US Launches Air Strikes Against ISIS Targets In LIbya

In what comes as the most expected geopolitical development in recent years, moments ago the United States announced that it had launched multiple airstrikes against Islamic State militants in Libya on Monday, opening a new, more persistent front against the group at the request of the United Nations-backed government, Libyan and U.S. officials said.

The strikes, which allegedly targeted an Islamic State tank and vehicles, come amid growing concerns about the group’s increased threat to Europe and its ability to inspire attacks across the region. “The presidency council, as the general army commander, has made a request for direct U.S. support to carry out specific airstrikes,” Serraj said. “The first strikes started today in positions in Sirte, causing major casualties.”

As AP reports, the strikes mark the start of a more intense American role in the fight against IS in Libya, as the U.S. steps in to assist the fragile, U.N.-backed government there. Of course, the government is fragile only because of US involvement 5 years ago (thanks Hillary) to topple Muammar Gadaffi and unleash the political chaos that led to the Arab spring in, according to some, unleashed jihadist organizations such as ISIS.  They were the first strikes by the U.S. on the group in Libya since February.

In a statement, Pentagon press secretary Peter Cook said President Barack Obama authorized the strikes following a recommendation from Defense Secretary Ash Carter and Gen. Joseph Dunford, chairman of the Joint Chiefs of Staff. To be sure, there was no formal authorization: this is merely the latest unilaterally-decided US attack on a sovereign.  “They are consistent with our approach to combating ISIL by working with capable and motivated local forces,” said Cook, adding that “additional U.S. strikes will continue to target ISIL in Sirte.”

Cited by AP, Fayez Serraj, the head of the U.N.-brokered presidency council, said in a televised statement that American warplanes attacked the IS bastion of Sirte on the Mediterranean in northern Libya.

“The presidency council, as the general army commander, has made a request for direct US support to carry out specific airstrikes,” Fayez Serraj, the head of the Libyan presidency council, said in a televised statement broadcast on Monday afternoon. “The first strikes started today in positions in Sirte, causing major casualties.”

“No U.S. ground forces will be deployed,” he said.

Actually that is a lie, and furthermore, the reason why none of this is surprising is because as we reported back in May, the US was already in the process of sending troops and weapons to Libya to “Fight ISIS.” This is what we said:

Just two years after the US provided generous amounts of modern weapons to both the “moderate” Syrian rebels as well as the Iraq military, which then conveniently and almost immediately “fell into the wrong hands” and served to arm what was then a little known group of Muslim fundamentalists that went by the name of the Islamic State, the US is about to do it again.

 

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Even more ironic is that there is an ongoing embargo to supply Libya with weapons, which however it about to be circumvented. As AP writes, “aiming at once to shore up the fragile government, and prevent Islamic State fighters and rival militias from further gains, the U.S., the four other permanent U.N. Security Council members and more than 15 other nations said they would approve exemptions to a United Nations arms embargo to allow military sales and aid to Libya’s so-called “Government of National Accord.”

 

The narrative is so worn out it can be seen from a mile away: “the step will boost the government’s efforts to consolidate power and regain control over Libyan state institutions like the central bank and national oil company.” As a reminder, this was the pretext used in virtually every failed US foreign intervention campaign. At least this time AP at least point out the obvious: the deployment of weapons “also comes with risks, not least of which is that the arms may be captured or otherwise taken by the Islamic State or other groups.”

And now that oil has tumbled below $40, the conclusion we left off with back then is just as appropriate:

The question then is what happens next? Our expectations is a rerun of the Syria fiasco, which will see a resurgent ISIS this time not in the middle east but operating in oil-rich and divided country of Libya, which in turn will unleash yet another refugee fiasco, which will impact Europe in the coming months. AP’s take is similar: “Worrying for Europe is the potential threat of a mass influx of refugees amassing in Libya, now that the earlier route from Turkey into Greece has been essentially shut down.” That may, however, change if tensions between Turkey and Germany are rekindled in the coming weeks.

 

Meanwhile, British Foreign Secretary David Hammond said his government had received a request from the Libyan government to bolster its Coast Guard — a project “which will address Libyan concerns about smuggling and insecurity on their border but will also address European concerns about illegal migration.”

