Month: September 2016

Submitted by Saxo Bank Head of Macro Analysis, Christopher Dembik via TradingFloor.com,

 

September will be quite a busy month for investors since there are around 30 major central banks meetings scheduled. Since the Bank of England’s last policy announcement, the total monthly amount in global official quantitative easing has reached almost $200 billion, which corresponds, for the purpose of comparison, to Portugal’s annual GDP in 2015.

Long-rumoured and oft-discussed, QE infinity is now a reality. Global credit conditions are the loosest they have ever been with the average yield on global government bonds (all maturities included) evolving to around 0.7%. 

The Federal Open Market Committee meeting on September 20-21 is the most crucial monetary policy event this month. There is clearly a case for an interest rate hike, but the final decision of the central bank will depend on the data for the month of August – especially the September 2 nonfarm payrolls report that could confirm the good momentum in the US labour market.

According to Bloomberg, more than 50% of investors expect a rate hike will happen before the end of the year.

In the wake of a Fed hike, monetary policy divergence would increase between the US and the euro area, which could further attract attention towards the US dollar. The European Central Bank will have fresh economic data this month that are likely to confirm downside risks are still present. These will encourage the central bank to adjust its asset purchase program at its September 8 meeting.

Our baseline scenario is that the ECB will extend its asset purchase program by six to nine months and will increase the issuer limits to 50%.

With the exception of the Russian central bank, the other central banks (Bank of Japan, Bank of England, Reserve Bank of Australia, etc.) should keep rates unchanged since they have already adjusted monetary policy in the past two months.

 

Global overview: Any reason to smile?

Is there a light at the end of the tunnel for the global economy? Consensus expected that the global PMI would enter into contraction this summer, which would constitute an early sign of recession. Actually, however, it inched up to a three-month high in July at 51.4.

This does not mean the global economy is getting better – far from it. The composite PMI output index for developed markets is still very sluggish. The stronger-than-forecasted emerging market growth (the composite PMI output index reached 51.7) is the main explanation behind the relatively solid global PMI performance in July.

Downward risks are still present, and that’s why central banks remain on alert.

The numerous central bank meetings scheduled this month could push volatility higher. The rapid reaction of central banks in the wake of Brexit certainly averted a panic this summer.

Over the past few weeks, the BoJ’s Kuroda and the ECB’s Coeure confirmed they won’t hesitate to act decisively again if needed, which is a clear signal that new measures are in the pipeline. However, one should not misinterpret their words. Global central banks acknowledge that monetary policy is not to remain the only game in town, thus they push more and more to hand the policy baton to the fiscal side of things.

We think the possible rate hike in September should go very smoothly because it has already been priced in and, above all, it will not fundamentally change global credit conditions. After all, the scale of the rate increase will be quite low, and is expected to reach a maximum of 25 basis points.

 

Western Europe: No time to rest on its laurels

The other central bank at the top of the agenda in September is the ECB. Governor Mario Draghi has hinted that the ECB will conduct a review of the impact of monetary policy this month based on fresh economic data.

This review will certainly focus on the effect of the corporate bond buying program (CSPP) that was launched last June and that has been pretty successful until now. The purchases reach €7 billion euros/month (mostly BBB1 and lower-rated companies), which is quite remarkable given the summer lull. However, risks on the downside remain thus we believe that there is a 100% chance that the review will open the door to further easing.

The most likely scenario is that the ECB extends QE by March 2017 to six or nine months, which is almost a done deal, and that it sets the issuer limits at 50% instead of 33%. This could allow the ECB to buy more German bonds and it would be a coherent decision considering the likely extension of the asset purchases.

We cannot rule out further deposit rate cuts but it is a risky monetary policy instrument (as outlined by the last International Monetary Fund staff report on the euro area) that can seriously hurt the profitability of the financial sector.

Therefore, it is probable the ECB will restrain from using this tool again in the short term. In the long run, the most logical evolution of the ECB monetary policy would consist in increasing the monthly amount of the CSPP in order to lower further borrowing and investment costs for large companies.

In this matter, the Bank of England showed the way one month ago by deciding to buy corporate bonds up to £10 billion/month.

 

Asia–Pacific: More easing to come…but later

In Asia-Pacific this month, the focus will be mainly on Japan and Australia. “Wait-and-pray” is the new mantra in Japan as the timid measures unveiled last July prove the central bank does not have much room left to act in the current monetary policy framework.

Since January 1, 2015, the BoJ’s balance sheet has increased by a massive 58% and the yen by 14% versus the US dollar. It is increasingly clear that Japanese monetary policy has not had the desired effect: it has not pushed the country out of deflation (Japan's July CPI print posted its largest annual fall in three years) and it has not succeeded in devaluing the Japanese yen, which is the most direct and massive consequence of accommodative monetary policy.

In this context, the next step for the BoJ will be when the report on the impact of the current monetary policy is submitted to the government, which should happen by the end of the month. Until then, no new measures are expected by the BoJ at its next meeting scheduled for September 20-21.

The ball is in the government’s court, monetary policy cannot do much at this level.

The BoJ is not the first global central bank to recognise that current monetary policy is about to reach its limits. In its last quarterly bulletin, the BoE recognised that the “money multiplier” approach, commonly used by policymakers, does not work. Moreover, RBA governor Stevens, who is leaving office, recently declared that he has “serious reservations about the extent of reliance on monetary policy around the world," explaining that "it isn’t that the central banks were wrong to do what they could, it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up”.

He has perfectly summarised in two sentences the main problem of the global economy: monetary policy has replaced fiscal policy since 2007 but it is not sufficient to boost nominal demand and growth. Fiscal policy is also required to stimulate the economy.

This is exactly the message sent by the BoJ to the Japanese government one month ago.

 

CEE–Russia: Waiting for the storm to pass

In the CEE-Russia area, unchanged policy rates are widely forecasted by the market, except for Russia. The last economic figures could push the Russian central bank to lower interest rates by at least 25 basis points to 10.25% at its meeting on September 16.

