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It was just last month when we checked in on BofA economist Ethan Harris who, in May of 2015 derided the “perma-bear” crowd for crowing about an abysmal Q1 GDP print.

“Looking ahead, it is much too soon to declare victory, but we expect the data to improve in the months ahead as seasonal and other distortions fade,” Harris concluded, suggesting that if the double-adjusted data continued to “improve”, BofA’s economics team would be able to proclaim that the bears had been vanquished once and for all.

8 months later, Harris admitted that “a series of shocks have undercut [his] optimism.” Those shocks are, i) slumping oil prices, ii) the demise of HY, iii) generally terrible news from the US industrial sector, and iv) market “moodiness” related to China and oil.

Of course all of those factors were already at play at the beginning of last year. Saudi Arabia had already begun its war on the US shale space which would have been all the evidence you needed to predict both the collapse of oil prices and the turmoil in HY, it was already abundantly clear that US corporates were eschewing capex for buybacks, and if you didn’t see the writing on the wall in China by January of 2015, then you can’t really call yourself an economist.

“Who could have possibly anticipated these ‘shocks’”?, we asked last month. “Oh yes, those pesky perma-bears, who actually looked at all economic indicators, not just the ones goalseeked to validate some initial (and erroneous) hypothesis,” we said, answering our own question as we are so very often forced to do.

BofA went on to lower their 2016 GDP forecast from 2.3% to 2.1%.

On Wednesday, Harris is back and although he’s doing his best to stay positive (bless his heart), he’s willing to admit that “recent market fragility” will likely force the Fed to lean more dovish and he also says “the stock market is pricing in a 50% or so probability of a recession.”

Apparently, Harris is also “surprised” by the strength of the dollar (because who could have seen that coming given the epic diveregence in monetary policy between the Fed and other DM CBs) and the tightening in financial conditions. He also concedes that “Q4 GDP growth was particularly weak.” Here’s an excerpt from Harris’ latest note: 

It has been an ugly start to the New Year: at Friday’s close, the S&P 500 was down 8.8% year to date (11.6% off its November high), 10-year treasury yields were down about 50bp ytd, and there had been a further widening in high yield spreads. Capital markets seem to be pricing in a 50% or higher probability of a US recession. For example, a simple probit model shows that the 6 month growth rate in the S&P500—falling by 8.8% from July to January — is signaling a 49% chance of a recession starting sometime in the next 12 months (Chart 3). Our rates team has developed an adjusted yield curve measure that signals a 68% probability of recession.

 

But don’t worry, Harris believes the market as well as BofA’s rate team may be “peddling fiction.” Here’s why: 

In our view, the weakness in 4Q GDP reflects both the erratic nature of recent GDP releases and some temporary factors holding down growth. The weakness in the second half of last year also reflects three partly temporary headwinds.  

 

Inventories rose about $113bn in both 1Q and 2Q last year. That is about double the sustainable pace. With moderate sales growth, companies were forced to slow production to slow the accumulation. Investment has now slowed to $69bn, slicing 0.7pp and 0.5pp off of growth in the last two quarters. As a result, we believe the adjustment is largely over: we expect a 0.2pp drag from inventories in 1Q and no drag thereafter. A similar story applies for the collapse in the mining sector: the worst is behind us. The third, and most important, headwind is the strong dollar.  

And while Harris doesn’t necessarily see the strong dollar problem as being “temporary” like the other headwinds facing the econony, he does say it’s important to remember that “the equity market is not the economy” (an effort to downplay the market’s pricing in of a looming recession).

Harris is right. The equity market is not the economy. Although judging by the Fed’s new reaction function, we’re not sure Janet Yellen agrees.

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Submitted by Gregory Copley via OilPrice.com,

The Government of Turkey has now put itself in a position whereby it must act rapidly and precipitously to avoid moving to an ultimately losing strategic position in the war against Syria, which could result in being forced back to fight a full-scale civil war to prevent the break-up of the State into at least two components, one being a new Kurdish state.