 

In Libya, meanwhile, the U.N.-established presidency council on Monday effectively gave the go-ahead for 18 government ministers to start work, even though they have not received backing from  the parliament.  The council was created under a U.N.-brokered unity deal struck in December to reconcile Libya’s many political divisions. It won the support of a former powerbase in the country’s capital, Tripoli, but failed to secure a vote of confidence by the country’s internationally recognized parliament, based in Tobruk, a city in eastern Libya.

 

The real wild card, however, is who ends up controlling Syrian oil now that ISIS can no longer trade freely with Turkey, and more importantly, who will end up buying ISIS oil via Libya.

And with the “Syria war” now relaunched, only this time a few hundred miles to the west, we expect much of the same fallout to reemerge: a wave of Europe-bound refugees crossing the Mediterranean, mysterious offshore buyers of ISIS oil pumped in Syria, and even more geopolitical fallout as the superpower scramble for positioning in hopes of being the major puppet masters of whatever government emerges as a result of this latest US military intervention.

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As Oil Tumbles, Just How (Massively) Overpriced Are Energy Companies? Here Is One Answer

Back in March, when oil was aggressively rising from its February lows and the market was happily extrapolating a rebound to more traditional levels, around $60-70bbl on hopes of a supply reduction from OPEC, we showed a dramatic chart of the energy sector’s forward PE, which had risen to never before seen levels.

 

 

Since then oil has plateaued and has resumed its descent, recently sliding in a new bear market, and as of this moment flirting with $40/bbl as the realization of an unprecedented gasoline glut, together with ongoing excess supply and weaker than expected demand, pushed back the supposed “equilibrium” date from late 2016 to sometime in 2017 if not later.

But while oil has seen a steep pullback, this has not yet impacted junk bonds which have been surprisingly resilient on the back of the ECB’s launch of the CSPP program in June at which point the oil-HY correlation broke down, nor has it truly hit energy stocks.

That may change soon: as BofA’s Michael Hartnett writes, “traders should wait to see if oil can hold $40/bbl before adding risk here. Should oil slice through $40/bbl, attention will quickly switch to weak oil, weak Chinese renminbi and weak credit in a repeat of last summer. EM debt could also be pressured given the massive recent inflows into the asset class. Note that energy stocks have jumped far higher than EPS expectations would justify.

How much higher? One answer is shown in the following chart from BofA, perhaps inspired by the fwd PE valuation chart we showed 5 months ago. A rough indication suggests that unless oil manages to credibly rebound and sustain its bounce, energy companies appear to be overpriced about 100% relative to fundamentals.

 

While the market continues to generously give energy companies the benefit of the doubt, a new problem has emerged: a rapidly rising cash burn rate. As Bloomberg points out, free cash flow after capital expenditure has collapsed and shows little sign of improving.

Worse, as of this moment only Exxon’s free cash flow is positive, and even then only just. What’s more, even Exxon’s free cash flow dips sharply into the red once factoring in the thing that really counts for investors: paying dividends.

It used to be that companies would lever up to do buybacks. Now they are issuing debt just to pay dividends.  Nowhere is this more obvious than in the following chart showing the substantial increase in energy sector leverage over just the past 12 months.

As Bloomberg concludes, “leverage has jumped, yet remains manageable for now. But the faltering oil-price recovery and a persistent glut in inventories are keeping the pressure on. Moreover, while oilfield services contractors have taken a lot of the strain so far by cutting fees, they are at a breaking point. Big Oil shouldn’t expect the third and fourth quarters to be keepers, either.”

Unless central banks can manage to push the price of oil materially higher in the coming quarters, the energy sector is likely to see a sharp equity repricing in the coming months… assuming of course that central banks don’t step in and bid up energy stocks. These days, that is a very foolish assumption.

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“Ominous” Oil-Equity Divergence Looms As WTI Crashes To 4-Month Lows

This is a crucial level as BofA warns, should oil slice through $40/bbl, attention will quickly switch to weak oil, weak Chinese renminbi and weak credit in a repeat of last summer.

 

Deja vu all over again…

 

Stocks suddenly wake up to the collapse in crude prices…

Who needs oil when you have ‘apps’ and ‘eyeballs’? Bloomberg highlights a chart ZH readers have seen countless time before, an “ominous pattern that preceded the two worst equity selloffs in 2015 is showing up again.”