Headline inflation was a bit lower than expected in July, at 7.2% year-over-year versus 7.5% y/y in June, which is the lowest level since March 2014. Moreover, preliminary data point out that Russia just saw its smallest economic contraction since 2014 (minus 0.6% on the second quarter y/y).

The primary force driving improvement was the industrial sector that benefited from a lower rouble but there are also early signs of recovery regarding consumer confidence and vehicle sales.

In this context, the central bank could be encouraged to lower rates in order to put the economy on the comeback trail. If it does not stimulate growth, the risk is quite high that the recovery will quickly falter and the economy will decline again, following what happened at the end of 2015.

Therefore, there is a strong probability the central bank will began a new cycle of rate cuts in September. 

 

Nordic: Things are getting very messy for Norway

In the Nordic area, the focus will be on Norway. The consensus expected a new rate cut by the Norges Bank on September 22 but this option is less and less likely due to soaring inflation. For quite a while, the Norges Bank had chosen not to pay too much attention to the evolution of inflation in order to focus on economic growth.

Accepting an inflation rate of 3.7% (June) despite an inflation target of 2.5% clearly takes some courage. Norway is an exception in a world of low inflation. Although history illustrates that central banks are able to fight high inflation, it seems that the Norges Bank has played with fire for too long.

Since March, there has been a remarkable acceleration in housing prices (11.14% y/y in July). The central bank got it all wrong because it had forecasted that prices would only increase by 4% y/y. The problem is that the rise in property prices is accompanied by an increase in household debt that is also higher than the Norges Bank assumed last spring.

In this context, a new rate cut would put into question the credibility of the central bank and its will to maintain price stability. The best solution would be to wait for the storm to pass, hoping the housing bubble will not burst too fast. 

 

Middle East: Tough Q3 for Turkey

Our worst fears were realized for Turkey. The economy has been severely hit by the attempted military coup. The Turkish business climate index collapsed by 24 points in August while core sales fell by 33% in July compared to the previous month.

As expected, Turkey’s central bank cut its interest rate for the sixth straight month in August to 8.5%. It is quite unlikely the central bank will be able to fully meet its commitment to maintain high interest rates in order to contain inflation. Political pressure will increase to further cut rates in the purpose to support domestic demand.

A new rate cut is not our baseline scenario for the central bank meeting on September 22. It is highly probable that the status quo will prevail this month. However, we expect further easing in the coming months and that Turkey’s overnight lending rate will be progressively cut to at least 8% by the end of the year.

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Angela Merkel, and Europe in general, had hoped they had managed to move beyond the unprecedented wave of refugees unleashed on the content in 2015 courtesy of the German Chancellor’s open door policy, with the fragile March 2016 refugee deal signed with Turkey. Sadly – for both Europeans who have suffered a surge in terrorist attacks as a result and for Merkel, whose approval rating has subsequently plunged – Europe is once buckling under the weight of a new wave of migrants.

According to Reuters, some 3000 migrants were saved in the Strait of Sicily in 30 separate rescue missions just on Tuesday, the Italian coastguard said, bringing the total to almost 10,000 in two days and marking a sharp acceleration in refugee arrivals in Italy. The migrants were packed on board dozens of boats, many of them rubber dinghies that become dangerously unstable in high seas. No details were immediately available on their nationalities.

Data from the International Organization for Migration released on Friday said around 105,000 migrants had reached Italy by boat in 2016, many of them setting sail from Libya. An estimated 2,726 men, women and children have died over the same period trying to make the journey.

A Red Cross member carries a child as migrants disembark from the Italian
Navy vessel Sfinge in the Sicilian harbour of Pozzallo, southern Italy

The reason for the surge are favorable weather conditions, which this week have seen an increase in boats setting sail. Some 1,100 migrants were picked up on Sunday and 6,500 on Monday, in one of the largest influxes of refugees in a single day so far this year. Italy has been on the front line of Europe’s migrant crisis for three years, and more than 400,000 have successfully made the voyage to Italy from North Africa since the beginning of 2014, fleeing violence and poverty.  So far this year, some 116,000 migrants—many of them from sub-Saharan Africa—have arrived in Italy. That compares with 154,000 for all of 2015, a phenomenon overshadowed by the surge of migrants arriving in Greece via Turkey.

The closing of European borders to the migrants means that, unlike, in previous years, the vast majority are stuck in Italy, unable to reach Europe’s north as they had hoped. Italian reception centers now host 145,000 migrants, according to the interior ministry in Rome.

And while North African refugees are fleeing the chaos in their native lands by boat, hoping to reach Italy in a perilous voyage across the Mediterranean, Greece is once again the target of those refugees from Syria who find themselves in Turkey as an intermediate step.

According to the WSJ, the number of people landing on Greek islands has risen to about 100 a day in August, up from fewer than 50 a day in May and June. About 460 people landed on Greek islands on Monday, a number Greece hasn’t experienced since early April.

The traffic is still far below daily peaks of 6,800 in October last year. But the rising numbers are making Greek and EU officials worried that the fragile deal with Turkey—aimed at returning almost all who land on Greek shores—could break down.

It could get much worse: as we have reported over the past few months, as Turkish officials, angered by what they see as a lack of European support for Turkish democracy as Ankara roots out alleged supporters of July’s failed coup, have threatened to scuttle the migration deal if the EU doesn’t grant Turkish citizens visa-free travel to the bloc by October. Turkey says it was promised the concession.

“We cannot independently verify an uptick, but even if it were true it is related to the increasingly popular view among illegal immigrants that the Turkey-EU agreement is on the brink of collapse and that there will be no legal mechanism to return them to Turkey once they cross the Aegean Sea,” a senior Turkish official said. “If the European Union fails to honor its agreement with Turkey, no matter how strong the enforcement, there will be greater incentives for more migrants to risk their lives at sea.”

