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By EconMatters
Barclays, BNP Paribas and a bunch of shorts are going to have to cover before the Doha Meeting. Expect the short squeeze to begin sometime this week.
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“cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before”
– BofA High Yield strategist Michael Contopoulos
While not as quixotic as Morgan Stanley’s Adam Parker piece on market-chasing cockroaches, BofA high yield analyst Michael Contopoulos has moved beyond merely bearish and is now outright catastrophic . That may be a little far fetched, but in his latest note – while he doesn’t call rally chasers “cockroaches” (yet), he seems at a loss to explain the ongoing junk bond rally. His reasoning: fundamentals just keep getting worse by the day, while price action has completely disconnected from reality, and virtually nobody expects what is about to unfold in the junk bond space.
First, according to his assessment of deteriorating macro and micro indicators, the recent price move makes little sense:
Despite the strong payroll data the economy still appears to be headed in the wrong direction, as our economist’s tracking model now indicates just 0.6% Q1 GDP growth and a revised 2.0% (from 2.3%) for Q2. Should our team’s figures hold, the period ending March 31st will mark the 3rd consecutive quarterly decline in GDP and the second sub 1% quarter in the last 5. More importantly for high yield investors, however, is that earnings growth continues to be anemic. 2 weeks ago we wrote that too much emphasis has been placed on Adjusted EBITDA, an approximation of cash flow that doesn’t take into account “1-off” charges, working capital, capex, etc. Although we understand the allure of this measure, in our eyes it has the tendency to cover up late cycle problems; namely asset impairments. With the understanding, however, that this measure is likely to be used for some time to come, we highlight the following: Even with 1-off adjustments 6 out of 17 sectors realized negative year-over-year Adjusted EBITDA in Q4, with a 7th sector growing at just 0.5%. On an unadjusted basis, 9 sectors realized negative EBITDA growth for Q4.
Because one quarter doesn’t tell the whole picture of a company’s earnings momentum, we also calculated both Adjusted and Unadjusted EBITDA by weighting the last 5 quarters 30%, 25%, 20%, 15,%, 10% (Q4 2015 having the highest weight Q4 2014 the lowest). What we find is that the commodities sectors are clearly not the only industries to be experiencing troubles as Capital Good, Commercial Services, Consumer Products, Gaming, Media, Retail, Technology and Utilities are all under pressure. Additionally, on an unadjusted basis Healthcare also doesn’t look like the darling some firm’s spreads would suggest.
Then he looks at where in the credit cycle the market currently finds itself:
We’ve written on multiple occasions how the main question mark surrounding the end of this credit cycle is its shape, not whether we’re currently living through it. As mentioned above, fundamentals have been consistently deteriorating even outside of commodities, defaults are rising, new credit creation is becoming difficult, and illiquidity is still a problem. Although technical tailwinds in the form of retail inflows and supportive central bank policies can prolong the market unwind, they do not change its direction as ultimately fundamentals will prevail.
That is a bold assumption with every central bank having become an activist, but yes: ultimately fundamentals will prevail.
In terms of the shape of this cycle, absent a recession we expect the pace of defaults to be much closer to the 1998 experience than the 2007 one. In fact, we have coined the phrase “a rolling blackout” to describe the potential for a period of many years where the market experiences general weakness and moderately high defaults as individual sectors take turns realizing their moment of distress. Whether these moments are based on a deterioration of underlying fundamentals, an unwind of crowded trades, or some sort of series of macro-economic incidents is nearly irrelevant, as the uncertainty and consistent underperformance of the overall market will likely frustrate many investors and asset allocators. In our view this is not unlike the 1998-2002 experience, where the very same scenario could played out: years of high yield underperformance, poor returns and moderately high defaults. Recall in those years, high yield returned 2.9%, 2.5%, -5%, 4.4%, -1.9% (and 3 years in a row of negative excess returns) while the default rate slowly crept up from 2% to 8% over the course of 3.5 years before hitting double digits.
Next, he proceeds to the “apocalyptic part”, stating quite clearly that “the losses over the credit cycle could be worse than we’ve ever seen before.” One reason: central bank intervention that keeps kicking the can instead of allowing the disastrous fundamentals to finally reveal themselves.
