Tag: finance

Submitted by Danielle DiMartino Booth via DiMartinoBooth.com,

Following the Great War, indoor plumbing became without a doubt a Godsend for much of the world. However, few innovative leaps, including even the wonders of indoor plumbing, have ever been entirely free of at least a few drawbacks. Think of electricity and its dependence on any number of variables from lightbulbs to Mother Nature. Or the inevitability of those scratches that marred our favorite vinyl, or later CDs, rendering them unfit for the human ear. And, oh, the sparks that flew the first time we married metal with that fantastic new convenience, the microwave. The greatest innovative leap of our lifetimes started out easily enough with the personal computer. But even that technological disruptor has proven it too can be disastrously disruptive with nasty viruses, bugs and glitches working 24/7 to wreak havoc on our universal connectivity.

As for the wonders of indoor plumbing, its vulnerability rendered it anything but wondrous as it invited that inevitable bane to be borne, known worldwide as the dreaded backup. While no doubt it was a huge relief to no longer have to tiptoe into the night on an outhouse run or tow water to and fro for this and that, plumbing didn’t turn out to be exactly turn-key and stress-free. Anxieties soon arose from the prospect of that first call to the pricey plumber. Even in the 1920s, their service charge and hourly rate were bound to have given pause to the humble housewife. The beauty of the profitable plumber pariah was the subsequent innovation that followed, that of Drano, which was thankfully introduced in 1923.

Over that same 100 years, give or take a few, the financial system has also suffered its own bouts of clogged pipes though the culprits have tended to be a wee bit trickier to dislodge than gelatinous grease and hardened hairballs. Recall that in October 1979, Fed Chairman Paul Volcker formally announced that the monetary base would be the new and improved target to better control the price of credit. When overnight credit is priced perfectly, the funding spigots stay open just enough to keep credit flowing, but not flooding the financial system.

Volcker’s pivot away from the fed funds rate, however, proved more Pandora than panacea. And so three years later, in October 1982, policymakers re-adopted the targeting of the federal funds rate where policy technically remains to this day. An Econ 101 refresher: the fed funds (FF) rate is the interest rate at which depository institutions lend reserve balances to one another on an uncollateralized basis in the overnight market.

Fast forward to the here and now and all is well for the rate setting masters of the universe save one niggling detail: for all intents and purposes, the fed funds market no longer exists. Relatively new regulations have simply made redundant the FF market as it once was and no longer is.

As intrepid readers of these weeklies, you should certainly be aware of one Zoltan Pozsar and his 20 years of groundbreaking work. Today, the thorough brilliance of his work has catapulted him to the rank of world’s preeminent professional plumber, at least as far as the global financial system is concerned.

Pozsar’s ascendance began as many things do, innocuously enough when one day early in his career he was tasked with a particular objective — to contextualize the importance of collateralized mortgage obligations and special investment vehicles within an obviously inflating housing bubble.

Conjure up an image of Russell Crowe in A Beautiful Mind, without the schizophrenia. Now you have a good idea of the ‘aha’ moment Pozsar experienced as he began to connect the dots between the various working pieces that had for years held together the housing market. His peers at the New York Fed knew it was no secret that subprime securitization had opened up housing availability to millions of Americans. But the extent to which toxic mortgages could infect the entire global financial system had not been readily apparent until Pozsar fully diagrammed the plumbing on a three-by-four-foot map. Google it for your edification. You’ll be the wiser for it.

Since leaving the Fed, Pozsar has been conspicuously prolific in his productivity. While at the IMF, he managed to remap the post-crisis financial system (it now resembles a one-foot-thick atlas). He then moved on to Credit Suisse where he is today, educating financial market participants on the vastly changed regulatory regime that has, by the way, eradicated the fed funds market.

Pozsar opens his latest Global Money Notes piece by redefining understatement given the impetus to invent a new monetary mouse trap, so to speak: “2016 is shaping up to be an important year for the Federal Reserve.” Before the year comes to a close, the Fed will not only specify the intended size of its balance sheet but also the securities to be stored on it over the long haul. Spoiler alert: there’s no shrinkage in the offing.

At the nexus of the Fed’s perennially large balance sheet are two seemingly complex terms: the Liquidity Coverage Ratio (LCR) and High-Quality Liquid Assets (HQLA). Hopefully your eyes didn’t roll into the back of your head after being hit with not one, but two, acronyms because these particulars are, well, important for understanding what’s to become the new normal of U.S. central banking.

The Third Basel Accord, or Basel III as it’s become less than affectionately known among banks, was handed down by the Bank for International Settlements (the global central bank to central banks) in 2009. The intent was to reduce the risks in the banking system in the aftermath of a crisis that revealed banks were anything but safe and sound. It should come as no surprise that the subject of reserve requirements was smack in regulators’ crosshairs. By the end of 2019, if all goes according to plan, when Basel III is scheduled to be fully implemented, the capital reserves that banks worldwide must hold against losses will have trebled.

Enter the LCR, which is effectively a global reserve requirement mandated by Basel III. For U.S.-based banks, the focus is on the ‘L’ in the LCR, as in liquid. Regulators prefer reserves over bonds to meet minimum capital requirements. From stage right then enters HQLA, which is the Fed’s baby and emphasizes that the quality of liquid assets held be high, as in pristine. The combination of these two regulations translates into banks having to hold loads more in reserves than they once did and that those reserves be of the highest quality.

“In the post Basel III world order, base liquidity (reserves) will inevitably have to replace market-based liquidity,” Pozsar explains. “This in turn means there are no excess reserves – every penny is needed by banks for LCR compliance. And this also means that the Fed has only limited ability to shrink its portfolio.”

Where does the fed funds rate fit into the picture? As mentioned above – it doesn’t.

