Liquidity Problems? Deutsche Bank Offers 5% Yields If Depositors Lock Up Their Money For Three Months

One of the reasons why central banks around the globe have flooded the financial system with trillions in excess reserves is to make sure that banks no longer have to rely on potentially fleeting short term deposits (and is also why negative interest rates have become the norm in so many part of the world, that $10 trillion in bills and bonds now trade with a negative yield). As a result of years of such central bank policy, banks – mostly in Europe – no longer need to compete with each other for deposits: after all why offer tempting deposit rates in an age of NIRP when banks can get all the liquidity they need straight from the ECB and in some cases even get paid on it.

Furthermore, the whole point of NIRP is to slowly unleash negative, not positive, interest rates in order to discourage savings.

Which is why we were surprised to find that in a promotional offer by Europe’s biggest, and by many accounts most insolvent, bank, Germany’s Deutsche Bank is not only not rushing to penalize depositors, on the contrary it is offering its Belgian clients a 5% gross return for new €10,000 – €50,000 deposits if this money is locked up for the next three months. The offer is only valid for the next 40 days, until June 24.

Why the offer? All else equal it would appear as if Deutsche Bank suddenly needs liquidity quite urgently (but only enough per person so that in a worst case scenario the amount is fully insured by the government) with a 3 month lock up; so urgently it is willing to pay sn interest which is higher than on some European junk bonds.

It begs the question: how is it that DB can’t get a far, far cheaper deal in the bond market, or using short-term unsecured funds?

Here is Deutsche Bank’s offer to Belgian clients to open a DB Invest Plus account (google translated):

Open a term account and get 5% gross annual Deutsche Bank will always offer the best offer on the market. Therefore, you can now 3 months 5% gross annualized receive when you open a DB Invest Plus deposit account.

 

An excellent opportunity to increase your returns

 

Deutsche Bank, you may be demanding for money. Proof? Stop by one of our Financial Centers. You now get a clear 3 months 5% gross per annum for new amounts from 10,000 to 50,000 euros, if you go for June 24, 2016 opens a DB Invest Plus deposit account (subject to early closing).

 

Please note that this promotion is only valid for the injection of fresh money, ie amounts previously never been in an account with Deutsche Bank AG Branch Brussels were (between 10,000 and 50,000 euros per person and per family and only at the Financial Centers Deutsche Bank AG Branch Brussels. offer reserved for Belgian residents).

 

5% in all simplicity

 

You receive a guaranteed rate of 5% gross per annum for 3 months for each new deposit of 10,000 to 50,000.

 

5% and a maximum efficiency

 

After deduction of withholding tax of 27% 1 provides the DB Invest Plus deposit account (a deposit account under Belgian law) a net return of 3.65% per annum for 3 months (fees apply to physical persons residing in Belgium).

 

 

5% in any flexibility

 

This account is designed for people who do not need immediate or within three months of their money and are looking for a fixed interest returns. To be clear: after 3 months will release your money and you can do whatever you want.

Which is certainly a great guaranteed return in this age of ZIRP/NIRP day and age; however the question is: why does Deutsche Bank need this money so urgently, and especially over the next three months.

And while we were pondering this, we noticed a new addition to the generic risk factors boilerplate language, where in addition to the usual stuff, we now see a warning about the infamous “bail in.”

In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits.

We wonder if DB will be alone in going against the ECB’s grain with such scandalously high rates, or if this turns out to be a systemic issue and suddenly every other bank will likewise rush to attract deposits at a time when the ECB would like nothing more than to have a minus sign in front of the 5%.

Finally, we must admit that we are especially amused by the google translator’s twisted humor when it comes to captioning the picture this especially enticing offer appeared on.

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How The Baby Boomers Blew Up The Stock Market

Authored by Jesse Felder of The FelderReport.com,

In my last piece, I openly worried about a few very smart investment minds who have recently attempted to rationalize or justify the persistently high equity valuations we have seen over the past 25 years. I don’t believe that, “it’s different this time.” The modern economy doesn’t have any new magical component that makes a standard stream of cash flows any more valuable than they were 50 or 100 years ago. Nor have investors become generally more intelligent.

I think there’s a very simple explanation for the high stock market valuations since 1990: demographics. From 1981-2000, the baby boom generation came into their peak earning and investing years. Is it just coincidence that during that very same time we witnessed the largest stock market valuation bubble in history? No. In fact, there is a statistically significant correlation between demographic shifts like this and stock market valuations.

6a0133f3a4072c970b017c37501fd9970b-550wi

A few years ago a pair of research advisors to the Federal Reserve Bank of San Francisco demonstrated this link. They found that demographics (specifically, the ratio between retirement age workers to peak earning and investing age ones) is responsible for 61% of the changes in the price-to-earnings ratio of the stock market over time. Additionally, they found that when their model’s forecast p/e was off by a significant amount the real p/e consistently reverted to their forecast p/e.

el2011-26-1

All this means is that there is a very strong relationship between the size of the generation that is currently in its peak earnings and investing years and the valuation of the stock market. Over the past 25 years we have seen the single largest generation in our nation’s history, the baby boomers, push stock market valuations higher than they have ever been. It’s not magic; it’s simple supply and demand (mainly demand).

According to this theory, for valuations to remain elevated the stock market needs the generations that follow the baby boomers to maintain the same population growth that the baby boom represented. We already know that this just isn’t going to happen. The generation following the baby boomers, Generation X, represents a significant deceleration in population growth. For this reason, this model forecasts a contraction of the price-to-earnings ratio over the next decade, from about 18 last year to roughly 8 in 2025.

el2011-26-2

In a piece from last December, I assumed an earnings growth rate of 3.8% over the coming decade, the historical average according to Robert Shiller, in forecasting 2025 earnings for the S&P 500 of 156.76. Apply an 8.23 p/e (forecast by the model) and you get a price level for the index of 1,290.