As we have further said, Turkey continues to have most of the leverage, something the WSJ confirms: “The tough talk from Turkey has alarmed Athens, which knows that any sharp increase in migration would mainly affect Greece. “We will be tested very hard if the agreement with Turkey collapses,” Greek Migration Minister Yiannis Mouzalas said this month.”

Greek officials say they suspect the recent uptick in migrant arrivals partly reflects a manpower issue: Numerous Turkish military and police personnel were suspended as part of the Turkish government’s postcoup crackdown. Turkey says it is assiduously keeping up its end of the migrant deal and that its security forces’ operational ability hasn’t been hampered in the wake of the coup attempt.

 

The closure of the Balkan migration route into the heart of Europe earlier this year has left nearly 60,000 refugees and other migrants trapped in Greece. Mr. Mouzalas said that if it weren’t for the deal with Turkey, which has slowed arrivals since March, 130,000 to 180,000 more people might be stuck in Greece.

Unlike in Italy, in smaller, poorer Greece, the numbers arriving on Aegean islands don’t need to reach 2015’s high levels to cause problems. The five islands that receive most of the newcomers—Lesbos, Leros, Chios, Kos and Samos—are already struggling.

Chios is currently sheltering about 3,300 migrants and refugees, three times its camp’s capacity. In the camp, built around an abandoned aluminum factory, migrants live in overcrowded containers with unsanitary conditions. Six to eight people, often from two different families, typically share a room designed for four. “We live like animals here,” says Wassim Omar, a 34-year-old English teacher from Syria, as he waits in the line for his family’s dinner of potatoes, olives and bread.

Many complain there isn’t enough food or access to doctors. Women say they and their children are afraid to leave their rooms after dark, as fights often break out among migrants of different nationalities.

Because of the overflow, many stranded on Chios are sleeping in two open camps closer to the island’s port. The razor fence around the official center also has holes in it, allowing people to walk in and out. Locals have complained of a surge in thefts and damage to their crops. To ease the situation on the islands, the Greek government will transfer a few hundred people to a new camp on the mainland, starting from Chios. Officials fear, though, that the move may encourage more people to come.

Vournous, the mayor, says he fears tensions between locals and migrants could easily escalate.

What is probably most vexing for the Greeks and the Italians, is that the influx of refugees was unleashed as a result of German, and specifically Angela Merkel, policies. However, as a result of border closures, Germany has largely succeeded in isolating itself from the refugee flow. The losers, once again, Europe’s poorest, peripheral nations.

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Earlier today we reported that in an surprising and abrupt development, one which may lead to ripple effects on global supply-chains and worldwide “just-in-time” logistics, the biggest South Korean shipping company and the world’s 7th largest container shipper, Hanjin Shipping, filed for bankruptcy leaving its assets frozen as ports from China to Spain denied access to its vessels.

 

It did not take long for the fallout from this historic bankruptcy – the largest ever for a container shipper in terms of capacity –  to reach the US, because as Bloomberg reported moments ago, at least three Hanjin ships are currently stranded off the California coast.

• STRANDED SHIPS INBOUND FROM KOREA, CHINA, JAPAN: OFFICIAL
• THREE HANJIN CONTAINER SHIPS STRANDED OFF CALIFORNIA COAST
• MARINE EXCHANGE OF S. CALIFORNIA OFFICIAL COMMENTS ON SHIPS

While we await details on just how this asset “freeze” will be resolved, we wonder what is the cargo on these ships, where it was meant to be delivered to, and just how much US production will be bottlenecked as a result of missing key supply-chain components. And then, we extrapolate that to the dozens of Hanjin ships around the globe.

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Here’s the big irony for the markets.  As we explain in Splitting Pennies book, Forex is the largest market in the world and the least understood.  Corporate America certainly doesn’t understand Forex.  Well, according to this report, about 50% do:

Forty-eight percent of nonfinancial companies listed on U.S. stock exchanges remained exposed to volatility in foreign exchange rates, commodity prices and interest rates in 2012 because they did not hedge them, according to a new study by Chatham Financial.  The interest-rate and currency risk adviser studied a sample of 1,075 companies ranging from $500 million to $20 billion in revenue. The nearly half that did not use financial instruments to hedge their exposures demurred despite the threat the risks posed to both the balance sheets and reported earnings (see chart at bottom). “That was surprising, knowing the pressure senior management teams and treasury feel around identifying ways to reduce risk to factors within their control so business can focus on other areas,”Amol Dhargalkar, managing director for corporate advisory at Chatham, says.

Many analysts have pointed to the fact that the new excuse of “Currency Headwinds” (accountant code word for “Don’t Understand Forex”) to define earnings in 2016:

Companies that do business outside of the USA have substantial forex exposure. This exposure can be an asset, if properly managed – but often it is a liability. Recently, the trend in corporate accounting has been to blame “currency headwinds” which can be a good excuse for up to $10 billion in losses. Did these executives ever hear about hedging?

So what does this data mean?  It means that half of Corporate America is speculating BIG in Forex.  Not hedging, when you have FX positions, is speculating.  For example, imagine you’re a big US multinational like McDonalds (MCD).  McDonalds (MCD) is a great example because they are one of the companies that lives off their FX hedges.  Without FX hedging, it’s questionable if MCD could survive, because more than 60% of their revenue comes from non-US Dollar (USD).  That means their revenue, without FX hedging, would be nearly an exact function of the FX markets (which is the case for these companies that don’t hedge).  Companies that lose billions of dollars due to ‘currency headwinds’ – they are losing huge in Forex.  

Here’s the irony.  Pension Funds and many institutions are reluctant to invest in Forex strategies because they are ‘risky’.  But they invest in the stock of companies that lose billions in Forex!  And that’s OK.  Well, everyone is losing, so why not us too.  Heck, I don’t want to be singled out as the one state pension fund that’s actually MAKING money for our retirees, that might cause me to get promoted, or lose my job.  

