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Excerpted from Doug Noland's Credit Bubble Bulletin,

Another unsettled week for global markets. Japan’s Nikkei equities index rallied 6.5%. Italian bank stocks surged 10%, with the Europe STOXX 600 Bank Index up 8.1%. Germany’s DAX equities index rallied 4.5%, with Spanish stocks up 5.0% and Italian 4.3%. Hong Kong's Hang Seng Financials index surged 5.9%. The EM market rally continued. U.S. bank stocks jumped 7.0%. A Friday evening Bloomberg headline: “Rough Week for Shorts as Banks Send S&P 500 to Four-Month High.”

Recalling back to 2008, U.S. financial stocks surged 10% in a single session. Reminiscent of 2008 market dynamics, global bonds aren’t much buying into the equities market “risk on.” Japanese 10-year (JGB) yields fell three bps (to negative 13bps), and German yields increased only four bps (to 13bps). Ten-year Treasury yields rose four bps, taking back only two-thirds of last week’s decline. European periphery spreads tightened only marginally.

Policy-induced short squeezes do tend to take on lives of their own. This one’s no exception. The basic premise is that years of central bank monetary inflation and market manipulation have nurtured a “global pool of speculative finance” of incredible dimensions. The unstable dynamic of “too much ‘money’ chasing too few real opportunities” – along with the associated “Crowded Trade” phenomenon – has made it extraordinarily difficult for active managers to compete with the indices. And as “money” continues to gravitate to passive bets on the major indices, the markets’ dysfunctional trend-following/performance-chasing dynamic becomes only more deeply entrenched (and detached from fundamentals). When markets lurch higher, irrepressible forces begin pulling everyone in.

…

U.S. data help put the spectacular Chinese Credit boom into clearer perspective. And when it comes to Credit Bubbles, there can be a fine line between burst and boom climax. Rather than the bust that appeared likely in 2016’s initial weeks, the first quarter witnessed record Chinese Credit expansion. Friday data showed Chinese March total social financing jumping $360 billion (led by a surge in bank lending). This was somewhat less than January’s incredible $520 billion expansion, though it did push Q1 Credit growth above $1.0 TN (historic).

Not long ago Chinese officials had set their sights on reining in rampant Credit growth. Having clearly reversed course, Credit expanded during the quarter at a blistering almost 20%. This compares to its recent official target of 13% and China’s GDP target of 6.5-7.0%. In such a circumstance, what is the prognosis for Chinese currency stability? Uncharted Territory.

With markets in a tailspin and “money” fleeing China, reasonable analysis back in January might have anticipated Chinese 2016 Credit slowing to, say, $1.5 TN. It will instead likely double this amount. When one is pondering the unstable 2016’s market backdrop, it’s helpful to think in terms of China as the marginal source of global Credit. The immediate good news for equities and commodities is that Chinese central planning still holds astounding sway over the nation’s lending and investing. The ongoing good news for global bonds is that this historic experiment in state-directed Credit and economic management is in peril. The extremely bad news for China – as well as global markets and economy – is that $3.0 TN of unsound Credit at this very late stage of the Credit cycle ensures an even more destabilizing bust.

It must be tempting for the believers to again revel in the brute power of the “perpetual money machine.” Yet the costs associated with the latest round of monetary inflation are steep. Not many months ago it appeared that China was determined to rein in excess, while the U.S. was ready to lead the world toward policy normalization. Today it’s become rather obvious that China is out of control and global policymakers are trapped at near zero or negative rates and perpetual QE monetary inflation. What was always sold as temporary extraordinary measures is increasingly recognized as desperate “whatever it takes” indefinitely.

To reverse a rapidly strengthening de-risking/de-leveraging dynamic central bankers were compelled to convey to the markets that they were still very much in control with virtually limitless ammunition. Rates could go deeply negative. QE would expand as big as necessary. And, for emphasis, if required central banks still had “helicopter money” – printing ‘money’ and disseminating it directly to consumers – waiting in the wings. They pushed Desperate Measures Too Far this time.

