Category: zerohedge

Are You Prepared For These Potentially Disruptive Economic Storms?

Authored by Frank Holmes via StockBoardAsset.com,

Summary

  • Are government inflation numbers more “fake news”?
  • A falling dollar is good for U.S. trade.
  • Are you ready for a big fight?

Hurricane Harvey

Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definetely one to tell your grandkids about one day.

Similarly, I hope investors have took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling.

As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve.

As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce.

Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices.

In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates.

Are Government Inflation Numbers More “Fake News”?

If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below.

If you believe the alternate CPI numbers, it makes good sense to have exposure to gold.

Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs.

Falling Dollar Good for U.S. Trade

Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.”

The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll.

However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices.

Ready for a Big Fight?

You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed?

At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital.

Hurricane Harvey

It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph.

As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar.

Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies.

However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come.

Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. marketsbecause he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets.

Stay Hopeful

It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made.

 

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Brazoria County Urges “GET OUT NOW” After Columbia Lakes Levee Breached

Levees at Columbia Lakes in Brazoria County have been breached, according to the official Brazoria County website.

Live Feed…

 

"Get out now," the alert reads.

Portions of Brazoria County, due south of Houston, had been under a mandatory evacuation notice since Sunday.

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Nikki Haley: “Something Serious Has To Happen… Enough Is Enough”

While we are confident that both Trump and Kim would be delighted to just keep trading insults at each other for the indefinite future, even as North Korea launches the occasional ballistic missile, that time may be over. Speaking at the UN, the US Ambassador to the United Nations Nikki Haley said on Tuesday that North Korea’s launch of a missile over Japan was “absolutely unacceptable and irresponsible” and that the Security Council now needed to take serious action.

“No country should have missiles flying over them like those 130 million people in Japan. It’s unacceptable,” Haley told reporters. North Korea has “violated every single U.N. Security Council resolution that we’ve had and so I think something serious has to happen,” she added, quoted by Reuters.

Saying “enough is enough,” Haley said she hoped China and Russia would continue to work with the rest of the U.N. Security Council when it meets on Tuesday afternoon to discuss what more can be done about North Korea’s nuclear and missile programs.

Of course, even if Russia and China do side with the rest of the Security Council as they did during the recent sanctions vote, it is unclear just what additional economic punishments and “harsh language” the UN can impose on the Kim regime to prevent him from doing what he has been merrily doing so far, oblivious of the consequences.

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China Warns North Korea Tensions At “Tipping Point”, Russia Says “Sanctions Exhausted”

Following North Korea's firing a ballistic missile across Japan overnight, China has warned that tensions on the Korean peninsula have reacha "tipping point" and urged all sides to avoid provocations.

Seems pretty provocative to us…

As ChannelNewsAsia reports, Foreign ministry spokeswoman Hua Chunying urged all sides to avoid provocations and repeated Beijing's call for the North to suspend missile tests in return for a halt to US-South Korean military exercises.

The situation is "now at a tipping point approaching a crisis. At the same time there is an opportunity to reopen peace talks," Hua told a regular news briefing.

 

"We hope relevant parties can consider how we can de-escalate the situation on the peninsula and realise peace and stability on the peninsula," she added.

 

Hua said the United States and South Korea "held one round after another of joint military exercises and they exerted military pressure on the DPRK (North Korea)".

 

"After so many rounds and vicious cycles, do they feel they are nearer to peaceful settlement of the issue?

 

"The facts have proven that pressure and sanctions cannot fundamentally solve the issue," she said, referring to UN sanctions imposed against North Korea.

China has backed the sanctions but also called for peace talks, but as Russia explains, sanctions pressure appears exhausted.

As if this was not clear enough, Russia has also stepped up its rhetoric, with Reuters noting that a senior Russian lawmaker said on Tuesday that North Korea’s latest missile test shows its threat to fire four missiles into the waters near the U.S. Pacific territory of Guam was not a bluff.

“Alas, Pyongyang has demonstrated that its threats to the U.S. base on Guam are not a bluff,” Konstantin Kosachev, chairman of the upper house of parliament’s international affairs committee, said on social media.

 

Kosachev also said that a United Nations Security Council resolution regarding North Korea’s missile program which passed this month had failed to achieve its objective, “because the situation has turned into a bilateral standoff between North Korea and the United States”.

Additionally, Russian Foreign Minister Sergey Lavrov, who is visiting the UAE, insisted North Korea back down…

"Regarding North Korea and the missile tests it is conducting, we stick to the resolutions of the U.N. Security Council and we insist on the fact that our North Korean neighbours should fully respect those resolutions," Lavrov said.