Why don’t these companies hedge you ask?  Isn’t it their fiduciary duty to their shareholders?  Here’s one perspective from PWC:

When a publicly held company engaged in a multi-billion dollar investment in an overseas location
recently, the firm considered using a hedge — or swap — contract to reduce the risk that a big currency
swing would impact costs and financial results. The plan was sound financially. Yet, management had
concerns about the reaction of investors to this approach and decided to drop the hedging plan, says
Chris Rhodes, accounting advisory services partner at PricewaterhouseCoopers (PwC).  Why? Because the CFO determined that,
although the hedge would protect all the cash
spent in the foreign jurisdiction against currency
exposure, the cost of capital — in this case
borrowing in external markets — “would be
negatively impacted by the inability of some
analysts to understand the reporting issues
involved,” Rhodes explains. “The concern is that,
although many analysts would immediately grasp
the sophisticated currency-hedging procedures
that were key to the plan, others might not.”

So you see, according to this perspective, CFOs understand Forex, but they understand that others such as analysts don’t understand, and think that there’s a negative perception problem, to closing a big gaping hole in their FX exposure.

One year in the 90’s, Intel Corporation made more money on their FX positions than they did selling processors.  Not all of Corporate America is completely stupid.  There are some savvy FX managers out there, that do a great job.  But for the other half, one has to wonder if FX volatility will finally drive these unhedged companies out of business.

Here’s what you see on every street corner in Russia:

At least, some humans are prepared for potential financial catastrophe, even if it’s as simple as FX volatility.

To learn more about Forex Hedging, checkout Splitting Pennies – your pocket guide designed to make you an instant Forex Genius!  Or checkout Fortress Capital Forex Hedging.

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Authored by Paul Craig Roberts,

Paul Wolfowitz and the lies that he told in the high government positions that he held are responsible for a massive number of deaths and massive destruction in seven countries. Wolfowitz has announced his vote for Hillary Clinton. Does this make you feel reassured?

The real surprise would have been Wolfowitz’s announcement in favor of Donald Trump. So why was what was expected news?

Trump has said that he doesn’t see any future in the conflict Washington has initiated with Russia, and Trump questions the point of NATO’s continuing existence. These peaceful attitudes make Trump into a “national security risk” according to Wolfowitz. What Wolfowitz means is that a peace candidate is a threat to Wolfowitz’s doctrine of US world hegemony. In the crazed mind of Wolfowitz and the neoconservatives, America is not safe unless it rules the world.

Hillary is a warmonger, perhaps the ultimate and last one if she becomes president, as the combination of her hubris and incompetence is likely to result in World War 3. On July 3, 2015, Hillary declared: “I want the Iranians to know that if I’m president, we will attack Iran. . . . we would be able to totally obliterate them.” http://ift.tt/2c5NMl8 The crazed Hillary went on from this to declare the President of Russia to be “the new Hitler.” Little doubt she thinks she can obliterate Russia also.

Hillary is the one who brought zionist neocon Victoria Nuland into the State Department to oversee the US coup in Ukraine in order to create more propaganda against Russia and force Washington’s European vassals to impose sanctions and place military bases on Russia’s borders, thus provoking a nuclear power and raising dangerous tensions.

This fits in perfectly with Wolfowitz’s intention. As Wolfowitz is Hillary’s likely Secretary of Defense, the two together mean World War 3.

When the Soviet Union collapsed, Wolfowitz, then a high Pentagon official, penned the Wolfowitz doctrine. The doctrine states that the principal goal of US foreign policy is to prevent the rise of other countries that could serve as constraints on US unilateralism. This means Russia and China,  The combination of Hillary with Wolfowitz should scare everyone in the entire world. The prospect of nuclear weapons being in such crazed hands as those of Hillary and Wolfowitz is the most alarming though imaginable.

The question is whether Hillary can be elected in the face of her violations of national security rules, for which she received a pass from corrupt Obama, and her heavily documented self-dealings that have produced a Clinton private fortune of $120 million and $1,600 million in their foundation. It is completely clear that the Clintons use public office for their private aggrandizement. Is this what Americans want? Two people who become even more rich as the world is led into nuclear war?

But with electronic voting machines, the question will not be decided by what Amerians want, but by how the electronic machines are programmed to report the vote. The US has already had elections in which the exit polls, always a reliable indicator of the winner prior to the appearance of electronic voting machines, indicated a different winner than the electronic voting machines produced. The secrecy of how the voting machines are programmed is protected by “proprietary software.” The machines have no paper trails, precluding vote recounts.

As both political establishments are fiercely opposed to Trump, how do you think the machines will be programmed? Indeed, the media is so opposed to Trump, the question is whether there will be exit polls and if there are, will they be misreported?

Republican operatives, not Republican voters, are all in a huff over their allegations that Trump is costing the Republicans votes. How can this be when Republican voters chose Trump over other candidates? Aren’t the Republican operatives saying that they, instead of the voters, should choose the Republican candidate?

If so, they are just like the Democrats. Some years ago the Democrat establishment created “super delegates” who are not chosen by voters. Enough “super delegates” were created in order to give the Party establishment the ability to over-ride the voters choice of presidential candidate. That it was the Democrats—allegedly the party of the people—who first took the choice away from the people is astonishing. Much information indicates that Bernie Sanders actually won the Democratic presidential nomination but was denied it by vote fraud and “super delegates.”

This is politics in America—totally corrupt. Chris Hedges might be right: nothing can change without revolution.

The demonization of Trump by the presstitutes is proof that Trump, despite his wealth, is regarded by the Oligarchs who comprise the One Percent as a threat to their agendas. The Oligarchs, not Trump, own or control the media. So the presstitute demonization of Trump is complete proof that he is the candidate to elect. The oligarchs who oppress us hate Trump, so the oppressed American people should support Trump.