April 12 – Reuters (Gernot Heller and Paul Carrel): “The European Central Bank's record low interest rates are causing ‘extraordinary problems’ for German banks and pensioners and risk undermining voters' support for European integration, Finance Minister Wolfgang Schaeuble told Reuters… Politicians from Chancellor Angela Merkel conservative camp, to which the finance minister belongs, have complained the ECB's ultra-low rates are creating a ‘gaping hole’ in savers' finances and pensioners' retirement plans as returns have dropped. Schaeuble suggested they risked fuelling the rise of euroscepticism in Germany, where voters flocked to the right-wing Alternative for Germany in state elections last month. ‘It is undisputable that the policy of low interest rates is causing extraordinary problems for the banks and the whole financial sector in Germany… That also applies for retirement provisions.’ ‘That is why I always point out that this does not necessarily strengthen citizens' readiness to trust in European integration,’ he added… A storm of protest erupted in thrifty Germany after ECB President Mario Draghi last month described the idea of so-called helicopter money – sending money directly to citizens – as a ‘very interesting’, if unexamined, concept.”

 

April 10 – Reuters (Michelle Martin): “A chorus of conservative German politicians have criticised the European Central Bank for its interest rate policy, which they say is hitting the retirement provisions of ordinary Germans, could lead to asset bubbles and even boost the right-wing. German Finance Minister Wolfgang Schaeuble partly blamed the ECB's policy for the success of the right-wing Alternative for Germany (AfD) in recent regional elections, which saw it take up to a quarter of votes in a setback to Schaeuble's conservatives… The newspaper quoted Schaeuble as saying he had told ECB President Mario Draghi: ‘Be very proud: You can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy.’”

 

April 14 – CNBC (Matthew J. Belvedere): “BlackRock chief Larry Fink said… that negative and low interest rates around the world are crushing savers, and those policies are ‘going to become the biggest crisis globally.’ …Fink called on political leaders to step in and provide fiscal reform to complement monetary policy. ‘We have become too dependent on central bankers’ to boost the global economies, he said, stressing easy money policies were supposed to be a temporary healing. ‘I don't call seven, eight years temporary… I don’t see how that [still] has a positive impact.’ ‘Over 70% of our clients are retirement plans and insurance plans. Our clients are in pain… Our clients are very worried how they’re going to be meet their liabilities’ because the yields are so low in the bond market.’”

 

April 14 – Bloomberg (Finbarr Flynn and Gareth Allan): “The top executive of Japan’s biggest bank delivered a rare criticism of the central bank, saying its negative interest-rate policy has contributed to anxiety among households and companies and prolonging it may weaken financial institutions. ‘Both households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems,’ Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., said… Hirano said there’s ‘no guarantee’ that negative rates will encourage companies to increase capital spending because low borrowing costs and deflation have been ‘business as usual for over a decade.’”

Albeit the Germans, Japanese bankers, pension fund managers or even the general public, it’s been a frustratingly long wait for policy normalization. And just when hope was running high, the rug was pulled right out from under. Around the world many had patiently accepted the favoritism and inequity of reflationary measures. But what was supposed to be extraordinary and temporary morphed into the normal and permanent: egregious wealth redistribution.

The course of global monetary policy increasingly lacks credibility. Patience has worn thin. Frustration and anger are being brought to the boil. Sure, global markets have gained momentum. But I actually think “whatever it takes” central banking has about run its course, with momentous ramifications for global market Bubbles. Reminiscent of how I felt in 2008, global markets would be a lot better off had they taken their medicine earlier.

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By EconMatters

 

Does this 30-year old Saudi Prince represent the entire economic and political interests of the Saudi Government? The more he talks, it illustrates the lack of diplomatic seasoning represented by his elders on the world stage. He seems more and more like the Donald Trump of Saudi Arabia who likes the media spotlight, in short an attention whore. This cannot be going over well with the higher ups in the Saudi regime. Who try to keep a low profile, and operate behind the scenes from a much more strategic, diplomatic standpoint.