Why is the formation called “ominous”? Because the last two times it emerged, stocks proceeded to tumble

 

But we do note that Oil ETF Shorts are building dangerously once again…

 

Squeeze time?

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Clinton Lead Surges In Latest Poll As Trump “Bounce” Fades; Dead Gorilla Gains

Pick your poll: Trump +3, Clinton +5, Clinton +1, Trump +4, Clinton +7. As The DNC ended, and Reuters 'tweaked' its polls, so narrative-confirming polls are being rushed out to maintain Hillary's momentum against Trump. Trump's post-convention bounce has been erased with Hillary surging to a 7-point lead according to the latest CBS News poll (with a reported 90% of voters confirming their minds are made up). But perhaps more reflective of today's distracted citizenry, Harambe – the dead Cincinnati Zoo gorilla – is polling at an unprecedented 5%, better than Green party's Jill Stein (though still less than 'Giant Meteor').

Trump's bounce is dead…

Source: RealClearPolitics

As The Hill reports,

Clinton has 46 percent support among voters nationwide while Trump has 39 percent support, according to the poll.

 

Last week's poll showed both candidates tied with 42 percent following the Republican National Convention.

 

Clinton's 4-point bounce following the convention is similar to those President Obama received in 2012 and 2008, but falls short of the convention bounce her husband saw in 1992.

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Clinton leads Trump among women and Trump holds his lead among men. The GOP nominee also has an advantage among whites without a college degree and Clinton leads among whites with a degree.

 

Clinton now has the support of more than 80 percent of Democrats and 73 percent of Bernie Sanders voters  said they plan to vote for Clinton in November.

But both mainstream party candidates have a new rival to worry about…As The NY Daily News reports,

A new poll shows that, in a presidential election with historic hate for both major party nominees, Harambe — the Cincinnati Zoo gorilla who was shot and killed in May after an infant fell into his enclosure — would fare pretty well as an independent contender.

 

 

A survey released Saturday by Public Policy Polling asked voters to consider the slain primate as a hypothetical third-run spoiler to Democratic nominee Hillary Clinton and Republican nominee — both of whom have earned all-time highs of unlikeability in polls.

 

Five percent of respondents said they would cast a ballot for President Harambe. Though not a major margin, 5% is greater than the support shown for Green Party candidate Jill Stein — who earned only 2% support in the poll. It nearly matches support for Libertarian candidate Gary Johnson, who has 6% support.

 

Five percent of voter support is also unprecedented for a candidate who is a gorilla, and is dead.

 

The poll also shows that, while voters aren’t exactly going ape for Harambe, they don’t hate him as much as they hate Trump and Clinton.

 

Harambe, however, is still not as possible as another election outcome: A meteor hitting the Earth. A survey Public Policy Polling survey showed that 13% of voters preferred "Giant Meteor" to Trump and Clinton.

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It seems de Tocqueville was correct, people do indeed get the government they deserve.

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The Burrito Index: Consumer Prices Have Soared 160% Since 2001

Submitted by Charles Hugh-Smith via PeakProsperity.com,

In our household, we measure inflation with the "Burrito Index": How much has the cost of a regular burrito at our favorite taco truck gone up?

Since we keep detailed records of expenses (a necessity if you’re a self-employed free-lance writer), I can track the real-world inflation of the Burrito Index with great accuracy: the cost of a regular burrito from our local taco truck has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.

That’s a $160% increase since 2001; 15 years in which the official inflation rate reports that what $1 bought in 2001 can supposedly be bought with $1.35 today.

If the Burrito Index had tracked official inflation, the burrito at our truck should cost $3.38—up only 35% from 2001. Compare that to today's actual cost of $6.50—almost double what it “should cost” according to official inflation calculations.

Since 2001, the real-world burrito index is 4.5 times greater than the official rate of inflation—not a trivial difference.

Between 2010 and now, the Burrito Index has logged a 30% increase, more than triple the officially registered 10% drop in purchasing power over the same time.

Those interested can check the official inflation rate (going back to 1913) with the BLS Inflation calculator by clicking here.

My Burrito Index is a rough-and-ready index of real-world inflation. To insure its measure isn’t an outlying aberration, we also need to track the real-world costs of big-ticket items such as college tuition and healthcare insurance, as well as local government-provided services. When we do, we observe results of similar magnitude.