 

"We base our position on these statements during discussions in the Security Council and will do the same in the session, which as far as we understand is being planned now and which will be dedicated to discussing the last missile launches from North Korea."

Finally, Russian Deputy Foreign Minister Ryabkov told reporters that while we can expect new sanctions pressure on the DPRK after the last launch, such pressure is exhausted..

"Judging by how colleges from the US and other countries acted in similar situations, the US allies – of course, we can expect new steps towards strengthening the sanctions regime," he said.

"But it will not solve the problems, it is already obvious that the resource of sanctions pressure on the DPRK has been exhausted."

 

"It is no longer possible to adopt resolutions in the UN Security Council that do not contain a clear indication that there can not be a military solution to the problem, but only a political one. A provision that would rule out additional unilateral sanctions beyond those that are collectively taken by the UN Security Council, "the Russian diplomat continued.

Either way, it appears Russia and China are pushing back to Trump to 'do something'.

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This is the Single Most Important Chart in the World

Yesterday we talked about the US Dollar ($USD) dropping below critical support.

By quick way of review, here’s the key chart. As you can see, the $USD staged a large bull market run in 2014 as the Fed wound down its QE program. The greenback was then range bound for three years until this month when it broke down in a big way.

US Dollar is Collapsing

Today I want to talk about the long-term chart of the $USD, as well as the implications of this chart on other asset classes.

Here’s the $USD’s chart running back 40 years. I call this the “single most important chart in the world,” because how the $USD moves has a massive impact on all other asset classes.

US Dollar is Collapsing

As you can see the $USD broke out of a massive 40 year falling wedge pattern. This initial breakout has failed to reach its ultimate target (120) and is now rolling over for a retest of the upper trendline in the mid-to low-80s.

Put simply, this chart is telling us that the $USD is going to be collapsing in the coming months.

The implications of this are going to be tremendous for the financial system. US corporate profits will be increasing particularly for large multi-national companies. Emerging Markets will outperform.

And most importantly, the $USD's collapse  is going to be like rocket fuel for inflation trades. Smart investors will use this trend to make literal fortunes.

If you’re not taking steps to actively profit from this, it's time to get a move on.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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Russian Central Bank Bails Out Otkritie Bank, Country’s Largest Private Lender

It’s been a while since the world had any bank solvency concerns; in fact, ever since the thrice botched bail out of Monte Paschi and the debacle that was Banco Popular, it has been largely smooth sailing. That changed moments ago, when the Russian central bank announced on Tuesday afternoon it has bailed out Otkritie Bank, which according to Interfax, “ranks 1st among privately-owned banks and 4th by assets among banking groups in Russia.”

Otkritie Bank’s clients include (as of 2016), 29,000 corporations 163,000 SMEs and 3.4 million individuals, including high net worth individuals. The Bank has 400 offices across Russia.

From Reuters:

  • RUSSIA’S C.BANK SAYS HAS DECIDED TO BAIL OUT OTKRITIE BANK, ONE OF THE COUNTRY’S LARGEST PRIVATE LENDERS – Reuters – 10:00 AM Eastern Daylight Time Aug 29, 2017
  • RUSSIA’S C.BANK SAYS TO BECOME SHAREHOLDER IN OTKRITIE BANK
  • RUSSIA’S C.BANK SAYS WILL NOT USE BAIL IN SYSTEM
  • RUSSIA’S C.BANK SAYS OTKRITIE BUSINESSES TO CONTINUE OPERATING AS USUAL

Otkritie’s current owners include the Czech PPF Group (29.9%) owned by Petr Kellner, the Slovak businessman Roman Korbacka (20%), and the Russian ICT Group (50.1%) of which Alexander Nesis is President. Or  rather included, as following the bailout, all of their stakes will be substantially diluted if not wiped out. The bank’s current owners and executives are said to cooperate with the regulator.

As the central bank’s press release adds “the bank is a systemically important credit organization, it occupies the 8th place in terms of assets. The Bank’s infrastructure includes 22 branches and more than 400 internal structural subdivisions.”