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Facebook is aggressively pushing back on the idea that it could (or would) tilt the scales in the presidential election against Donald Trump.

After CEO Mark Zuckerberg publicly denounced the political positions of Donald Trump’s presidential campaign during the keynote speech of the company’s annual F8 developer conference…

“I hear fearful voices calling for building walls and distancing people they label as ‘others,’” Zuckerberg said, never referring to Trump by name. “I hear them calling for blocking free expression, for slowing immigration, for reducing trade, and in some cases, even for cutting access to the internet.”

 

For a developer’s conference, the comments were unprecedented – a signal that the 31-year-old billionaire is quite willing to publicly mix politics and business.

Gizmodo reports that inside Facebook, the political discussion has been more explicit. Last month, some Facebook employees used a company poll to ask Zuckerberg whether the company should try “to help prevent President Trump in 2017." Every week, Facebook employees vote in an internal poll on what they want to ask Zuckerberg in an upcoming Q&A session. A question from the March 4 poll was: “What responsibility does Facebook have to help prevent President Trump in 2017?”

A screenshot of the poll, given to Gizmodo, shows the question as the fifth most popular.

 

As Gizmodo adds, it’s not particularly surprising the question was asked, or that some Facebook employees are anti-Trump. The question and Zuckerberg’s statements on Tuesday align with the consensus politics of Silicon Valley: pro-immigration, pro-trade, pro-expansion of the internet.

But now, as The Hill reports, a spokesperson for the company says it cannot confirm or deny leaks but bristled at the suggestion it would seek to help or hinder any political candidate.

"We encourage any and all candidates, groups, and voters to use our platform to share their views on the election and debate the issues,” the spokesperson said in a statement.

 

“We as a company are neutral — we have not and will not use our products in a way that attempts to influence how people vote.”

Which seems in direct opposition to the clearly un-neutral comments that Zuckerberg shared recently.

And one final thought, while FB employees appear to be left-leaning "safe space"-creating establishmentarians, the firm's billions of 'customers' are most certainly not – as is very evident by the soaring popularity of non-mainstream political parties around the world. So, the question that has to be asked is – will Facebook's 'bias' cost them millions in eyeballs? Judging by this week's debacle over AdParlor's hastedly denied talk of an 18% plunge in ad spend, perhaps it already is…

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Submtted by C.Jay Engel via The Austrian View blog,

“Like champagne, bull markets remove inhibitions.” –James Grant

My readings over the last several weeks have consisted primarily of David Stockman and Jim Grant– two sane voices in the insane financial world. Each have contributed wondrous thoughts and reflections on the nature of 21st century finance, which is primarily a story of the “corruption of capitalism” (to use Stockman’s phrase) and the rise of bubble finance. This tragedy of course, is a result of the slow and pernicious takedown of free markets, especially in the area most people refuse to look: money and banking.

The consequences of the financialization of the world, which began to manifest as “fiat money” was disconnected to its underlying commodity (gold) in the 1970’s, eventually led to a corruption of financial culture – not only the culture of Wall Street itself, but also down to the way Main Street treated its relationship with savings and “investments.” There was a catastrophic shift in the mentality of the people as the Fed moved forward to an era of what David Stockman calls “Prosperity Management.”

The middle class in America forgot all about the importance of savings and frugality and instead bought into the lie that one’s future would be “taken care of” if only it threw its money into the stock market. An important mechanism for the allocation of scarce resources into productive investments, the stock market is a vital piece of a free market capitalist economy. But when the United States government decided that money, credit, and interest rates would be controlled and managed solely by the whims of the central planners, no longer having anything to do with the multi-century long underlying commodity of gold, the stock market quickly became a betting center–a gambling house.

