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Submitted by Jeffrey Snider via Alhambra Investment Partners,

How did the world get this way? I don’t mean the oncoming recession, if that is indeed, as it appears, the economy’s fate. How did the payroll statistics ever attain this kind of deference and even religious zeal?

U.S. manufacturing is shrinking, corporate profits are declining and goods are piling up on warehouse shelves. Those trends have elevated concern that a U.S. recession may loom in the next year or two.

Yet in the one area that matters most, the economy has continued to shine: Hiring.

Those two paragraphs are at extreme odds with each other, so much so that they are mutually exclusive. It cannot be both. Forced to choose, the media and economists pick the latter every time no matter how much of the former forces its way into the analysis (and not voluntarily). It makes no sense for today but perhaps more meaningfully it hasn’t meant anything this whole time. Hiring has supposedly been robust all throughout the past two years and still “manufacturing is shrinking, corporate profits are declining and goods are piling up on warehouse shelves.” There can be but unbreakable ideology to the blindness.

That is visited on the other side of this equation, too. By that I mean the financial and what is ailing the global version of related US malaise. Here, too, convention and orthodoxy prevents full recognition in favor of debt, debt and more debt – the very death trap of monetarism.

Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.

 

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

This analysis continues without ever asking how all that happened to begin with; where did all the debt and deference to banking come from and how did it get there? The main economic commentator at the New York Times preaches nothing but credit-based “demand” from every single economic outlet any government or central bank might be able to reach (and a great deal more that he would prefer they just co-opt and direct should any resistance be exercised). Debt is the tool of the statist monetarist, so it is a little late now for someone inside the orthodoxy to suddenly attain conscious awareness.

The idea that you can fix bad debt with more debt is as prevalent as the idea that the US economy can be binge hiring while careening into recession. What’s truly sad is that those two mistakes are really, at root, the same. The road ahead to real recovery and sustainable growth starts with “unlearning” monetarism. It is a huge task.

Furthermore, and I write this with increasing frequency, you would think the current problems would be easily and obviously recognizable to any such orthodox persuasion. Collapsing commodities, inability with and even zero “inflation”, only further economic questions and indications of recession; all those add up in traditional format of declining “money supply.” Thus, even if more debt actually were a good idea (and it’s not), there isn’t any way to actually do it. Such enormous piles of bad debt are only serviceable under rapidly expanding money growth; the useless byproducts of QE, or what the Fed calls bank reserves, are nothing of the required monetary component. If money growth is declining then that means all that past debt never created the economy as was intended; without that economy, there will only be less “money.”

For the immediate future, that starts with the curves and RHINO. There is only more trouble lurking there under exactly those terms.

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

Two years after being fined for falsifying safety records, nine months after a transformer exploded at the Indian Point Nuclear Reactor just 37 miles from midtown Manhattan, and two months after Entergy – the plant’s operator – shutdown the Unit 2 reactor after a major power outage cut power to several control rods (when the company assured that no radioactivity was released into the environment), this afternoon NY Governor Andrew Cuomo said he learned that “radioactive tritium-contaminated water” had leaked into the groundwater at the nuclear facility in Westchester County.

Cuomo, in a letter Saturday to the state Health Department and the Department of Environmental Conservation, called for the probe into the Indian Point NPP after he said Entergy, the plant’s owner, reported “alarming levels of radioactivity” at three monitoring wells, with one well’s radioactivity increasing nearly 65,000 percent.

 

It is unclear if the facility was taking a page out of the Fukushima “crisis response” book, or was being honest when it said that the contamination has not migrated off site “and as such does not pose an immediate threat to public health.” For the sake of millions of downriver New Yorkers, we hope it was the latter. 

From Cuomo’s statement:

“Yesterday I learned that radioactive tritium-contaminated water leaked into the groundwater at the Indian Point Nuclear facility.  The company reported alarming levels of radioactivity at three monitoring wells, with one well’s radioactivity increasing nearly 65,000 percent. The facility reports that the contamination has not migrated off site and as such does not pose an immediate threat to public health.

 

“Our first concern is for the health and safety of the residents close to the facility and ensuring the groundwater leak ‎does not pose a threat.

 

“This latest failure at Indian Point is unacceptable and I have directed Department of Environmental Conservation Acting Commissioner Basil Seggos and Department of Health Commissioner Howard Zucker to fully investigate this incident and employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, cause and potential impacts to the environment and public health.”

 

The Governor’s letter directing Acting Commissioner Seggos and Commissioner Zucker to their begin investigation can be viewed here. The text of that letter is also available below:

Despite Indian Point’s denial that the contamination has migrated off site, Cuomo said that the incident requires a full investigation.

There was no immediate comment from Indian Point on the situation, Lohud reported.

The plant, located in Buchanan, NY which supplies about 30 percent of the energy to New York City, has been under increased scrutiny from Cuomo’s office, and the Democratic governor supports closing the plant, even as he supports keeping open two other upstate nuclear facilities.

In December, Cuomo ordered an investigation into Indian Point after a series of unplanned shutdowns, citing its risks being just outside the city and in the populated suburbs.

Cuomo said the “latest failure at Indian Point is unacceptable” adding that the DEC and health department should “employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, cause and potential impacts to the environment and public health.”

In other words, nothing will change.

Which is probably why such failure escalations, which lead to a lot of verbal jawboning and shuffling of papers and nothing else, will continue until one day the failure leads to tragic consequences and everyone will say how nobody could have possibly seen this coming.

