STALL SPEED : Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall
As we reported last month, Global Economic Risks have taken a noticeable and abrupt turn downward over the last 60 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggested the global economic condition is at a Tipping Point. Though we stated "Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses" nothing has occurred even after the 19th disappointing EU Summit to address the EU Crisis. Some event is soon going to push the global economy over the present Tipping Point unless major globally coordianted policy initiatives are undertaken. The IMF recently warned and reduced Global growth to 3.5%. This is just marginally above the 3% threshold that marks a Global recession. This would be the first global recession ever recorded. The World Bank is "unpolitically'projecting 2.5%. The situation is now deteriorating so rapidly, as to be impossible to hide anylonger.
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CURRENCY WARS: The Fighting Resumes - The "Race to the Bottom" Monetary Policy Programs Accelerates
THE "UNLIMITED" & "UNCAPPED" SALVO - The macroprudential policy strategy of Financial Repression reached a seminal point last month with the announcement of the Federal Reserve's "Unlimited" QEIII/Operation Twist and the ECB's "Uncapped" OMT. We have moved into the outer limits of Monetary Policy which now forces the accelerated currency debasement of the developed economies against its Asian & BRIC competitors. The 'race to the bottom' has entered another phase which now sets the battle lines for the next set of conflicts.
In case you haven't been keeping score, here is how the "Race to Debase" currently stands. (see right) MORE>>
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed Technical Analysis coverage available this month.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
“As long as there are individual national budgets, I regard the assumption of joint liability as inappropriate and from our point of view this isn’t up for debate...The Spanish government will be liable for paying back the loans to recapitalize its banks. Plans to give the Euro rescue fund the power to inject cash directly into banks won’t be made retroactive.”
-German Chancellor Merkel
EU SUMMIT OUTCOME
Cyprus needs money, Spain needs money, Portugal probably needs more money and Greece is just about out of money.
The summit was held, the meeting is over and the worth of any accomplishments is about at Zero as the only agreement was a plan to have a plan to deal with bank supervision.
While all of this wrangling continues the tone at the summit was no longer the nicey-nice repartee of past meetings.
This is not an inch forward, this is not a millimeter forward; this is quicksand where they are all stuck as both money and time run out as the Socialists scream for alms while the landed gentry, utilizing head fakes and other polite deceptions, refuse to provide it.
The clock is running, the cash is almost gone and make-believe will no longer suffice.
The crisis phase, in my opinion, has been entered
“I would say that we have entered the crisis stage of Europe now. We have a stand-off between France and the southern nations, the troubled countries, in one corner and Germany, Austria, Finland and the Netherlands in the other. The last summit yielded nothing and worse than nothing because the two camps are worlds apart and sharply divided. They couldn't agree on the banking supervision issue. They have no agreed upon path for Spain, for Greece, for Cyprus, for Ireland or for Portugal. Germany has drawn a line in the concrete concerning legacy sovereign issues, legacy bank issues and Ms. Merkel has stated quite dramatically that Germany will not allow the new ESM to be used for old problems and that the individual nations will have to foot the bill for them. The "Muddle" is over in my opinion and the "Crisis" has now begun. The long, long road of "put it off" has reached its conclusion and there is no agreement and no compromise on how to proceed. We have finally reached the "Danger Zone" and I advise you to note the change!”
'PUBLIC SECTOR' INVOLVEMENT EXPOSED
The “Public Sector Involvement” trick was the ECB handing money to the Greek banks who then bought private sovereign debt issued by Greece, got the bonds, then pledged the bonds back to the ECB and got their money back.
The IMF has shorted the fuse box and they want the EU or the ECB to take an “Official Sector Involvement” hit which you may translate into “Debt Forgiveness” which would probably be the end of the governments in more than one Northern European nation.
Europe then is faced with writing off the debt of Greece or having the ECB take the hit which would mean a recapitalization of the ECB as they only have $18 billion of paid-in capital or the IMF refusing to fund the next tranche of Greek aid which means that the European Stabilization Funds would have to pick up the bill and that local politics may collapse without the IMF’s participation.
In the case of Spain it is not Mr. Rajoy “assessing the situation” but a very concentrated effort to get “Euros for Nothing and Conchitas for Free.” Not only does Spain have several of its integral regions calling for succession but it has a regional debt problem exceeding $50 billion in my estimation and a bank problem that is several multiples of that.