The presstitute demonization of Trump did not work in the Republican primaries. Is it working in the presidential election? We don’t know, because the polls are reported by the presstitutes, not by Trump.

If the demonization does not work, and the election has to be stolen from Trump by the electronic machines, the consequence will be to radicalize Americans, something long overdue. Perhaps the expectation of this development is the reason all federal agencies, even the post office and Social Security, have acquired arms and ammunition, and Cheney’s firm Halliburton was paid $385,000,000 to build detention centers in the US.

Those who control us are not going to give up their control without a world war. In the United States evil has seized power from the people, and evil will not give it back.

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Just over a month ago, on July 21, we reported that Amazon and Wells Fargo had launched a partnership which they dubbed at the time a “tremendous opportunity”, to offer college students an even greater incentive to get buried under student loans when Wells Fargo announced it would offer a discount on private student loans to members of Amazon’s “Prime Student” program.

“We are focused on innovation and meeting our customers where they are—and increasingly that is in the digital space,” John Rasmussen, a Wells Fargo executive, said in a July 21 news release. “This is a tremendous opportunity to bring together two great brands.”

As we said then, “in Amazon’s latest attempt to entice shoppers into its premium Prime program, Wells Fargo will cut half a percentage point from its interest rate on student loans to Amazon customers who pay for a “Prime Student” subscription, which provides the traditional Prime benefits such as free two-day shipping and access to movies, television shows and photo storage. The subscription-based service will cost $49 a year, half the regular Amazon Prime fee.”

Meanwhile, Wells Fargo, Buffet’s favorite US bank, would benefit by expanding the size of its student loan portfolio. The third largest U.S. bank by assets and the second-largest private student lender by origination volume, is interested in “meeting our customers where they are – and increasingly that is in the digital space,” John Rasmussen, head of Wells Fargo’s Personal Lending Group, said in a news release. The bank had $12.2 billion in student loans outstanding at the end of 2015, compared with $11.9 billion at the end of 2014.

Apparently, Wells was not interested enough, because just six weeks after revealing said “tremendous opportunity”, the two companies unexpectedly ended their partnership.

As Bloomberg recaps our previous thoughts, “the deal between the giant online retailer and the nation’s third-largest bank by assets represented Amazon’s first foray into the competitive market of lending to college students. For Wells Fargo, which has aggressively tried to build up its student loan business, the partnership was meant to help the bank reach millions of potential customers who shop on Amazon and might be enticed by the bank’s half-percentage point discount on its higher-education loans.”

There was little justification for the abrupt deal failure: Catherine B. Pulley, a Wells Fargo spokeswoman, said Wednesday that the “promotion for Prime Student members has ended.” She didn’t immediately respond to messages seeking further details. Deborah Bass of Amazon e-mailed the same statement in response to questions but did not immediately respond to a message seeking additional information.

As Bloomberg adds, as of today, Amazon no longer features Wells Fargo on its student-focused website, and the bank’s Amazon-focused site now redirects visitors to Wells Fargo’s general student loan section. The two companies had been talking about the partnership for more than a year, according to a July report in the Wall Street Journal.

While there is no information at all on what causedthe abrupt end in the relationship, consumer advocates should be delighted: they quickly assailed the partnership between the two companies after it was announced in July. Pauline Abernathy, a former official in Bill Clinton’s White House who now works for the Institute for College Access & Success, described the arrangement as “the kind of misleading private loan marketing that was rampant before the financial crisis.”She said both companies buried the otherwise high costs and inflexible repayment terms that she said are standard in private student loans and that the deal was a “cynical attempt to dupe current students.”

“We congratulate Amazon for deciding to stop promoting Wells Fargo’s costly private education loans. Private loans are one of the riskiest ways to pay for college,” Abernathy said Wednesday.

Come to think of it, she is not wrong.

Undergraduate students can borrow from the feds at a 3.76% interest rate, a loan that effectively acts as an entitlement thanks to virtually no underwriting requirements. But the government caps student borrowing, leaving many to rely on private student loans to fill the gap between college costs and federal loan limits. A review of Wells Fargo’s website shows student loans that carry interest rates as high as 10.93%.

Which explains why both Amazon and Wells Fargo had so much to gain, and nothing to lose form their partnership, and which makes the sudden, unexplained collapse of this arrangement all the more  curious and surprising.

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Based on a supply-side estimate of potential growth and projections of the main components of demand; Bloomberg's Chief Economist Tom Orlik notes that China potential growth – the rate at which the economy could expand when firing on all cylinders – will slow to 7.1% in 2016 and 7.0% in 2017 from 7.3% in 2015. The government's growth target for 2016 is 6.5-7% and – based on the 13th Five Year Plan – a minimum of 6.5% from 2016-2020.

 

 

And that is why China is starting to manage expectations as the Xinhua news agency reported on Wednesday, citing the head state planner, that China will need "arduous efforts" to meet annual economic targets, with the economy expected to be under continued pressure in the second half of the year.

As Reuters reports, the comments from Xu Shaoshi, head of the National Development and Reform Commission (NDRC), come as China's economy shows signs of stabilizing, but concern remains as to the sustainability of growth driven by government investment and the property market.

Xu, however, said he was confident China "could meet major annual targets in economic growth, employment, commodity prices and residents' income", according to the state news agency.

"Great difficulties remain in meeting goals for investment and trade," Xinhua quoted Xu as saying.

"Currently, the foundations for stable economic development are not solid enough and downward pressure remains large, with difficulties hard to underestimate."

Despite the weakest economic growth in 25 years, government sources have said policymakers do not see the need to reduce interest rates or bank reserves amid evidence companies and banks are hoarding cash.

The focus instead has been on structural reform and fiscal measures…

"China will continue to design and implement targeted and flexible macro-control measures, and pursue a proactive fiscal policy and a prudent monetary policy," Xu said, according to Xinhua.