However, Cliff Asness has shown that earnings are very highly correlated with the level of inflation. With 10-year TIPS now implying inflation of less than 2% we can make a new earnings forecast using that as our assumed level of earnings growth. In this case, we arrive at a 2025 earnings number of 131.75. Applying an 8.23 multiple we get a price level for the index of 1,084. This would represent a decline of about 50% over the coming decade, a truly horrific prospect.

Ned Davis Research has also studied this relationship and come to a similar conclusion. The chart below comes from Davis’ terrific book, “Being Right or Making Money.”

Scan

Of course, there are many factors that influence stock prices and valuations over time and demographics is just one of them. But it’s the only one I’ve found that convincingly explains the persistently high valuations we have seen since the 1990’s. And it doesn’t support the idea that high valuations are here to stay, as some may believe. In fact, it suggests just the opposite.

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The ECB Met With Goldman, Other Banks At Shanghai G-20 Meeting, Allegedly Leaking March Stimulus

On May 18, 2015, the ECB’s Benoit Coeure held a closed-door speech under “Chatham House” rules in which he leaked to an audience of hedge funds in London that “the central bank would moderately front-load its purchases in its quantitative easing program because of the seasonal lack of market liquidity in the summer.” The reaction was an instant 50 pips drop in EURUSD as one or more funds decided to ignore the “rules”, and promptly traded on the material, market moving leak.

The problem for the ECB is that it had just disclosed material, non-public, was inside information to a group of market professionals fully aware they would trade on the news. It wasn’t released to the trading public until around 8am the next day (London time) when it resulted in a further 150 pip plunge. This, for lack of a better word, was criminal.

 

 
As egregious as this obviously was, it didn’t surprise us or anyone else familiar with the relationship between policymakers and those who essentially gamble on policy decisions, aka the commercial banks who own the central banks. Indeed, it was simply another example of nefarious intermingling between central planners and a select group of private sector operators and came just as Jeb Hensarling began to turn up the heat on Janet Yellen regarding leaked Fed data (an investigation that has gone precisely nowhere).

To be sure, once caught leaking market moving data to a select group of billionaires, just a few days later the ECB blamed the fiasco on an “internal procedural error” and promised such behind the scenes meetings with hedge funds profiting from ECB leaks would not happen again.

It happened just a few months later when as the FT reported in November “some of the European Central Bank’s top decision-makers met banks and asset managers days before major policy decisions, and on one occasion just hours before, copies of their diaries reveal.”

The diaries show two members of the ECB’s executive board, Benoît Cœuré and Yves Mersch, met UBS bank the day before a two-day policy meeting of the central bank’s rate-setting governing council on September 3 and 4 2014. Mr Cœuré also met BNP Paribas bank on the morning of September 4, the day the ECB’s governing council surprised markets by cutting interest rates. It also announced it would begin buying private sector assets to save the eurozone’s economy from the threat of deflation. UBS and BNP Paribas declined to comment.

It would appear that when it comes to leaking ECB data, Benoit Couere is the designated middleman whose only job is to notify commercial banks of top secret ECB decisions. Of course, the ECB was troubled by these recurring allegations, and said that “officials never discuss market-sensitive information in private meetings. “The quiet period refers to public communication ahead of monetary policy governing council meetings. The same underlying principles — guarding against signalling future monetary policy — are of course applied to bilateral meetings. In any case, no market-sensitive information is disclosed by the ECB in any non-public forum,” an ECB spokesperson said.

Ironically, just 6 months earlier, the same Couere had very deliberately leaked market-sensitive information to a select group of hedge funds.

* * *

Fast forward to March 10, 2016 when the ECB announced the biggest expansion to quantitative easing in European history, when it shocked the market by announcing not only a reduction in its negative rate and expansion in the TLTRO program, but also the launch of a corporate bond monetization program.

Well maybe not “shocked” the market, because as Bloomberg writes, ECB board members met with representatives of banks and investment managers including Goldman Sachs, BlackRock, Credit Suisse and Moore Europe Capital Management in February, just days before the ECB’s March 10 announcement, records published on Friday showed.

Once again the ECB was holding closed door sessions ahead of key market moving events, and if the events from 10 months prior are any indication, the ECB has allegedly leaked everything it was preparing to do to a select group of banks.

As Bloomberg reports, the ECB has released the Executive Board’s diaries, with a three-month lag,  since the start of this year under a drive to become more transparent. The latest edition covers part of the period between the Jan. 21 monetary policy meeting, when President Mario Draghi signaled the need for more stimulus, and the March 10 session when the ECB lowered interest rates and expanded a bond-buying program.

The documents don’t cover the weeklong “quiet period” before policy meetings, when board members are supposed to refrain from making comments that could influence expectations about monetary policy decisions.

 

The Frankfurt-based central bank is treading a fine line between keeping abreast of market sentiment and avoiding the perception that some participants get an unfair advantage from confidential meetings. While guidelines have been tightened in the past year after the inadvertent release of price-sensitive information at a dinner for financial professionals in May 2015, the subsequent risk of a disconnect was shown in December when markets sold off after the ECB announced a smaller stimulus package than investors had anticipated.

But what we find most entertaining is that it was once again the same designated leaker, the ECB’s “markets chief” Benoit Coeure who was instrumental in perpetuating the ECB’s allegedly criminal information leakage.

ECB Vice President Vitor Constancio and markets chief Benoit Coeure each met with Goldman Sachs in Shanghai on Feb. 27 and Feb. 28, respectively, the diaries show. The men were in the Chinese city for the Group of 20 meetings of finance ministers and central-bank governors. Coeure also met with Credit Suisse and BlackRock over those two days. The topics were described broadly as covering global economic and financial issues.

Benoît Coeuré, executive board member of the European Central Bank

Why the European Central Bank would be meeting with a private bank-slash-central bank incubating hedge fund at a meeting whose purpose was to secretly implement the Shanghai Accord and weaken the dollar, is unclear.

Oh wait, we almost forgot that the head of the ECB is former Goldman partner, Mario Draghi, the same person who was instrumental in creating, and covering up, the FX swaps designed to cover up the tragic Greek economic situation as the insolvent European nation was becoming part of the Eurozone.

And now it all falls into place.