Banks would never choose to hold their liquidity buffers in unsecured interbank markets as they would be penalized (the fed funds market is unsecured). Rather, they will be compelled to use the secured repo markets, backed by Treasury collateral, or by accumulating reserves directly at the Fed.

“Excess reserves are not sloshing but rather sitting at the Fed,” Pozsar continues. “They sit passive and inert because banks must hold these reserves as HQLA to meet LCR requirements. You have to fund what you hold and since HQLA cannot be encumbered, you can only fund them unsecured. And banks always attempt to fund assets with positive carry.”

That last part refers to the fact that banks get paid interest by the Fed for reserves they have parked there

Does all of this mean that the Fed will be forced to shirk its role as directive general of the price of credit? Of course not. But the fact is, it can’t just leave the fed funds rate swinging in the wind; the FF has yet to be replaced as the means by which to price a full array of contracts in the financial markets. Lest ye worry, a committee mandated with replacing said FF rate has been actively pursuing an ideal replacement thereof since January of last year. Of course it has an important name! It is none other than the Alternative Reference Rate Committee.

Presumably this esteemed group is working furiously to devise a new overnight bank funding rate (last acronym, promise – OBFR), which Pozsar says is a “necessity, not a choice” given the disappearance of the FF market. The new OBFR will not be interbank, as is the case with the FF rate, but rather a customer-to-bank target rate that’s a global dollar target rate rather than just an onshore dollar funding rate. It will be as if the Fed was targeting LIBOR today.

“What this means for the Fed’s reaction function isn’t clear,” Pozsar concludes. “But our instinct tells us that we will deal with a Fed inherently more sensitive to global financial conditions, inherently more sensitive to global growth and inherently more dovish than in the past…”

Far be it from yours truly to worry. Still, it’s hard to take comfort in the knowledge that the Drano we’ve all come to know, though maybe not love, is now off the market. Less comforting yet is the fact that the plumber among financial market plumbers managed to end his forecast for the future with an ellipsis. He may as well as have ended with, “Better the devil you know…”

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In his latest must read presentation, Citigroup’s Matt King continues to expose – and be very concerned by – the increasing helplessness (and cluelessness) of central bankers, something this website has done since 2009, fully aware how it all ends.

Take Matt King’s September 2015 piece in which he warned that one of the most serious problems facing the world is that we may have hit its debt ceiling beyond which any debt creation is merely pushing on a string leading to slower growth and further deflation.

Or his more recent report which explained why despite aggressive easing by the BOJ and ECB, asset prices continue to fall as a result of quantitative tightening by EM reserve managers and China, which are soaking up the same liquidity injected by DM central banks.

Or his February 2016 report, in which his bearishness was practically oozing from every page, and which started off with the stunned observation, that “none of this is “supposed” to be happening” – inflation and economic growth are supposed to be rising in a world as manipulated by central bankers as this one. Instead, the opposite is taking place.” He then went on to say that “maybe it will all fizzle by itself”… “but if it doesn’t, then we have a problem.”

It wasn’t just one problem: as we laid out it was at least 8 problems, of which the last one was the most dire one: “if there is a next phase, it’s likely a crisis of confidence in central banks.” Because if central bank confidence goes away, so do the asset price gains of the past 7 years, all of which have been on the back of an unprecedented push by central banks to preserve the system if only that much longer.

Sure enough, central banks appear to have heard his ominous warning, and starting with the January Shanghai Accord, and the concurrent Beijing debt firehose which unleashed $1 trillion in debt in the first quarter, managed to stabilize if not the world, then certainly stock markets for a few months, courtesy of another epic credit-impulse driven push.

* * *

Over the weekend, King released his latest must read presentation, dubbed aptly enough “When the wisdom of crowds becomes the blundering herd”, in which he no longer laments the failure of central planning – we assume it’s taken for granted – and instead proceeds to highlight some of the direct consequences of living in a world in which extreme events are becoming increasingly more common, in everything from elections and polls (for which Trump is especially grateful)…

 

… to historic polarization in politics…

 

… to polarization in geography…

 

… even to polarization in weather…

 

… and of course, record polarization in the economy…

… in wealth and income…

 

… and markets…

 

… King then goes on to show just how senseless is any attempt to centrally-plan complex systems… 

 

… in which the longer central planners push the world away from an equilibrium point…

 

… pushing the system into a state of increasing fragility, defined by homogeneity, extensive interconnection, critical linkages, and slow, violent feedback…

 

… the more violent the snapback will be, and the greater the probability of breaching the critical tipping point beyond which the world will devolve into full blown systemic chaos, from which there is no return even with full central bank intervention.

Matt King’s question is also the $64 quadrillion one: “at what point does behavior become nonlinear?”

Neither we, nor King knows the answer – Janet Yellen most certainly does not – but looking at the gallery of unprecedented swings from one extreme to another, and of record divergences, we can’t help but think that we are very close, which is also why King is worried.

* * *

So until that one critical moment, in which central banks finally do push the world’s “complex system” beyond the tipping point of no recovery, here are Citi’s views on how to live, adapt and what to expect in world in which extreme events are now the norm, and in which complex systems have been hijacked by central planners.

First, the implications for politics: Direct democracy + disaffected populations = increased chance of extreme outcomes, as seen in election outcomes both in Europe and the US over the past year.

 

Then, the implication for profits, where it is increasingly a “winner takes all” outcome, especially if the winner has access to zero-cost debt with which to fund an expansive, monopolistic rollup.

The implication for jobs is well-known to regular ZH readers: “only the wealthy benefit from wage growth.” Now, even Citi admits it. To all other workers, better luck next time.

 

Then the one thing that nobody in power ever dares to mention: that near-record debt (the only time total US debt was higher as a % of GDP was just before World War II), merely amplifies the cycle and adds to the probability of tipping points.