It was due to this transition that people forgot all about the necessity of savings and frugality– dismissing these as artifacts of a long gone era. No, the rise of bubble finance propelled middle class America into the delusion of easy riches and perma-prosperity that would come merely by throwing what they had into the stock market. David Stockman writes in The Great Deformation:

Neither the Greenspan Fed nor the mad money printers of the Bernanke era which followed ever leveled with the American public about the sobering truth evident in the saga of these high flyers [the big-cap companies which experienced a mighty bubble effect during the 1990’s –CJE]; namely, that there is no such thing as effortless, instant riches on the free market.

 

Yet, instead of coming clean and embracing sound money policies which would have induced the American middle class to revert to frugal living and saving for retirement, the thrust of Fed policy since the dot-com crash has been to perpetuate the lie. Accordingly, the massive baby boom generation that desperately needed to save has remained enthralled to the financial delusions that the Greenspan Fed foisted on the public.

 

Unfortunately, this wrong-headed policy has not only made the Federal Reserve a hostage of Wall Street, but it also has warped and deformed the very foundation of the nation’s economy. Having fostered a bull market culture of stock gamblers during the 1990s, the Fed simply broadened the casino’s offerings after 2001 to include housing, real estate, and derivatives.

 

By so doing, it kept the party going for a spell, but in the process implanted the most pernicious possible error in the workings of the American economy; namely, the belief that savings out of current income is unnecessary and even counterproductive because higher savings would allegedly reduce consumption expenditures and the rate of GDP growth.

 

Under the Fed’s new prosperity management régime, by contrast, the buildup of wealth did not require sacrifice or deferred consumption. Instead, it would be obtained from a perpetual windfall of capital gains arising from the financial casinos. In this manner, the historic laws of sound finance were mocked by the nation’s central bank: households would grow steadily richer, even as they enjoyed the luxury of borrowing and consuming at rates far higher than the sustainable capacity of their incomes. The bull market culture had now totally deformed the free market.

This culture is everywhere I look. I haven’t been around long in the investment business, obviously. I’ve yet to go through a bear market. Only two years in; but I’ve noticed it. It’s all around me. I read the “advice.” I digest the “financial planning” industry’s trends. It’s already tiring. It’s difficult to make sense of it– who would buy stocks at these price levels? With the S&P 500 priced for negative real returns over the next 10-12 years (see John Hussman), what will happen when people begin to realize that their “wealth on paper” doesn’t reflect the reality of needing to purchase the necessary goods and services to last the rest of their lives?

James Grant, writing in 1999 (right before the dot com bubble burst), reflected on the madness of people rushing into the stock market:

Watching “Wall Street Week” and reading The Wall Street Journal– especially the very accessible “C” section– the public has recalibrate its investment expectations. If the S&P delivers 20% a year, year in and year out, people ask, why settle for less? Why settle for a paycheck when one can elect to receive stock options? And if five million Americans (according to Forbes) are day trading for fun and profit on the Internet, why settle for professional money management? […]

 

How the daytime soaps stay on the air is beyond me. Everyone seems to be speculating or watching others speculate. I use the word “speculate” advisedly. An investment is a speculation to the extent that its success is contingent on a forecast of uncertain events. […] On the other hand, an outright purchase of the S&P 500 is a rank speculation. At prevailing levels of valuation, its success depends critically on the continued unfolding of what might conservatively [be] described as a state of worldly perfection.

What is the risk if, instead, there were imperfection?

One year later, of course, the world found out precisely the risk.

And yet, people are still speculating, still buying the overpriced S&P 500. Still immersed in the culture of Wall Street based on the assumption (which was proven false in the dot-com crash as well as the housing crash) that the Fed can push this thing up forever. Or perhaps they don’t even know that the Fed is behind it. Perhaps they think “this is just the way capitalism works.” Well, it isn’t. This is the way monetary bubble blowing works when a central bank is given the authority to do with the money supply whatsoever it wills. In any case, most “will not see it coming.” And I’m not talking about a sudden and drastic stock market crash. Of course, that could very well happen. But it could also be that the market simply makes lower “highs” and lower “lows” as it completes a massive, albeit slow and painful, path to the bottom. Mish Shedlock provides the following chart of Japan’s experience:

Whether by sudden collapse or by painful drowning, it seems to me that the Wall Street gambling-for-riches culture is on its final leg. It’s a great tragedy that Bull Market culture and the expectation of Fed-guaranteed riches has disseminated itself throughout the western world. It is a culture born out of the failure of governments around the globe to keep their monies sound and the subsequent bubble-economies that inevitably rose up via the desire of the central banks to engage in “prosperity management” via the mechanism of money and banking manipulations.

