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Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

It is common knowledge by now that Federal Reserve Chairman Alan Greenspan oversaw, enabled and approved of, a major transition in the US economy. His infamous “Greenspan-put” in which his actions at the central bank would be driven, if not dictated, by the whims of financial markets, clearly led to higher asset prices. Investors obviously picked up on the strong bias in the Greenspan-Fed’s conduct of monetary policy as they slashed rates at the tiniest hiccup in financial markets, and kept them at low levels for much longer than what would be considered prudent by former administrations. Following markets on the escalator up and taking the elevator down together set a precedent that created a Frankenstein monster, which socialised losses through the printing press while privatizing profits. Such a system was and still is unsustainable as it more or less ensures valuations decouple from underlying fundamentals.

The monetary system in place since the gold-exchange standard that emerged from the rubble of WWI clearly favours inflation over deflation, so we should expect values expressed in money to have an upward trend imbedded in them. However, a stable system would see nominal valuations rise more or less in tandem. In other words, we would expect a balanced sustainable system to see the price of apples, S&P500, cars, commodities and GDP grow more or less at the same pace.

Note, we are not saying certain markets will never experience idiosyncratic price movements due to their own peculiarities as driven by shifts in supply or demand. On the contrary, shifts in relative prices are the one thing that make a capitalistic system stable over the long run. What we are saying though is that the upward trend in prices is due to a diminution of the value of money per se ,driven by the inherent inflationary bias in monetary policy execution. With stable money, relative prices would change, but not the overall price level. This is important, as any comparative analysis of the pre-Greenspan era versus recent past must take into account the fact that prices do rise, relentlessly. We must thus examine financial asset valuations in relation to other markets to understand what the Greenspan put mean.

One way to do that is to look at equity values relative to GDP. As the chart clearly shows, right after Greenspan takes charge of the Federal Reserve equity valuations move to a completely new paradigm. Monetary policy implementation completely changed under Greenspan’s watch.

Removing uncertainty about the future course of interest rates obviously created a herd mentality among investors. Why would anyone take a contrarian position when the central bank more or less told the public what the Fed would do? Do not fight the Fed emerged as the most profitable market mantra. What used to be extreme overvaluations in the pre-Greenspan era became the exact opposite under his watch. It is almost as Fischer’s unfortunate 1929 “stocks have reached a permanently high plateau“-prediction finally came true. Reversion to mean though, require a 50 per cent drop in equity values. A staggering 90 per cent drop is necessary to compensate for the current extreme over-valuation through an undershoot from the pre-Greenspan mean.

A better way at looking at equity valuations, which does not entail a flawed GDP concept, is to compare it with other asset classes. Our next chart depict US farmland and residential real estate compared to the S&P 500. The idea is that these all reflect somewhat the productive capacity of society and should therefore yield more or less the same. And throughout history they did. While they clearly diverged now and then, such as the equity boom of the 1960s, farmland bubble in the 1970s and housing in the 2000s, the massive divergence in equity valuations starting with Greenspan’s reigns stands out.

And this is not because farmand productivity suddenly fell. On the contrary, from the 1940s output per acre has steadily risen. This is central bankers herding investors into stocks by altering the risk/reward balance.   

As a side note, with the latest bout of monetary madness farmland prices has indeed reached a new bubble; a bubble so severe that it makes the folly of the 1970s look like good old fashioned mid-western prudence. Turns out there were some unintended consequences of printing trillions of currency units after all.

As we have shown here before, the S&P500 is extremely dependent on what happens around FOMC days.

Excluding trading on the day of and after an FOMC decision shaves more than 40 per cent off the index.

via Zero Hedge http://ift.tt/1W1yc9O Tyler Durden

By Mark Fleming-Williams of Stratfor

Europe Without the Union

The European project was always bound to fail. Europe is a continent riven by geographic barriers. It has spent two millennia not only indulging in massive and constant internal wars, but also keeping written records of them, informing each generation of all the times their forebears were wronged. Over the centuries, great empires have risen and fallen, leaving behind distinct groups of people with different histories, languages and cultures. Any project attempting to fuse these disparate cultures into one monolithic state over the course of just 70 years was by its very nature doomed. It would inevitably encounter insurmountable levels of nationalistic resistance, and eventually the project would stall. That is the point at which we now find ourselves.

Crises abound, and though they all have different facades, each stems from the same underlying issue: Citizens ultimately prize their national and regional identities over the supranational dream. The sovereign debt crisis and repeating Grexit scares, born of the introduction of the euro in 1999, have exposed Northern Europe's unwillingness to subsidize the south. TheBrexit referendum, scheduled for June, can trace its roots to the 2004 enlargement of the European Union, and the ensuing wave of Polish migration to the United Kingdom. Meanwhile, amid the ongoing immigration crisis, national leaders are appeasing their populations by bypassing European rules and re-erecting border controls to stem the flow of refugees across their territory. In all of these situations, the same factors are at work: The driving forces within Europe are national in nature, and countries will ultimately put their own interests first.