* * *

Cuomo’s full letter directing Acting Commissioner Seggos and Commissioner Zucker to their begin investigation can be viewed here. The text of that letter is also available below:

Dear Commissioners Zucker and Seggos:

 

I am deeply concerned to have learned that radioactive tritium-contaminated water has recently leaked from operations at the Entergy Indian Point Energy Center (Indian Point) into groundwater at the site.  This is not the first such release of radioactive water at Indian Point, nor is this the first time that Indian Point has experienced significant failure in its operation and maintenance. This failure continues to demonstrate that Indian Point cannot continue to operate in a manner that is protective of public health and the environment.

 

The levels of radioactivity reported this week are significantly higher than in past incidents.  Three of forty monitoring wells registered alarming increases.  In fact, one of the monitoring well increased nearly 65,000 percent from 12,300 picocuries per liter to over 8,000,000 picocuries per liter.

 

Our first concern is for the health and safety of the residents close to the facility and ensuring the groundwater leak does not pose a threat. As such, I am directing you to fully investigate this incident and employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, its causes, its potential impacts to the environment and public health, and how the release can be contained.  We need to identify whether this incident could have been avoided by exercising reasonable care.  We also need to know how a recurrence of this episode can be avoided by specific steps that Entergy should be taking.

 

Please report back at the completion of the investigation.

                                                                        Sincerely,
                                                                  

                                                                        ANDREW M. CUOMO

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

Over one year ago, when the “conventional wisdom” punditry was dreaming up scenarios in which the Fed could somehow hike rates to 3% and in some magical world where cause and effect are flipped, push the economy to grow at a comparable rate we said that not only is the Fed’s tightening plan going to be aborted as it represents “policy error” and tightening in the middle of a global recession, but it will result in the Fed ultimately cutting rates back to zero and then, to negative.

Gradually the market is agreeing with us, and as the following chart shows, the probability of a negative 3 month Libor rate in 2 years has risen to 10%.

It is also why, as we showed earlier, the bets on NIRP within two years have spiked in recent months, in what is the “shadow market crash” trade du jour.

* * *

So now that talking about NIRP in the US is no longer anathema but a matter of survival for market participants for whom frontrunning the Fed’s policy failure has emerged as a prerequisite trade, the question is: what are the mechanics of NIRP, what are the implications of negative rates for US markets.

Here is the handy answer courtesy of Bank of America’s Marc Cabana

Mechanics of negative rates

Negative interest rates have generally been employed after a central bank has already lowered their deposit rate to zero and they either desire to (1) further ease monetary policy to fight the growing threat of deflation, i.e. ECB, BoJ, Riksbank policies, and / or (2) reduce capital inflows that were resulting in undesired currency strength, i.e. SNB and DNB policies.

To implement negative rates, central banks set their “deposit rate” or rate at which banks can deposit funds with monetary authority at a negative level. This results in banks paying a fee for holding their reserves with the central bank. Most countries that have adopted negative rates do not apply them to required reserves but only apply them to all or some of the deposits at the central bank, Table 1.

So why don’t banks holding excess reserves just move them off of their balance sheet via lending or asset purchases to avoid the fee? Recall, monetary policy generally runs through a closed system and the central bank is the only entity that can permanently change the amount of reserves outstanding. Funds loaned by one bank or used to purchase securities will eventually end up re-deposited at another, which means that reserves can only be re-allocated within the system but not independently withdrawn from it. Banks could convert their excess reserves to cash but storage costs generally make this unattractive unless rates are deeply negative.

Taking rates negative in the US

To implement negative interest rates in the US, the Fed could utilize the overnight reverse repo facility (ON RRP) and interest rate on reserves. These tools could potentially shift the fed funds effective into negative territory, though the amount of negative fed funds trading would likely depend on the cost of holding reserves.

ON RRP: If the Fed desired to take rates negative they could set the ON RRP rate below zero or temporarily suspend the facility. Setting the ON RRP rate below zero would lower the “soft floor” it establishes on interest rates and likely shift lower levels on other money market instruments. It is also possible that the Fed could temporarily suspend the ON RRP facility, which would move money market rates lower as money funds and GSEs would no longer have a backstop investment option at the Fed. We guess that the Fed would maintain the ON RRP facility in a negative rate environment since they would likely view any period of negative rates as temporary and set the ON RRP rate at 20 to 25 basis points below IOER. Note that the Fed did not see the existence of the ON RRP and the temporary reserve draining that it provides as contradicting prior periods of expansionary monetary policy accommodation, Chart 2 (the ON RRP was used for “testing” purposes at that time).

Interest on reserves: The Fed could also lower the interest rate on required (IORR) and excess reserves (IOER) to below zero. The Board could choose to move these rates below zero in tandem or move them in an asymmetric manner. For example, the Board could keep the IORR rate at zero in order to avoid an explicit tax on required bank reserve holdings while moving the IOER rate to a negative level. This is the case in Europe, where required reserves are remunerated at the MRO rate of +5 basis points, with reserve holdings in excess of required subject to the -30 basis point rate.

In all likelihood, the Fed would only take the IOER rate negative and leave the IORR rate at zero. If the Fed were to adopt such an approach before it begins the process of winding down its balance sheet, it would be subjecting nearly $2.3 trillion in excess reserves to negative rates, Chart 3. Assuming the Fed took the IOER rate to negative 10 basis points, this would result in an annual cost to those holding excess reserves of nearly $2.3 billion. In order to limit the costs, the Fed could consider exempting a certain amount of excess reserves by institution similar to the policies of the BoJ, SNB, and Danish central bank. However, negative interest rates would be yet another cost to holding reserves in addition to the FDIC assessment fee for domestic banks and SLR for large banks.