Capitalism –and economic prosperity– require the accumulation of capital. This is the opposite of the capital consuming impact of financial bubbles, which result from the artificial increase in the supply of credit via central banks.

Many have not realized the dangers of the Bull Market culture. It lasts for a time. But in the end Stockman’s observation is right on the money (so to speak): “that there is no such thing as effortless, instant riches on the free market.” Many learned the hard way in 2000 and 2008. But these lessons were swiftly forgotten as the Fed swept in to save the day. In this way as well, the Fed refuses to let the public endure a teachable moment.

Let us not forget the ever-applicable (perhaps, increasingly applicable) words of Murray Rothbard:

“Every time there is a long boom, by the final years of that boom, the press, the economics profession, and financial writers are rife with the pronouncement that recessions are a thing of the past, and that deep structural changes in the economy, or in knowledge among economists, have brought about a “new era.” The bad old days of recessions are over. We heard that first in the 1920s, and the culmination of that first new era was 1929; we heard it again in the 1960s, which led to the first major inflationary recession of the early 1970s; and we heard it most recently in the later 1980s. In fact, the best leading indicator of imminent deep recession is not the indices of the National Bureau; it is the burgeoning of the idea that recessions are a thing of the past.

 

More precisely, recessions will be around to plague us so long as there are bouts of inflationary credit expansion which bring them into being.”

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In early 2015, after seeing a staggering $1.4 trillion in Euro area government debt trade at negative interest rates (the number has since grown to $6 trillion) we wondered when the bailout of insolvent governments was going to make its way to other debtors. Our question was quickly answered when we found that a negative rate mortgage had been issued by Nordea Credit, a bank in Denmark. Recently, even the WSJ finally stumbled on this bizarre inversion of traditional borrower obligations.

We noted at the time that this this was the first of many such paradoxes, as eventually more and more banks would begin to fall in line with ECB expectations and lend at slightly negative (at first, then progressively more negative) rates, rather than lose even more money as a result of leaving cash in the ECB deposit facility.

This is just the beginning: according the Danish media outlet, as a result of variable-refinancing, as recently as a week from now “a greater share of customers could have a negative rate.”

Earlier this month we got evidence of that when we learned that a bank had issued a negative interest rate on a mortgage in Belgium.

Now, courtesy of news.com, we learn about another bank that is paying customers to take out a mortgage, this time in the Netherlands.

As a result of entering into a variable mortgage agreement that was denominated in Swiss Francs, and set at 0.7% above Swiss Libor, Achmea Bank now finds itself having to pay borrowers to take out a mortgage.

There is more to this story however.

It took a court case to force the bank to pay what it owed. As CHF Libor rates plummeted on the heels of the ECB’s NIRP policy, instead of paying the borrowers their contractual due, the bank tried to get away with simply telling the borrowers that they didn’t owe anything on their interest payment.

In a ruling announced on Monday, the Netherlands’ consumer financial products watchdog, Kifid, said it had sided with the unnamed holders of the variable interest rate mortgage, who brought the case, rather than with lender Achmea NV.

 

The mortgage was denominated in Swiss francs, with a variable rate set at 0.7 per cent above Swiss Libor, a benchmark rate. When Swiss Libor fell below minus-one per cent in January 2015, the bank should have paid the mortgage holders around 0.3 per cent interest, Kifid said in the ruling.