Today's problems were both predictable and predicted. The next step, however, is harder to foresee. Having identified a system's inherent flaw, one can very well state that it is unsustainable, but unfortunately the flaw provides no guide as to the exact circumstances of the system's end. There are still many different ways that the demise of the European Union's current form could come about. For example, the project could unravel via market forces, as it nearly did in 2012 when investors tested the commitment of the core to save the periphery and found it to be (barely) willing to do so. Or a disaffected populace could elect a nationalist party such as France's National Front, which could either lead the country out of the European Union or make the bloc so unmanageable that it ceases to function. Perhaps the most likely scenario at this point would be for the European Union to survive as a ghost of its former self, with its laws ignored and stripped back to the extent that it holds only a loose grip on its members.

Where Integration Will Persist

The exact circumstances of the European project's end are not yet clear, but there are certain fixed, underlying truths that are sure to outlast the European Union's current form. With them, a forecast can still be made of the shape of things to come. These fundamental realities stem from deeper, unchanging forces that will bring countries together according to their most basic goals; they are the same forces that limited the European project's lifespan in the first place. By looking at these underlying factors, one can predict which countries will emerge from a weakened or collapsed European Union with close ties, and which are likely to drift apart in pursuit of their own interests once they are freed from the binding force of the European Union and its integrationist ideals.

The best place to start is the Benelux region. Belgium, the Netherlands and Luxembourg have long played a key role in European geopolitics, situated as they are on the flat and traversable land between Europe's two great Continental powers, France and Germany. Indeed, it was in the Benelux region that the European project began. Belgium and Luxembourg formed an economic union in 1921, and talks began for a customs union with the Netherlands in 1944, before the end of World War II. But it was World War II itself that really gave birth to the European Union as the Benelux countries combined with their two flanking giants and Italy to create a bloc that would prevent a reoccurrence of such destructive conflict. In the 70 years that had elapsed since German unification, France had endured three invasions, and all the members of the fledgling union suffered greatly as a result. Today, 70 years later and without a reoccurrence of catastrophic conflict, their strategy appears to have worked.

Thus the Benelux, France and Germany will be motivated to continue their integration efforts. Caught between two economic powers, the Benelux will want to secure their friendship. Meanwhile, France and Germany's rivalry will also draw them together. However, the fateful fact here is that the Franco-German relationship has been one of the major fault lines in the current European Union, meaning that a smaller version of the bloc will be similarly flawed.

Italy, for its part, will not be invited to the party this time around. For one, it lacks the same geopolitical circumstances, safely shielded as it is behind an Alpine wall. Moreover, the eurozone's third-largest economy has been at the center of both the sovereign debt and the immigration crises, and Germany in particular will be as reluctant to stay attached to the indebted Italy as it is to remain tied to Spain. The Franco-German-Benelux bloc is the likely heir to the euro, if the currency continues to exist, and it will maintain the European Union's integrationist ethos. It will adopt a more positive stance toward free trade than its predecessor, with the Netherlands and Germany outweighing the protectionist urges of Belgium and a France shorn of its traditional Mediterranean allies. This "core" bloc will be the Continent's center of gravity in the future. In the times that it has been whole since its unification in 1871, Germany has dominated the Continent, and it appears set to keep doing so for at least the next decade or two.

Germany's influence in Europe is not purely geopolitical. A large part of it is based on trade. The past two decades in particular have seen Germany assemble a powerful international goods factory. It takes unfinished products from its neighbors (eight of whom send Germany more than 20 percent of their exports) and transforms them into sophisticated mechanical goods before shipping them onward. In 2014, Germany was the number one export destination for 14 of its 27 EU peers, and the top source of imports for 15 of them. Access to this machine has especially benefited former communist states in Central and Eastern Europe, which have capitalized on high levels of investment from Germany (as well as the Netherlands and Austria) and capital inflows to achieve impressive GDP growth. European Union or no, the players in this network will all be highly motivated to keep it running.

Eastern and Western Interests Diverge

Still, there are two catches. The first is immigration. The subject has hung over these relationships since at least the 2004 enlargement, when Germany was one of several countries to impose restrictions on the freedom of movement for new eastern members. The influx of refugees into Europe has recently rekindled this friction, with the Visegrad Group (Hungary, Slovakia, the Czech Republic and Poland) bonding over a mutual aversion to Germany's attempts to dole out quotas of newly arrived migrants. The relationship emerging to Germany's east and southeast is one in which the free movement of goods and capital is encouraged, but the free movement of people is restricted.

The second catch is Russia. Over the next decade, Russia will experience some significant changes in both its external relationships and its internal systems. The first half of this forecast has already come to pass, and Russia has grown increasingly belligerent in its periphery. Stratfor believes this will become more pronounced until the system designed by Russian President Vladimir Putin either adapts or collapses. This will clearly have a considerable effect on Russia's European neighbors, albeit to varying degrees. And so, geography will come into play once more. We have already seen the Russian military used to powerful effect in Ukraine, but its ability to push farther into Romania is somewhat tempered by the Carpathian Mountains, a natural barrier that snakes north and west, also providing protection to Hungary and Slovakia. Poland, by contrast, stands starkly exposed to Belarus, a close Russian ally, with no mountain range to shield it. Farther north, the similarly unprotected Baltic states lack Poland's bulk and thus have even less protection; a larger country like Poland could at least buy time to organize a defense.