 

Meanwhile, with defaults set to soar coupled with tumbling recovery rates, this means that whoever is on the hook will suffer massive losses now that the default outlook is even more binary than usual.

* * *

Finally, the two most important observations for market participants: market liquidity continues to deteriorate as a result of leverage constraints which imply lower diversity, and which together with central banks buying up increasingly more debt and equity securities, it means ever greater clustering of volatility, leading to periods of extremely low volatility punctuated by the occasional session of historic vol which forces exchanges to shut down the very measurement of the VIX as happened on August 24, 2015.

 

And then, finally, the implication for market levels is the most ominous: with the leverage cycle near – and in some cases beyond – its tipping point, equities are increasingly jittery as shown in the chart on the right.

 

Citi’s conclusion: the world is now much closer to a tipping point that what is implied by rates, which in turn merely represent what central banks want them to represent, which as we have said over many years, has nothing to do with the underlying reality.

In summary:

Extreme events are becoming more common, which is an intrinsic feature – not external shock – in a system that is fast approaching its “centrally-planned” tipping point. Citi’s suggestion: position for tipping points, and stay away from the conventional, fake optimistic forecasts that all shall be well as propagated by the financial media. This is why Citi is now very worried.

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Submitted by Richard Sisk via Military.com,

A small team of U.S. troops was on the ground in Yemen and Navy ships with Marines aboard were offshore to support friendly forces against an al-Qaeda offshoot as the U.S. deepened its involvement in yet another Mideast civil war, the Pentagon said Friday.

Capt. Jeff Davis, a Pentagon spokesman, declined to say how many U.S. troops were in Yemen near the port city of Mukalla, a former stronghold of the al-Qaeda in the Arabian Peninsula terror group, or whether they were Special Forces.

Davis said it was a "very small team" that had been sent into Yemen two weeks ago and was expected to be withdrawn soon. "We view this as short term," he said.

In addition, the U.S. has been conducting anti-terror airstrikes in Yemen against the terror organization apart from the effort to assist local forces on the ground, Davis said. Four airstrikes since April 23 had killed an estimated 10 fighters, he said.

The amphibious assault ship USS Boxer, lead ship for an amphibious ready group with Marines from the 13th Marine Expeditionary Unit aboard, and two Arleigh Burke-class guided missile destroyers, the USS Gravely and the USS Gonzalez, were also positioned off Mukalla, Davis said.

The troops on the ground and the ships offshore together were providing "airborne intelligence, surveillance and reconnaissance, advice and assistance with operational planning, maritime interdiction and security operations, medical support and aerial refueling," Davis said.

At a Pentagon briefing, the spokesman was vague on the mission of the troops but stressed that they were not advising and assisting friendly forces much like similar teams embedded in Iraq and Syria.

After some back and forth with reporters on the semantics of how to characterize the troops, Davis said it was appropriate to call them an "intelligence support team. We have a small number of people who have been providing intelligence support."

Davis said that the U.S. troops were supporting forces of the United Arab Emirates, but in a sign of the complexity of Yemen's civil war, forces of Yemen's embattled government and troops from Saudi Arabia were also involved in the drive to oust al-Qaeda in the Arabian Peninsula from Mukalla.

The Saudi Embassy in Washington said in a statement "Saudi forces are also on the ground alongside the UAE forces in Mukalla and that it is a Saudi-led Arab Coalition that is fighting AQAP alongside the U.S. military contingent on the ground."

The U.S. National Counter-Terrorism Center has described the terror group as "a Sunni extremist group based in Yemen that has orchestrated numerous high-profile attacks" against the U.S. It was the organization that sent Nigerian-born Umar Farouk Abdulmutallab on a Northwest Airlines flight over Detroit on Christmas day 2009 to detonate explosives in his pants but other passengers foiled the attack.

The group's most prominent operative was the charismatic Anwar al-Awlaki, a dual U.S. and Yemeni citizen, who communicated with Army Maj. Nidal Hasan prior to Hasan's shooting rampage at Fort Hood, Texas, in 2009, killing 13 people. Al-Awlaki was killed by a U.S. drone strike in Yemen in September 2011.

Davis said that the organization remained fixated on attacking the U.S. "This is of great interest to us. It does not serve our interests to have a terrorist organization in charge of a port city, and so we are assisting in that," he said.

Davis said the U.S. involvement was specifically aimed at "at routing AQAP from Mukalla, and that has largely occurred," suggesting that the ships and troops would quickly be withdrawn.

*  *  *

Yemen's civil war has killed more than 6,200 people, displaced more than 2.5 million and caused a humanitarian catastrophe in one of the world's poorest countries, according to the United Nations and human rights groups.

The war began in March 2015 when Houthi rebels, members of the Shia Zaydi sect and backed by Iran, overran the capital of Sanaa, forcing the government of Abd Rabbo Mansour Hadi to flee. A month later, al-Qaeda in the Arabian Peninsula took over Mukalla.

Saudi Arabia then came to the aid of Hadi, forming a coalition of Arab states including Bahrain, Qatar, Kuwait, United Arab Emirates, Egypt, Jordan, Morocco, Senegal and Sudan.

 

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Massive capital outflows from China in an effort to preserve capital is something that we've covered extensively in the past (here and here for example). Last month, China's Ministry of Commerce (MOC) came out to do some damage control, and downplayed the extent of the activity. It also hinted that the government would "help" Chinese companies with overseas M&A in the future…

From Xinhua

The Ministry of Commerce (MOC) Tuesday denied that Chinese companies were on a global buying spree and said the speed of their overseas mergers and acquisitions (M&A) was "appropriate and normal."

 

"It is an overstatement to say Chinese companies are 'buying out the world' as such a claim confuses finalized deals with those that are pending approval," said MOC spokesperson Shen Danyang at a news conference.
 