While Draghi’s diary is dominated by meetings with fellow central-bank heads and finance ministers, he also met with Royal Bank of Scotland Group Plc on Feb. 3. to discuss European Union “economic and financial issues.”

Many other banks were also notified: Peter Praet, the ECB’s chief economist, met with Nomura, Germany’s Deka Group and Brussels-based BNP Paribas Fortis, as well visiting SGH Macro Advisers in New York. Other meetings included Yves Mersch with Roubini Global Economics and Moore Europe, Coeure with Deutsche Bank AG, HSBC Holdings Plc and France’s Attali & Associes, and Constancio with Axa Group.

* * *

So did the ECB once again leak material, market moving, non-public information to some of the biggest investors in the world? There is a very simple way to prove it did not: release the full transcript of what was said. This, however, won’t happen for the same reason the Fed will never release the transcript of what was said between Janet Yellen and former Goldman partner and BOE head Marc Carney on February 11 at the trough of the market dump, nor will the Fed release what was said between Janet Yellen and former Goldman partner and ECB head Mario Draghi the very next day as stocks soared.

 

Why won’t these critical transcripts be released? Because as the Fed explained to a Zero Hedge reader a month ago, “the responsive document contains nonpublic commercial or financial information” and while “the document containing the exempt information was reviewed… no reasonably segregable nonexempt information was found.” Case closed.

This came from the “most transparent Fed ever”, and organization that is supposedly there to serve the people, not the banks… who just happen to be its owners as Ben Bernanke’s former advisor explained.

We doubt the most leaky if least transparent ECB would be any better.

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Are Newspapers Captured By Banks?

With Donald Trump going after Jeff Bezos' "capture" of The Washington Post this week, along with Facebook's alleged liberalization of the mainstream's news feeds, the topic of press independence is once again back out of conspiracy theory back-rooms and near top of mind for many average indoctrinated joes. Almost thirty years ago, Edward Herman and Noam Chomsky claimed that media are “effective and powerful ideological institutions that carry out a system-supportive propaganda function," but as ProMarket's Luigi Zingales exposes, for Italy, there is some circumstantial evidence that Italian newspapers are captured by banks.

Economists would argeu that in a competitive market, media responds to the ideological preferences of their consumers, not of their owners (see).

This result is likely to be true when it comes to political ideology: consumers have strong preferences and in a competitive market media responds to these preferences. The same conclusion is less obvious when it comes to business interests. Most consumers do not have a strong ideological preference for the treatment of derivatives in bankruptcy or the proper accounting treatment of mergers. As a result, media can more easily cater to advertisers.

Yet, as long as there is sufficient diversification of interests on these issues across advertisers and media owners, on average the media can perform their function to inform in an unbiased manner, rather than to manufacture a particular consensus.

These conditions, however, are likely to fail when all of the media are in financial difficulty and the issue at stake directly concerns the banking system. When debtors are in economic or financial distress, creditors have great influence over their decisions. There is no reason why newspapers should be any different. Hence, financial institutions could–at least in principle–obtain a significant market power on the reporting of some news in the printed media, thanks to their lending. Is this just a mere academic possibility or does it have some empirical basis?

The current Italian environment represents a unique opportunity to test this hypothesis at least. Many Italian newspapers are losing money and/or are heavily indebted (see Table 1 below).

Table1

Even those that are not heavily indebted have reason to be influenced by the interests of banks. For example, Il Messaggero and Il Mattino are owned by Caltagirone, an industrialist who also owns a large stake in Unicredit, one of the two largest banks in Italy. Editoriale Espresso is controlled by the De Benedetti family, who during this period had to negotiate with the banks regarding another company they own (Sorgenia). The only newspaper that is not highly leveraged or highly dependent on banks for other reasons is Il Fatto Quotidiano.

To test how newspapers report about news that touches directly on banks’ interests, we need some events in which banks’ interests are at stake, and we need a benchmark. As a benchmark I will use the foreign media.  For events, I will choose government actions, one against banks’ interests, and one in favor of them. The first, which occurred in January 2015, is the Government’s decision to force large cooperative banks (Banche Popolari) to become stock companies. The management of these banks violently opposed this decision for fear of losing control. The second event, which occurred in April 2016, regards the Government-sponsored creation of a superfund (not unlike that championed by Paulson in the fall of 2007) called Atlante, to mutualize bank losses across the entire financial system. The Government and the Bank of Italy used their moral suasion to coax banks, pension funds, and insurance companies to invest in a fund that will buy non-performing loans and new equity offerings by banks. In part, it was regulatory arbitrage. In part, it was a transfer of the banks’ losses onto the portfolio of pensioners and retirees. The major banks heavily supported the creation of this fund.

Thus, both of these decisions had strong government support, but they did not both have strong bank support: banks opposed the first, and supported the second.

I collected all the news that appeared in the top 10 Italian newspapers during the first 9 days for both events, having a research assistant classify the articles on the basis of their content. An article is considered positive (+1) if it contains explicit positive judgments about the decision. For example, on 4/11/16 Il Messaggero printed an article stating that the Atlante fund was “an amazing result.” “To the many voices in favor of “Atlante”, from Draghi to the IMF, from the G-20 to Minister Schaeuble, the authoritative Jean-Claude Trichet adds his,” writes La Repubblica on 4/20/16.

An article is considered neutral if it simply describes the fund, as for example Conti’s article in Il Giornale on 4/13/16.  An article is considered critical if it raises doubts on whether the fund could actually work for the stated purpose. For example, an article on 4/12/16 in Il Fatto Quotidiano titled “Too many NPLs but too little money: the weight that crushes Atlante.” To establish what the “unbiased” view should be, I also collect the opinions published in the six top foreign newspapers.

 

figure1

 

Figure 1 compares the average scores of the articles in Italian and foreign newspapers about the two events. Italian newspapers are strongly in favor of the Atlante fund, while the foreign newspapers are mostly against. The opposite is true for the transformation of Popolari: Italian newspapers are mildly against it, while foreign newspapers are strongly in favor of it.