This geographic divergence will divide Central and Eastern Europe into two groups, one focused on trade and the other on security. The Central Europeans (the Czechs, Hungarians, Romanians, Bulgarians and Slovaks) will be wary of antagonizing Russia. The Carpathians, though a barrier, are not insuperable. And yet these countries, sheltered by the mountains, will also be free to focus much of their energy toward pursuing continued prosperity through trade with the core. A shared interest in maintaining trade with Germany is not the foundation for a defined bloc, but more the makings of a loose grouping that becomes weaker with both distance from Germany and time, as Germany's strength begins to wane. Poland and the Baltics, by contrast, will not have the luxury of focusing primarily on their own enrichment. With Russia's presence looming, these countries will be bound closely together, focusing their energies on defense pacts and alliances — and especially on cultivating strong relationships with the United States. Trade will continue, of course, but the identity of this bloc will center on resisting the Russian threat. If and when internal challenges force Russia to turn its attention inward, Poland will have an opportunity, the likes of which it has not seen for several hundred years, to spread its influence east and south into the former territories of the old Polish-Lithuanian Commonwealth in Belarus and Ukraine.

In the north, Scandinavia will form its own bloc. Its members have a history of shared empires, free trade, freedom of movement agreements and a (failed) currency union; they are natural bedfellows. Indeed, an institution that has been somewhat dormant since the rise of the European Union — the Nordic Council — already exists to aid their international governance. This bloc is likely to be almost or equally as integrated as the French- and German-led core, with which it will have close trade and diplomatic relations.

Winners and Losers in a New Order

One of the countries most pleased with the new arrangements will be the United Kingdom, assuming it can hold itself together long enough to enjoy them. Having dedicated much of the last millennium to keeping the Continent divided and playing one side off another, the United Kingdom was forced to join the European Union once the organization's unity was truly unquestionable. With a Continent divided once more, the United Kingdom will be able to return to its preferred long-term strategy, maintaining a balance of power while at the same time attempting to develop a trade network that mixes regional with global. By contrast, Spain and Italy are likely to be left behind. Both will be struggling to stay whole, with Spain in particular danger of coming apart at the seams because of the internal conflicts raging among its constituent parts. Both will attempt to remain as close as possible to the core, though protectionist tendencies in the southern countries may inhibit these trading relationships. Spain and Italy are also likely to enjoy the newly regained freedom of being able to devalue their own currencies to regain competitiveness. From the core bloc's perspective, the two countries are likely to represent a continuing point of tension, with France pushing for their inclusion as Germany and the Netherlands resist. But time will work in France's favor here, since its advantageous demographics compared with those of Germany point to it gaining increasing influence over the bloc as the years pass.

The picture that has been laid out here is not meant to be an exact representation of Europe at a specific date in the future. Even if the European Union does unravel suddenly, as it nearly did in 2012, it is unlikely that countries would move on and settle into their new roles as seamlessly as described. Events will move at different speeds, and there may be considerable strife involved in the transition. With countries such as Italy and Spain battling to avoid isolation, France will be put in the difficult position of having to choose between either remaining close to Germany or standing with its Mediterranean allies. Elements of the current system may persist, and links will continue to exist across the blocs. For example, if the euro does survive in the core bloc, it may also continue to be used in some of today's other eurozone countries that are deemed to be fiscally responsible, such as Finland, for want of a compelling reason to make a change. There are still many unknowns. However, the intention is to show the picture that exists beneath the tracing paper. The image that actually emerges will depend on where and how pressure is applied in the years ahead.

via Zero Hedge http://ift.tt/21TQk9l Tyler Durden

Submitted by Ryan McMaken via The Mises Institute,

Last month, we looked at military spending by state, and how some states — South Carolina and Virginia, for example — have military spending as a major component of their local economies. Proposing cuts to government spending via military spending would likely be political suicide in any of these places.

But of course military spending is just one type of government spending, and some states are heavily dependent on government spending whether the spending be on civilian federal employees, the military, or transfer payments such as Social Security and Medicare.

Federal Spending as a Percentage of State GDP

If we look at federal spending as a proportion of each state's overall GDP, we find that the recipients are not exactly evenly distributed:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

This is all federal spending, so these totals are a combination of military spending, social welfare programs such as Medicare, and ordinary civilian federal spending, including civilian research facilities and other programs funded by federal grants.

These are proportional numbers, so they are a function of both the amount of federal spending as well as the overall size of GDP. So, in California, for example, which receives immense amounts of government spending, is nevertheless a state where federal spending is offset by a very large private sector. In a more rural state with few major private industries, such as New Mexico, the state shows up as being highly reliant on federal spending.

By this measure, the state most reliant on federal spending is Mississippi where federal spending is equal to 32 percent of the state's GDP. The state least reliant on federal spending is Wyoming where federal spending is equal to 11 percent of the state's GDP:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

The above measure gives us a sense of how much federal spending is taking place relative to overall economic activity. But, it tells us little about how much the feds are spending in each state relative to the tax revenue being produced in each state.