The takeaway? Our money is losing its purchasing power much faster than the government would like us to believe.

Comparing Burritos to Burritos: A Staggering Divergence of Reality and Official Inflation

According to official statistics, inflation has reduced the purchasing power of the dollar by a mere 6% since 2011: barely above 1% a year. We’ve supposedly seen our purchasing power decline by 27% in the 12 years since 2004—an average rate of 2.25% per year.

But our real-world experience tells us the official inflation rate doesn’t reflect the actual cost increases of everything from burritos to healthcare.

The cost of a regular taco was $1.25 in 2010. By official standards, it should cost a dime more. Oops—it’s now $2 each, a 60% increase, six times the official rate.

The cost of a Vietnamese-style sandwich (banh mi) at our favorite Chinatown deli has jumped from $1.50 in 2001 to $2 in 2004 to $3.50 in 2016.  That $1.50 increase since 2004 is a 75% jump, roughly triple the official 27% reduction in purchasing power.

So let’s play Devil’s Advocate and suggest that these extraordinary increases are limited to “food purchased away from home,” to use the official jargon for meals purchased at fast-food joints, delis, cafes, microbreweries and restaurants.

Well, how about public university tuition? That’s not something you buy every week like a burrito. Getting out our calculator, we find that the cost for four years of tuition and fees at a public university will set you back about 8,600 burritos. Throw in books (assume the student lives at home, so no on-campus dorm room or food expenses) and other college expenses and you’re up to 10,000 burritos, or $65,000 for the four years at a public university.

University of California at Davis:

2004 in-state tuition $5,684 
2015 in state tuition $13,951 

That’s an increase of 145% in a time span in which official inflation says tuition in 2015 should have cost 25% more than it did in 2004, i.e. $7,105.  Oops—the real world costs are basically double official inflation—a difference of about $30,000 per four-year bachelor’s degree per student.

Here’s my alma mater (and no, you can’t get a degree in surfing, sorry):

University of Hawaii at Manoa:

2004 in-state tuition: $4,487
2016 in-state tuition: $10,872

Sure, some public and private universities offer tuition waivers and financial aid to needy or talented students, but the majority of households/students are on the hook for a big chunk of these costs. And remember that many students are paying living expenses, which doubles the cost of the diploma.

If you think I cherry-picked these two public universities, check out this article:

So the divergence between real-world costs and official inflation isn’t limited to burritos; it’s just as bad in items that cost tens of thousands of dollars.

The Official Fantasy of Hedonic Adjustments

In the official calculation of inflation, hedonic adjustments offset soaring costs: that 160% increase in the cost of a burrito is offset by the much lower cost for computers, especially when the greater processing power and memory are accounted for.

Clothing has also gotten cheaper, and this theoretically offsets higher costs elsewhere.

The problem with this is sort of calculation is that we have to eat every day and we have to pay higher education costs if we want our kids to remain in the middle class, but we only buy a new “cheaper” computer once every few years, and we don’t even have to buy new clothing at all, given the proliferation of used clothing outlets, swap meets, etc. (I do my annual clothing shopping at Costco: two pair of jeans for $15 each , one pair of shoes for $15, etc.)

The savings on $100 of new clothing per year or a $600 computer every three years does not offset the doubling or tripling of costs for items we consume daily or big-ticket essentials such as higher education, rent and healthcare.

Official Inflation: A Flawed Metric

Official inflation also assumes that consumers will actively substitute a cheaper alternative for whatever is soaring in price. If a burrito doubles in cost, then the consumer is supposed to buy a banh mi sandwich instead. (Oops, that doubled in price, too. So much for substitution gimmicks.)

The problem is pretty obvious: there are no alternatives for big-ticket essentials. There is no “cheaper” substitute for a four-year public university diploma or meaningful healthcare insurance. There is also no alternative to renting a roof over your head if you can’t afford to buy a house (or don’t want to gamble in the housing-bubble casino).

The scale of the costs matters. If I bought a burrito every working day (5 per week, with two weeks of vacation annually) for four years, that’s 250 per year or 1,000 burritos over four years. That’s one-tenth the cost of a university degree—assuming I can get all the classes needed to graduate in four years.