Should the market realize a mid to high single digit default rate for years cumulative losses over the length of the entire cycle could be worse than we’ve ever seen before. A total of 33% of issuers defaulted over the course of the 1987 and 1999 default cycles, higher than the 25% in 2008 as the latter benefitted from unprecedented central bank intervention. But the very same policies which helped alleviate the pain in the last cycle will likely add to the severity of the next one. This is because many of the companies that should have defaulted 7 years ago but instead received a lifeline will likely shutter doors now. As risk premiums have caused yields to jump nearly 400bp, many of these firm’s business models will now likely be unsustainable; especially given the lack of EBITDA growth we have seen this cycle (Chart 1). When these issuers are then coupled with the newest crop of unsustainable businesses from this credit cycle, we could see cumulative default rates approaching 40% this cycle versus the traditional 33%.
It’s not just the upcoming surge defaults. Contopoulos also e focuses on product-specific issues which we have discussed before, namely the already record low recovery rates, a unique feature of this particular default cycle. These are only going to get worse.
However, not only will defaults be higher than in past cycles, but credit losses are also likely to be worse than ever before. That’s because recoveries, even outside of the commodity space have been paltry in the post crisis years. Given where we are in the default cycle, prevailing recoveries are a full 10 points lower than where they should be. Chart 2 highlights historical time periods characterized by low default rates (inside of 4%). Whereas in the past, recoveries tended to surpass 50% in low default environments, the last few years have seen those averaging 40%. This is telling because it means the pressure on recoveries is not being caused by the abundance of assets for sale in the market, which increases as more companies default, but rather because of the quality of these assets as we have discussed in part 1 of our recovery analysis published last year.
One reason for the collapse in recovery rates: the extensively documented chronic underinvestment in replenishing the asset base, and instead “investing” in buybacks and dividends.
So why are today’s assets garnering less enthusiasm than before? One reason, of course, is that a large portion of defaults today are in the commodity space, which are finishing with sub 10% recoveries as investors try to grapple with a market which may not have hit its bottom. However, problems persist even outside of the commodity industries. Take a look at the YoY growth in capex for non-commodity HY issuers (Chart 3). It’s striking how CEOs have invested much less in their businesses this cycle compared to previous ones. In fact, most of the capex growth since 2010 has come from energy issuers on the back of the US energy independence story in the early part of the decade; and we all know not to count on that going forward. On top of that, asset impairments as a percentage of tangible assets are through the roof, chipping away at valuations of an already low asset base. Not surprisingly, non-commodity recoveries reflect the same extent of erosion post 2010 as does overall HY (Chart 4).
If that wasn’t bad enough, it gets worse: “Given that HY companies have seen hardly any organic growth within last few years, it is of little surprise that recoveries today are so low. The bad news is that we think they are going to decline further.”
Contopoulos then analyzes various fundamental trends to determine the shape of the upcoming default cycle, and concludes with the following bleak assessment:
So where does this leave us? According to our model, should the default cycle look similar to the 1999 experience (2yr cumulative DR of 25%), and debt-to-asset ratio touch the highs of that cycle (0.51x), recoveries can be as low as 16c on the dollar. There is also a case to made that if there is no catalyst to total capitulation, and we see a longer flatter default cycle, we could see 2yr cumulative default rates much less than 25%. While this is reasonable, one can also argue that debt-to-asset ratio which today already stands at 0.48x, could ultimately go much further past 0.51x. Additionally, as we have seen in the post crisis years, default rates matter less than debt-to-asset ratios, meaning recoveries even under a rolling blackout scenario could even be worse than we expect.
Table 3 presents a scenario analysis of the range of recoveries to expect in the next few years depending on one’s forecast of default rates and debt-to-asset ratios. In almost any scenario recovery rates stand to be well below 30% this cycle.
According to Contopoulos, investors are only slowly starting to appreciate just how bad the future will be for junk bond investors:
While most investors we have talked to appreciate that recoveries will be lower going forward, we think it’s just as important to highlight just how much. Because, 8% yield may sound attractive if your expected credit losses are 400bps (6% DR*70% LGD). But the picture suddenly becomes unappealing knowing these losses could accumulate to 500bps; suddenly leaving you with an unremarkable excess spread cushion.
And it appears that investors have begun to pay attention, at least as seen from the events in the primary market. It’s no surprise that CCC issuance has cratered in the last year as investors are unwilling to extend credit to low quality issuers. Now it seems they are even rewarding BB issuers for using their newly raised debt judiciously, as can be seen from the lower clearing yields for debt being earmarked for capex investment over anything else
Welcome to the brave new world of massive default losses and record low recoveries.