To discover that, we need to compare federal spending to tax collections from each state. So, I took gross tax collection by state, and then subtracted refund totals. I then compared the "net" collections to Pew's total federal spending data in each state. (The tax data used was 2013 data.) We can then measure the result in terms of dollars spend in each state per dollar in tax revenue collected. States that have a value of less than a dollar in the map below receive less than a dollar in federal spending for every dollar in taxes paid from that state. So, for example, Ohio receives 91 cents in federal spending for every dollar collected in taxes from Ohio:

I've divided this graph up into "net tax payer states," "break-even states" and "net tax receiver" states. The lightest shade of blue are states that, by far, pay in more than they receive back, such as New Jersey and Minnesota. The next lightest shade of blue are states that are more or less "break even" in the sense that spending and tax collections hover somewhat around a 1-for-1 relationship. The darker blue states are states that receive considerably more in federal spending than they pay in taxes.

Here are all states, including values:

Naturally, these values aren't spread evenly within the states themselves, either. Areas that are more rural and reliant on agriculture will tend to be net tax receiver areas both because farmers and ranchers receive a lot of government subsidies, and also because agricultural work tends to have lower productivity than urban work.

Urban areas, in contrast, produce most of the tax revenue, so highly urbanized states will tend to more often be "break even" or "net tax payer" states.

Other Considerations

One thing that must not be ignored is the fact that the US government spends more than it takes in nationwide. During 2013, for example, the federal government spent a dollar for every 80 cents it took in via taxes.

Nationwide, the tax-spending ratio is not one dollar, but it about $1.20. So, states that are getting around $1.20 back for every dollar extracted in taxes are really just at the national average.

This is being made possible by old-fashioned deficit spending and also by monetization of the debt which the Federal Reserve facilitates by expanding the money supply. Once interest rates rise or the international value of the dollar begins to fall significantly, this sort of overspending will no longer be possible, and many states will find themselves in dire straits. (States that are "net tax payer" or "break even" states will adjust the best to any significant disruptions in federal spending.)

On the other hand, the realities of the central bank tend to favor the richer, more urban states at the expense of the poorer tax-receiver states.

For example, the Fed's war on interest rates tends to more heavily impact communities that have a relatively large number of modest savers and risk-averse investors. By driving down interest rates so far, the Fed is favoring wealthy investors with access to high-yield investments at the expense of ordinary Main-Street households who rely on more conservative, easily-accessed forms of saving and investment, such as savings accounts and CDs. As a result, capital accumulation is negatively impacted most in parts of the country that produce the least tax revenue and have less productive workers.

In other words, the central banking regime perpetuates the current imbalance between net tax payer states and net tax receiver states by making it more difficult for poorer parts of the country to accumulate wealth and increase productivity.

Simultaneously, the money creation process tends to favor the financial sectors in large urban areas at the expense of less urban and poorer areas. Thanks to the way the central bank creates money, it is the urban investor classes that get to spend the new money first — before prices adjust to the new, larger money supply — while more rural, less urban, and less productive parts of  the country receive this money only after prices have risen. This further perpetuates the tax-spending imbalance.

So while it is true that urban, coastal taxpayers are often paying more in taxes and financing government spending in other parts of the country, those same taxpayers do indeed benefit from national policy that favors the investor class (and those who work with them) over others. They're paying more taxes because they have higher incomes, but these higher incomes come, to a certain extent, at the expense of Americans outside these corridors of financial power.

Beyond the monetary angle, of course, is the fact that states also are restrained in their ability to fully utilize resources in their own states by federal regulations.

Western states, especially, are not able to access resources on federal lands except in a manner consistent with federal laws written primarily by politicians from outside the state. Such policies are unresponsive to local needs and economic realities. 

And, of course, trade regulations, when implemented at the national level, may have significant negative impacts on certain states that are not free to negotiate their own trade arrangements with foreign economies.

The Jones Act and trade barriers on sugar are just two examples.

While we can see that the net tax receiver states do indeed benefit from large amounts of federal spending, we must also take into account the fact that federal policy may also be hobbling those local economies while favoring and redirecting wealth toward the net tax payer states.

That is, the tax-and-spend wealth transfers from net taxpayer states to net tax receiver states could be viewed as something that merely helps to diminish the effects of impoverishment that are the result of national policy. Were it not for these policies, it is entirely possible that these net tax receiver areas would not have become so reliant on federal spending in the first place.

via Zero Hedge http://ift.tt/24KoPBj Tyler Durden

As we wrote early yesterday when we summarized the outcome of the first day of China’s National People’s Congress (NPC), China failed to deliver any of the major stimulus programs the market was expecting.

As a reminder, this is what Goldman was expecting as late as this past Friday: upon rhetorically asking itself “at what level do we expect the government would set the official deficit target given that many market participants expect a level above 3% or even as high as 4%” to which Goldman said “given our expectation that local governments will be allowed to issue more bonds within the budget (RMB500 bn in 2015) and recent statements from senior policy makers, including the Minister of Finance Lou Jiwei, that a 3% “red line” for the deficit might not be applicable to China, we expect the official deficit ratio target will be modestly above 3%.“

It was not and China revealed a 2016 budget deficit of 3.0% – the absolute minimum, and well below the whisper 4%. Worse, as Goldman notes, “after adjusting for fiscal stabilization fund and cross-year deposits/withdrawal from the general public budget account, the actual expenditure-revenue difference was already 3.5%.”

So did China actually trim its deficit expectations? If so, expect a major risk off move in the commodity sector.