Financial journalist Alan Kohler had some pointed comments around the policy of NIRP and how it’s devolving into ridiculous things such as negative mortgage rates. He rightfully asserts that central banks will look back on this period as a time in which more harm was done than good (as is always the case).

He begins by comparing the central banks’ use of NIRP with significant global events that haven’t necessarily fared very well, including very creation of the European Union.

“We may well look back ruefully on negative interest rate policy, or NIRP, from our post-apocalyptic dirt-floor humpies as one the greatest idiocies of the 20th and 21st centuries, up there with America’s sack and dump of Iraq in 2003 and 2011, the repeal of the Glass Steagall act and the Maastricht Treaty in Europe,” he wrote.

He then goes on to say what we know all too well, which is that whenever the central banks finally take a break from their textbooks and broken excel models, they’ll realize that nothing they’ve done has worked, and that they’ve caused more damage than otherwise would have been the case.

“Unless a miracle happens and the European and Japanese economic cadavers suddenly sit up and rub their eyes, central banks will eventually have to give up and admit defeat. The hope will be that not too much damage has been inflicted.

He sums it up by pointing out one of the main goals of central banks to begin with, which is of course to take from the savers and distribute elsewhere.

“But that is central banking for you, in the era of leverage: take from the savers and give to the borrowers in the hope that they will ‘do something’.

 

“Not so far, they’re not … they’re just punting it on real estate.”

Meanwhile, we look forward to finding out how many banks are trying to do what Achmea unsuccessfully tried to, i.e., to not pay borrowers what is owed, as variable rate mortgages continue to go negative, and how many ultimately have to comply with the contractual fine print. But the biggest joke will be on the depositors: because while banks will, grudgingly, pay money to those who live on credit, those funds will be provided by savers, as depositors across Europe will soon be forced to pay to keep their money in the bank.

Sadly, such is the upside down world of the “new normal”, where savers are punished while those living beyond their means, are rewarded.

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Via NorthmanTrader.com,

A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.

I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:

Speaking for a breakdown so far is the historical similarity in structure of the monthly RSI and a decrease in GAAP earnings since 2015. Furthermore the $SPX has broken its ascending trend line in 2015 coinciding almost perfectly with the peak in GAAP earnings. These 3 developments are bearish in any historical context.

Note though something curious has happened during the same time: While price has recovered dramatically since February the continued decrease in earnings has made stocks the most expensive in years with a GAAP P/E ratio north of 24.

Another key consideration: M1 money supply has continued to rise and print new record highs, not really deviating from the path it has embarked on ever since the financial crisis.

The reasons are generally well known as the Fed is a key source of influence:

While the Fed has ended QE3 in October 2014 and is supposedly on some sort of rate hike path the evidence shows that its balance sheet has not only not decreased but it has stayed in a range and even made new highs in 2015. Just like the S&P 500. Imagine that:

And this issue highlights the battle for control here and the argument for a break higher:

A: A potential continued increase in M1 money supply which just made a new all time high in April:

B: Should earnings revert higher (against current trend) then the combination of increased money supply & improved earnings would support the notion of an equity move toward the upper measured move target.

And perhaps markets are anticipating this move as evidenced by a sudden breakout in the cumulative advance/decline index:

However and perhaps a warning sign that things are not as well as they suddenly seem: The $NYSE composite index just barely managed to get back to 2007 highs, a somewhat unimpressive result considering that it took over $4.5 trillion in Fed balance sheet expansion and a $10 trillion increase in US debt to get back to the same levels. And note it too, just like the $SPX, broke a key trend line in 2015:

The bottom line: This is a big battle for control. On the one hand fundamentals and technicals suggest a breakdown of size may well be in the cards, while on the other hand, continued “highly accommodative” central bank policies coupled with perhaps an incremental relative improvement in earnings to come may result in a breakout making stocks even more expensive than they are now, the classic blow-off top scenario if you will. Clarity will only emerge once the range is decisively broken in either direction.

Whoever wins this battle gets the big move. 324 handles.

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