Since there is no particular reason why foreign newspapers should be biased in one way or the other, we can take their reporting as unbiased reporting. Hence, on news where the Italian banks had an interest in positive reporting, Italian newspapers are much more positive than foreign ones. By contrast, on news where the Italian banks had an interest in negative reporting, Italian newspapers are much more negative than foreign ones.

It will take many more episodes like this to reach a reliable conclusion. However, there is prima facie evidence consistent with Italian banks pressuring Italian newspapers to write more favorably about topics they have a direct interest in.

 

figure2

 

Figure 2 and 3 show how the variability across newspapers is related to the leverage of the newspaper. The blue line represents the average score of foreign newspapers and the green line the average of Italian ones.

In Figure 2 there is a very strong negative correlation between leverage and spin. The less indebted newspapers have a more positive opinion of the Popolari decree (like the international media), the more highly levered ones have a more negative opinion.

In Figure 3 there is a positive correlation between leverage and positive spin. The more indebted newspapers have a more positive opinion of the Atlante fund, while the less indebted one have a more negative view (in line with the international media).

 

figure3

 

Notice that because the two events have very different means, this bias is not a newspaper specific bias pro or against the government or pro or against a more favorable spin in general, but it moves exactly in line with the interest of banks: the more levered a newspaper is, the more it seems to agree with banks, whatever the interest of banks is.

How can this occur? While it is plausible that banks can put some pressure on newspapers’ editors, it is hard to imagine that any serious journalist would change her opinion according to what the editor says. Yet, capture can be obtained in much more subtle ways.

The most pervasive way is capture by sources. Often journalists are not experts on the topic they write about and thus they rely on the opinions of sources, whether they admit it explicitly or not. When the usual sources are all on one side of an issue, the newspapers will inevitably follow that bias. This possibility, however, cannot explain the difference between Italian newspapers and foreign ones. If anything, foreign correspondents have to rely more on sources, because they are less knowledgeable of the Italian situation. But they appear less biased.

The second possibility is that newspapers’ editors select the opinion to publish under explicit or implicit pressure from banks. To explore this possibility I look at the main Italian newspaper, which is also one of the more indebted ones: Il Corriere della Sera. I find that two regular economic commentators expressed negative opinions about the Atlante Fund elsewhere (in a foreign newspaper and in an online magazine) but did not publish any article in Il Corriere della Sera on the issue of the Atlante fund. This is consistent with the newspaper selecting commentators to write about an issue in order to project a pro-bank spin.

The data are clearly too limited to draw a strong conclusion. Yet, there is some circumstantial evidence that Italian newspapers are captured by banks, enough to call into question the Panglossian view of the media shared by most people in the economic profession, and enough to call for an investigation by the Italian antitrust authority.    

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Meet Donald Trump’s Chinese Fan Club

For the duration of Donald Trump’s campaign trail right after Hillary Clinton, China has been the go-to “punching bag.”  Earlier this month, the presumptive Republican nominee went as far as describing China’s trade relationship with the U.S. as “rape” and has repeatedly said China is stealing U.S. jobs.  Curiously, despite Trump’s relentless criticism of China, it is here that the republican candidate is building a small but rapidly growing fan base who see beyond the bluster (while loathing what Hillary Clinton stands for).  Fans such as Gu Yu, “a young technology entrepreneur, likes his blunt, no-punches-held approach.”

“I think Donald Trump has the guts to say things that normal people in the rest of society fear to say,” said Gu. He says he is 100% supportive of Trump, and even though he can’t cast a ballot, he says the Americans that can should trust Trump. In a moment of surprising lucidity, Gu said that “I think political correctness covers up problems instead of solving them.” He is absolutely correct.

 

Gu is part of a small but vocal group of Chinese fans of the presumptive GOP nominee. Online they have formed small groups on Chinese social media site Weibo, with names like “Donald J Trump Superfans Nation.”

According to CNN, one social media user wrote, “Hillary Clinton just makes empty promises, while Trump is the King of doing what he says.” Another calls him “honest, sharp, pragmatic, and stylish.” One person even said they’d vote for him because he is “so handsome.”

 

Even more curious is that Trump who repeatedly bashed China is starting to grow a cult following, Hillary who has been far more tempered and respectful in her policy stance on China, if faring far worse.

One often quoted comment from Chinese social media platform Weibo recalls her husband’s public infidelity: “If she can’t manage her husband, how can she manage America?” And Sima Nan, a television pundit sometimes described as China’s Bill O’Reilly, openly calls her a “crazy old woman.”

To be sure, when it comes to Trump, the opinions of fans like Gu aren’t always shared by China’s official state media for obvious reasons. In March, the state-run newspaper The Global Times called Trump a “rich narcissist, and a clown” and said “the rise of a racist … worries the whole world.”

However, in yet anotehr curious twist, an online poll by the same paper did suggest that 54% of Chinese would vote in favor of the U.S. billionaire.

China’s foreign ministry spokesperson, when recently asked about Trump’s candidacy, urged people to take a rational and objective view of the relationship between the two countries.

But what is most surprising, is that unlike many in the US, Trump’s China fanclub sees through the bluster. Gu dismisses Trump’s anti-China rhetoric as political theater, and says he’ll tone it down should he be elected.

“I think normal people will be like goldfish and have three-second memories,” said Gu. “Three months after the election, no one will remember that.”

China’s familiarity with Trump grew during his run as the host of “The Apprentice”, the U.S. reality show popular with Chinese audiences.

According to CNN, a Chinese translation of Trump’s best-selling memoir and business manual “The Art of the Deal” can be found in bookstores across Beijing. His success as a businessman no doubt heightens his appeal as a politician.

Trump Consulting is one of several companies in China that have gone as far as naming their businesses after Trump. It is a Chinese real estate firm and its website proudly boasts the origins of its name.

Ironically, the businesses owner, Ding Shi, told CNN that he doesn’t like Trump the politician at all, though does admire his business prowess. “Donald Trump is a political clown,” said Ding. “But I wouldn’t change my company name for that. He’s a real estate tycoon after all.”