The Oliver Wyman bank stress tests had all of the validity of a three toed sloth residing in your living room as there was no verification, no audits and nothing but garbage pressed into the shredding machine and so “garbage in is garbage out” and let’s not deceive ourselves that it was anything else. Once again, one more time, we have an example of a country trying to get anyone else, everyone else, to pick up the bill because they cannot afford it. Germany, in the meantime, says that Spain does not need the money and so the bills go unpaid and the crisis worsens.
Germany has been fairly clear. The new ESM fund will not pick up the check and it is up to each country to pay for their own past problems.
You may translate this piece of jargon into a “No” to Ireland that the ESM will not pick up the bill for the Irish banks and the same response for Spain.
This new German definition puts Portugal, Greece, Spain and Ireland back at square one and effectively closes the door on any further negotiations.
“Our goal is banking supervision that’s worthy of the name, because we want to create something that’s better than what we currently have,” Merkel told reporters.
Germany and France argued contentiously about the timing. Berlin has insisted the supervisor be effective before the ESM can begin cash injections into Spanish banks, those transactions are not foreseeable to occur until the latter half of the year, around the time of Germany’s national elections.
Angela Merkel said it would take more than a few months before the supervisor was fully effective and direct bank recapitalisation could be considered.
However, the agreement appeared to upset German finance minister Wolfgang Schaeuble's efforts to delay and limit the scope of European banking supervision.
Germany has been averse to see its politically sensitive Savings and Cooperative banks come under outside supervision. It rejects any joint deposit guarantee under which wealthier countries might have to underwrite banks in poorer states.
The final deal came after the leaders of France and Germany held a private meeting after numerous public clashes over greater EU control of national budgets.
A French government source said the European Stability Mechanism (ESM) could start recapitalising troubled banks as early as the first quarter of 2013, but a German source said it was "very unlikely" to happen so soon.
Dr. Merkel earlier demanded broader authority for the executive European Commission to veto national budgets that breach EU rules. She said a December EU summit would make decisions on these issues of closer euro zone economic governance.
The point when the ECB will effectively become the bloc's banking supervisor is important because it would open the way for the euro zone's bailout fund to inject capital directly into troubled banks, without adding to their sovereign governments' debts.
It will come as no surprise to many that the initial size estimates of Spain's regional bailout fund are now being questioned. The government is now 'analyzing' whether the EUR18bn 'temporary' bailout fund needs to be increased. In a word - Yes! As this chart from Bloomberg Briefs shows, the size of the 'help' is pittance compared to the debt-loads of Catalonia alone (which recently sought secession). As Bloomberg's Niraj Shah notes, Spanish regional elections in the Basque country and Galicia take place on Sunday, followed by a ballot in Catalonia on Nov. 25. Prime Minister Mariano Rajoy may prefer to seek a bailout after the elections as a series of defeats for his People’s Party could exacerbate investor concerns about the government’s ability to control spending and revenue and bring down the deficit. Perhaps our 'context' update on Spain's situation last night was rather prescient after all?
In what seems like a remarkable coincidence:
Spanish region of Asturias will seek EU261.7m from central govt’s rescue fund for regions
Source: Bloomberg Briefs
2- Sovereign Debt Crisis
CHINA - Has Caught the Gold Bug big time!
Chinese Gold Imports Through August Surpass Total ECB Holdings, Imports From Australia Surge 900% 10-21-12 Zero Hedge
First it was more than the UK. Then more than Portugal. Then a month ago we said that as of September, "it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings." Sure enough, according to the latest release from the Hong Kong Census and Statistics Department, through the end of August, China had imported a whopping gross 512 tons of gold, 10 tons more than the latest official ECB gold holdings. We can now safely say that as of today, China will have imported more gold than the 11th largest official holder of gold, India, with 558 tons.
Yet despite importing more gold than the sovereign holdings of virtually all official entities, save for ten, importing more gold in July than in any month in 2012 except for April, importing more gold in 8 months in 2012 than all of 2011, and importing four times as much between January and July than as much as in the same period last year
with the status quo cartel in desperate need of China stepping up its monetary easing, and jumping right into the race to debase, which is absolutely critical to halt the plunge in tech company revenues and earnings, any interim slowdown in purchases is merely a springboard for even more purchase in the future once inflation does come back to China with a bang.