I can always lower the cost of lunch by making a peanut-butter-and-jelly sandwich at home rather than buying a burrito for $6.50, but there are limited ways to reduce the cost of a public university, which is already the “cheaper” alternative to private universities.

Even stripped-down healthcare insurance has soared in multiples of the official inflation rate.

Inflation in big-ticket items adds up to tens of thousands of dollars—costs that can’t be offset by choosing a cheaper mobile phone, cheaper clothing  or substituting a peanut butter sandwich made at home for a burrito at the taco truck.

Even if you skip buying lunch for four years, you’ve only offset 1/10th of the cost of a university diploma, a four-year stint in which the student lives at home and also eats peanut-butter-and-jelly sandwiches every day for four years (at least in in our barebones example of books, tuition and fees only, no dorm or university-provided food expenses).

As for healthcare: feast your eyes on this chart of medical expenses.

According to official inflation calculations, the $12,214 annual medical costs for a family of four in 2005 “should cost” $14,963 today in 2016.

Oops—the actual cost is $25,826, $10,863 higher than official inflation, which adds over $100,000 in cash outlays above and beyond official inflation in the course of a decade.

So let’s add the $30,000 per university student above and beyond inflation for two college students over a decade and the $100,000 in healthcare costs that are above and beyond inflation over that decade, and we get $160,000.

Since deductions for education and healthcare don’t completely wipe out income taxes, the household has to earn close to $200,000 more over the decade to net out the $160,000 to pay typical college and healthcare costs above and beyond what education and healthcare “should cost” if inflation in big-ticket items had actually tracked official inflation.

$100,000 here, $100,000 there and pretty soon you’re talking real money in a nation in which median household income is around $57,000 annually.

So if a household’s income kept up with official inflation over a decade, that household would have to earn at least $20,000 more per year just to keep pace with real-world, big-ticket cost increases.

That’s the problem, isn’t it? If the household’s wages only kept up with inflation, there isn’t another $20,000 a year in additional income needed to pay these soaring big-ticket costs. So the shortfall has to be borrowed, burdening the household with debt and interest payments for decades to come, or the kids don’t attend college and the household goes without healthcare insurance.

I’ve done some real-world apples-to-apples  calculations on our household’s costs of healthcare insurance, which we buy ourselves without any subsidies because we’re self-employed and we earn too much to qualify for ACA/Obamacare subsidies. (I would have qualified easily for the subsidies due to low earnings for the 20 years prior to Obamacare, but weirdly, as soon as ACA passed my income increased. Go figure.)

We’ve bought our stripped-down healthcare insurance from one of the more competitive non-profit providers, Kaiser Permanente, for the past 25 years. We’ve had the same plan (no meds, eyewear or dental coverage, and a $50 co-pay for any visit) for the entire quarter century. (Our plan is now grandfathered; the ACA equivalent is more expensive.) To keep the comparisons apples-to-apples, I compared identical coverage for the same-age person from year to year.

In 1996, the monthly cost to insure a 43-year old was $95. Now, the same plan for a 43-year old is $416 per month—more than four times as much for the same coverage.  If the costs had risen only in line official inflation, (52% since 1996), the monthly costs would be $145, not $416.

The cost of insurance for a 55-year old in 2008 was $325 per month. Today, the same plan for a 55-year old is $558, a 72% increase over a time span that officially only logged an 11% increase in inflation.

Last but not least, let’s look at a government-provided service—weekly trash pickup.  Since 2011, our trash fees have gone up 34.5%, compared to the official reduction in purchasing power of 6% since 2011.

Once again, real-world costs have soared at a rate that is almost six times higher than the official rate of inflation.

The reality is real-world inflation in big-ticket essentials is crushing every household that doesn’t qualify for government subsidies of higher education, rent and healthcare.