Overseas M&A deals by Chinese companies in the first quarter of the year stood at 16.56 billion U.S. dollars, a far cry from the 113 billion dollars cited by some reports, Shen said.
 

Instead of the rumored 100 billion dollars, Shen said that the worth of overseas M&A deals by Chinese companies last year was 40.1 billion dollars, or a mere 6.2 percent of the world's total M&A market value.
 

Although Chinese companies have increased transnational acquisition in recent years, their M&A and China's overseas investment were both in the early stages, he said.
 

According to Shen, Chinese overseas investment only accounts for 3.4 percent of the world's total, while the figure for the United States is 24.4 percent. China trails behind other developed economies such as the United Kingdom, Germany, France and Japan.
 

Overseas M&A by Chinese companies create win-win results, he said, citing the acquisition of AMC Entertainment by Dalian Wanda Group in 2012. The deal helped AMC turn losses into profits the same year, and get listed in the New York Stock Exchange the subsequent year, while some 1,100 new jobs were created in the United States.
 

Shen proposed more government support for Chinese companies to help them with overseas M&A as they still lack experience of dealing with cultural differences and policy hurdles.

As far as the size of the current 2016 deal flow, the MOC is using carefully worded language which excludes announced takeovers, which if included in the total puts the number at $92 billion through the end of March (excluding the Anbang/Starwood debacle) according to the Wall Street Journal. 

Regarding outflows being "appropriate and normal", we will just leave this CLSA chart here, which shows ODI surpassing FDI on an annualized basis for the first time in 2016.

 

And finally, as we've said to many times in the past, it will only be a matter of time before Beijing clamps down on this method of circumventing capital controls in order to preserve capital ahead of the coming devaluation of the yuan. With the MOC public relations effort, and more specifically MOC spokesperson Shen's comments about "helping" companies in the future, we wonder if that time has now come.

via http://ift.tt/1XfOdMm Tyler Durden

The dollar's recent rapid slide has been accompanied by a constant backdrop of dovish cooing from the Fed. Until this week, SocGen's Albert Edwards notes that both equity and commodity markets had embraced the weak dollar as the elixir to solve all their ills. That relief, however, has now proved fleeting as fear of weak economic activity has reasserted its influence on investors. The weak dollar, Edwards warns, should be seen as merely a shuffling of deckchairs on the Titanic before the global economy sinks below the icy waves.

Risk assets are once again refocusing on the increasingly dismal prospects for global growth rather than the short-term relief of dollar weakness, according to SocGen's inimitable Albert Edwards. The US remains the main concern, although the rapid unravelling of Abenomics in Japan and a likely imminent tightening of monetary policy in China to snuff out yet another housing bubble in the major cities also feature high on investors’ worry list.

But it is in the US that growth concerns remain most intense, with renewed weakness in the manufacturing ISM as we move into Q2 following on from the moribund 0.5% qoq Q1 GDP outturn. Yet there was some optimism around after the GDP release that non-farm businesses inventories have risen at a slower pace  ie only $61bn in Q1 2016 against $87bn in Q4 2015 and a much faster $110bn pace in H1 2015. The slower pace of increase means that non-farm inventories have been a drag on GDP for three successive quarters, deducting an annualised 0.22% from Q1 GDP (and 0.12% and 0.8% in the two previous quarters). If you think that means that the inventory problem is solved though, think again. It’s not the level of inventories that are the problem, but the level relative to sales which are at heights normally seen preceding or at the depths of recession (see chart below).

It is disturbing for the growth bulls that the recent slower pace of inventory accumulation has made absolutely no dent on this overhang. We remind readers of our view that it is the business investment cycle (fixed and inventory) which, despite comprising only 15% of GDP, ’causes’ recessions in an accounting sense. The chart below shows that when yoy GDP is negative, the contribution of business investment to that decline is virtually 100%, ie recessions would seldom occur in the absence of the business investment cycle. With the US whole economy now plunging, the continuing inventory overhang is an increasingly precarious sword of Damocles hanging over investors’ heads as profits swoon and liquidation beckons.

In addition to Edwards reality check, Andrew Lapthorne, SG’s quant guru, has been flagging the following chart to clients… Firstly, we all know by now that US companies consistently put the most optimistic spin on earnings to gratify both analysts that follow their companies and investors who want to hear good news. These manipulated earnings are what is reported each quarter and referred to as pro forma earnings. Andrew points out though that even moderately ‘scrubbed’ MSCI trailing operating earnings have been falling away precipitately in the US (this is a moderate scrub as opposed to a heavy scrubbing as defined by the EPS reported on a GAAP basis). This ties up exactly with what the whole economy profits data is also telling us. Most notably the current divergence between trailing operating profits and pro forma measures only normally occurs as a recession begins to unfold. This matters because the stock market eventually stops reacting to the manipulated pro forma earnings and slumps in line with what is really happening under the bonnet (or hood for my US readers).

Let us return to the central banks and the games they are playing with the markets. The chart below shows just how detached US stocks have become from earnings (in this case we have used the MSCI operating metric discussed above). This is an exercise of stretching the PE elastic via loose monetary policy as far as you can in an attempt to boost real economic activity. Ultimately, though, if the earnings don’t arrive, the elastic will snap back and hit you square in the face. If you think the US situation looks bad, take a look at the eurozone chart on the right below where earnings remain dead in the water and PE expansion makes up well over 100% of the rise in equity indices. We have previously lauded Mario Draghi’s bubble blowing credentials as on par with Alan Greenspan.

But Edwards concludes by setting the scene for what is to come…

Let me tell you how all this ends.

 

It ends with investors accepting that they can pretend no longer and profits are sliding into recession.

 

It ends as the equity market spirals into a deep bear market as company management reach the end of the road in the face of the recessionary conditions and ‘kitchen sink’ years of EPS manipulation.