From the South China Seas:
Fung expects gold imports on the mainland to stay soft this month as prices have continued to remain high.
"However, gold consumption is likely to climb again in the fourth quarter, a traditionally peak season when Chinese people buy gold jewellery for weddings and presents," he added.
All rhetoric aside, one unspinnable aftereffect of China's relentless appetite for gold comes from a different place, namely Australia, where gold just surpassed coal as the second most valuable export to China. From Bullionstreet:
Australia's gold sales to China hit $4.1 billion in the first eight months of this year as it surged by a whopping 900 percent.
According to Australian Bureau of Statistics, the yellow metal became the second most valuable physical export to China, surpassing coal and only behind iron ore.
The unprecedented jump in gold sales, along with continued acceleration of export revenues for other commodities led by coal, up 80 per cent to $4bn, caused total exports to China to rise by 10.7 per cent for the year to August, the Bureau said.
Perth Mint supplied most of the gold to China through a variety of banks.
Analysts said Chinese buyers are hoarding the precious metal amid a slowing economy, property-buying restrictions and uncertain financial markets as its central bank increases its holdings.
China's foreign currency reserves of gold are low and its move to build them up will provide an important base demand for gold, they added.
In other words, take the chart above, showing only Chinese imports through HK, and add tens if not hundreds more tons of gold entering the country from other underreported export channels such as Australia. One thing is certain: China no longer has any interest in buying additional US Treasurys. What it does have an interest in is up to readers to decide.
Xiao Gang, Chairman of the Bank of China (one of the “big 4” banks the Chinese government controlls), published an interesting op-ed in China Daily on October 12th. Although some may consider the China Daily the English-language mouth piece of the Chinese government, its op-ed columns often hold some genuinely interesting discussions and analysis of events and affairs in China.
In this op-ed, Xiao Gang takes on the issue of “shadow banking,” that hazy and complicated area of finance that in the developed economies is often associated with hedge funds. As discussed in greater detail below, things are slightly different in China itself.
Chinese finance is undergoing dramatic changes which are not yet widely understood. Historically (mainly before 2008), the vast majority of lending in China was done by the normal banking sector in the form of loans. The process was a cornerstone of the government’s control over the economy. The vast majority of banks in China are controlled by the government, so the “who and when” of lending was firmly in the hands of China’s leaders.
The years 2008/9 will be remembered as watershed years for Chinese finance. The financial crisis rippling out from the United States caused a dramatic reaction by China’s policymakers as exports collapsed. Two key trends developed.
The first is fairly obvious; a wave of credit was unleashed and has continued since that time as China’s growth became more and more reliant on investment and the lending needed to support it. This exacerbated the fears that an unbalanced Chinese economy is undergoing an unsustainable build-up of debt, much like Japan’s did during its boom years.
The second trend came later and is much harder to pin down. In late 2009 and 2010, as policymakers began to worry about the credit boom, inflation, a property bubble, and overcapacity, they attempted to put a brake on lending activities. The reduction in formal lending forced an economy addicted to credit to increasingly turn to less usual financing channels – some of them in the “shadow banking” sector. This trend really began taking off near the end of 2009 and has generally increased ever since. The latest data (September 2012) shows that these non-normal bank credit channels now account for a substantial amount of the financing going on in the economy.
Taking these two trends together – an economy relying increasingly on debt creation for growth, and that debt creation becoming more and more complicated and obscure, it is easy to see why so many officials and analysts are worried.
Formal banks are key players in the “shadow banking” system, helping to create, fund and market wealth management products to their customers – products which are riskier than deposits but which potentially pay a healthier return to investors. Their goals are obvious, if credit taps are shut off, many borrowers who are not able to repay loans will default, hitting the banks’ formal loan books hard. Hence the shadow and formal banking systems have become intertwined, and the transmission of problems from one to another, or a negative feedback loop between the two, are not hard to imagine.
As Mr. Xiao bravely states in his column, it is paramount that the government increases its regulation of the “shadow banking” sector. The difficulty is that shadow banking is just one of the main economic dilemmas facing China at present: Is an economic rebalancing necessary? Is pushing through an economic rebalancing worth than pain of slower growth?