Turkey’s leadership, in insisting – in 2011-12 – on sponsoring a proxy war to overthrow Syrian President Bashar al-Assad, has already led to a refugee crisis of irreversible strategic damage to Europe, but Turkish Presisdent Reçep Tayyip Erdogan, the Saudi Arabian military-political leadership, the U.S. Barack Obama administration, and the Qatari Emir now find themselves with nowhere to go except to escalate further in the hope that the Syrian revival, backed by Russia and Iran, will collapse.

Clear indications are emerging in Washington, DC, that the Pentagon is preparing to support a direct military invasion of Syria by Turkish Armed Forces, despite the Munich accord in the week ending February 13, 2016, which was meant to bring about a ceasefire in Syrian fighting. US officials have been actively engaged with those of Turkey and possibly Saudi Arabia in the preparations for ground force attacks on Kurd-ish military formations inside northern Syria, and U.S. Air Force Fairchild A-10 strike aircraft have deployed over northern Syrian territory in early February.

The planned intervention by Turkey (and possibly other powers, such as Saudi Arabia) is specifically not aimed at countering the activities of ISIS (asad-Dawlah al-Islamiyah  al-‘Iraq wash-Sham/Islamic State), but solely about countering the growing capability of Syrian- and Iraqi-based Kurdish fighters, and to offset the gains which Syrian Government forces, supported by Russian and Iranian/HizbAllah forces, made in and around Aleppo.

The prospect of yet another abandonment of the Kurds is causing considerable division within some U.S. military and intelligence circles, but the fiction is that the Turkish battle is with ISIS.

It is understood that the Turkish Government wishes to establish a cordon sanitaire inside Syria, along the Turkish border, to prevent the flow of Kurdish fighters from Syria into Turkey, where they are reportedly supporting the civil war which is now underway in the Kurdish areas of Turkey. General Adem Huduti, commander of the Second Turkish Army, based in Malatya, has primary ground force responsibility for the areas contiguous with Syria and Iraq, and was believed to be key to the operation, which could engage, initially, some 20,000 or so of the Second Army’s 100,000-man strength, supported by Turkish Army Avia-tion AH-64W helicopter gunships, and other airborne systems, and possibly Turkish Air Force fixed-wing ground attack support and fighter cover, to protect against Syrian and Russian Air Force fighters. At least two armored brigades, with modern main battle tanks, and two mechanized infantry brigades, would be deployed, based on current observations of forward deployments by the Second Army. They would be sup-ported by self-propelled 15mm artillery.

The Obama Administration and the Government of Turkish President Erdoan and Prime Minister Ahmet Davutoglu appear to have calculated — probably correctly — that the Russian Government would not di-rectly interfere with the assault on Kurdish forces, the YPG [People's Protection Units (Kurdish: Yekîneyên Parastina Gel)] in a move designed to split those forces, driving to a depth of some 25 miles inside Syria.

Meanwhile, it should be expected that a number of false-flag attacks would be mounted by U.S. and Turk-ish operators to give the impression that the Turkish incursion would be responding to humanitarian con-cerns. Questions, then, should be raised by reports of attacks on February 14-15, 2016, by aircraft against civilian hospital targets in Aleppo. False-flag attacks (ie: purporting to be from one side, but in reality by another) have been used consistently by Islamist forces since the Sarajevo attacks (blamed on the Serbs) in the 1990s, and through later conflicts.

The proposed major military assault into Syria holds considerable risk for Turkey, not the least of that being a possible accidental escalation of hostilities with Russia, but it now seems unavoidable if Ankara is not to see a major disaster, not only wasting more than five years of intense effort to overthrow the Syrian Gov-ernment of President Bashar al-Assad, but also to avert the unfettered escalation of the Kurdish war to wrench a large part of Turkey away from Ankara to create a new Kurdish state which would link with Iraqi and Syrian Kurds. Already, Turkey has paid an enormous price in unanticipated consequences from its ef-fort to lead a coalition (Turkey, Saudi Arabia, Qatar, and the U.S.) into overthrowing Assad.

