchased most of the debt:

No inflation here–just a 137% increase in 15 years:

A system that piles debt on students in exchange for a marginal or even zero-return on their investment is morally and financially bankrupt.

We can do better and must do better, which is the subject of my book The Nearly Free University and the Emerging Economy.

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