Fed funds target: The Fed could also work to set a target range for the fed funds effective below zero. At present, fed funds trading is driven largely by Federal Home Loan Bank (FHLB) lending as they seek to earn a higher rate on their cash versus what can be provided on overnight deposit with banks, in the ON RRP, or in their non-interest bearing account at the Fed. In a negative rate environment, FHLB activity in the fed funds market would likely depend on the cost of keeping funds with banks or at the Fed. If banks or the Fed charged FHLBs on their account holdings, the FHLBs might still be willing to lend funds at rates where other banks would find it profitable to engage in fed funds – IOER arbitrage, even at negative rates. However, if banks or the Fed did not pass along such charges, there would be little incentive for the FHLBs to sell funds below zero and volumes would decline from their already low level of around $50 billion per day.

What are the Implications of negative rates

Negative rates would shift the structure of interest rates lower which should theoretically be stimulative by lowering borrowing costs. In the US, we would expect Treasury bills to trade at negative levels and for rates on other money market instruments to decline. Negative rates have indeed been effective at shifting broader interest rates lower, with yields on German and Japanese sovereign debt trading negative out the 7 year tenor and Swiss government debt trading negative out to 15 years. While it is difficult to separate the effects of negative interest rates from increased forward guidance or asset purchase expectations, negative rates are effective at removing a lower bound that investors may have once believed to be a floor.

Despite the declines in interest rates, our European colleagues have found mixed evidence of the negative rate impact on lending conditions. Their findings suggest that banks may try to offset the negative deposit rate impact on their profitability by raising loan borrowing costs.

Negative rates also weaken the domestic currency which should be stimulative for the export sector. There is clearer evidence that negative rates serve to weaken domestic exchange rates when they are applied to stimulate growth and boost inflation, as in the case of the BoJ, ECB, and Riksbank,Table 2. Foreign exchange rates are inherently relative so if the US were to move rates into negative territory it would likely cause the dollar to weaken, though this might only be temporary if other central banks responded by further lowering their policy rates below zero.

Negative rates would likely hurt bank profitability given an increased pressure on net interest margins. Assuming the Fed does not cut rates this year, US banks are expected to benefit from over $12 billion in interest on reserves payments. In a negative rate environment, banks would be reverting payments to Federal Reserve and they also might be reluctant to pass negative borrowing costs along to their retail depositors. Additionally, there is no guarantee that banks would increase lending given lower spreads across its loans. Charges or fees on smaller retail depositors would likely be avoided for as long as possible, though it may be difficult to avoid explicit deposit charges depending on the extent of negative rates. In Europe, many banks have applied fees for large corporate account deposits and some have also extended fees to retail deposits, especially where rates are more deeply negative, such as Switzerland and Denmark.

Negative rate complications in the US

Negative rates would present a variety of challenges in the US, especially for the functioning of money markets and money market mutual funds. The US Treasury would also likely need to adjust their auction systems to allow for bill and nominal coupon offerings to close above par. There could also be shifts in savings and payment behavior to avoid potential costs from negative rates.

Money markets and implications for money funds

Federal Reserve officials have often noted concerns over money market functioning when discussing negative rates. However, the Fed’s thinking on this issue has likely shifted over recent years as negative rates abroad have generally not been associated with broad strains in money market functioning. The Fed has also questioned whether the infrastructure underlying securities transactions in the US could readily adapt to negative interest rates in trading, settlement, and clearing systems. We believe that the Fed will work with industry participants to address some of these technical issues before taking rates negative, though they would probably like to see rates higher before seriously engaging in these discussions to avoid signals about near term policy.

Another complication of negative rates is the $3 trillion money fund industry and its ability to operate in such an environment. Money funds struggled to offer low positive yields over recent years and cut their fees in order to retain business amidst low frontend rates, Chart 4 & Chart 5. Should money market rates decline further, it is likely that the majority of money funds would be challenged to generate positive returns even if weighted average maturities or lives were extended to their full 60 or 120 day maximums. To deal with low returns, money funds could consider charging customers, reducing management fees, seeking subsidies from fund sponsors, or closing their doors.

Negative rate impacts on money fund asset totals would likely depend on what alternative investment options were yielding. Investors in government money market funds would likely only consider withdrawing their funds only after comparing money fund rates to other alternatives, such as bank deposits or negative yielding Treasury bills. Similarly, investors in prime funds might compare the liquidity and convenience of money funds to what could be provided by investing directly in low-yielding CD or commercial paper markets.

Although negative rates have posed challenges for the $1.15 trillion (€1.04 trillion) in European money funds, the industry has adapted. European money fund assets have increased since the fourth quarter of 2013 even as ECB deposit rates went negative, Chart 6. European money funds have responded to the challenging rate environment by taking their yields negative. In January, the Institutional Money Market Fund Association euro prime and government money fund 7-day averages yielded negative 17 and negative 43 basis points, respectively. To apply this, some European money funds employ “reverse stock splits” or “reverse distribution mechanisms” where outstanding shares in the fund are gradually reduced to reflect the negative yield. Some European funds have also applied explicit customer charges as a result of negative yields. Both mechanisms allow European money funds to generate management fees while rates are negative.

US money funds might consider applying similar mechanisms in a negative rate environment. However, there would likely be numerous legal questions and substantial amendments to pre-existing fund documentation in order to apply such terms. If such changes were not possible, money funds might need to receive sponsor support or consider closing their doors. Any large shifts out of money funds would risk meaningful disruptions to typical intermediation channels, given that corporates and financial firms are beneficiaries of more than $1 trillion in existing prime fund investments. Any permanent shrinkage in money fund assets could also complicate the Fed’s eventual exit strategy and diminish the importance of the ON RRP facility, where money funds are the largest participants.