 

It ends as corporate bond spreads explode as years of excess debt accumulation lead to widespread corporate bankruptcies, making the recession much deeper.

 

It ends with social unrest and double digit budget deficits (again).

 

It ends with investors losing faith with the Fed as the resumption of QE proves ineffective in reviving the economy.

 

It ends in deeply negative interest rates, currency and trade wars, helicopter money and ultimately inflation.

 

In a nutshell, it ends badly.

One final thought: On the front page of the Fitchburg Sentinel from July 31 1920, an exuberant business press headlined: "Ponzi will not reveal business secret."

This was published less than a month before Charles Ponzi’s scheme blew up.

As Edwards concludes, actually, isn’t this exactly what central banks have done over the last few years to the financial markets?

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Shortly after it first went public, Zynga hit a market cap of $9 billion. Since then, the company which had such one time hits as Farmville and Words with Friends has seen its valuation crater, with its public stock now valued at roughly $2 billion. However, excluding the company’s $1.5 billion in cash implies that its underlying operations are valued at about half a billion dollars. Which is ironic because that is less than the value of the San Francisco-company’s based headquarters.

According to SFGate, “Zynga now faces the same kind of problem that many SF homeowners face: its house is worth more than the company.” Perhaps that is why the company announced in February that it was putting its 668,000-square-foot, seven-story headquarters on 8th and Townsend for sale as it dealt with declining market share and layoffs.

The blog Halting Problem cited multiple sources saying that the building, which Zynga bought in 2012 for $228 million, is now worth around $540 million. In other words, “as a real estate flipper, Zynga is doing gang-busters. As a publicly held company, not so much.” Perhaps instead of Facebook video games, Zynga should have been a REIT? Meanwhile, Zynga is going from owner to renter with a building that’s worth more than it is. “How San Francisco.”

Zynga HQ located on 8th and Townsend

Why is this happening? Since it’s early successes, Zynga has had a hard time adapting from a Facebook desktop world to a mobile-apps world, and its newer games have generally flopped. As a result, the company has pared down its workforce from over 3,000 employees to anywhere from 1,700 to 2,300, depending on the source.

Halting Problem offered this stinging critique from one analyst: “I’m not sure what’s more ridiculous now: the outrageous prices of the SF housing market or the idea that anyone still enjoys playing Farmville.”

Perhaps Zynga’s next game will be Sale-Leasebackville? Unfortunately, if the game is modeled after the creator’s own disastrous attempts at pivoting its business model into something that will generate cash, the outcome is assured: bankruptcy, followed by full liquidation.

And speaking of doomed companies occupying overpriced digs, we wonder what is the valuation of Yahoo’s Sunnyvale campus? Surely there are a few dozen Chinese money launderers who would be delighted to park their hard-stolen cash in the only thing left of value in Marissa Meyer’s crumbling business empire.

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Submitted by Mish Shedlock of MishTalk

Greece Shut Down By Protests And Strikes Over Pensions; Emergency Eurogroup Meeting Monday

In protest of still more pension cuts, Greek unions started a 3-day strike on Friday that has shut down much of the country.

The Greek parliament holds a pension reform vote on Monday. The vote is expected to pass but perhaps barely. Syriza has a slim three seat majority in the 300-seat Greek parliament.

Also on Monday, the Eurogroup called an “extraordinary” meeting in Athens to discuss the state of play of the macroeconomic adjustment program for Greece.

“Extraordinary” is a euphemism for “emergency”. More demands on Greece are coming up. Greece is way off projected (and mandated) budget surplus targets.

 

Greek Protesters

Protesters have gathered outside parliament in Greece ahead of a vote on further austerity measures in return for more international bailout money. The rally coincides with a three-day general strike against the introduction of tax and pension changes.

The BBC reports Greece Protests Ahead of Vote on Pension and Tax Change.

Once again protesters have gathered in Syntagma Square, just outside Greece’s parliament, as lawmakers debate tax and pensions reforms inside the building. Thousands marched in Athens on Saturday – but Sunday’s rally is expected to be even bigger.

 

The changes expected to be approved by MPs include tax hikes and pension cuts. Greece has been unable to unlock the next loan installment of €5bn (£4bn) after clashing with its creditors over the need for more reforms.

 

The nationwide strikes are the fourth series to be called since Prime Minister Alexis Tsipras’s government won re-election after organising a referendum on the country’s bailout.

 

Greece is already looking to implement spending cuts that will amount to 3% of the country’s gross domestic product or €5.4bn euros by 2018.

Third Bailout

Emergency Meeting

An Extraordinary Eurogroup Meeting has been called for May 9, conveniently timed to coincide with a Greek vote on pension reform.

Discussions will cover a comprehensive package of policy reforms as well as the sustainability of Greece’s public debt. Both elements need to be in place in order to finalise the programme’s first review and unlock further financial assistance to Greece.

Agreed Primary Surplus Path

• -0.25% in 2015
• +0.50% in 2016
• +1.75% in 2017
• +3.50% in 2018

Fairy Tale Math

Achievability of that path is such an amazing fairy that even the IMF recognizes the problem.

On May 6, I noted Showdown! In Leaked Letter IMF Tells Germany “Debt Relief for Greece or IMF Drops Out”.

Christine Lagarde’s letter was conveniently leaked to coincide with the convenient timing of the emergency meeting which in turn was conveniently timed for the same day of the pension vote.

In the letter, Lagarde stated “Third, going forward, we do not expect Greece to be able to sustain a primary surplus of 3.5 per cent of GDP for decades to come.”

Instead of conducting an emergency meeting, I suggest a meeting with the church lady.

Lagarde now proposes a primary surplus of 1.5%.

That is nearly as unlikely as a surplus of 3.5%. And at a rate of 1.5%, it will take decades longer for Greece to pay back the hundreds of billions of euros it owes in these programs.