4 - China Hard Landing
CHINA - China' Political Transition & Ogoing Emergence as a Super Power
With this evening's news that Japan and the USA are 'backing down' from a planned 'joint security drill' to recapture a remote 'uninhabited' island in Okinawa province (apparently amid concerns of backlash from Beijing); and chatter of the PBoC gauging demand for reverse repos(instead of flooding us with newly minted Yuan which everyone believes is just the remedy), it seems very clear who the world's super-power is (militarily and economically). Furthermore, as The Diplomat explains, multi-faceted challenges to the new leadership — possible economic stagnation, social unrest, elite disunity, and a revival of pro-democracy forces — will make it more distracted and less politically capable to maintain discipline on numerous actors now involved in China's foreign policy. The effects of such accumulated internal woes, while not necessarily aggressive, are certain to be an erratic pattern of behavior that both worries and puzzles China's neighbors and the rest of the international community.
"Be careful what you wish for. A weaker China could nevertheless
inflict serious damage to the world order."
On China's Political Transition (via Damien Ma's interview with Foreign Affairs Magazine):
In totality, these internal difficulties will reduce the resources available to maintain and expand China's influence around the world, constrain the Chinese military's ability to accelerate its modernization, and make Chinese leaders more reluctant to assume greater international or regional responsibilities. Most worryingly, erratic behavior driven by a mixture of lack of leadership experience and political security will most likely mark Beijing's foreign policy conduct in the coming years.
Given the high profile China has assumed in projecting its economic influence around the world, particularly in resource-rich developing countries, one might dismiss as fanciful the suggestion that looming economic hardships at home may severely limit Chinese capacity for establishing itself as an economic alternative to the West. But a closer look at how China has been funding its investments in Africa, Central Asia, and Latin America would show that such investments are not only expensive, but also very risky. The grants and concessionary loans China has made to various countries to gain their goodwill have totaled at least tens of billions of dollars (these are reported figures; nobody knows the real amount). They were made when China enjoyed double-digit growth and had ample cash to throw around.
But as the Chinese economy decelerates and less money flows into Beijing's coffers, the Chinese government will obviously have less funds to sustain such economic and diplomatic offensives. Politically, continuing a lavish foreign aid program when its own people are struggling will surely arouse fierce criticisms from the public. Not too long ago, the Chinese Foreign Ministry was denounced bitterly when it was revealed that China donated safe school buses to Macedonia when its own schoolchildren have to ride in unsafe vehicles.
China's risky foray into developing countries will face another hurdle. Most of the big-ticket projects China has supported in these countries are funded by loans from China's state-owned banks. Based on previous experience, many of these projects are likely to fail. As Chinese banks are themselves expected to struggle to deal with a wave of non-performing loans at home, the last thing they want to do is to keep funding these high-risk, low-return projects abroad. So it is a foregone conclusion that a weaker China at home means a less influential China abroad.
Another obvious casualty is China's much-vaunted campaign to project its "soft power." Internally called "dawaixuan" (big external propaganda), this campaign has led to a huge expansion of official Chinese media presence around the world. Xinhua, for example, has launched its English-language television news service. The nationalist tabloid, Global Times, has added an English edition. The official China Daily has regularly placed high-priced full-page ads in The New York Times, The Wall Street Journal, and The Washington Post. Judging by the worsening of Chinese image around the world, this campaign has been a flop. When Beijing's propaganda chiefs get their new austerity budgets in a year or two, it is hard to imagine they will decide to throw good money after bad.
Some Western observers may welcome such mounting woes inside China since they will diminish Chinese influence and reduce the "China threat." But be careful what you wish for. A weaker China could nevertheless inflict serious damage to the world order.
One obvious casualty of China's internal weakness will be Beijing's reluctance to play a more constructive role in global and regional affairs. Cynics might say that Chinese leaders, even when times were good, talked more than they actually delivered. While some of such criticisms were true, a more objective assessment may show that Beijing has, on occasion, played a more positive role than it has received credit for, such as during the East Asian financial crisis in 1997-98 and in its push for regional free trade. Even on the Korean Peninsula, it has made Pyongyang behave less belligerently since early 2011 (after failing to do so in 2010).
On Iran and Libya, China has also chosen not to be a spoiler. On global climate talks, Beijing's evolving negotiating positions have also improved considerably. However, even China's modest contributions to the world order could be at risk if its leaders, so distracted by domestic crises, decide not to make any contributions at all.