 

On the fiscal front, finance minister Lou Jiwei said China was considering higher export rebates for some mechanical and electrical products, Xinhua reported.

Xu concluded by warning of regional polarization, difficulties with farmers' incomes and stable demand growth, and potential risks in finance and employment, as challenges facing the economy… but apart from that, everything is awesome??!!

And sure enough it was proven awesome tonight when, right on cue ahead of the weekend's G-20 gathering, Bloomberg reports that China’s official factory gauge unexpectedly rose last month to the highest level in almost two years, suggesting a weakening in July was flood-related and temporary (even though Services PMI dropped and Aussie PMI crashed)…

The manufacturing purchasing managers index rose to 50.4 in August, the statistics bureau said Thursday, up from July’s 49.9 and compared to the 49.8 median estimate of economists surveyed by Bloomberg. The non-manufacturing PMI stood at 53.5 compared with 53.9 in July. Numbers above 50 indicate improving conditions.

"The number is quite surprising, but still reasonable following the policy support in some sectors," said Zhu Qibing, chief macro economy analyst at BOCI International (China) Ltd. in Beijing."The PBOC will refrain from more easing, but won’t tighten immediately."

Measures of new orders, purchases quantity and input prices paced the PMI rebound. But the gains weren’t shared equally, with large enterprises reporting improved conditions even as medium and small firms deteriorated, the data showed.

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So – China is fine (despite currency turmoiling) because floods across southeastern regions responsible for about a fifth of China’s economic output interrupted production in the summer… so that's good news right? Except the promise of more stimulus is now less likely… especially a broad-based stimulus. Still, Chinese stocks were the best in the world in August…

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While the mainstream media was focused on today’s primetime Brazilian spectacle, namely Dilma Rouseff’s impeachment vote in the Senate, which passed as expected with a substantial majority permanently removing Rouseff from office and assuring that her replacement, Michel Temer rules until at least 2018 (unless the unpopular politician is also impeached in the meantime), what has gotten far less press is the ongoing devastation of the Brazilian economy which has failed to see even a token pick up in recent months despite the change in the ruling administration.

Here are the latest stunning updates.

According to the most recent economic data, the labor market continues to implode: the unemployment rate surged to 11.6% with the ranks of the unemployed topping 11.8 million (up from 8.6 mn a year ago) as the following chart from Goldman Sachs shows.

The national unemployment rate printed at 11.6% in the 3-month period ending in July, up from 11.3% in June and up from 8.6% a year ago, and 6.9% two years ago. In seasonally adjusted terms the unemployment rate climbed to 11.4% in July, from 11.1% in June and 8.4% a year ago.

Formal salaried employment in the private sector shrank 3.9% yoy, while employment in the informal sector grew 0.9% yoy. Self-employment grew 2.4% (a reflection of increasingly limited salaried employment opportunities). By sector of economic activity, industrial employment shrank by a large 10.6% yoy (-1.4mn jobs).

Employment declined 1.8% yoy in the 3-month period ending in July, while the economically active labor force grew 1.5%. 

Meanwhile, as the number of working Brazilians tumbles, average real wages conttinued their unprecedented decline, sliding 3.0% yoy. The labor force participation rate rose one-tenth from a year ago: to 61.5%.

Alas, there is little hope in sight: according to Goldman, the labor market is set to deteriorate further given the forecasted weak performance of the economy, particularly of the labor-intensive services sector.

It wasn’t just the labor market that continues to flounder, however. According to today’s GDP report, in the second quarter the economy continued to contract , driven, among other things by the impact of the ongoing credit crunch and severe labor market deterioration on consumption. Specifically, real GDP dropped -0.6% qoq in Q2 sa (non-annualized) once again missing the consensus print of -0.50%.  Real GDP contracted 0.6% qoq sa in 2Q2016, adding to the large contractions averaging -1.3% qoq sa during 1Q2015-1Q2016. The 1Q2016 figure was revised to -0.43% qoq sa, down from the original -0.28% qoq sa.

In yoy terms, real GDP declined -3.8% during 1Q2016, a modest improvement from the -5.4% Q1 plunge. Private consumption declined 5.0%, and public consumption retrenched 2.2%. Finally, gross fixed capital formation declined by a large 8.8% yoy. Just like in China, which historically was a major source of Brazilian upside, aggregate investment remained low and decline again: 16.8% of GDP during 2Q2016, down from 18.4% of GDP in 2Q2015 and 20.1% of GDP in 2Q2014. The national gross savings rate was even lower (15.8% of GDP), still much lower than the 19.7% of GDP reached during 1Q2013 and 18.8% of GDP in 1Q2014.

According to an analysis by Goldman’s Alberto Ramos, the contraction of real activity during 2Q was driven by private consumption on the demand side and services on the supply side. Final domestic demand contracted again (-0.5% qoq sa); sixth consecutive decline and printed in negative territory in eight of the last nine quarters. On the supply side, the large labor intensive services sector retrenched again at the margin as noted above (-0.8% qoq sa; -3.3% yoy); sixth consecutive quarterly decline averaging -0.9% qoq sa.

As Ramos concludes, “the ongoing economic recession/depression has now lasted an extraordinarily long period of time and has been unusually deep: leading to a 9.7% cumulative decline in per-capita real GDP. By 2Q2016, real GDP was at the same level of 3Q2010. Final private sector domestic demand has declined a very large 12.4% cumulatively since 2Q2014.”

* * *

Completing the abysmal picture was the latest capital flow data, according to which Brazil’s primary fiscal deficit remained stuck at -2.5% of GDP, while gross debt now approaching a record 70% of GDP.

More details: The consolidated public sector posted a R$12.8bn primary deficit in July significantly worse than the R$4.7bn deficit recorded a year ago. The central government posted a R$11.9bn deficit, and the states and municipalities a smaller R$334mn deficit. The performance of subnational governments is expected to deteriorate further in the months ahead given tightening budgetary pressures and the recent re-profiling of debt service payments to the treasury. Finally, state-owned enterprises recorded a larger than expected R$629mn deficit.