The war has taken far longer than anticipated, and has cost Turkey all of its regional allies; it has also united the Kurds of Turkey, Iraq, and Syria into a desire to finally create their Kurdish state; it has generated a refugee flow from Syria and Iraq which is now beyond Ankara’s capacity to manage; and it has created a major rift between Turkey and the European Union, while costing Turkey most of its political support in Washington (except from the Obama White House and the State Dept.). Moreover, the escalation has led to the Russo-Turkish rift, in which Russian sanctions against Turkey are now starting to bite into an already fragile Turkish economy.

At the same time, the Iranian Government feels that Iranian vital strategic interests have been directly challenged by Ankara, and that while Iran had few options but to trade through Turkey during the period of international sanctions, it now — with sanctions being lifted — no longer has to hold back so much in de-fending its interests against Turkish depredation.

Senior levels of the U.S. Defense Dept., albeit impacted by consistent browbeating from the White House, have said repeatedly that there were no vital U.S. interests at stake which would warrant a major U.S. military intervention inside Syria, but no Defense official would countermand a direct order from the White House to undertake covert or support operations assisting the Turkish position. The White House and Ankara have been seeking triggers which would force the U.S. into a position where it would have to intervene directly.

Russia is unlikely to provide that casus belli, largely because of the 1936 Montreux Convention could give Turkey the right to close the Bosphorous transit link between the Black Sea and the Mediterranean to Russian naval shipping in the event of a formal state of war between Turkey and Russia. Moscow has consist-ently refused to rise directly to Turkish military provocations. Rather, it has preferred to respond politically and economically.

It has been obvious for some time to Russian, Kurdish, Iranian, and Syrian officials that Turkey would have to lash out to defend its position.

As a result, all of those states in confrontation with Turkey have had time to begin bolstering their defenses in the area which Turkey intends to invade in Syria.

Moreover, the reality is that Turkey now places itself in the position, de facto, of declaring war on Syria. This has a significant new element and catalyst:

Turkey and its allies have been operating through a range of proxies, including ISIS, the al-Nusra Front, and so on to wage war on Syria. Thus, at least, Syrian forces would, in facing a conventional Turkish military invasion, legitimately be able to respond militarily, if they could gain the territorial foothold to do so. Thus the determination by Damascus and Moscow to regain as much territory in and around Aleppo as quickly as possible. This raises the question, however, of whether Turkey would use this as a pretext to attempt to engage NATO forces, or at least the forces of the US.

 

NATO as a whole has been resisting Turkish overtures to join the conflict, or to allow Turkey to cite “Article Five” of the North Atlantic Treaty, stating that an attack on a NATO member is an attack on all of the alliance.

But the Obama Administration, with less than a year to run on its term, is also throwing caution to the winds, and is empowered in this by the diversion of U.S. political attention on the November 2016 Presidential elections. President Obama hopes to move the U.S. into an irrevocable military action in Syria before the Washington political establishment can warn him off it. And he might succeed. But to what end? This has become an ideological commitment for the White House. The engagement by U.S. President William Clinton in fabricating a casus belli for intervention in Serbia in the 1990s provides a precedent, and there has for some time been a strong psychological campaign underway to sway Western public/political opinion on the necessity for armed intervention in Syria.

What, then, are the options open to the governments and forces seeking to oppose the Turkish military intervention, knowing that, at the very least, Turkish forces would be able — with their strong combined arms operations and advanced systems, supported by U.S. and Turkish command and control operations — to make swift and significant gains inside Syrian territory?

There are several factors. Firstly, Turkish forces should be expected to attempt more than one cross-border operation, in an attempt to divide Kurdish forces. Secondly, Kurdish forces themselves should be expected to respond with their own “diversionary” attacks behind Turkish lines, well inside Turkey, alt-hough Turkey has ample forces to deal with that in the initial stages.

It must be assumed that the Kurdish forces would have already been reinforced with significant anti-tank capabilities. As the Turkish Army discovered when it moved into Iraqi Kurdistan on several occasions, it cannot expect to emerge unscathed from the operation. Moreover, Russian and Syrian forces will have utilized the available time to determine how best, for example, to cut or minimize Turkish abilities to re-supply its forces inside and around Aleppo, and Ankara may have to accept that to gain its cordon sanitaire it may also lose Aleppo back to the Syrian Government.