Outright debt reductions or default is coming up. But don’t expect the eurogroup to come to that conclusion. Instead it will demand still more budget cuts as soon as the next set passes.

It’s the Debt, Stupid!

The budget cuts and reform are surely needed. The problem is over €300 billion in debt that Greece cannot possibly pay back.

Of the first two bailouts of €215.9 billion in Greek aid, only €9.7 billion went to Greece. The rest went to banks and other creditors.

For details, please see It’s the Debt, Stupid!

The third “bailout” adds another €86 billion plus bridge loans to the mix.

Default still looms and the totals keep ratcheting up.

* * *

Some images from today’s protest:

Third day of protests against #Greece‘s pension reform that is about to be voted tonight. #AthensLive http://pic.twitter.com/oUXDOq2q2g

— AthensLive GR (@AthensLiveGr) May 8, 2016

The Farmers union, chanting “We are farmers, you are traitors”. http://pic.twitter.com/GXBZeMSqN1

— AthensLive GR (@AthensLiveGr) May 8, 2016

From our photographer @angelosfoto http://pic.twitter.com/N4s8Fea6F7

— AthensLive GR (@AthensLiveGr) May 8, 2016

Photos of the various blocks coalescing in Syntagma by @TassosMorfis and @angelosfoto #Athens #Strike http://pic.twitter.com/c0FeX15pUD

— AthensLive GR (@AthensLiveGr) May 8, 2016

There is a Russian block taking part in the protest today. #Athens #Strike http://pic.twitter.com/9A1YZ4aJnS

— AthensLive GR (@AthensLiveGr) May 8, 2016

The Greek parliament under the magnificent spring sun, as protesters gather outside http://pic.twitter.com/YD59TAsTDE

— AthensLive GR (@AthensLiveGr) May 8, 2016

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Authored by Anis Shivani, originally posted at Salon.com,

Our awful elites gutted America. Now they dare ring alarms about Trump, Sanders — and cast themselves as saviors. Both parties ignored workers, spewed hate, enriched themselves, hollowed out democracy… And now the problem's populism?

This week, on the night of the Indiana primary, I read one of the most loathsome political screeds it has been my misfortune to encounter.

It was an alarm bell raised by Andrew Sullivan, arguably the greatest hypocrite of the Bush era, on par with his partner in many crimes Christopher Hitchens (remember “Islamofascism?”). Sullivan proclaims that the election of Trump would be an “extinction-level” event. Well, perhaps it will be.

But the extinction Sullivan is most worried about is clearly that of his own breed of callous elites, who could care less about normal human beings who do not have decent jobs and who live in crappy housing and who are so desperate to find a way out of the trap that even someone like Trump starts sounding rational to them.

Now this panic alert, designed to get us in line behind Hillary, is raised by the man who ended The New Republic as we knew it (which then went on to end and then end again), promoting racist and imperialist dogma during his reign at the magazine in the 1990s, and then, with his finger in the wind (which to him and that other arch-hypocrite Hitchens meant being like George Orwell), turned into one of the biggest shills for the war on terror, the Iraq war, the whole works, all the while denouncing the fifth column within our ranks. This so-called journalist, who has no record of liberal consistency, who keeps shifting to whoever holds moral power at any given moment, is scaring us about the mortal threat that is Trump.

No, the danger is the elites, who have made such a joke of the democratic process, who have so perverted and rotted it from within, that the entire edifice is crumbling (to the consternation of the elites). Both parties are in terminal decline after forty years of ignoring the travails of the average worker (the Republicans admit they’re in the intensive care unit, while the Democrats calling for Sanders to quit already have yet to come around to admitting that they might have the flu), and voters on both right and left have at last—and this is a breath of relief—stopped caring about the cultural distractions that have kept the elites in power. No, they want their jobs back, even if it means building a wall, keeping Muslims out, deporting the illegals, and starting trade wars with China and Japan—because what else did the elites give them, they’re still opposing a living wage!

Sullivan comes right out and says it: it’s all because of too much democracy, the same bugbear elites on both sides have been offended by since the “crisis of excess democracy” in the mid-1970s, the same lament that Sullivan’s masters in the ivory tower, Samuel P. Huntington and others, have been leveling ever since they made it their job to put the exuberance of the late sixties and early seventies to rest once and for all. So they engineered the neoliberal revolution, where the “qualified” elites are firmly in charge, and the only way to get ahead is not democratic (or individualist) unpredictability—and who is a greater exemplar of unpredictability than Trump?—but elite planning, a certain coldhearted “rationality” that is as efficient as any totalitarian system ever was in sidelining those who do not have what it takes to succeed.

So, the problem, according to all the elites, is too much democracy. Thank you Andrew Sullivan, a Harvard humanities education—all that Plato you read!—was hardly ever put to worse use in the four-hundred-year annals of the institution.

You, Andrew Sullivan, and the Democratic party flacks who want the Bernie supporters to throw our lot behind the most compromised Democratic candidate of all time, Hillary Clinton, and you, who are so worried about the wall and the ban on Muslims and the attack on civil liberties, will you please tell us who started it all?

You did!

You’ve all now, the elite punditocracy on either spectrum, suddenly become nostalgic for George W. Bush, because he didn’t—well, not always—use the crude and blatant vocabulary that Trump deploys to demonize Mexicans and Arabs and Muslims and foreigners. But Bush is the one who actually implemented, with your full support, plans to surveil, discriminate against (in immigration proceedings), and impose a de facto bar on Muslims from the “wrong countries” that is still, under Barack Obama, a severe disability on Muslims who may want to emigrate to this country.

Where were you elites when Barack Obama, Hillary Clinton, and the Democratic party elite spoke as one with Republicans on endlessly strengthening border security, on the need to mercilessly enforce immigration laws, on imposing such punitive measures against potential legalization that it becomes possible only in theory not in reality?