On a 12-month trailing basis, the consolidated public sector primary fiscal deficit remained broadly unchanged from June to July at a high 2.54% of GDP (vs. 2.51% of GDP in June), but rose visibly from 1.88% of GDP in December 2015. The overall public sector fiscal deficit (primary surplus minus interest payments) is running at an extraordinarily high 9.6% of GDP (slightly down from 10.4% of GDP in December due chiefly to gains in the outstanding stock of Dollar swaps driven by the recent BRL appreciation). The 12-month net interest bill is tracking at 7.0% of GDP, compared with 8.5% of GDP in December.

According to Goldman, given the 0.9% BRL depreciation against the USD in July, the stock of Dollar swaps issued by the central bank added R$1.8bn from the overall public sector net interest bill (the difference between the DI rate and the exchange rate variation plus the “cupom cambial”). The 12-month trailing implicit interest rate on total net public debt is tracking at a very high 22.3%.

Putting all this together means that gross general government debt is now tracking at 69.5% of GDP, up from 66.5% of GDP at end-2015. Net public debt has deteriorated 5.6 percentage points of GDP since December.

Goldman’s conclusion:

A deep, permanent, large structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, fiscal consolidation in Brazil will be a multi-year endeavor. Most likely, returning to primary fiscal surpluses will take no less than 2-3 years, and returning to a primary surplus level that stabilizes the debt dynamics (around 2.5% of GDP) likely 4-5 years, or perhaps longer. At the end of the fiscal consolidation process we estimate that Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP. This would be the level of primary surplus that would put gross public debt on a clear declining trajectory, something that is required for Brazil to rebuild fiscal buffers and regain room to use fiscal policy counter-cyclically, whenever needed and appropriate. Furthermore, we believe a deep fiscal adjustment that would elevate public sector savings is needed to facilitate a permanent structural current account adjustment (rather than just a cyclical adjustment driven by the sharp contraction of domestic demand), and also to endow the central bank with extra degrees of freedom to set monetary policy at a less restrictive level.

What is most fascinating, however, is that despite the all too clear economic depression raging in Brazil, which gets progressively worse by the month, the stock market continues to rise pricing in a Phoenix-like recovery, which even Goldman now admits will take “4-5 years, or perhaps longer.” Why this unprecedented surge in asset prices? Simple: a mountain of central bank-created liquidity which finds its way into any market that offers even a modium of incremental yield, such as Brazil’s. Alas, for those asking when the record divergence shown below closes, and the Bovespa will be painfully reacquainted with gravity, we have no answer.

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Submitted by Brandon Smith via Alt-Market.com,

The latest Federal Reserve meeting in Jackson Hole, Wyoming, is over and so far it would seem that the general investment world is not too happy about Janet Yellen’s statements as well as those of other Fed officials.  In fact, many people are looking for some simple clarity as to what the central bank is actually planning.

Most importantly, investors want to know why the Fed is suddenly so adamant about continued interest rate hikes in 2016.  Only a couple months ago, almost everyone (including alternative economic analysts) was arguing that the Fed would “never dare” to raise rates again so soon, and that there was no chance of a rate hike so close to the presidential elections.

Instead, investors have been greeted with surging rate-hike odds as Fed officials openly hint of another boost, probably in September.

As I have been saying for years, if you think the Fed’s motivation is to protect or prolong the U.S. economy, then you will never understand why they do the things that they do.  Only when people are willing to accept the reality that the Fed’s job is to undermine the U.S. economy can they grasp central bank behavior.

Here is the issue that scares mainstream markets — many day traders are greedy, but not necessarily dumb.  They KNOW full well that the only pillar holding up stocks at record highs has been central bank intervention.  A vital part of this intervention has been the use of near-zero interest rates.  That is to say, cheap and free overnight loans through the Fed have allowed banks and other corporations to remain “solvent,” and these loans have been the fuel companies have used for corporate buybacks of stocks.

Corporate buybacks have been a primary driver in the bull market rally that supposedly saved the world from the ongoing deflationary destruction of capital.  In 2015, buybacks reached historic levels and garnered one of the largest equities reversals in history.   While these buybacks do little or nothing to heal the economy on Main Street, they certainly do wonders for equities portfolios.  By buying up their own shares, corporations boost the value of remaining shares through a brand of legal trickery.  And, in the process, these corporations also boost the overall perceived value of global stock markets.

As Edward Swanson, author of a study from Texas A&M, noted on stock buybacks used to offset poor fundamentals:

“We can’t say for sure what would have happened without the repurchase, but it really looks like the stock would have kept going down because of the decline in fundamentals… these repurchases seem to hold up the stock price.”

Yes, to us he seems to be stating the obvious, but for the average American, a green stock market means a recovering economy.  There is no deeper question of why the markets are rallying, and this lack of understanding is dangerous for our country.

Even marginal hikes in borrowing costs will kill the party and, while people not involved in finance and stocks are oblivious, day traders know exactly what is going on.  This is the reason for the underlying panic felt by the investment world at any hint of a rate hike by the Fed.

As we saw with the limited audit of TARP, the Fed was pumping tens of trillions in overnight loans into distressed banks and companies, even foreign companies overseas.  I suggest that if a FULL audit of the Fed were ever conducted, we would find tens of trillions more in overnight loans since 2008.

Imagine for a moment if those loans never stopped.  Imagine that such loans have been an ongoing mainstay of our financial system and stock markets in general.  Now, ask yourself, what would happen if the companies reliant on these free loans suddenly had to pay interest on them?

Think about it; what would the interest cost be on a mere .5% to 1% of $16 trillion in overnight loans through TARP?  What would the cumulative cost be on all the loans banks and companies need to survive every quarter?   In the end, corporations would either drown in billions of dollars in exponential debt or they would have to stop accessing loans from the Fed.  Once the loans stop, the stock buybacks stop.  Once the buybacks stop, stock markets crumble.