Furthermore, Goldman also said that “if the government intends to achieve a higher growth rate (it has been widely reported that the government may target a range of 6.5-7.0% yoy real GDP growth this year), more fiscal stimulus would also be needed, which we think would primarily be through more infrastructure investment.” Sure enough, Premier Li announced a targeted growth rate of 6.5% to 7.0%, however he was very vague, on purpose, in the details of how China would achieve this growth aside from noting something about even more roads to nowhere, to wit: “we should also expand major infrastructure projects, with the aim of increasing the length of high-speed railways in service to 30,000 kilometres and linking more than 80 percent of big cities in China with high-speed railways, building or upgrading around 30,000 kilometres of expressways, and achieving full coverage of access to broadband networks in both urban and rural areas.”

Will this tepid infrastructure play be enough to boost commodity prices, which have soared in recent weeks heading into the congress on hopes of a massive stimulus, only to see another water pistol, we will find out in a few short hours.

In the meantime, here is Goldman’s Yu Song with a post-mortem of what actually happened in China over this much anticipated weekend.

NPC comment 1: Government Work Report sets 2016 economic targets

The annual National People’s Congress (NPC) started yesterday (March 5) and will last until the 16th. Premier Li Keqiang announced 2016 economic targets in yesterday’s morning session. The China People’s Political Consultative Conference (CPPCC) started on March 3 and will run in parallel with the NPC but will conclude on the 13th.

These two conferences are not the venues for the government to make new policies. If anything, there is a tendency to refrain from any significant policy moves (such as exchange rate adjustment) which could potentially lead to market instability. However, these conferences are highly important for the market since more information on policy decisions already made will be released.

The Government Work Report is the report of the State Council to the congress. 

It reviewed changes over the past year and set a number of economic targets for 2016:

GDP growth target to be in a range of 6.5%-7.0%. Last year, the target was around 7.0%. This year, we note the absence of the word ‘around’ in front of the range, suggesting the government’s determination to maintain at least 6.5% growth. Put differently, with an around 7.0% target, getting a 6.9% growth – which was the actual growth last year – is totally consistent with the target. With a 6.5%-7.0% range, if growth falls to 6.4%, it will be viewed as technically out of range. This determination is mostly related to the commitment to double 2010 income level by 2020 and concerns about employment. Doubling income level by 2020 implies an annual growth target at 6.5% till 2020, which is above our estimate of potential growth under the assumption of modest reforms. Some skeptics may say this simply means there will be more data ‘smoothing’, but we believe there could be at least some modest additional policy easing which will impact real growth. We have already seen some signs of this change since the start of the year, even though some observers may have gone too far to expect an aggressive loosening with money and credit continuously on the upside significantly as it did in January. Having said that, although the government has many controls over the economy, it may not always reach the targets it set. In 1998 for example, after significant efforts to reach an 8% or above growth, actual growth fell modestly below the target to 7.8% and even this number led to controversies (because the government failed to deliver its growth target). Overall, we see modest upside risks to our reported GDP growth forecast and less so in terms of the alternative measures of growth. Should activity growth rebound after a period of weakness, we believe loosening will likely become less aggressive as it typically did in the past.

The CPI target was set at 3% as usual and hence contains no new information. As CPI has in fact been running at significantly below that level for an extended period of time, it is not normally a binding target. There will be some temporary acceleration in CPI inflation recently – we expect February CPI to exceed 2% and surprise the market on the upside. But even if it does come in at 2.4% (our February CPI forecast) which can be viewed as closer to the upper bound/target of 3%, we believe it is mostly driven by temporarily adverse weather conditions and hence will start to normalize from March. The only risk of a continuous rise in CPI inflation is if broad money and credit supply were to be maintained at January which we see as unlikely unless external demand falls as much as it did during the GFC. Even if it does, we believe chances of that kind of loosening on an going basis is very low. We see largely balanced risks to our 1.5% forecast for the whole year though 1Q data is likely to surprise on the upside.

The M2 target of 13% is higher than last year’s 12%. But last year’s target statement had an additional line that, when implementing policy actual growth rate can be modestly higher. As recent M2 growth has been running at around 13%, this target itself does not necessarily represent a looser monetary policy stance but more a continuation of the existing policy stance. This is also consistent with the recent RRR cut which sent a clear signal of loosening bias but not to the degree seen at this time last year (when RRR cuts were as large as 100bp).The government also set a total social financing (TSF) target (13%) for the first time, reflecting the rising perceived importance of this measure. In the past, the target on credit supply had been on the much narrower RMB loan metric. (Note that TSF is not exactly ‘total’ in the sense local bonds and some other new products are not included. If we adjust for the local government bond swap program, the growth rate will be higher at 15.3%.) As TSF has been running at slightly below 13% recently and M2 growth modestly above, these two targets together represent a broadly stable monetary policy. This will likely raise concerns about the continued wide gap between money/credit growth and GDP growth, but in the absence of faster domestic financial reform and/or capacity cuts, we believe it will help keep the economy closer to the growth target and reduce deflationary pressures in the short term.