In Part 2: How To Beat Inflation, we examine a number of strategies for offsetting the soaring costs of everything from burritos to healthcare — with particular focus on the investments and actions you can take today, inside and outside of the markets, to preserve the purchasing power of your wealth from the nefarious "stealth tax" placed on your money by the kind of inflation discussed above.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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Saudis Slash Oil Prices For Asian Markets; So Much For Solving That Banking Liquidity Crisis

Shortly after we spoke yesterday about the banking liquidity crisis in Saudi Arabia caused by the “Saudi circ ref” (low oil prices -> budget deficits -> more oil pumping -> even lower oil prices), almost on cue, the state-owned Saudi Aramco, the worlds largest oil exporter, announced the largest price cut for Arab light sweet crude sold into Asian markets in 10 months.  Aramco priced September exports to Asia $1.10 per barrel below regional benchmarks which is a $1.30 cut vs. August pricing.  Oil pricing into Asian markets has come under intense pressure in 2016 as the battle for market share has intensified between the Saudis, Russians and Iranians (a topic we’ve covered extensively here, here and here).

Saudi Oil Price

Saudi prices cuts, which we fully anticipate to be matched by the Iranians, come as Iran continues to flood the market with supply in a race to return production to pre-sanction levels of 4 mm barrels per day.  Since international sanctions against Iran were eased in January, 1H16 shipments to Asia have surged with Japan’s purchases up 28%, India up 63%, South Korea up over 100% and China up 2.5%.  Mohsen Ghamsari, director of international affairs at state-run National Iranian Oil Co., said:

“Iran is exporting about 2 million barrels of its daily output of 3.8 million.  It has regained about 80 percent of the market share it held before the U.S. and European Union tightened sanctions on its oil industry in 2012.”

Iran has already boosted crude production 25% this year and aims to reach an eight-year high for daily output of 4 million barrels by the end of the year.

Iran Crude Shipments

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Italian Banks Crash Despite ‘All Clear’ From EU Stress Tests

For a few minutes at the open, mainstream business media persuaded itself that the EU stress tests had proved that everything was fine in Europe's banking system again. But very quickly, things went south with Italian banks – the center of the storm – reversing gains and then extending losses with Unicredit now down 8% (after being up 4%).

As Citi's Christian Schulz notes, "The 2016 stress test is unlikely to fully restore investors’ trust in the eurozone banking system, in our view."

And it seems he is right…

Monte Paschi is holding gains amid its massively dilutive capital raise, but this is noise across the stock's bid-offer.

Finally, we offer Macro-Man's sarcastic take on the EU stress tests as evidence of why EU banking stocks are sliding…

1)  In the latest European bank stress test, Monte dei Paschi ended up with Tier 1 capital of -2.4% in the most stressed scenario

 

2) Although there was no official pass or fail awards, a negative capital ratio is pretty clearly an epic fail

 

3) Having sold  €8 billion worth of stock since 2014, BMPS proposes to sell another €5 billion before year end…

 

4) …providing they can also unload €9.2 billion worth of NPLs turds off of their balance sheet first

 

5)  Since the imposition of negative rates in Europe (illustrated by the arrow), here is what the SX7E index has done
 

6)  So naturally, the stress tests did not measure the impact of more negative rates, only a move higher in rates

 

7) This is the equivalent of measuring the impact of a dog whistle on a deaf person

 

8) More European banks failed the Fed's stress test (DB and Santander) than the EBA version (albeit, as noted, there were not official pass/fail grades this time around.)

 

9) If you can believe it, DB scored half a percent better on the stress test than Barclays

 

10)  If you were wondering,  by far the highest score on the EBA stress test was achieved by NRW.Bank in Germany.   In a possibly related coincidence, their website looks like it's a school project for a middling web design student, though its career portal does offer applicants the opportunity to "venture into the fascinating world of finance!"

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You can't make this stuff up!!

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Construction Spending Growth Crashes To 5-Year Lows

For the third month in a row, US construction spending dropped MoM (tumbling 0.6% in June, missing expectations of a 0.5% bounce). The overall construction spending data is now unchanged (+0.3% YoY) from a year ago – the weakest annual growth since July 2011.

 

 

Some high(low)lights include:

  • *U.S. JUNE PRIVATE CONSTRUCTION SPENDING FALLS 0.6% FROM MAY
  • *U.S. PRIVATE NON-RESIDENTIAL CONSTRUCTION FALLS MOST SINCE DEC.
  • *APRIL CONSTRUCTION OUTLAYS FELL 2.9%, REVISED FROM 2% DROP
  • *U.S. STATE, LOCAL GOVT CONSTRUCTION OUTLAYS LOWEST SINCE NOV.

But apart from that, everything is awesome.

 

Chart: Bloomberg

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