And since we live in a world where bailouts are bullish, this happened:

  • DOLLAR BONDS OF RUSSIA’S OTKRITIE BANK RISE ACROSS THE CURVE AFTER CENTRAL BANK PLEDGES RESCUE, BOND MATURING APRIL 2019 UP 20 CENT

Otkritie Bank was featured prominently in a January FT article which laid out the previously unknown details of the late-2014 Rosneft bailout, in which Otkritie played a critical role:

As 2014 drew to a close, Rosneft, Russia’s state-run oil company, faced a dire situation. Plummeting global oil prices, a rapidly devaluing rouble and western sanctions left the company with no obvious way to refinance the $18bn debt that was due to mature in just a few weeks.

 

With little room to manoeuvre, Rosneft set in motion one of the most audacious trades in Russia’s short capitalist history — and nearly brought down the economy in the process. The company quietly issued Rbs625bn in bonds to an unnamed intermediary, which then used them as collateral to obtain reverse repo loans — deals to purchase securities with an agreement to sell them later at a higher price — from the Russian central bank. The intermediary then passed on the dollars to Rosneft, allowing it to raise short-term capital.

 

Currency investors thought that Igor Sechin, Rosneft’s powerful chief executive, was effectively shorting the rouble and they pushed it to record lows. “The deal negatively stirred up the market,” tweeted Alexei Kudrin, the former finance minister. “Extremely bad timing.” Later, Vladimir Putin, Russia’s president, gave Mr Sechin a public dressing-down.

 

The deal nevertheless showed that it was possible for Russia to circumvent western sanctions imposed over the Ukrainian conflict by turning to little-known private banks like Otkritie, which bought the Rosneft bonds — effectively making the companies special-purpose vehicles for Russia Inc.

In a nutshell the Russian central bank had used Otkritie as a funding SPV as it was exempt from the US sanctions at the time.

In effect, Otkritie helped Rosneft inadvertently tank the rouble, then made an even bigger bet that Russia would not default.

At the time, Otkritie’s management said the trade was the jewel in the crown of a five-year plan to become what it calls Russia’s largest “financial corporation” by acquiring distressed assets, borrowing heavily to buy oligarchs’ banks, and aggressively trading securities — in large part with cheap state funding.

Three years later it unexpectedly and suddenly was bailed out.

It is unclear why, although there is a possibility that Ruben Aganbegyan, CEO of Otkritie Financial Corp may have said or done something that displeased Putin…

* * *

Here is the full google-translated bailout statement from the Russian Central Bank:

The Bank of Russia took a decision to implement measures aimed at improving the financial stability of PJSC Bank Financial Corporation Discovery (Moscow) (the Bank).

 

Within the framework of these measures, the Bank of Russia is expected to participate as the main investor using the funds of the Banking Sector Consolidation Fund.

 

Implementation of measures to improve the financial stability of the Bank is carried out in cooperation with the existing owners and managers of the Bank, which will ensure the continuity of its activities in the banking services market and subsequently carry out all the necessary activities with a view to further development of the Bank’s activities.

 

The bank will continue to operate as usual, fulfilling its obligations and making new deals. The Bank of Russia will provide financial support to the Bank, guaranteeing the continuity of its activities.

 

By Order of the Bank of Russia No. OD-2469 of August 29, 2017, in accordance with Articles 189.25, 189.26, 189.31 of Federal Law No. 127-FZ of October 26, 2002, a temporary administration for the management of PJSC Bank Financial Corporation Discovery was appointed. The staff of the temporary administration included employees of the Bank of Russia and LLC MC FSSS.

 

A moratorium on the satisfaction of creditors’ claims is not introduced. The mechanism for converting funds from creditors into shares (bail-in) does not apply.

 

Financial organizations and specialized services included in the Bank Group, including the Public Joint Stock Company Insurance Company Rosgosstrakh, Public Joint Stock Company National Bank TRUST, Public Joint-Stock Company Rosgosstrakh Bank, JSC NPF Lukoil-guarantor, JSC NPF of Power Industry “, JSC” NPF “RGS”, JSC “Opening Broker”, as well as “Tochka” and Rokketbank will continue to operate in normal mode and serve customers.

 

The bank was established on December 15, 1992. The bank is a systemically important credit organization, it occupies the 8th place in terms of assets. The Bank’s infrastructure includes 22 branches and more than 400 internal structural subdivisions.

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‘Hope’ For “Better Business Conditions” Ahead Plunges To Lowest Since Election

Headlines are crowing of a better than expected Conference Board consumer confidence index, but under the surface, things are not nearly as exuberant as the administration would like them to be.

The percentage of consumers expecting business conditions to improve over the next six months decreased from 22.4 percent to 19.6 percent, the lowest level since Nov 2016's election…

 

Perhaps more worrisom is that employment expectations have also plunged…

Those with plans to buy a home or a car also fell in August.