And that’s precisely how Trump wants it.

More in the clip below

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Another Headline Head Fake – The Consumer Can’t Save The U.S. Economy

Submitted by David Stockman via Contra Corner blog,

After a week in which all the big retailers—Macy’s, Kohl’s, Nordstrom’s, Gap, JC Penney, Dillard’s——reported exceedingly downbeat results for their April quarter, it is not surprising that the Census Bureau’s statistical fabrication mill reported robust April retail sales. Likewise, you could count on the financial press to trot out the superlatives, as in the case of the Reuters’ headline proclaiming, “U.S. retail sales rise strongly, boost economic outlook”:

U.S. retail sales in April recorded their biggest increase in a year as Americans stepped up purchases of automobiles and a range of other goods, suggesting the economy was regaining momentum after growth almost stalled in the first quarter…….”The retail sales report shows that recent claims of the demise of the U.S. consumer have been greatly exaggerated,” said Steve Murphy, a U.S. economist at Capital Economics in Toronto.

Not exactly. Retail sales of $450.89 billion in April were down 2% from $460.1 billion in March.

Yes, April has one fewer day than March so there is a matter of seasonal adjustment. But that’s where the shenanigans start.

The Census Bureau reported seasonally adjusted April sales of $453.44 billion, up by a headline catching 1.3% from March.

But then again, based on the seasonal adjustment factor used in 2011, the SA number would have been $450.35 billion, up only 0.6%; and had the 2014 seasonal adjustment factor been used, headline sales would have been $452.6 billion, representing an in-between gain of 1.0%.

Then we also have Easter falling in April during both of the latter two years versus March 27th this time; and in all years there were April showers, too, normal or not!

For crying out loud, seasonally-maladjusted, weather-whacked single month deltas from the rickety government statistical mills are only one step removed from noise. But they are seized upon by the financial press because the latter are exceedingly lazy and always on the prowl for anything that might be “good news” for the stock averages.

But that’s what Bubble Finance has come to. Namely, a cult of the daily stock market that is so myopic, superficial and sycophantic that it has practically reduced financial journalism to noise, as well.

To be sure, there is plenty of information in the Census Bureau on-line data base that shows in an instant that the vaunted American consumer is running out of steam. As will be documented further below, there is not a snowball’s chance that the debt besotted consumer can save the US economy from the demise that lies ahead.

Even as to the near-term, in a nearby post Jeff Snider put the lie to the headline noise with charts that provide historical and cyclical context.The 2.9% year-over-year non-seasonally adjusted gain in April was obviously nothing to write home about and was among the lowest monthly gains outside of recession during this century.

In fact, the April retail sales report brought even more evidence of continued deceleration from the 4-6% annual gains recorded earlier in the recovery. It is reminiscent of the pre-recession patterns of the past, not a signal that the consumer has spung back to life.

ABOOK May 2016 Retail Sales Total

Even these sharply weakening trends overstate the case. The above figures include auto sales, which have rebounded under the tailwind of soaring auto lease and loan finance. In fact, practically any consumer who can fog a rearview mirror has gotten a car loan, but that is not a good thing; it’s a booby-trap as explained below which will boomerang in the years ahead.

Meanwhile, yeaterday’s Census Bureau release provided unmistakable evidence of an exhausted consumer that the media cheerleaders missed altogether.

Thus, between April 2010 and April 2014 when households were recovering their sea legs after the trauma of the financial crash and Great Recession, ex-auto retail sales grew at a 4.1% rate in nominal terms, and 2.1% adjusted for the CPI.

By contrast, during the last 24 months, non-auto sales have barely crawled higher, rising from $343.3 billion in April 2014 to $355.0 billion in April 2016. That’s less than a 1.7% annual rate.

Moreover, even if you credit the BLS’ comically understated CPI, it is evident that inflation adjusted sales outside of autos are now rising at barely a 1.0% annual rate.

It would take less than five minutes to spot that dramatic slowdown by scrolling through the Census Bureau data. Apparently, the algos which scanned the April release and posted the stories didn’t have the milliseconds to spare.

Likewise, it wouldn’t take long to see that even auto sales have shifted to a distinctly lower gear. April NSA auto sales were up just 3% on a y/y basis compared to annual gains of 10% to 15% early during the recovery, and from the exceedingly deep cyclical hole that accompanied the GM/Chrysler bankruptcies in 2008-2009.

ABOOK May 2016 Retail Sales Autos

Actually, the robust upturn of auto sales since 2010 has been a mixed blessing, to say the least. It has been induced by a spectacular explosion of auto loans and leases.

To wit, since July 2010 motor vehicle sales reported in the monthly retail sales data have risen at a $354 billion annualized rate. At the same time, auto loans outstanding have increased from $699 billion to $1.052 trillion. The arithmetic gain in auto debt thus happens to be $353 billion.

That’s right. Exactly 99.72% of the gain in sales was funded by more debt. And during the last year it has gone off the deep end; auto loans have grown by $54 billion while annualized sales have climbed by only $28 billion.

Needless to say, payback time is just around the corner. The virtuous cycle of declining used car generation and rising used car prices has exhausted itself. Yet that was crucial to the debt financed car-buying spree because it meant rising trade-in prices and therefore enhanced capacity to make down payments and loan terms.

Thus, in the run-up to the new auto sales crash in 2008-2009, used car prices plunged by 20% and new light vehicle sales fell from an 18 million annual rate to barely 10 million at the bottom of the cycle.

By contrast, during the first three years of the post-June 2009 recovery, used car prices soared by 24%, enabling the credit fueled recovery of new vehicle sales shown in the graph.

Here’s the thing, however. The worm is fixing to turn because the used car market is facing an unprecedented tsunami of used vehicles coming off loans, leases, rental fleets and repossessions. As shown above, used vehicle prices have been weakening for the last several years, but between 2016 and 2018 upwards of 21 million vehicles will hit the used car market compared to just 15 million during the last three years.