Fiscal deficit: The 3% on-budget deficit is reported as a looser policy stance as it is up from the 2.3% budget deficit last year. However, after adjusting for fiscal stabilization fund and cross-year deposits/withdrawal from the general public budget account, the actual expenditure-revenue difference was already 3.5%. There is no detailed information on how this 3% target was derived in terms of fiscal stabilization fund or cross-year deposits/withdrawal, so we cannot be sure that this represents a net loosening of the on-budget deficit (until we receive more information on the full budget). Assuming those adjustments are the same as last year, this will imply a modestly larger fiscal deficit. The main fiscal loosening will likely still be mainly via quasi fiscal loosening done by policy banks.

What’s also important is the strong emphasis on tax cuts as the main reason behind the larger deficit. We see this as a clear positive step which is a key component of the supply side reform. Achieving the goal of a significant net tax reduction is not something easy, as much of the expenditure side is inelastic. There is a risk that while some tax cuts, such as cuts to import duties of some consumer goods, are partially offset by the rise in effective tax burden in other areas, there could be more stringent tax collection at the local level. Nevertheless, we view the clear policy direction as a positive move.

The employment and unemployment targets (urban job creations more than 10 million and registered unemployment rate not higher than 4.5%, same as last year) had generally not been of much relevance in recent years despite slowing growth, mainly because the targets were set leniently in our view and the measures such as unemployment are not sensitive to economic fluctuations. Even back during the GFC, urban registered unemployment never exceeded 4.3%. Hence, we believe the unchanged targets will face limited challenges despite likely restructuring in the overcapacity industries which we estimate will lead to meaningful but not very large impacts on employment, especially over the slightly longer run.

There were no targets on trade for the first time in recent years (China customs also suggested the abandoning of trade growth target earlier in the year). Instead, there was only a statement on the desire to achieve faster growth than last year which was very low (-2.9% and -14.2% for exports and imports respectively). We believe this is a positive development as it suggests the government has formally recognized that foreign trade growth rate is not something the government can and should control. Unrealistic targets in the past sometimes led to adverse effects such as reported trade data distortion. We see this move as part of a process of de-targeting economic growth and there are likely to be more similar moves in the future, but the pace of change is likely to be slow.

The Government Work Report also stated the need to reduce overcapacity, reform SOEs, eliminate barriers to entry for monopolized industries, continue infrastructure construction, step up international cooperation, control pollution, reduce poverty, among others. The statement on exchange rate was a short standard party line. There was also no mentioning of the registration based stock listing and property prices.

* * *

Finally, as we summarized yesterday, here is a full breakdown of all the empty and hollow promises China made yesterday, of which we are absolutely confident it will deliver on none at all:

• To target 2016 GDP growth of between 6.5 percent and 7 pct.
• To target 2016 CPI around 3 pct.
• To target 2016 M2 growth target around 13 pct.
• Sees 2016 budget deficit at 3 pct of GDP.
• To use various monetary policy tools to maintain reasonable liquidity.
• To continue to implement prudent monetary policy.
• To continue to implement proactive fiscal policy.
• Will keep renminbi exchange rate basically stable in 2016.
• Will continue to improve yuan exchange rate regime in 2016.
• To deepen reform of financial sector.
• To further liberalise interest rates.
• To deepen reform of state owned commercial banks.
• To reform stock and bond markets.
• To promote sound development of multi-level capital market.
• To crack down on unlawful activities in the securities and future markets.
• To ensure no systemic or regional financial risks arise.
• To strengthen unified macroprudential management of foreign debt.
• To launch Shenzhen-Hong Kong stock connect pilot at appropriate time.
• To establish catastrophe insurance system.
• To develop internet finance.
• To develop inclusive and green finance.
• To insure proportion of direct financing is increased.
• To develop private banks.
• Sees growth in outstanding social financing of around 13 pct in 2016.
• To launch trial allowing commercial banks to participate in debt equity investment for small businesses.
• To establish standard financing mechanisms for local governments to issue debt.
• Says China to issue 400 billion yuan of special local government debt in 2016.
• To keep urban registered jobless rate below 4.5 pct in 2016.
• Will create 10 million new jobs in 2016.
• Will quicken supply-side structural reform.
• Will appropriately deal with zombie firms in 2016.
• To address issue of zombie firms using mergers, reorganizations, bankruptcies and debt restructurings.
• Will push ahead with reform of state-owned firms.
• Says will resolve overcapacity in industry, focus on steel and coal.
• Says 100 billion yuan in subsidies will be used primarily to resettle laid off employees.
• Says convinced Hong Kong, Macao will maintain long-term prosperity and stability.
• Says will oppose Taiwan independence separatist activities.
• Says will safeguard peace and stability in Taiwan Strait.

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Yesterday, when reading the latest note by JPM’s “Gandalf” head quant Marko Kolanovic, we noted something strange: for the first time we observed a JPM quant not only commenting on such sensitive topics as social fairness, but daring to challenge the oligarch orthodoxy implying that Buffett is wrong that “the babies being born in America today are the luckiest crop in history.”

This is what he said:

While we do not take either a glass half-full or glass half-empty view on the current state of US economy, there are good reasons to believe that ‘the luckiest generation in history’ statement is overly optimistic. US primary results show a very strong lead for D. Trump in the Republican Party, and a surprisingly good showing for B. Sanders. We believe this indicates that a significant part of the electorate disapproves of the current political establishment and feels left behind by the new economy (e.g. voters may not agree with W. Buffet that an average upper-middle class American today has a better living standard as compared to John D. Rockefeller Sr.).