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Be Thankful for Price Gouging in Houston

Via The Daily Bell

Did the hotel crew need the rooms? No. They came to “cover” the storm.

But people fleeing Hurricane Harvey were in desperate need of hotel rooms. And the news crew was complaining about paying a high price.

The news team reported on the terrible incident of gouging. But they actually demonstrate exactly why prices need to go up when demand goes up.

I wonder if they decided to bunk up together and buy fewer rooms because of the high price. After all, that is the whole point of “gouging.”

When demand shoots through the roof, the reason prices need to go up is not simply business greed. Higher prices slow demand.

One family might choose to stay with their annoying inlaws instead of getting a room. Great, one more spot for someone who doesn’t have family in the area.

Another family with three kids might decide to book only one room instead of two. Again, this helps keep rooms available for other people in need. Yes, they will have to spend a bit more, but they will have a place to sleep.

The basic economics of supply and demand is apparently something neither this news crew, nor the Texas Attorney General’s office understand.

Hotels aren’t the only ones guilty of price gouging as Houston grapples with continued rainfall and flooding from Hurricane Harvey, the most powerful storm to hit Texas in more than 50 years. Over the weekend, more than 500 complaints of price gouging were lodged with the Texas attorney general’s office, according to CNBC—including $99 cases of bottled water, gas at $10 a gallon and hotels tripled or quadrupled in price.

“These are things you can’t do in Texas,” Texas Attorney General Ken Paxton told CNBC in an interview Monday. “There are significant penalties if you price gouge in a crisis like this.”

Is this news team willfully ignorant, or actually that clueless? The Attorney General I’m sure just wants to get re-elected.

$100 cases of water means people only buy what they really need, thus leaving a case for the next person in dire need. Otherwise, why not stock up on ten cases of water? You may have six cases leftover at the end of the disaster, while twenty other people dehydrated or desperately drank contaminated water.

Let’s see, $10 per gallon gas? I better only fill up on four gallons to get me out of the area, to another gas station with normal prices. That means four times as many people have gas available to get out of the city, instead of people filling up their tanks like normal.

This is not rocket science. Yes, it can be frustrating and emotional if you are in the situation, but it actually benefits the people in the disaster. What is spending a few hundred extra dollars to avoid drowning, starving, dehydrating, or sleeping in the streets? I bet they spend $600 on a phone without the blink of an eye.

The compassionate thing to do is actually charge higher prices so that supply is spread across more people in need.

If the prices don’t go up, it is first come first serve. That means the lucky ones get all the supplies, and the late comers are left with nothing. Would you rather miss the chance to get a $5 pack of water, or have the opportunity to buy a $100 case of water?

Same goes for generators. When you find out power is going to be out for a week, you want to go out and buy a generator. But to run the air conditioner at the normal temperatures, while keeping the big screen TV on, and every light in the house, you need two generators.

What?! Generators now cost three times what they cost last week! I guess we will conserve electricity, and only cool the house to 75. We can buy the second generator after the situation blows over, and we will be prepared for next time.

But the news team, and the government encourages people to document the gouging and hold businesses legally accountable. Good job guys, you have ensured shortages for the late-comers.

They may be able to keep “honest” businesses in line with the threat of legal action, but haven’t they ever heard of ticket scalpers?

Someone will buy all the cases of water, and then price gouge on the black market instead of the legally accountable government controlled market. Why not buy up all the generators if you know they will be in low supply and high demand? Or are people not allowed to sell their own generators for a high price either?

Stores could limit customers to only buying one. But how do they stop a customer from sending their wife in to get the next one, then their son, brother, or some random guy in exchange for $20?

By the way, shout out to all the preppers who don’t need to buy $100 bottled water, and who already have their generators. They are probably saving the asses of people who were ridiculing them last week for their paranoid nature.

If hotels are gouging, then news crews are vultures. Aren’t they making money on the disaster as well?

We hope everyone in the areas affected by Hurricane Harvey stays safe, and are able to acquire all the supplies they need.

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Bitcoin Soars To Record High $4,600

The prices of Bitcoin has exploded overnight, surging over 6% to a new record high above $4600 as demand from South Korea and Japan spurred more safe haven buying as gold and Treasury bond prices rose following North Korea's most provocative missile launch yet.

Heavy volume taking Bitcoin higher…

 

The cryptocurrency landscape is a little more mixed but Ether is gaining…

 

This mornig's rally has pushed the cryptocurrency market cap over $160 billion for the first time.

 

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