This means used car prices are likely to enter another swoon like 2006-2008, causing trade-in values to plummet and thereby draining the pool of qualified new car borrowers. When the cycle turns down, fogging a rearview mirror is never enough.

To be sure, there is nothing very profound about the certainty that an auto credit boom always creates a morning after hangover, and that the amplitudes of these cycles is getting increasingly violent owing to the underlying deterioration of auto credit. Currently, average new vehicle loans are at a record 70 months, loan-to-value ratios have hit 120% and upwards of 80% of new retail auto sales are loan or lease financed.

Moreover, the race to the bottom is happening once again in the lease market. That is, monthly lease rates have gotten so ridiculously cheap that the implied residual values are at all time highs. This means that when the used car pricing down-cycle sets in during the flood of vehicles ahead, massive losses will be generated, causing a sharp contraction of the leasing market, as well.

Stated differently, the auto sales piece of retail sales has virtually nothing to do with a rebounding consumer. Its a reflection of an artificially bloated and unstable credit cycle that is about ready to take the plunge.

And that gets to a larger issue brilliantly dissected in a nearby post by Thad Beversdorf. The entire mainstream meme about the consumer being the 70% backbone of the US economy, and that implicitly households can spend the America to prosperity ignores a crucial factor. Namely, that the PCE (personal consumption expenditure) component of GDP is not the same thing as household jobs and wage and salary income, at all.

More than 25% of PCE is accounted for by government income transfers led by social security and medicare—both if which are heading for insolvency in the years just ahead. On top of that, the surge in household leverage ratios in the two decades leading up to the 2008 crash and arrival of Peak Debt added a further layer of spending power derived from credit expansion, not production and wages.

As a result, as Beversdorf’s chart demonstrates, the share of PCE accounted for by transfer payments and consumer borrowings has soared from 24% in 1993 to nearly 36% today. This means that the prospective trend of consumption spending is as much a matter of fiscal policy and household credit health as it is wage and salary growth.

To wit, reported PCE has grown from $4.4 trillion in early 1993 to $12.3 trillion at present. That represents a 4.3% growth rate over the last 23 years.

Yet had the 1993 transfer payment/consumer debt share remained constant at 24% of PCE——today it would be only $10.2 trillion, if you assume that the growth of government transfer payments on the margin was financed with Federal borrowing.

Screen Shot 2016-05-12 at 9.17.18 PM

At the end of the day, the seasonally maladjusted data for April retail sales amounts to no more than a swiggle in the larger trend. To wit, consumption spending financed by the growth of transfer payments and household borrowing is coming up hard against Peak Debt, while tepid growth in wage and salary income remains hostage to a domestic economy plagued with structural barriers to growth, an aging business cycle and a gathering global recession from which it is not remotely decoupled.

So contrary to Reuters and its Keynesian quote standbys, it is not true that “the demise of the U.S. consumer have been greatly exaggerated”.

Actually, it can be hardly exaggerated enough.

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Maduro’s Last Stand: Venezuela Declares State Of Emergency

From extending the weekend, to rationing electricity, to running out of money to print money, we've been covering the real-time events that have occurred in Venezuela as it devolved into a completely failed state.

 

Sadly, last night as starving citizens looted marketplaces in search of food, we predicted that a civil war was almost inevitable, and that Nicolas Maduro would do what he could to hang on for dear life (literally). Today we learn, with his entire socialist utopia literally crumbling beneath him, Venezuelan president Maduro has declared a 60-day state of emergency.

 

Additionaly, as a last ditch effort to extend whatever is left of his time as president, Maduro is trying to drum up sympathy claiming that the United States was responsible for the chaos in his country.

"Washington is activating measures at the request of Venezuela's fascist right, who are emboldened by the coup in Brazil." Maduro said.

Maduro gave no further details on the "threats" that led him to declare the state of emergency, but the idea of a coup was naturally downplayed by opposition lawmaker Tomas Guanipa.

"Today Maduro has again violated the constitution. Why? Because he is scared of being recalled." Guanipa opined.

*  *  *

Unfortunately for the people of Venezuala, whatever turn this saga takes will be ugly to say the least…

If people needed yet another textbook example of how socialist utopias ultimately end, Venezuala would be a good place to start.

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Chart Of The Day: Bonds Vs Stocks Vs Reality

Another week goes by and another gaggle of Fed guffaws pukes out the same old 'we are data-dependent' meme, the same old 'everything is on track' narrative, and the same old 'bonds are wrong, stocks are right' idiocy. Do they not see what this constant nonsense has done to Kuroda and The Bank of Japan's credibility – propagandizing in the face of overwhelming facts. In order to help those who just can't seem to shake off the "well The Fed said it so it must be true" denial pysche, we offer the following chart…

Just wait for 2017… it's going to awesome!!

 

So which do you think is "right" – the stock 'market' or the bond market?

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Why Are We So Bad At Solving Problems?

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

I am not very optimistic about the fate of mankind as it is, and that has a lot to do with what I cite here, that while our problems tend to evolve in exponential ways, our attempts at solving them move in linear fashion. That is true as much for the problems we ourselves create as it is for those that – seem to – ‘simply happen’. I think it would be very beneficial for us if we were to admit to our limits when it comes to solving large scale issues, because that might change the behavior we exhibit when creating these issues.

In that sense, the distinction made by Dennis Meadows below between ‘universal problems’ and ‘global problems’ may be very useful. The former concerns issues we all face, but can -try to – solve at a more local level, the latter deals with those issues that need planet-wide responses – and hardly ever get solved if at all. The human capacity for denial and deceit plays a formidable role in this.

I know that this is not a generally accepted paradigm, but that I put down to the same denial and deceit. We like to see ourselves as mighty smart demi-gods capable of solving any problem. But that is precisely, I think, the no. 1 factor in preventing us from solving them. And I don’t see that changing: we’re simple not smart enough to acknowledge our own limitations. Therefore, as Meadows says:

“we are going to evolve through crisis, not through proactive change.”