A piece of conventional wisdom about a weaker China is that it will be more belligerent because its leaders will have the incentives to divert domestic attention with appeals to nationalism and a more aggressive foreign policy. This is a simplistic understanding of how Beijing behaves. To be sure, such temptations do exist, and one can expect China's new leaders, hobbled by inexperience and lack of political capital, to pander to nationalist sentiments. But Chinese leaders are no fools. Talking tough is one thing, but acting tough is another. When we examine Chinese foreign policy behavior in the last sixty years, we will find that Beijing, for all its bombastic rhetoric, actually has picked its fights carefully. Acutely aware of their own limited military capabilities, Chinese leaders have avoided getting into fights they would be sure to lose.
If we apply this insight to speculating about Chinese external conduct in the coming years, the only thing we are certain about is uncertainty. The confidence derived from a strong economy and relative domestic stability will be gone, and so will be the self-imposed restraints on jingoistic rhetoric. Multi-faceted challenges to the new leadership — possible economic stagnation, social unrest, elite disunity, and a revival of pro-democracy forces — will make it more distracted and less politically capable to maintain discipline on numerous actors now involved in China's foreign policy. The effects of such accumulated internal woes, while not necessarily aggressive, are certain to be an erratic pattern of behavior that both worries and puzzles China's neighbors and the rest of the international community.
Over the past 4 years the Fed's strategy in response to the Second Great Depression has been a simple one: purchase record (and now open-ended) amounts of fixed income product (offset by releasing record amounts of reserves in the banking universe which in turn has converted every bank into a TBTF and Fed-backstopped hedge fund, as the concurrently shrinking Net Interest Margin no longer leads to the required ROA from legacy bank lending) to stabilize the bond market, and to crush yields in hopes of forcing every uninvested dollar to scramble for equities, primarily of the dividend paying kind now that dividend income is the only "fixed income" available.
So far the strategy has failed for the simple reason that the smart money instead of being "herded", has far more simply decided to just front-run the Fed thus generating risk-free returns, while the "dumb money", tired of the HFT and Fed-manipulated, and utterly broken casino market, has simply allocated residual capital either into deposits (M2 just hit a new all time record of $10.2 trillion) or into "return of capital" products such as taxable and non-taxable bonds. Alas none of the above means that the Fed will ever stop from the "strategy" it undertook nearly 4 years ago to the day with QE1 (as any change to a "strategy" of releasing up to $85 billion in flow per month will be immediately perceived as implicit tightening and crash the stock market). Instead, it will continue doing more of the same until the bitter end. But how much more is there? To answer this question, below we present the entire universe of marketable US debt, in one simple chart showing the average yield by product type on the Y-axis, and the total debt notional on the X.
The Fed, with the recent advent of QEternity, aka the incorrectly named 'QE 3', is already engaged in the monetization of virtually everything to the right of Municipal debt (under the blue arrow in chart below). The reason why the Fed needs to continue buying up Treasurys in the 10Y+ interval is simple - in doing so it is funding the long-end of US deficit spending, aka everything that has a greater than zero duration in the age of ZIRP. However, that amount is merely enough to keep the status quo as is, in other words to keep the deficit government funded. Remember that the Fed's ultimate goal is to inflate the debt stock of both the US and the world. Which means that not even QEternity will be enough. It also means that very soon the Fed will be forced to shift its monetization appetite further to the left of the X-axis, and increasing buy up more and more higher yielding fixed income product, in a rerun of Japan, which the US has now become. Recall that the BOJ is also openly monetizing Corporate debt, as well as various equity-linked products.
Said otherwise, the "smart money" is now loading up on those debt products, IG and HY debt, munis and non-agency MBS, which the Fed will sooner or later become the buyer of first, last and only resort. And just like Bill Gross was buying up MBS on record margin in February (as we showed) in advance of QE3, so now everyone else is once again merely preparing for the inevitable next step, as the Fed proceeds to monopolize the entire marketable debt universe.
Sadly for the Fed this also means that any incremental free money will simply continue to chase more fixed income product before the Fed starts buying it (thus providing an easy bid to sell into), instead of buying up already ridiculously overpriced equities (where record profit margins are about to slam into the immovable walls of soaring input and commodity costs crushing the "cheap" P/E illusion), which in turn will force Bernanke to one day in the near future, go full Japanese retard, and announce the Fed will as a matter of policy, as opposed to simply via the PPT and Citadel in times of desperation, commence buying equities. But that's a story for another day.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK -Oct 21st- Oct 28th, 2012
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