Negative Treasury rates and elevated auction demand

Negative Fed policy rates would place further downward pressure on Treasury yields, increase the scope of issues trading below zero, and likely necessitate changes to US Treasury Department auction systems to allow bill and nominal coupon offerings to close above par. Treasury auction rules do not allow for issuance of bills or nominal coupons at negative rates. According to current rules, in the event that bills or nominal coupons are auctioned at par, auction participants are awarded a pro-rata share of their bid amount for the issue. This results in elevated bid-to-cover ratios when issues are expected to trade negative in the secondary market, as auction participants are incented to overbid, expecting that their ultimate allocation will be pared back, Chart 7. Current auction rules effectively amount to a subsidy for auction participants when issues are trading at negative rates, since auction participants pay the Treasury par but can then quickly sell in the secondary market at a premium. Should the Fed adopt a negative rate policy, we expect that Treasury would work to quickly update its auction systems to capture this implicit subsidy.

Note that similar auction issues do not apply to all Treasury securities, as TIPS can be issued at a negative yield while floating rate notes (FRN) can be auctioned with negative discount margins and issued at a premium. Since TIPS and FRNs have floors on the indexed or floating-rate portion of their issues, investors will not be required to make periodic payments to Treasury during periods of deflation or with negative bill rates.

Shifts in systems and payment behaviors

New York Fed researchers have written about shifts in savings and payment behavior to avoid potential costs from deeply negative rates. Should rates move substantially below zero and banks begin to charge depositors, it is possible that cash vault holdings would increase or that special banks could be formed to store physical currency. Consumers and businesses might also seek to pre-pay credit card, account payable, or tax bills in order to reduce their cash holdings. Similarly, those who are expecting payments from creditworthy entities might prefer to defer them while those receiving checks might wait longer periods before depositing them. We do not expect the Fed would find such behavioral shifts particularly productive and might view them as an additional cost to negative interest rates. However, these behavioral shifts have yet to meaningfully manifest themselves in Europe and it may require an environment of more deeply negative interest rates before they emerge.

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

Submitted by David Stockman via Contra Corner blog,

Well, they got that right. Detecting that “parts of the U.S. jobs report for January seem fishy”, MarketWatch offered this pictorial summary:

Actually, it proves none of those things. For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January—-suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession.

So are we really “heading in the right direction” as claimed by Bovino, Zandi and the rest of the Cool-Aid crowd?

Well, just consider two alternative seasonal adjustment factors for January that have been used by the BLS in the last five years. Had they used the January 2013 adjustment factor this time, the headline gain would have been 171,000 jobs; and had they used the 2010 adjustment factor there would have been a headline loss of 183,000 jobs.

We could say in a variant of the Fox News motto—–we report, you decide. But believe me, you can look at years of seasonal adjustment factors for January (or any other month) and not find any consistent, objective formula. They make it up, as needed.

Likewise, you would think anyone paying half attention would realize by now that the 4.9% official unemployment rate (U-3) is equally meaningless due to the vast number of workers who have exited the “labor force”. In a nearby post, Jeff Snider puts this in perspective by juxtaposing the bottom dwelling trend of the adult employment-to-population rate with the U-3 headline.

His graph makes plain as day that when the U-3 unemployment rate dropped in the past, it was logically correlated with a rising share of the civilian population being employed; and that 5% or better unemployment usually meant a 63-64% employment ratio for the civilian population.

Since the financial crisis of 2008, however, that correlation has broken down completely, and the ratio still has not risen above 59.5%. Yet given the 250 million adult population today, it would take about 10 million more jobs than reported on Friday to achieve the reported 4.9% unemployment rate at the historic 63.5% employment ratio.

The larger point is that the monthly jobs report has now become the essential vehicle for propagating a false recovery narrative that serves the interest of Wall Street and Washington alike.

Month after month the artificially concocted and misleading headline jobs number is used to drive home a comforting meme. Namely, that the nightmare of the financial crisis and recession is fading into the rearview mirror; that the Fed and Washington have fixed the underlying ills, for instance, via Dodd-Frank; and that the soaring values of stocks and other financial assets since the March 2009 bottom are real, sustainable and deserved.

In that context, Obama’s crowing about the alleged success of his economic policies, as evidenced by the 4.9% unemployment rate reported on Friday, was especially annoying. You might have thought that the former community organizer would have noticed that notwithstanding the unfailing appearance of improvement in the BLS charts that prosperity does not seem to be trickling down.

Food stamp participation rates are the still the highest in history, and bear no resemblance to where these ratios stood during earlier intervals of so-called full employment. In a word, 4.9% unemployment can’t be true in a setting where the food stamp participation rate is nearly 15%.

Nor did he mention the “good jobs” aspect of the usual Washington blather about employment. The chart below is the reason why. There has been no recovery in the number of full-time, full-pay jobs since the pre-crisis peak.

On the margin, the US economy swapped-out 1.4 million manufacturing jobs for only a slightly higher number of waiters and bartenders. Never mind the fact that the average manufacturing job pays $55,000 on an annualized basis compared to less than $20,000 for gigs in restaurants and bars.

We have previously called this the bread and circuses economy, and the January numbers once again did not disappoint. Nearly one-third of the 151,000 gain for January was in this category alone. Moreover, the 1.83 million job gain in this sector since the December 2007 pre-crisis peak accounts for 38% of all the net new jobs generated by the entire US economy during that period.

Another large—–and aberrant—–chunk of the January jobs gain was in retail. Consistent with normal post-holiday patterns the NSA count of retail sector jobs dropped from 16.3 million in December to 15.7 million in January, representing a loss of nearly 600,000 jobs.

You could call that par for the seasonal course, but you would be wrong. In defiance of all logic, the BLS seasonally adjusted the number into a gain of 58,000, thereby accounting for another one-third of the headline total.