This new world will be one where investors should and will adjust their expected compensation higher to make up for rising defaults, dwindling recoveries, and declining liquidity, all of which are here to stay.
Come to think of it, we almost prefer Adam Parker’s incoherent ramblings about cockroaches better: at least it gave some sense that there could be a happy ending. If only for the cockroaches that is….
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Submitted by Lance Roberts via RealInvestmentAdvice.com,
Over the weekend, Donald Trump, in an interview with the Washington Post, stated that economic conditions are so perilous that the country is headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market.
Of course, such a distinctly gloomy view of the economy runs counter to the more mainstream consensus of economic outlooks as witnessed by some of the immediate rebuttals:
There are no signals of any "massive" recession ahead or a market crash and his talking like this is grotesque. https://t.co/bPaLZl5i5E
— Ben White (@morningmoneyben) April 3, 2016
Here is the problem.
Ben is correct. There is CURRENTLY no evidence of a recession now, or even in the few months ahead. There never is.
The majority of the analysis of economic data is short-term focused with prognostications based on single data points. For example, let’s take a look at the data below of real economic growth rates:
Each of the dates above show the growth rate of the economy immediately prior to the onset of a recession.
You will remember that during the entirety of 2007, the majority of the media, analyst and economic community were proclaiming continued economic growth into the foreseeable future as there was “no sign of recession.”
I myself was rather brutally chastised in December of 2007 when I wrote that:
“We are now either in, or about to be in, the worst recession since the ‘Great Depression.'”
Of course, a full-year later, after the annual data revisions had been released by the Bureau of Economic Analysis was the recession officially revealed. Unfortunately, by then it was far too late to matter.
However, it is here the mainstream media should have learned their lesson.
The chart below shows the S&P 500 index with recessions and when the National Bureau of Economic Research dated the start of the recession.
There are three lessons that should be learned from this:
For example, the level of jobless claims is one data series currently being touted as a clear example of why there is “no recession” in sight. As shown below, there is little argument that the data currently appears extremely “bullish” for the economy.
However, if we step back to a longer picture we find that such levels of jobless claims have historically noted the peak of economic growth and warned of a pending recession.
This makes complete sense as “jobless claims” fall to low levels when companies “hoard existing labor” to meet current levels of demand. In other words, companies reach a point of efficiency where they are no longer terminating individuals to align production to aggregate demand. Therefore, jobless claims naturally fall.
But there is more to this story.
The last two-quarters of economic growth have been less than exciting, to say the least. However, these rather dismal quarters of growth come at a time when oil prices and gasoline prices have plummeted AND amidst one of the warmest winters in 65-plus years.
Why is that important? Because falling oil and gas prices and warm weather are effective “tax credits” to consumers as they spend less on gasoline, heating oil and electricity. Combined, these “savings” account for more than $200 billion in additional spending power for the consumer. So, personal consumption expenditures should be rising, right?
What’s going on here? The chart below shows the relationship between real, inflation-adjusted, PCE, GDP, Wages and Employment. The correlation is no accident.
Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, can not be repealed.
More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer?
The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy.
To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy. No sign of recession? Are you sure about that?
Importantly, the extremely warm winter weather is currently wrecking havoc with the seasonal adjustments being applied to the economic data. This makes every report from employment, retail sales, and manufacturing appear more robust than they would be otherwise. However, as the seasonal trends turn more normal we are likely going to see fairly negative adjustments in future revisions. This is a problem that the mainstream analysis continues to overlook currently, but will be used as an excuse when it reverses.
Here is my point. While Trump’s call of a “massive recession” may seem far-fetched based on today’s economic data points, no one was calling for a recession in early 2000 or 2007 either. By the time the data is adjusted, and the eventual recession is revealed, it won’t matter as the damage will have already been done.
As Howard Marks once quipped:
“Being right, but early in the call, is the same as being wrong.”
While being optimistic about the economy and the markets currently is far more entertaining than doom and gloom, it is the honest assessment of the data and the underlying trends that is useful in protecting one’s wealth longer term.
Is there a recession currently? No.
Will there be a recession in the not so distant future? Absolutely.
Trump’s call for a “massive recession” may very well turn out not to be true. However, whether it is a mild, or “massive,” recession will make little difference as the net destruction to personal wealth will be just as disastrous. That is the nature of recessions on the financial markets.