The natural conclusion of these ideas is the literal wall, but Trump didn’t start it, he’s only putting the finishing touches on the discourse that you elites, on both sides, have inflamed for twenty-plus years. Bill Clinton started the demonization of immigrants—legal immigrants were made ineligible for benefits—for the first time since the liberalization of immigration laws in 1965. Bill Clinton ended welfare, tapping into racist discourse about African Americans, and permanently unmoored millions of people from the social safety net. No, Trump didn’t start any of it, Paul Begala and Karl Rove, representing both parties, and the elite interests they represent, poisoned the discourse.

Elites on both sides insisted on not addressing the root causes of economic dissatisfaction, hence the long-foreseen rise of Trump. Paul Krugman, a Hillary acolyte, is nothing more than a neoliberal, whose prescriptions always stay strictly within orthodox parameters. Yet he was construed as some sort of a liberal lion during the Bush and Obama years. Not for him any of Bernie’s “radical” measures to ensure economic justice and fairness. Oh no, we have to stay within the orthodoxies of the economics profession. Now he’s all offended about Trump!

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Following the biggest news of this weekend, the (anticipated) resignation/termination of Saudi Arabia’s longstanding oil minister Ali al-Naimi, everyone has been wondering about what comes next and how this development will impact the price of oil. We laid out our preliminary thoughts as follows:

Ultimately this is not about the new oil minister: this is about Prince Mohammed taking full control over Saudi oil. So the question everyone now wants answered is “what does this mean for oil?”

 

While nobody knows the answer, what is clear is that over the past 2 months, Prince Mohammed has had a far more hawkish outlook on oil prices. [I]t was Mohammed who effectively scuttled the Doha oil deal which was “this close” to reaching a conclusion before a last minute collapse as the crown prince intervened, overriding al Naimi’s proposal.

 

Furthermore, as the FT reported at the time, “there were other signs that Saudi Arabia’s oil ministry was preparing for a deal. Between January and March the country held its oil output at around 10.2m barrels per day — a level consistent with the proposed freeze.” Then a few weeks ago, Prince Mohammed once again poured cold water over any expectations that Saudi Arabia would permit higher oil prices when he said last week said “the country’s production could immediately rise to 11.5m b/d — if there was demand.”

 

In other words, on the margin al Naimi’s termination and Prince Mohammed’s official ascent to the top of the Saudi oil chain of command are likely bearish in the short term, as Saudi Arabia reverts to its 2014 strategy of pushing oil prices low enough to put marginal producers out of business, a process that due to relentless hedging and generous banks, has taken way too long.

 

In summary, it is likely the slow fruition of Saudi plans to put high cost producers out of business, coupled with Saudi Arabia’s own economic deterioration that forced the king to take this drastic measure.

Shortly thereafter, one of the few energy market strategists we pay attention to, Reuters’ John Kemp, proceeded to tweet his thoughts on the matter of Saudi oil “succession”, in what effectively was a repeat of our own conclusion (start at the bottom), and where the most notable observation is that “if anything dep crown prince has pursued an even more hawkish line to use oil weapon in broader struggle with Iran”:

 

Still, speculation is just that, and the market will be driven by any official statement out of Saudi Arabia and its new oil minister, Khalid al-Falih. One day after the surprising power shift, made his first official statement saying that Saudi Arabia was “committed to meeting demand for hydrocarbons from its customers and would maintain its petroleum policies.” From Reuters:

“Saudi Arabia will maintain its stable petroleum policies. We remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy,” Khalid al-Falih said in an e-mailed statement.

 

“We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity.”

As Reuters summarizes, Falih’s comments on Sunday support analysts’ views that no shift in Saudi oil policy is likely as a result of his appointment, however the emphasis on maximum sustainable capacity once again hints that any incremental increase in global demand will be promptly met by a boost in Saudi output, just as the deputy crown prince bin Salman said would happen in his BLoomberg interview one month ago. 

Some other observations came from Dow Jones, which points out that as al-Naimi departs his job, “the kingdom’s crown as top crude supplier to Asia. home to some the world’s biggest and fastest-growing oil consumers, is slipping” something we first discussed several weeks ago. “Stiffening competition from countries such as Russia and Iran is threatening Saudi Arabia’s longtime hold over markets including China, Japan and India.”

Those competitive forces, intensified by the nearly two-year slump in oil prices, underscore the challenges Mr. Naimi faced during his final years as oil minister. Mr. Naimi was dismissed Saturday, replaced by Khalid al-Falih, chairman of state oil company Saudi Aramco.

 

Analysts say Mr. Falih is likely to follow Mr. Naimi’s policy of trying to safeguard Saudi Arabia’s market share, even if it means contributing to the world’s continuing supply glut. Saudi Arabia has faced pressure from smaller OPEC members to cut its production since oil prices started tumbling in mid-2014.

 

“Khalid Al-Falih believes in the policy implemented by Al-Naimi and does not see the need for Saudi Arabia to intervene to balance the market,” analysts at the research firm Energy Aspects wrote in a report Saturday. Mr. Falih “has made his opposition to unilateral cuts or freezing of production very clear,” they wrote.

In other words, more of the same even as the Saudi policy of keeping its production high has had mixed success in Asia. Asian refiners still source the bulk of their oil from Middle Eastern producers, often on long-term contracts that are already in place. China, the region’s biggest oil importer, still gets more of its crude from Saudi Arabia than anywhere else, although its reliance on Russia has been surging in recent months forcing Saudis to recently deliver oil at spot prices.

But while China’s oil imports grew 13.4% year-over-year to 7.3 million barrels a day in the first quarter of 2016, its imports from Saudi Arabia grew just 7.3%, customs data show. The kingdom’s share of Chinese imports fell to 15% from 15.9%.