Nor is this a one month aberration, either. When you combine the leisure and hospitality  category of the nonfarm payroll with retail, temp agencies, personal services like gardeners and maids etc., you get a larger subset that we have labeled the Part Time Economy.

Not only did it account for well more than half of the of the January gain, but also a similar portion of the eight-year peak-to-peak gain since December 2007. That is, the US economy has generated 4.875 million additional nonfarm payroll jobs since we were at 5% unemployment last time around.

But as is evident from the graph, nearly 2.6 million or 53% of these gains represented part-time jobs. On an income equivalent basis, however, the payroll slots amount to a 40% job. Most of them a generate less than 25 hours per week and pay rates of less than $14 per hour. So on a full year equivalent basis that is an annualized pay rate of $20,000 per year compared to $50,000 for full time jobs, or what we have labeled as the Breadwinner Jobs category.

Needless to say, we are still not there yet when it comes to full-pay, full-time jobs. There are still a million fewer of these jobs today than there were at the pre-crisis peak. And nearly 2 million fewer than when Bill Clinton was vacating the White House back in January 2001.

 

At the end of the day, the monthly jobs report is an economic sideshow. The nonfarm payroll part of it, in particular, is a relic of your grandfather’s economy when most jobs  represented 40-50 hours per week of paid employment on a year round basis.

You could compare both short-term changes and longer-term trends because jobs slots where pretty much apples-to-apples units, and the BLS had not yet invented most of the insane trend-cycle modeling manipulations and dense and obscurantist birth/death and seasonal adjustment routines that have turned the report into quasi-fiction.

As I have suggested before, the world would be far better off if they simply shutdown the BLS. There are already far more timely, accurate and honest price and inflation indices published by a variety of private sources.

And if we need aggregated data on employment trends, the US government itself already publishes a far more timely and representative measure of Americans at work. It’s called the treasury’s daily tax withholding report, and it has this central virtue. No employer sends Uncle Sam cash for model imputed employees or for 2.1 million seasonally adjusted payroll records that did not actually report for work.

Stated differently, the daily tax withholding report is the real thing and the whole thing; it captures the labor input of the entire US economy in real time, and does not get revised and manipulated endlessly over the course of months and years from its original release.

Why is this important. My colleague Lee Adler has been tracking the daily withholding reports for more than a decade and knows their details and rhythms inside-out. He now reports that tax collections are swooning just as they always do when the US economy enters a recession.

In fact, he latest report as of February 6th indicates that,

“The annual rate of change in withholding taxes has shifted from positive to negative. It has grown increasingly negative in inflation adjusted terms for more than a month. Following on the heels of a weak December, it is a clear sign that the US has entered recession……..the implied real growth rate is now roughly negative 4.5% per year……it is the most negative growth rate since the recession. It follows the longest stretch of zero growth in several years, This can no longer be considered temporary or an anomaly. It has all the earmarks of a trend reversal and is getting worse.”

We will have more on this next week, but here’s the thing. Wall Street’s fast money boys and girls and robo-machine’s will have the mother of all hissy fits when it becomes apparent once again that the US is plunging into recession, and that all those sell-side hockey sticks on corporate earnings will be going up in smoke.

The talking heads have spent the entire first five weeks of this year insisting that the market’s rough patch is simply the pause that refreshes because there is never a bear market outside of recession.

Well, exactly. The recession is arriving; the bear market has incepted; and the bulls are heading for the slaughter. Again.

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

Having long mocked the sheer idiocy of using organic cash or worse, debt proceeds, to fund buybacks just so management can eek out a few more million in equity-linked compensation while activists enjoy a few extra points in P&L on the back of naive bondholders managing ‘other people’s money’, we were delighted to see the buyback bubble begin to burst in the middle of 2015 starting with Michael Kors (as detailed in “When Stock Buybacks Go Horribly Wrong“) and Monsanto (“When Buybacks Fail…”), when each respective stock plunged far below the average buyback price.

But nothing compares to what Hess did yesterday.

A quick recap: back in 2013, when it was trading at a discount to its peers, Hess became the target of an activist campaign led by Paul Singer’s Elliott Management who demanded a quick boost in the stock price, as a result of which the energy producer decided to exit its refining business (arguably the only line of business that would have benefited from the current depressed oil price) while not only raising its dividend but also authorizing a $4 billion share buyback.

The company then boosted its buyback further with proceeds from the sale of its retail gas stations (for $2.9 billion) while growing its debt by $1 billion from 2013 to 2015, leading to the repurchase of a total of 62.7 million shares through the end of 2014 at an average price of $83.

The stock price reacted as expected: it soared past $100 from below $60 before Elliott turned up. It then continued to spend more billions under additional buyback all the way through the third quarter of 2015, which however took place just as the worst oil downturn in history was taking place. The full history of Hess’ stock buybacks is shown below.

 

And then the stock crashed, as investors finally realized that plunging oil, sliding cash flow and surging debt meant the company found itself in a life and death fight for survival.

Which brings us to yesterday, when in an attempt to shore up liquidity and avoid halting its dividend, Hess sold 25 million shares at a price of $39/share: a 10% discount to the prior closing price.

As Reuters puts it, the “Hess folly is one for the ages.”

The silver lining? Unlike before, when Hess’ weak management team was kicked around by a hedge fund, at least it is being proactive now and scrambling to preserve its business even it means huge pain and dilution for shareholders.

The company ended 2015 with $2.7 billion in cash and a big revolving line of credit it hasn’t dipped into yet. Capital just raised will push net debt from 5.4x EBITDA to below four times, according to Cowen estimates. That should allow Hess to keep investing in future production and pay dividends. If oil remains at $30, however, it has just bought itself a few quarters of time.