Since the opinion of Kolanovic’s boss Jamie Dimon – if only that for public purposes – is largely a carbon copy of Buffett’s, we hope this rare statement of truth from a banker does not cost Kolanovic his job, especially since his uncanny insight and abilities to time market inflection points have made him almost as invaluable to stock pickers as Gartman (the latter, by batting a solid 0.000, is arguably the most irreplaceable voice on Wall Street today).

Insight such as this, on who is buying and selling this bear market rally:

Since mid-February, the S&P 500 has staged a meaningful rebound. Similar to the market rally in October 2015, systematic strategies had an important role in both the January selloff (here) and February rally (Figure 1).  

 

Short term equity momentum (1-month) turned positive around the 1930 level and 6m momentum turned positive a few days ago. This would have resulted in CTAs covering most of their short equity exposure and inflows in $50-70bn (also confirmed by the equity beta of CTA benchmarks). The market moving higher also changed the index option (gamma) imbalance and resulted in daily hedging flow that suppressed realized volatility. Lower realized volatility in turn led to some (albeit smaller) equity inflows into Volatility Targeting strategies (~$10bn) and Risk Parity strategies ~$10-$20 bn. All In all, over the past 2 weeks, equity inflows from systematic strategies totaled around $80-$100bn. Taking into account the low liquidity (S&P 500 futures market depth) and assuming that total equity market depth is ~4 times that of futures (including stocks, ETFs, and options), we estimate that more than half of the market rally in the second half of February was driven by these systematic inflows. Another likely significant driver is the rally in oil prices over the past 2 weeks.

… and that, as we showed, and as UBS confirmed last Thursday, has been entirely a function of an epic short covering squeeze.

So now that we know who drove the rally, here – according to Kolanovic – is what happens next:

What is the fate of this market rally? In terms of technical flows, more inflows would come if 3M and 12M momentum turn positive, which would happen at ~2025 and ~2075, respectively (the precise level depends on the timing of potential moves). If volatility stays subdued, volatility-managed strategies could also increase equity exposure. However, equity momentum is also vulnerable to the downside and a move lower could be accelerated by 6M and 1M momentum unraveling at ~1950 and ~1900, respectively. From the perspective of systematic strategies, downside and upside risks are balanced. However, equity fundamentals remain a headwind. In our recent strategy note, we showed that historically, periods of consecutive quarterly EPS contractions are often followed by (or coincide with) economic recessions (~80% of the time over the past ~120 years). EPS recoveries that follow 2 consecutive EPS contractions (~20% of times) were typically triggered by some form of stimulus (fiscal, monetary or exogenous). We expect market volatility to stay elevated and investors to remain focused on macro developments such as the Fed’s rates path, developments in China, and releases of US Macro data. Elevated volatility and EPS downside revisions will provide a headwind for the S&P 500 to move significantly higher (via multiple expansion). While investors need to have equity exposure, we think there are better opportunities in Value stocks, International and EM equities (as compared to broad S&P 500 exposure)

Which probably also explains why late last week JPM’s head strategists went underweight stocks last week “for the first time this cycle“, while urging clients to buy gold.

via Zero Hedge http://ift.tt/1QDWzqr Tyler Durden

By EconMatters

It has been a bad 4 years for the Canadian Dollar versus the Greenback. It is trying to make a recovery as of late as the price of Oil is off the bottom, but if Oil takes another leg lower, this could spell more pain for the currency.

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Submitted by Claire Bernish via TheAntiMedia.org,

Legislators in Mexico City passed a proposal on Thursday to bar presidential candidate Donald Trump from entering the country.

Though the proposal amounts to a tellingly symbolic gesture, the lawmakers hope the measure will pressure Mexican President Enrique Peña Nieto to take a more adamant stand against Trump’s xenophobic rhetoric — including his blanket characterization of Mexican immigrants as ‘rapists and criminals.’

“What we’re saying is that if he wants to build a wall so that Mexicans can’t enter his country, then he is not welcome in our country,” Manuel Delgadillo explained to WorldPost.“What we need now is for President Peña Nieto to make a strong statement condemning Mr. Trump’s anti-Mexican comments.”

Delgadillo also said the Mexico City legislators were concerned with the billionaire’s “hyper-nationalist” dialogue, which has stoked anti-Mexican sentiment throughout the United States.

Deputy Víctor Hugo Romo of the Revolutionary Democratic Party — the politically left political party responsible for the proposal — compared Trump to Hitler, calling him “primeval, egocentric, and primitive.”

“Hitler was very popular,” Romo said, reported MSV Noticias. “He generated a lot of sympathy by adopting nationalist politics that vindicated the Germans’ sense of self-worth. [Trump] is practically a copy. I consider Donald Trump a chauvinist, a misogynist who fosters and leans toward repression … He doesn’t respect diversity.”

Trump’s demagoguery has also been recently condemned by two of Mexico’s former presidents.

Felipe Calderón denigrated Trump’s anti-immigrant policy for its transparency in not being aimed at immigration, per se, instead saying “he is talking about migrants that have a different color than him — and that is frankly racist.” He sharply cautioned that Trump “is turning the United States into a neighbor that we’re all going to end up rejecting and hating.”