And here it is in its context:

‘Limits to Growth’ Author Dennis Meadows ‘Humanity Is Still on the Way to Destroying Itself’

SPIEGEL ONLINE: Professor Meadows, 40 years ago you published “The Limits to Growth” together with your wife and colleagues, a book that made you the intellectual father of the environmental movement. The core message of the book remains valid today: Humanity is ruthlessly exploiting global resources and is on the way to destroying itself. Do you believe that the ultimate collapse of our economic system can still be avoided?

Meadows: The problem that faces our societies is that we have developed industries and policies that were appropriate at a certain moment, but now start to reduce human welfare, like for example the oil and car industry. Their political and financial power is so great and they can prevent change. It is my expectation that they will succeed. This means that we are going to evolve through crisis, not through proactive change.

I don’t really think that Dennis Meadows understands how true that is. I may be wrong, but I think he’s talking about a specific case here . While what he makes me ponder is that perhaps this is all we have, and always, that it’s a universal truth. That we can never solve our real big problems through proactive change. That we can only get to a next step by letting the main problems we face grow into full-blown crises, and that our only answer is to let that happen.

And then we come out on the other side, or we don’t, but it’s not because we find the answer to the problem itself, we simply adapt to what there is at the other side of the full-blown crisis we were once again unable to halt in its tracks. Adapt like rats do, and crocodiles, cockroaches, no more and no less.

This offers a nearly completely ignored insight into the way we deal with problems. We don’t change course in order to prevent ourselves from hitting boundaries. We hit the wall face first, and only then do we pick up the pieces and take it from there.

Jacques Cousteau was once quite blunt about it:

The road to the future leads us smack into the wall. We simply ricochet off the alternatives that destiny offers: a demographic explosion that triggers social chaos and spreads death, nuclear delirium and the quasi-annihilation of the species… Our survival is no more than a question of 25, 50 or perhaps 100 years.

Without getting into specific predictions the way Cousteau did: If that is as true as I suspect it is, the one thing it means is that we fool ourselves a whole lot. The entire picture we have created about ourselves, consciously, sub-consciously, un-consciously, you name it, is abjectly false. At least the one I think we have. Which is that we see ourselves as capable of engineering proactive changes in order to prevent crises from blowing up.

That erroneous self-image leads us to one thing only: the phantom prospect of a techno-fix becomes an excuse for not acting. In that regard, it may be good to remember that one of the basic tenets of the Limits to Growth report was that variables like world population, industrialization and resource depletion grow exponentially, while the (techno) answer to them grows only linearly.

First, I should perhaps define what sorts of problems I’m talking about. Sure, people build dams and dikes to keep water from flooding their lands. And we did almost eradicate smallpox. But there will always be another flood coming, or a storm, and there will always be another disease popping up (viruses and bacteria adapt faster than we do).

In a broader sense, we have gotten rid of some diseases, but gotten some new ones in return. And yes, average life expectancy has gone up, but it’s dependent entirely on the affordability and availability of lots of drugs, which in turn depend on oil being available.

And if I can be not PC for a moment, this all leads to another double problem. 1) A gigantic population explosion with a lot of members that 2) are, if not weaklings, certainly on average much weaker physically than their ancestors. Which is perhaps sort of fine as long as those drugs are there, but not when they’re not.

It’s quite simple, isn’t it? Increasing wealth makes us destroy ancient multi-generational family structures (re: the nuclear family, re: old-age homes), societal community structures (who knows their neighbors, and engages in meaningful activity with them?), and the very planet that has provided the means for increasing our wealth (and our population!).

And in our drive towards what we think are more riches, we are incapable of seeing these consequences. Let alone doing something about them. We have become so dependent, as modern western men and women, on the blessings of our energy surplus and technology that 9 out of 10 of us wouldn’t survive if we had to do without them.

Nice efforts, in other words, but no radical solutions. And yes, we did fly to the moon, too, but not flying to the moon wasn’t a problem to start with.

Maybe the universal truth I suspect there is in Meadows’ quote applies “specifically” to a “specific” kind of problem: The ones we create ourselves.

We can’t reasonably expect to control nature, and we shouldn’t feel stupid if we can’t (not exactly a general view to begin with, I know). And while one approach to storms and epidemics is undoubtedly better than another, both will come to back to haunt us no matter what we do. So as far as natural threats go, it’s a given that when the big one hits we can only evolve through crisis. We can mitigate. At best.

However: we can create problems ourselves too. And not just that. We can create problems that we can’t solve. Where the problem evolves at an exponential rate, and our understanding of it only grows linearly. That’s what that quote is about for me, and that’s what I think is sorely missing from our picture of ourselves.

In order to solve problems we ourselves create, we need to understand these problems. And since we are the ones who create them, we need to first understand ourselves to understand our problems.

Moreover, we will never be able to either understand or solve our crises if we don’t acknowledge how we – tend to – deal with them. That is, we don’t avoid or circumvent them, we walk right into them and, if we’re lucky, come out at the other end.

Point in case: we’re not solving any of our current problems, and what’s more: as societies, we’re not even seriously trying, we’re merely paying lip service. To a large extent this is because our interests are too different. To a lesser extent (or is it?) this is because we – inadvertently – allow the more psychopathic among us to play an outsize role in our societies.

Of course there are lots of people who do great things individually or in small groups, for themselves and their immediate surroundings, but far too many of us draw the conclusion from this that such great things can be extended to any larger scale we can think of. And that is a problem in itself: it’s hard for us to realize that many things don’t scale up well. A case in point, though hardly anyone seems to realize it, is that solving problems itself doesn’t scale up well.

Now, it is hard enough for individuals to know themselves, but it’s something altogether different, more complex and far more challenging for the individuals in a society, to sufficiently know that society in order to correctly identify its problems, find solutions, and successfully implement them. In general, the larger the scale of the group, the society, the harder this is.

Meadows makes a perhaps somewhat confusing distinction between universal and global problems, but it does work:

You see, there are two kinds of big problems. One I call universal problems, the other I call global problems. They both affect everybody. The difference is: Universal problems can be solved by small groups of people because they don’t have to wait for others. You can clean up the air in Hanover without having to wait for Beijing or Mexico City to do the same.