Still, that does not absolve management of pandering to a vocal shareholder: if instead of spending billions on buybacks Hess had done the right thing and saved the cash, it would not only have avoided the wild swings in the stock price which rewarded just activist investors while punishing long-term holders, and have a far bigger war chest to defend itself from $30 oil.

The bottom line: Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 share.

As Reuters concludes, “this modern Hess era is a case study that should be required reading in boardrooms everywhere.”

Which brings us to a warning we presented back in November 2012 when we showed “where the levered corporate cash on the sidelines is truly going” and cited Andrew Lapthorne who prudently warned:

We know that buybacks are contrarian indicators, occurring at the top (and not the bottom) of the market. Why, we ask, are companies leveraging up now and not 12 months ago, when equity prices were much lower? We conclude that (contrary to what we read), US dividend payments are not enjoying a revival relative to cash flows and that buybacks remain the distribution channel of choice for corporates wishing to boost EPS and limit the effects of option dilution. Indeed, some of the biggest US names have issued debt to pay for buybacks (Home Depot, Microsoft, Amgen, Hewlett Packard, McDonalds, DirectTV, to name but a few) but there are also firms in Europe that have been doing the same (Siemens, Telenet, Adecco). In the current economic climate, you may find this surprising – we do too! A buyback in this form is not a return to shareholders – it’s called gearing or balance sheet risk and will come to haunt some firms when the economy enters a downswing.

 

But can this time around be different? I seriously doubt it. When the next leg in the “structural bear market” occurs, expect the equity buybacks to end, contributing to a renewed steep downturn in bank borrowing and monetary aggregates.

For most corporations the equity buybacks have now ended (which luckily means the period of “activist investing” is now over): for some with a whimper, for Hess – with both a bang and an equity offering. The only thing missing is the realization the the next leg of the “structural bear market” has arrived.

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

Two days ago, a Saudi military spokesperson told AP that the kingdom is ready to send ground troops to Syria “to fight ISIS.”

That served as confirmation of what we’ve been saying for months and represented an affirmative answer to the following question that we posed in December: “Did Saudi Arabia just clear the way for an invasion of Syria?“

Four months ago, we previewed the “promised” battle for Aleppo, Syria’s second largest city, which is controlled by a mishmash of rebels and is one of the hardest hit urban centers in Syria. In October, Iran called up Shiite militias from Iraq, rallied thousands of Hezbollah troops, and coordinated with the Russian air force on the way to planning an assault on the city. Victory would mean effectively restoring Assad’s grip on power. So important was the battle, that Iran sent Quds commander Qassem Soleimani to the frontlines to spearhead a kind of pep rally prior to the assault.

Fast forward four months and Russia, Iran, and Hezbollah are on the verge of routing the Syrian opposition. After an arduous push north from Russia’s air field in Latakia, Aleppo is now encircled. Rebels and terrorists alike (assuming there’s a difference) are cut off from their supply lines in Turkey and Moscow’s warplanes are bearing down. Tens of thousands of people are fleeing the city ahead of what promises to be a truly epic battle.

Put simply: this is it. It’s almost over for the opposition.

That’s not to say ISIS isn’t still operating in the east. That, as we’ve said on a number of occasions, is another fight.

But the “moderate” opposition backed by the West and its regional allies is on the ropes. That’s why Saudi Arabia is floating the ground troop trial balloon. It has nothing to do with Islamic State and everything to do with making a last ditch effort to keep arch rival Iran from restoring the Alawite government in Damascus on the way to preserving the Shiite crescent and the supply line to Hezbollah in neighboring Lebanon.

Now, it’s do or die time. Either the Saudis and the Turks invade or it’s all over for the rebels.

And Iran knows it.

“I think Saudi Arabia is desperate to do something in Syria,” Andreas Krieg of the Department of Defence Studies at King’s College London, told AFP. He also notes that “the ‘moderate’ opposition is in danger of being routed if Aleppo falls to the regime.”

“Turkey is enthusiastic about the ground troop option since the Russians started their air operation and tried to push Turkey outside the equation,” Mustafa Alani of the independent Gulf Research Centre added, underscoring Russia’s warning that Turkey may be preparing a ground assault.

On Saturday, Tehran openly mocked the Saudis. “They claim they will send troops (to Syria), but I don’t think they will dare do so,” Maj. Gen. Ali Jafari told reporters. “They have a classic army and history tells us such armies stand no chance in fighting irregular resistance forces.”

In other words, Iran just said the Saudis are useless when it comes to asymmetric warfare.

Readers will recall what we said back in October: “… it’s worth noting that using Hezbollah and Shiite militias to fight the ground war decreases the odds of Moscow getting mired in asymmetric warfare with an enemy they don’t fully understand.”

In other words, Hezbollah has no problem engaging in urban warfare – they practically invented it.

The Saudis – not so much. “This will be like a coup de grace for them,” Jafari continued. “Apparently, they see no other way but this, and if this is the case, then their fate is sealed.”

Yes, “their fate will be sealed,” or, as Foreign Minister Walid al-Moualem said on Saturday, “I assure you any aggressor will return to their country in a wooden coffin, whether they be Saudis or Turks.”

via Zero Hedge http://ift.tt/1Pekka1 Tyler Durden

Submitted by Alasdair Macleod via GoldMoney.com,

Last Sunday (31 January) Zero Hedge ran an article drawing attention to the big names in the hedge fund community who are betting heavily that the yuan will suffer a major devaluation any time between the next few months and perhaps the next three years.

The impression given is that this view is universal, almost to the exclusion of any other.