Moreover, while the cordon sanitaire may push Kurdish forces back from the Turkish border, this does not necessarily guarantee that Turkey can maintain its logistical lines with ISIS. The Russian destruction of the ISIS oil trade routes to Turkey may continue to erode the economic viability of the Islamic Caliphate, and cut into the revenues being earned from that trade by the Erdo?an family.

Whatever happens, the Russian economic sanctions against Turkey, coupled with the prospective loss of Iranian trade, the ongoing decline in energy transit revenues, and the now-determined and organized Kurdish bid for a new state to be carved out of Turkey mean that Ankara is grasping at straws to reverse its fortunes. Little wonder that Washington has been increasing its pressures on Israel to restore relations with Turkey to supply gas from Israeli Mediterranean fields in the future, to compensate for the losses from Russian-controlled sources.

It is even possible that the U.S. may even seek a viable solution to the Turkish military occupation of the northern 37 percent of Cyprus since 1974 (unlike the Turkish-biased 2004 Annan Plan), in order to get Cyprus – a strategic partner with Israel, Greece, and Egypt on the gas fields – to go along with the U.S. plan to get Mediterranean gas to Turkey to save it from the Russian sanctions.

via Zero Hedge http://ift.tt/1PRv3Fy Tyler Durden

You would have thought that if there was any one event that could turn Europeans against the notion that the EU is capable of accommodating the millions of asylum seekers fleeing the war-torn Mid-East it would be a terrorist attack on a major European capital.

As it turns out, sentiment towards refugees was remarkably resilient in the wake of the Paris attacks. Sure, France closed its borders, but by and large, it appeared that Europeans viewed the attacks as a reminder of why people were fleeing Syria and Iraq rather than as emblematic of what they would ultimately export to Western Europe.

But sentiment did eventually sour. Not due to a terrorist attack, but rather due to a wave of sexual assaults on New Year’s Eve.

Women gathered in the city center in Cologne, Germany reported being groped and robbed by “gangs” of Arabs, and once reports of the attacks made international headlines, victims came out of the woodwork as allegations poured in from Austria to Finland, to Sweden where several prominent newspapers alleged a vast coverup of incidents that allegedly took place at a youth festival in central Stockholm’s Kungsträdgården last August.

The revelations have sparked a massive backlash against refugees and have also served to whip certain segments of the population into a nationalistic furor that now threatens to upend the political establishment in a number of European countries.

“We have seen what they are capable of. They are testosterone bombs,” far-right Dutch politician Geert Wilders said last month. “It’s sexual terrorism, a sexual jihad,” he added.

Now, in what will likely go down as one of the most politically incorrect sets of images in recent memory, wSieci (a conservative Polish magazine) has run a cover story entitled “The Islamic Rape of Europe.” Here are the rather edgy visuals:

Make no mistake, we certainly understand Europe’s frustration with what, if the allegations are true, are a series of deplorable attacks and with the ineptitude officials have shown when it comes to tackling the bloc’s refugee crisis.

But we can’t help but wonder whether it occurred to wSieci that Syria and Iraq (where the refugees are coming from) have been getting “raped” by the West and its regional allies for more than a decade. Metaphorically speaking of course.

via Zero Hedge http://ift.tt/1KXb9My Tyler Durden

Against expectations of a 3.5mm build (following a small draw last week), API reports total crude oil inventories shockingly drew down by 3.3 million barrels. Meanwhile Cushing inventories also drew down (by 175k versus expectations for a 700k build and 523k build last week), but we note that Gasoline inventoriers rose (by 750k) for the 14th week in a row.

API Breakdown:

• Crude down 3.3 million
• Cushing: up 175,000
• Gasoline up 750,000
• Distillate down 2 million

 

 

Having rallied all day on Iran over-supply news (??), WTI extended its gains, pushing above $31 to the day's highs.

 

With the Cushing draw supporting the front-month against the out curve…

 

Charts: Bloomberg

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Submitted by Simon Black via SovereignMan.com,

This is starting to become very concerning.

The momentum to “ban cash”, and in particular high denomination notes like the 500 euro and $100 bills, is seriously picking up steam.