 

Meanwhile, Chinese oil imports from Russia surged 42% in the first quarter of 2016, accounting for 13% of the total in the quarter, up from 10.6% in the same period the previous year.

In other words, if the Saudis want to regain Chinese market share from the Russians, they may well have no choice but to either aggressively boost production or cut prices, or both, once again.

* * *

In another report, the WSJ confirmed precisely what we said yesterday when it wrote that the dismissal of Ali al-Naimi as Saudi Arabia’s oil minister “puts the country’s deputy crown prince firmly in control of energy policy and makes it less likely the Organization of the Petroleum Exporting Countries will change tactics next month, OPEC officials said.”

Prince Mohammed bin Salman, second-in-line to the throne, has taken a hard line on Saudi oil policy, doubling down on the kingdom’s strategy of maintaining high crude output in the face of collapsed prices. OPEC officials said the appointment of a new minister, Khalid al-Falih, makes it unlikely that Saudi Arabia will advocate changing policy with OPEC, the 13-nation cartel that controls a third of the world’s oil production.

 

It could still be a long and fractious meeting when OPEC convenes on June 2. Some members want to pull back or freeze the cartel’s output, while Saudi rival Iran is intent on throttling its own production up now that Western sanctions on its nuclear program have ended.

 

“Naimi knows OPEC and OPEC knows him and any change will present another problem for OPEC ministers,” said John Hall, chairman of Alfa Energy and a longtime OPEC watcher. “To understand the new direction that will undoubtedly arise from the new leadership of the Saudi ministry will take time.” Mr. Falih is an experienced oil executive, leading the state oil company for years, but he hasn’t attended an OPEC meeting and doesn’t have the long-term relationships with other countries that Mr. Naimi did.

 

Mr. Falih will have to navigate a landscape of increased competition from Iran, Saudi Arabia’s main rival for power and influence in the Middle East. Freed from Western sanctions, Iran has embarked on a campaign to grab back customers it lost to Saudi Arabia and others, in both crude-oil markets and petroleum products like chemicals, Tehran officials said.

 

In his first remarks as minister, Mr. Falih on Sunday said in a news release that the country would “remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy.”

 

Mr. Falih moves into his new job as Riyadh and Tehran are at odds diplomatically, backing opposing sides in the violent conflicts in Yemen and Syria, and representing different strains of Islam–Sunnism in Saudi Arabia and Shiism in Iran. Riyadh cut off ties with Tehran this year after some of its diplomatic buildings in Iran were ransacked by protesters following the execution of a popular Shiite cleric in Saudi Arabia.

Our assessment based on all the latest news is that the Saudi strategy of attempting to put high-cost, marginal producers, whether in (Venezuela) or out of OPEC (US shale) will accelerate, especially as Saudi’s sworn nemesis, Iran, pushes its own output higher month after month.

* * *

As we reported yesterday, Falih’s appointment was part of a bigger Saudi shake-up announced on Saturday as King Salman restructured some big ministries in a major reshuffle intended to support a wide-ranging economic reform program. As part of the restructuring, the Petroleum Ministry has been renamed the Ministry of Energy, Industry and Mineral Resources. Additionally, the water and electricity ministry was abolished and its responsibilities split. The energy ministry will now oversee activities related to electricity.

“The creation of a new Ministry in Saudi Arabia that brings together the Kingdom’s abundant and unrivalled energy and mineral resources and industrial capabilities is in line with the ambitious objectives of Saudi Vision 2030,” Falih said.

* * *

Finally, while we wait to see how US oil futures will react to the Saudi news, local Saudi equity markets took the news in stride. On Sunday, the Saudi stock index closed 0.2% higher after rising as much as 1.0% at one stage. Petrochemical blue chip Saudi Basic Industries gained 0.3%. State utility Saudi Electric climbed 1.8%.

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Via NorthmanTrader.com,

Despite the large February – April rally stocks are down year over year (May 6 2015- May 6 2016). $SPX is down over 1%, the Nasdaq is down over 4% and small caps are down over 8%. On May 6 stocks closed basically where they were in the third week of March which implies they haven’t really gone anywhere in the past 7 weeks.

And not going anywhere has really been the theme since QE3 ended. So this period of consolidation remains completely unresolved, literally stuck in the middle:

As I’ve outlined recently ultimately this range will resolve itself into a big move once a directional breakout has confirmed itself.

We are closer to all time highs than any recent lows and with yet another OPEX period coming bulls likely have again the horn to make magic happen, after all, OPEX retains an almost perfect track record of pre-programmed buying:

There are exceptions of course. Both Januarys in 2015 and 2016 were OPEX busts and so was August of 2015. If anything August showed how quickly the bid can disappear.

So here we are in May of 2016 and we can observe an almost perfect replay of last year. A rally into the upper Bollinger band, a retrace back toward the lower Bollinger band and 50MA just in front of OPEX. Will the program just replay itself? After all new time highs were made in May last year.

Still something happened on Friday that has happened only twice in over 20 years on the $SPX: The weekly 100MA has crossed over the weekly 50MA. Only by 1 handle mind you, but it has happened.

The last two times this happened carnage followed:

Both of these crossovers happened in context of the following events:

1. SPX had broken a multi-year ascending trend line
2. GAAP earnings were declining

Both of these conditions are in place here as well.

However, given the consolidation of price over the past year and a half it is also relevant to point out that a similar consolidation occurred in the mid 1990’s which resulted in a massive price move toward the upside. The big difference to then: GAAP earnings were rising. They clearly aren’t now.

The conclusion to all this: Bulls can’t afford any further price decrease here because it would confirm the MA cross-over and likely set in motion a larger corrective move inviting new lows altogether. This is at least the track record.

So this next 2 weeks into OPEX may hold the golden key as to the ultimate directional move of this market.

Buckle in.

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