A market cynic would point out that when everyone is short, there is no one left to sell, so it is a good time to buy. This may indeed be true, and gives the Chinese authorities the opportunity to squeeze the bears mercilessly should they so choose. However, as Zero Hedge points out, some bear positions are in the form of put options rather than naked shorts, so hedge fund losses in this case would be limited to option money if the trade goes wrong. Instead, whoever sold the options to them will ultimately absorb the losses to the extent they have not hedged their corresponding positions in turn.

The advantage of buying long-dated OTC put options is that you can wait for a financial strategy to come right. The motivation for buying them is therefore less to do with market timing, and more to do with economic expectations.

At its simplest, the common view appears to be that China is suffering from the debt problems that follow an excessive expansion of bank credit, the unwinding of which is expected to lead to crippling deflation. This view is variously informed by the findings of Irving Fisher in his analysis of the 1930s depression, and perhaps the Austrian school's description of credit-driven business cycles thrown in. To these can be added the experience of modern credit bubbles, particularly the aftermath of the sub-prime crisis of 2007/08, which remains fresh in hedge-fund managers' minds. It amounts to a rag-bag of impulsive thought, and consequently it is assumed a large devaluation will be required to reduce the prices of China's exports, so that China's labour force will remain competitive and employed.

There are many empirical examples that disprove the idea that devaluation is the route to export success, so it is something of a mystery why it should be seen as a certain outcome for the yuan. The root of the idea that devaluation for China is an economic cure-all is the supposed improvement it gives to the balance of trade. And here the mystery deepens, because the fall in prices for imported commodities has actually increased China's trade surplus, so much so that the trade surplus for all of 2014, which was $382bn equivalent, was exceeded by just the last seven months of 2015, while at the same time the economy was supposed to be collapsing. The total trade surplus for 2015 at $613bn was a record by a very large margin. A devaluation is definitely not required on trade grounds.

Instead, China's trade surplus is a secure platform from which to pursue market-based reforms. And here the objective is more about permitting the population to build personal wealth, increasing the numbers of the middle class instead of destroying it. This is an alien concept to western macroeconomists, leaving them uncomfortable with their anti-market, pro-interventionist ambitions. They have a monetarist and Keynesian notion that devaluation counters the price deflation they think China faces, encourages moderate inflation, and stimulates animal spirits. This depends on the broad question as to whether or not a retreat into monetary manipulation actually solves anything, and more importantly, whether or not the Chinese authorities also believe in these theories.

The Chinese authorities appear to show little interest in fashionable macroeconomic suppositions. Instead, the leadership's motivation runs counter to western political thinking. China is made up of over forty different ethnic groups, which without a strong central government, would probably be at each other's throats. Western-style democracy would simply lead to civil war and a disintegration of the state, as evidenced elsewhere in Iraq, Afghanistan, Egypt, Libya and now Syria. It is for this reason that the state communist party ruthlessly suppresses all political discord.

The Chinese leaders know that political oppression can only work if it is not in the masses' economic interest to oppose their government. For this reason, they use the market to enhance individual wealth, and are acutely aware that a failure to better the people's condition risks fomenting dissent. Economic factors align the leadership's interest with those of the people, not democratic representation.

This is what drives economic policy. The leadership is mercantilist in its approach, rather like the East India Company when it ruled India. Individuals working with John Company, as it was known, had the opportunity to accumulate great fortunes, and if they survived the diseases and fevers, these nabobs returned home to Britain and became landed gentry. The elite in China is motivated in a similar fashion and are conditioned on loyalty to the state and its commercial objectives.

This forms the basis of the cycle of five-year economic plans, which can be regarded as the equivalent of business plans, something unknown in western politics. The thirteenth version commences with the year of the monkey on Monday, the full details of which are due to be released in March. We already know that it will tell us how production will be directed to improve the earnings and the standard of living of the lowest paid workers. Greater controls will be imposed on pollution and the use of water resources. The internet will be accorded greater economic resources within the "Internet Plus" project. Social insurance will be increased and extended towards better healthcare and pensions. And lastly, financial reforms will continue to liberalise markets.

What will not be mentioned in these plans, which are for domestic consumption, is geopolitics, the financial war between China and America. It is this aspect of China's future about which the hedge fund managers seem woefully ignorant. And it is a bad mistake to ignore the importance of geopolitics to both China and America, because it has the potential to have a far larger effect on the CNY/USD exchange rate than anything else. If there is any doubt in the reader's mind that there is a financial war being waged, it is worth reading in its entirety a speech given last April by Major-General Qiao Liang, the Peoples Liberation Army strategist. There is a translation here. Of the many quotes available the best one to show why financial power is seen by the Chinese to supplant military power is the following:

"A few strokes on a computer keyboard can move billions or even trillions [of dollars] of capital from one location to another. An aircraft carrier can keep up with the speed of logistics, but it can't keep up with the flow of capital. It is thus unable to control global capital."

It is appropriate at this juncture to make a simple observation: you do not win a financial war by undermining your own currency. Instead, you should undermine the enemy's currency.

This is precisely what China is doing to the dollar. Last year China elevated her currency's standing on the world stage by forcing the IMF, against America's will, to include it in the SDR basket. This year she plans to establish gold and oil contracts priced in yuan, two key commodity markets which Chinese demand now dominates. China has also established the Asian Infrastructure Investment Bank to act as the financing arm for an Asia-wide industrial revolution, to be spearheaded by China. She has successfully replaced, for the purpose of this trans-Asia project, the various multinational organisations set up in the wake of the Bretton Woods agreement.