Global problems, however, cannot be solved in a single place. There’s no way Hanover can solve climate change or stop the spread of nuclear weapons. For that to happen, people in China, the US and Russia must also do something. But on the global problems, we will make no progress.

So how do we deal with problems that are global? It’s deceptively simple: We don’t.

All we need to do is look at the three big problems – if not already outright crises – we have right now. And see how are we doing. I’ll leave aside No More War and No More Hunger for now, though they could serve as good examples of why we fail.

There is a more or less general recognition that we face three global problems/crises. Finance, energy and climate change. Climate change should really be seen as part of the larger overall pollution problem. As such, it is closely linked to the energy problem in that both problems are direct consequences of the 2nd law of thermodynamics. If you use energy, you produce waste; use more energy and you produce more waste. And there is a point where you can use too much, and not be able to survive in the waste you yourself have produced.

Erwin Schrödinger described it this way, as quoted by Herman Daly:

Erwin Schrodinger [..] has described life as a system in steady-state thermodynamic disequilibrium that maintains its constant distance from equilibrium (death) by feeding on low entropy from its environment — that is, by exchanging high-entropy outputs for low-entropy inputs. The same statement would hold verbatim as a physical description of our economic process. A corollary of this statement is an organism cannot live in a medium of its own waste products.

The energy crisis flows seamlessly into the climate/pollution crisis. If properly defined, that is. But it hardly ever is. Our answer to our energy problems is to first of all find more and after that maybe mitigate the worst by finding a source that’s less polluting.

So we change a lightbulb and get a hybrid car. That’s perhaps an answer to the universal problem, and only perhaps, but it in no way answers the global one. With a growing population and a growing average per capita consumption, both energy demand and pollution keep rising inexorably. And the best we can do is pay lip service. Sure, we sign up for less CO2 and less waste of energy, but we draw the line at losing global competitiveness.

The bottom line is that we may have good intentions, but we utterly fail when it comes to solutions. And if we fail with regards to energy, we fail when it comes to the climate and our broader living environment, also known as the earth.

We can only solve our climate/pollution problem if we use a whole lot less energy resources. Not just individually, but as a world population. Since that population is growing, those of us that use most energy will need to shrink our consumption more every passing day. And every day we don’t do that leads to more poisoned rivers, empty seas and oceans, barren and infertile soil. But we refuse to even properly define the problem, let alone – even try to – solve it.

Anyway, so our energy problem needs to be much better defined than it presently is. It’s not that we’re running out, but that we use too much of it and kill the medium we live in, and thereby ourselves, in the process. But how much are we willing to give up? And even if we are, won’t someone else simply use up anyway what we decided not to? Global problems blow real time.

The more we look at this, the more we find we look just like the reindeer on Matthew Island, the bacteria in the petri dish, and the yeast in the wine vat. We burn through all surplus energy as fast as we can find ways to burn it. The main difference, the one that makes us tragic, is that we can see ourselves do it, not that we can stop ourselves from doing it.

Nope, we’ll burn through it all if we can (but we can’t ’cause we’ll suffocate in our own waste first). And if we’re lucky (though that’s a point of contention) we’ll be left alive to be picking up the pieces when we’re done.

Our third big global problem is finance slash money slash economy. It not only has the shortest timeframe, it also invokes the highest level of denial and delusion, and the combination may not be entirely coincidental. The only thing our “leaders” do is try and keep the baby going at our expense, and we let them. We’ve created a zombie and all we’re trying to do is keep it walking so everyone including ourselves will believe it’s still alive. That way the zombie can eat us from within.

We’re like a deer in a pair of headlights, standing still as can be and putting our faith in whoever it is we put in the driver’s seat. And too, what is it, stubborn, thick headed?, to consider the option that maybe the driver likes deer meat.

Our debt levels, in the US, Europe and Japan, just about all of them and from whatever angle you look, are higher than they’ve been at any point in human history, and all we’ve done now for five years plus running is trust a band of bankers and shady officials to fix it all for us, just because we’re scared stiff and we think we’re too stupid to know what’s going on anyway. You know, they should know because they have the degrees and/or the money to show for it. That those can also be used for something 180 degrees removed from the greater good doesn’t seem to register.

We are incapable of solving our home made problems and crises for a whole series of reasons. We’re not just bad at it, we can’t do it at all. We’re incapable of solving the big problems, the global ones.

We evolve the way Stephen Jay Gould described evolution: through punctuated equilibrium. That is, we pass through bottlenecks, forced upon us by the circumstances of nature, only in the case of the present global issues we are nature itself. And there’s nothing we can do about it. If we don’t manage to understand this dynamic, and very soon, those bottlenecks will become awfully narrow passages, with room for ever fewer of us to pass through.

As individuals we need to drastically reduce our dependence on the runaway big systems, banking, the grid, transport etc., that we ourselves built like so many sorcerers apprentices, because as societies we can’t fix the runaway problems with those systems, and they are certain to drag us down with them if we let them.

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BREXIT – The Movie

With establishment scaremongery reaching 11 on the Spinal Tap amplifier of doom, confusion over Brexit's reality remains high among Brits with at least 20% undecided still and the rest almost evenly split. As we noted previously, a vote for Brexit would be the first time the European Union’s process of ever-greater integration has taken a serious backward step and that is why, as 'Brexit: The Movie' explains "we, the people, are being cajoled, frightened, and bullied into surrendering our democracy and freedom," blowing apart the pro-EU propaganda, and makes the case for an independent, confident and outward-looking Britain.

The fearmongering continues…(is this any stranger than proclaiming WWIII looms?)

(h/t @4bins)

Brexit: The Movie lays bare the nature of the European Union – and shows why millions of Brits are voting to leave it. Full movie below:

Brexit: The Movie from WAGTV on Vimeo.

 

Investors may be growing uninterested in the seemingly inconclusive Brexit debates– but it’d be misguided to be complacent around the threat it poses…

 

Perhaps, given The Brits natual skepticism, it's time for the establishment to stop talking – but then again, that will never happen.

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