Of course, I am sure to be chastised for penning such thoughts just as I was in 2000 and again in 2007. That is the cost of heresy against the financial establishment, but well worth paying to keep my clients from being burned at the stake, not if, but when the next recession begins.
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Nothing to see here, move along…
But but but the "great" jobs data… The dead-cat-bounce is over…
Trannies had a tough day…
But US equities are holding on to some of the gains from Friday's exuberance…
Notably there was significant selling at VWAP (suggesting institutional derisking)…
Treasuries traded in a worryingly narrow illiquid range today ending very modesly lower in yield…
The US Dollar Index ended the day unchanged after weakening from overnight strength after the dismal slew of US data today…
Despite the "deadness" of the FX and bond markets, commodities had a volatile day with crude gettin smashed to one-month lows…
Finally, as a gentle reminder…
Charts: Bloomberg
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Submitted by David Stockman via Contra Corner blog,
Simple Janet has attained a new milestone as a public menace with her speech to the Economic Club of New York. It amounted to yelling “stay” in a burning theater!
The stock market has been desperately trying to correct for months now because even the casino regulars can read the tea leaves. That is, earnings are plunging, global trade and growth are swooning and central bank “wealth effects” pumping has not trickled down to the main street economy. Besides, there are too many hints of market-killing recessionary forces for even the gamblers to believe that the Fed has abolished the business cycle.
So by the sheer cowardice and risibility of her speech, Simple Janet has triggered still another robo-trader spasm in the casino. Yet this latest run at resistance points on a stock chart that has been rolling over for nearly a year now underscores how absurd and dangerous 87 months of ZIRP and wealth effects pumping have become.
As we have indicated repeatedly, S&P 500 earnings—–as measured by the honest GAAP accounting that the SEC demands on penalty of jail——-have now fallen 18.5% from their peak. The latter was registered in the LTM period ending in September 2014 and clocked in at $106 per share.
As is shown in the graph below, the index was trading at 1950 at that time. The valuation multiple at a sporty 18.4X, therefore, was already pushing the envelope given the extended age of the expansion.
Indeed, even back then there were plenty of headwinds becoming evident. These included global commodity deflation, a rapid slowdown in the pace of capital spending and the vast build-up of debt and structural barriers to growth throughout China and its EM supply train, as well as Japan, Europe and the US.
In the interim it has all been downhill on the profit and macroeconomic front. By the March 2015 LTM period, S&P reported profits had dropped to $99 per share and have just kept sliding, posting at only $86.44 per share for the December 2015 LTM period just completed.
So there you have it. The casino has actually been trying to mark-down the Bubble Finance inflated stock prices that the Fed’s wealth effects lunacy has generated since the great financial crisis. Yet our Keynesian school marm and her posse just keep finding one excuse after another to feed the algos.
Indeed, Yellen had barely ambled up to the rostrum, and they had the market back up to 2065. After Friday’s further bump to 2072, the math of that is a round 24X earnings.
That’s right. With ample evidence of financial risk and bubbles cropping up everywhere during the past 18 months, Simple Janet stood there at the New York Economics Club podium and threw the robo-traders a big sloppy wet one!
Let’s cut to the chase. You can not get more clueless or irresponsible than that.
Even if you take the Humphrey-Hawkins mandate as literally and mechanically as the creationists read the scriptures, the Eccles Building should have declared “mission accomplished” long ago. After all, by the writ of the BLS itself, unemployment is at the historical 5.0% full-employment marker and core CPI is at 2.3% and rising.
But Simple Janet is willing to nit-pick even the phony Humphrey-Hawkins targets to the second decimal place because she apparently has no idea that a 38 bps money market rate is not a pump toggle on some giant bathtub of GDP; it’s an ignition fuse that is fueling the greatest speculative mania in modern history.
The longer the Fed perpetuates today’s massive 24X bubble with soporific open mouth interventions like Yellen’s pathetic speech last week, the more violent and traumatic the risk asset implosion will ultimately be. You would think our monetary politburo might at least notice that after trading in no man’s land between 1870 and 2130 on the S&P 500 for the past 700 days, the casino is positioned exactly where it stood in 2007 and 2000.
.
It was also never true that the financial market is merely a neutral transmission channel to the main street economy that can be used as a pumping device to manage GDP and the dual mandate variables embedded in it.
In fact, financial markets are the delicate mainspring of the entire capitalist economy. The nuances of pricing in the money and debt markets, the exact shape of the yield curve, the cost of carry and maturity transformations, the price of options and hedging insurance, capitalization rates on earnings and cash flows and much more are what actually enable sustainable growth, real wealth creation and financial stability.