So 2015 was the year when China did the groundwork to replace the dollar throughout Asia, the Middle East and North Africa, as well as sub-Saharan Africa, which she also dominates commercially. 2016 will be the year when the dollar finds its hegemonic status is increasingly confined to the Americas, Western Europe, Japan, diminishing parts of South-East Asia and western financial markets.

This brings us to another consideration ignored by the US-centric hedge fund community: the dollar itself is likely to take a big hit in 2016. Besides the damage inflicted by the internationalisation of the Chinese currency and the loss of hegemonic status that it imparts to the dollar, deflationary forces are increasing in America's domestic economy, because it is suffocating under a debt burden now too great to bear. The analysis hedge funds are applying to China would be more appropriately applied closer to home, and in this case the Fed will probably seek ways to devalue the dollar to counter a gathering slump. And unlike China, which has a record trade surplus, the US has an increasing trade deficit.

American monetary policy is failing, and the Fed is on the back foot. China meanwhile has a plan, and that is to redeploy labour currently making cheap price-sensitive goods for America and elsewhere. The low-end of the labour force will be retrained and re-employed into both higher-value production and in the development of infrastructure on an Asia-wide basis. Asian development will be spearheaded by the yuan as the common currency for cross-border settlements.

In summary, a significant devaluation for the yuan is neither necessary nor desired by the Chinese authorities. The announcement that China will start targeting the yuan against a basket of currencies and not the dollar is consistent with the strategy of undermining the dollar's value. With dollar reserves accumulating at a record rate because of the trade surplus, China should have no problem maintaining a yuan rate of her choosing. If anything she will seek to dispose of dollars on the basis they are over-valued relative to the commodities she needs for the future. China will sell her dollars not to protect the yuan, but to dispose of an overvalued currency.

via Zero Hedge http://ift.tt/1mkEK73 Tyler Durden

Europe’s worsening migrant crisis is the best thing that ever happened to the PEGIDA movement.

The group very nearly faded into obscurity early last year after then-leader Lutz Bachmann posted a picture of himself dressed as Hitler on Facebook with the caption “He’s back.”

Then, 1.1 million Mid-East asylum seekers flooded across Germany’s borders.

At first the German people welcomed the refugees with open arms. Then, things quickly deteriorated. The Paris attacks instilled fear in the hearts of many Europeans who previously supported Angela Merkel’s open-door policies and then, the wave of sexual assaults that swept through Europe on New Year’s Eve killed whatever goodwill was left.

Far-right movements like PEGIDA have flourished amid the turmoil as nationalism – an ideology many assumed died with Hitler and Mussolini – is once again on the rise alongside a creeping sense of xenophobia among the bloc’s increasingly exasperated populace.

On Saturday, Europe’s unease was on full display as PEGIDA staged simultaneous protests in multiple cities. “We must succeed in guarding and controlling Europe’s external borders as well as its internal borders once again,” PEGIDA member Siegfried Daebritz told a crowd on the banks of the River Elbe who chanted “Merkel must go!”.

Demonstrations were staged in Amsterdam, Prague, Calais (site of the infamous “jungle” migrant encampment), Dublin, and the English city of Birmingham.

“At lunchtime Saturday, several hundred protesters gathered in front of a local eatery in Calais, chanting slogans such as “We are one” and singing the French national anthem,” CNN reports. “You don’t understand the problems we have here,” on demonstrator shouted at journalists covering the protest.

“German media put the number [of protesters in Dresden] at up to 8,000,” Reuters notes.

“We’re demonstrating against the Islamisation of Europe, we’re demonstrating against immigration, against an invasion,” Robert Winnicki, leader of Poland’s far-right Ruch Narodowy (National Movement), told a crowd of hundreds in Warsaw.

At the rally in Birmingham, PEGIDA supporters carried signs that read “Trump is right.”

There were also rallies in Slovakia and Estonia.

Here are the visuals.

From Birmingham:

From Calais:

From Dreseden:

From Dublin:

Irish members of the public block attempts by #Pegida & other #fascist from marching in #Dublin #Ireland #refugees http://pic.twitter.com/BwZsVQ0wtu

— Citizen Journalist (@ProDemocracy11) February 6, 2016

A rather chilling manifesto, dubbed “The Prague Declaration”, was released by PEGIDA prior to the coordinated rallies. It reads as follows:

Being aware of the fact that the thousand-year history of Western civilization could soon come to an end through Islam conquering Europe, and the fact that the political elites have betrayed us, we, representatives of different European nations, declare the following:

• We will not surrender Europe to our enemies. We are prepared to stand up and oppose political Islam, extreme Islamic regimes, and their European collaborators.
• We are prepared to risk our freedoms, properties, jobs and careers and maybe even to put our lives at stakes, as it was done by the generations before us. It is our duty to future generations.
• We refuse to submit to the Central European government. The rules of the global elites have brought only poverty, unemployment, corruption, chaos and moral collapse. It is about time to end this.
• We fully respect the sovereignty of European nations and the right of the people of every European country to govern their matters as they see fit.
• We esteem as sacred the right of the citizens of every European country to protect the borders of their country and their right to decide which immigrants to accept and which not to accept into their country.
• We refer to our common European roots, traditions and values as well as the historic alliances of our nations. We are determined to protect Europe, the freedom of speech and other civic freedoms as well as our way of life together.

We will manifest this determination by our participation in a joint demonstration which will take place in many European cities on February 6, 2016.

This, ladies and gentlemen, is when things get dangerous. All the movement needs now is a charismatic leader capable of turning this groundswell of discontent into an organized political push.

As Europe’s citizenry becomes increasingly frustrated with the bloc’s politicans, and as the flow of migrants is set to increase with warmer weather and the siege of Aleppo, we wonder if somewhere out there, an as yet unknown, aspiring politician is busy penning his or her “struggle.”

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