On Monday the European Central Bank President emphatically disclosed that he is strongly considering phasing out the 500 euro note.

Yesterday, former US Treasury Secretary Larry Summers published an op-ed in the Washington Post about getting rid of the $100 bill.

Prominent economists and banks have joined the refrain and called for an end to cash in recent months.

The reasoning is almost always the same: cash is something that only criminals, terrorists, and tax cheats use.

In his op-ed, Summers refers to a new Harvard research paper entitled: “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”.

That title pretty much sums up the conventional thinking. And the paper goes on to propose abolishing, among others, 500 euro and $100 bills.

The authors claim that “without being able to use high denomination notes, those engaged in illicit activities – the ‘bad guys’ of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’.”

Personally I find this comical.

I can just imagine a bunch of bureaucrats and policy wonks sitting in a room pretending to know anything about criminal activity.

It’s total nonsense. As long as there has been human civilization there has been crime. Crime pre-dates cash. And it will exist long after they attempt to ban it.

Perhaps even more hilarious is that many of these bankrupt governments have become so desperate for economic growth that they now count illegal drug activity and prostitution in their GDP calculations, both of which are typically transacted in cash.

So, ironically, by banning cash these governments will end up reducing their own GDP figures.

What’s really behind this? Why is there such a big movement to ban something that is used for felonious purposes by just a fraction of a percent of the population?

Cash, it turns out, is the Achilles’ Heel of the financial system.

Central banks around the world have kept interest rates at near-zero levels for nearly eight years now.

And despite having created massive bubbles and enabled extraordinary amounts of debt, their policies aren’t working.

Especially in Europe, the hope of stoking economic growth (and even the sickening goal of inflation) has failed.

So naturally, since what they’ve been trying hasn’t worked, their response is to continue trying the same thing… and more of it.

Interest rates across the European continent are now negative.

Japanese interest rates are now negative.

And even in the United States, the Federal Reserve has acknowledged that negative interest rates are being considered.

They have no other choice; raising rates will bankrupt the governments they support and derail any fledgling economic growth.

Look at how low interest rates are in the US– and yet 4th quarter GDP practically ground to a halt. They simply cannot afford to raise rates.

As global economic weakness continues to play out, central banks will have no other option but to take interest rates even further into negative territory.

That said, negative interest rates will be the destruction of the financial system.

Because sooner or later, if banks have to pay negative wholesale interest rates to each other and to the central bank, then eventually they’ll have to pass those negative rates on to their customers.

Many banks have already started doing this, especially on larger depositors.

We’ve seen this in Europe where some banks charge their customers negative interest to save money, and in some extraordinary circumstances, pay other customers to borrow money.

It’s total madness.

There’s a certain point, however, when interest rates become so negative that no rational person would hold money in the banking system.

Eventually people will realize that they’re better off withdrawing their money and holding physical cash.

Sure, cash doesn’t pay any interest. But it doesn’t cost any either.

If you have a $200,000 in your savings account at negative 1%, you’d have to pay the bank $2,000 each year.

Clearly it would make more sense to buy a safe and hold most of that money in cash.

Problem is, the banks don’t have the money.

For starters, there’s literally not enough cash in the entire financial system to pay out more than a fraction of all bank deposits.

More importantly, banks (especially in the US and Europe) are extremely illiquid.

They invest the vast majority of your deposit in illiquid loans or securities of dubious long-term value, whatever the latest stupid investment fad happens to be.

And many banks have been engaging in a substantial balance sheet shift, rotating bonds from what’s called “Available for Sale” to “Hold to Maturity”.

This is an accounting trick used to hide losses in their bond portfolios. But it also means they have less liquidity available to support bank customer withdrawal requests.

The natural side effect of negative interest rates is pushing people to hold money outside of the banking system.

Yet it’s clear that a surge of withdrawal requests would bring down that system.

Banks don’t want that to happen. Governments don’t want that to happen.

But since central banks have no other choice than to continue imposing negative interest rates, the only logical option is to ban cash and force consumers to hold their money within the banking system.

Make no mistake, this is absolutely a form of capital controls. And it’s coming soon to a banking system near you.

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