But the blunderbuss Keynesians who have taken control of the Fed and other central banks lock, stock and barrel are clueless. Their massive, chronic, heavy-handed intrusions in financial markets have falsified all prices and turned the financial markets into incendiary gambling casinos. There is no true price discovery left—-just an endless cycle of speculation and front-running that eventually reaches a breaking point and implodes.
We are there now. Yellen and her band of Keynesian pettifoggers insist on perpetuating the bubble because they fear a hissy fit in the casino, but pretend to justify their dithering by reference to the “incoming data”.
Thus, in her New York speech Yellen mentioned three risks that purportedly justified the Fed’s decision to punt at the March meeting. The most preposterous was that growth in China is slowing and there is uncertainty about how it will handle the transition from exports to domestic sources of growth.
Is she kidding?
China is a madcap $30 trillion credit bubble waiting to fracture and bring the world economy down for the count with it. I have actually been in China for the last 10 days and the evidence that this giant construction site will soon grind to a stop is palpable. I will report more on this state made disaster next week.
But the very idea that the Fed would base a decision to delay normalization of money market rates after 87 months of ZIRP because the China credit binge is finally cratering speaks volumes. It proves that the Eccles Building is inhabited by monetary crackpots who cannot even recognize a giant Ponzi scheme when it is starring them in the face.
Likewise, Yellen unaccountably cited a second risk to the economic outlook that justifies deferral of rate normalization. Namely, that the potential for further commodity and especially oil price weakness could have “adverse” effects on the global economy.
Really!
Of course there is going to be much more carnage in the oil patch. After all, a decade of coordinated money printing by most of the world’s central bank eventually generated spectacular levels of excess capacity and malinvestment in the global oil and gas patch.
To wit, between 2004 and 2014 total debt of the global oil and gas industry nearly tripled, rising from $1.1 trillion to nearly $3 trillion. And that was not the free market at work, or proof that “drill baby drill” had anything to do with an upsurge of technological innovation and enterprenurial spirits.
Instead, the current massive overhang of surplus stocks and excess production capacity is owing to the drastic mispricing of capital and the temporary bubble in petroleum demand that pushed prices into an artificial and unsustainable triple digit range. Accordingly, the present oil price collapse is just getting started. It will be subtracting from CapEx and production levels in the US and around the world for years to come.
Finally, Yellen offered a third excuse, and it was a real whopper. In effect, she said that after nearly 100 months of “extraordinary” monetary policies the Fed dare not risk another recession because it stranded itself on the zero bound and has no dry powder remaining to counteract the next downturn.
Does this ship of fools domiciled in the Eccles building really believe they have abolished the business cycle? By the sound of the following, there is no other conclusion possible.
I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”
Yes, Yellen is not only guilty of yelling “stay” in a burning theater. Speaking to the Wall Street speculators assembled at the Economic Club of New York, she actually threatened to keep the carry trade gambles in free money until they finally blow the place sky high for the third time this century.
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It’s time to settle the campus speech and sex wars once and for all—in a court of law, says the Foundation for Individual Rights in Education.
As I previously noted, today marks the fifth anniversary of the infamous “dear colleague” letter that initiated the federal government’s current crackdown on free expression and due process on college campuses. On this day, five years ago, the Education Department’s Office for Civil Rights advised colleges and universities that they would lose federal funding if they did not strengthen their efforts to protect students from sexual harassment and violence.
OCR’s authority stems from Title IX, a one-sentence-long federal statute mandating gender equality in higher education. The Obama administration’s OCR team, however, has interpreted Title IX in a manner that gives the agency seemingly limitless power to compel universities to follow speech-suppressing policies. The dear colleague letter, for instance, obligates universities to adjudicate sexual misconduct using a preponderance of the evidence standard, even though this dictate cannot be found within Title IX itself. OCR is essentially making up rules to advance its agenda that fall outside of the scope of the law, critics contend.
Enough is enough, says FIRE. The organization is asking a student or institution to sue the agency directly—and will pay all relevant legal fees:
Five years ago today, the Department of Education’s Office for Civil Rights (OCR) announced sweeping new requirements for colleges and universities adjudicating allegations of sexual misconduct. By unilaterally issuing these binding mandates via a controversial “Dear Colleague” letter (DCL), OCR ignored its obligation under federal law to notify the public of the proposed changes and solicit feedback.