In interviews, Vicente Fox called Trump “crazy” and a “false prophet.” He also repeatedly stated, referring to the candidate’s proposal that Mexico must fund the building of a wall along the U.S.-Mexico border, “I’m not going to pay for that fucking wall … He should pay [for] it … He’s got the money.”

He added that “Democracy cannot pick crazy people” who don’t “know what’s going on in the world.”

However, the remarkably tabloid-esque field of presidential hopefuls for the 2016 election would appear to evidence exactly that.

via Zero Hedge http://ift.tt/1X57b5M Tyler Durden

There is perhaps no more perverse relationship in the world than that which exists between the West and Saudi Arabia – or, “the ISIS that made it,” as Kamel Daoud, a columnist for Quotidien d’Oran, and the author of “The Meursault Investigation” calls the kingdom.

We’ve been over and over the glaring absurdity inherent in the fact that the US and its partners consider the kingdom to be an “ally” in the fight against terrorism and you can read more in the article linked above, but the problem is quite simply this: the Saudis promote and export an ultra orthodox, ultra puritanical brand of Sunni Islam that is virtually indistinguishable from that espoused by ISIS, al-Qaeda, and many of the other militant groups the world generally identifies with “terrorism.”

Wahhabism – championed by the Saudis – is poisonous, backward, and fuels sectarian strife as well as international terrorism. That’s not our opinion. It’s a fact.

But hey, Riyadh has all of the oil, so no harm, no foul right?

Even as the very same ideals exported by Riyadh inspire the ISIS jihad, the kingdom is so sure it has the political world in its pocket that it sought a seat on the UN Human Rights Council, even as the country continues to carry out record numbers of executions.

They even had the nerve to establish what they called a 34-state Islamic military alliance against terrorism in December. Of course the members don’t include Shiite Iran (the Saudis’ mortal enemy) or Shiite Iraq, both of which are actually fighting terror rather than bombing civilians in Yemen and engaging in Wahhabist proselytizing.

But while everyone in the world is well aware of just how silly the “alliance” is, the farce will apparently continue as French President Francois Hollande on Friday awarded Crown Prince Mohammed bin Naif France’s highest national honor, the Legion of Honor for “for his efforts in the region and around the world to combat extremism and terrorism.”

This is the same Francois Hollande whose country was attacked not four months ago by fighters inspired by the very brand of Islam the Saudis teach. 

This would be like pinning a Blue Ribbon on Kim Jong-Un for his efforts to promote sanity and maturity in international relations.

There are no words.

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Via Dana Lyons' Tumblr,

The Value Line Geometric Composite, which broke critical support in early January leading to an immediate 12% drop, has climbed all the way back to the breakdown level.

The Risk Model that orients our investment posture utilizes market inputs other than simply price in its construction. However, if we were to choose one price plot to guide our investment decisions, it would most certainly be the Value Line Geometric Composite (VLG). The VLG, as we have explained many times in these pages, is an unweighted average of approximately 1700 stocks. Thus, in our view, it serves as the best representation of the true state of the U.S. equity market. It has also historically been very true to technical analysis and charting techniques which is quite remarkable considering there are no tradeable vehicles based on it. And it has been remarkably accurate of late in offering guideposts for trading this market – something to keep in mind based the current level of the VLG.

Consider some of our posts this year focusing on the VLG:

January 6:  “BREAKING!: The Bull Market?”

 

The VLG breaks what we had labeled the “pass/fail” line around 436, signified by a cluster of key Fibonacci Retracement lines stemming from the major post-2009 bull market lows. The break of this level, besides perhaps dealing the fatal blow to the cyclical bull market, opened up an immediate 12% of further downside to the 382 level.

 

January 20:  “UPDATE>>Just 2 Weeks After Breakdown, Key Index Hits Ground Floor”

 

Just 2 weeks later, the VLG tags the 382 level. This level, signified by the next sequential Fibonacci Retracement levels, also proves to be accurate, not only as a magnet but as support. The index would test the level again in February, ultimately forming a closing low of 383.82. From there, it has bounced, just as it was drawn up.

 

February 23:  “Is The Stock Rally Glass Half Full Or Half Empty?”

 

About 8 days into the February bounce, the VLG came to a crossroads halfway between the 382 and 436 level. The area included several potential points of resistance; however, based on some of the proprietary indicators that we track, there were suggestions that the rally was not over and that the VLG could push through the potential resistance. Based on that, we surmised that the VLG glass was half full and the index was more likely to rally another 6% to the 436 level than it was to visit 382.

Fast forward 8 more days to today and we find the VLG hitting a high of 437, confirming our short-term inclination and recovering all the way up the elevator shaft to where it broke down on January 6.

Short-term view:

Long-Term view:

So what now? Well, after rallying 14% in just about 3 weeks, a ratcheting down of upside expectations would certainly seem warranted. Sure, the VLG has favorable momentum here and the indicators we track are still pointing positive, so there could very well be some overshoot to the upside. However, considering how spot-on the VLG’s chart levels have been in marking turning points, it would seem wise to continue to pay some heed to the levels.

Furthermore, if you hold the view, as we do, that the stock market has entered into a cyclical bear market, the upside to any bounce may be capped. Thus, while the VLG has climbed from the ground floor all the way back up the elevator shaft, it may find the access to upper floors there rather limited.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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