Without free cash from the Fed, the bubble in stock markets will finally and thoroughly implode, crashing down to meet all other fundamentals.

Why would the central bank pull the plug on life support to stock markets?  There are multiple reasons, but a top reason is that this is the Federal Reserve’s modus operandi.  They consistently seem to raise rates into recessionary conditions that they also tend to create.  In essence, the Fed likes to acclimate and addict markets to low interest percentages, and then increase those percentages to agitate and elicit a chaotic reaction.

In my article Brexit Aftermath – Here’s What Will Happen Next, I stated:

“Really, the only safe measure the Fed can take from now on is to do nothing.  I highly doubt that they will do nothing.  In fact, even in the face of the Brexit I still believe the Fed will raise rates a second time before the end of the year.  Why?  This is what the Fed has always done as recession takes hold.  Historically, the Fed raises rates at the worst possible times.  As with the Brexit, I am going to have to take the contrary position to most analysts on this.”

What analysts out there need to understand, whether they are independent or mainstream, is that a great shift in central bank policy and attitude is coming. Christine Lagarde at the IMF calls it the “economic reset,” some Fed officials, like Atlanta Fed President Dennis Lockhart, state that central banks are entering a “brave new world.” These are highly loaded phrases that represent a drastic overhaul of the global financial system; an overhaul that is quite deliberate and inevitably destructive for certain nations and economies, including the U.S.

If we examine the policy pursuits and recently stated goals of central banks around the world, and those statements made after the Brexit referendum, we find that a process of complete global centralization is underway. This includes a push for all central banks to “coordinate policy” under a single directive.

Alternative analysts already know that all central banks are ALREADY covertly coordinated by the Bank for International Settlements.  So, when central bankers call for policy coordination in the mainstream press, what they really mean is, they want the existing coordination that is covert to become publicly accepted and celebrated.  They want that which is illegal to become legal.  That which is morally reprehensible to become morally relative.

Central bankers also want their position of authority over the global economy to become a public priority.  Ten years ago, when I asked average people what they knew about the Federal Reserve, most of them responded with confusion.  They had never heard of the institution, let alone what its function was.  Today, almost everyone knows about the Fed, but there is also an assumption attached that central banks, whether they are successful or not, are supposed to maintain economic stability.  Keep in mind that global stocks barely vibrate today until a central bank somewhere publishes a policy statement.  This is not how investment is supposed to function.  The jawboning of central banks should be mostly meaningless.

The brave new world of central banking is a plan to expand on this corrupt correlation.  That is to say, the general public and the mainstream should be questioning whether central banks should exist at all.  Instead, people are arguing over what policies are better for central banks to adapt.  The existence of central banks is considered an absolute.  The masses are only given the option to debate what faces and what hats central banks should wear.  If we get anything out of this deal, we only get to choose the form of our destructor.

I should point out also the growing trend in the mainstream media of criticism against the Fed.  This is a relatively new thing.  For the past several years the more effectively critical the alternative media became against the Fed, the louder MSM talking heads would cheerlead for the establishment.  With central bankers becoming more open about their global shift into something "different", a new program of stabbing at the Fed has been initiated.  This is not a coincidence.

As I have argued in various articles, the Fed itself may be just as sacrificial to the elites as the U.S. economy.  In the process of global centralization, the Fed would eventually have to take a back seat to the IMF, World Bank and the BIS.  It is not surprising to me in the slightest that the bought-and-paid-for mainstream media is changing gears and attacking the institution they once desperately defended.  Priorities are evolving.

I believe that with the advent of a second rate hike in 2016, many conditions will change.  The Dow and some emerging markets will no longer enjoy unmitigated support, and they will begin to fall going into the elections.  As I have mentioned many times in past articles, Donald Trump is the most likely candidate to take up residence in the White House.  Conservatives will be lulled into a temporary euphoria, happy just to have defeated she-demon Hillary Clinton, only to discover that an overall global implosion has entered a new stage.  This implosion will of course be blamed on those same conservative movements.

In the meantime, central banks around the world are going to start openly coordinating while the IMF will take up a “leadership role” in managing international policy.  Central banks will also be branching out and taking on new powers.  As suggested at Jackson Hole, many central bankers are arguing for “new tools” to fight future fiscal downturns, and no, this does not mean negative interest rates.  Instead, watch for central banks to change the definition of inflation on a whim, or adjust the relative value of currencies through agreements with other countries instead of allowing free markets to determine values, and watch for complete overhauls in how economic instability is calculated.

What we are heading for is a world in which many nations will suffer from reductions in living standards and where some first world nations will be reduced to third world conditions.  In order to normalize increased global poverty, you have to stop calling it poverty and start calling it a “brave new world.”  You have to convince the populace that the economic degradation is not a problem that can be solved — rather, it is a problem we must all adapt to and accept.

Be very wary when elites and international financiers mention “global reset,” or a “brave new world,” or a “new world order.”  What they are talking about is not a program that is in your best interest.  What they are talking about is the deliberate creation of chaos; a slow burning calamity that can be exploited to derive the benefits of even more centralization and even more power.

They will call it random.  They will call it coincidence or fate or even blame it all on their ideological opponents.  In the end, they will eventually call it a natural progression of events; a social and financial evolution.  They will call it inevitable.  None of this will be true.  There is nothing natural about a totalitarian framework — it is a machine that is carefully crafted piece by piece, maintained by the hands of a select few tyrants and fed with the labor, sacrifice and fear of the innocent.

The only solution is to expunge the parasites from our fiscal body.  These institutions and the people behind them should not exist.  Most if not all of our sociopolitical distress today could be cured if a “brave new world” meant wiping the slate clean and dispelling financial elites and central bankers into a bottomless pit.

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