To correct this error, and to begin to fix a broken system of campus sexual assault adjudication that regularly fails all involved, the Foundation for Individual Rights in Education (FIRE) seeks a student or institution to challenge OCR’s abuse of power. FIRE has made arrangements to secure legal counsel for a student or institution harmed by OCR’s mandates and in a position to challenge the agency’s violation of the Administrative Procedure Act(APA). In keeping with FIRE’s charitable mission to advance the public interest, representation will be provided at no cost to the harmed party.
FIRE’s argument is that OCR has violated the Administrative Procedure Act, which requires agencies to make new rules available for public scrutiny before they go into effect. Since OCR never gave the public a chance to weigh-in on the preponderance of the evidence standard, the agency violated APA, according to FIRE.
When cornered on this question, OCR has suggested that its guidance isn’t actually mandatory, meaning that it hasn’t violated APA. Of course, the guidance certainly looks mandatory to the hundreds of institutions meekly submitting to it.
The law firm of Kaiser, LeGrand & Dillon is prepared to represent the student or students who answer FIRE’s call for a lawsuit.
“For months now, people have been asking how OCR could possibly think it had authority to essentially take over campus sexual misconduct proceedings nationwide simply by sending out a letter that no one in the general public got to look at before it went out,” Justin Dillon, a partner at the firm, wrote in an email to Reason. “We’re obviously thrilled to partner with FIRE and see if we can finally make OCR answer that question.”
Interested students can contact FIRE at APA@thefire.org.
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California Gov. Jerry Brown simply does not care about what will happen to citizens in non-urban parts of the state under a $15 minimum wage.
He didn’t literally say that, but what he did say when today was that he understood that there may be some bad outcomes for such a massive, unprecedented mandate. And then he signed it into law anyway.
Here’s the quote of what he said. Look for one little adverb that indicated (probably accidentally) exactly why the law was passed, even though Brown has previously been resistant to it:
Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.
The key word is “politically.” Politics don’t hold communities together. But they can keep entrenched interests in power.
Read more from Brown’s signing here, my analysis (and others) on the potential terrible impact of the increase here and here (including interactions with California labor law that nobody is even talking about), and note that New York Gov. Mario Cuomo also signed a $15 minimum wage law today.
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Whether you define gold as a barbarous relic, a pet rock, “tradition“, or “doomed“, Russia surely refers to it as a saving grace. As Russia’s foreign reserves dwindled to just under $350 billion in early 2015, many predicted Russia was going to burn through all of their reserves in the not too distant future as they dealt with a depreciating Ruble and plummeting oil revenues.
However, this dire prediction did not pan out mainly due to one thing: Russia’s strategic decision to load up on as much gold over the past few years as it possibly could.
As we have shown in the past, Russia has shown an insatiable desire for Gold, and as Bloomberg points out, has increased their holdings more than 12% since last July.
This has paid dividends (figuratively in Russia’s case, literally for those who participate in India’s gold monetization scheme) as Gold’s price has helped push Russia’s foreign reserves back over $380 billion for the first time since January 2015.
Perhaps most critically, what their gold purchases have afforded the Central Bank of Russia is the luxury of not having to purchase fx in the market. Purchasing foreign currencies to increase reserves would put further downward pressure on an already depressed Ruble. Russia is walking a fine line between stimulating their economy, and containing inflation (something further fx purchases would surely exacerbate), and they are content to not have to press that any further at the moment.
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Thousands of people are gathering in Reykjavik’s Austurvöllur square in front of the parliament building to vent their anger over the previously discussed revelations involving Prime Minister Sigmundur Davíð Gunnlaugsson and the Panama Papers. As a reminder, various local politicians have already asked for his resignation which he has refused to grant. Additionally, as Iceland Monitor writes, the PM’s words in an interview today that “It’s not like everyone is going to attend the protest,” seems to have sparked further fury.
Many shops and restaurants have put up signs that they will be closed for the duration of the protest.
Police chief at the Reykjavik Metropolitan Police, Ásgeir Þór Ásgeirsson expects large crowds and says that the preparations are ” standard”. “We hope that the public will cooperate with us and show enough respect towards the police as not to throw things at us or to somehow make us the target of the protest.”
One early protester was arrested for throwing skyr at the house of Parliament this afternoon.
The protest started at 5 pm local time: it can be watched in real time below.
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