Investments of any kind involve risk.  Please read our complete risk disclaimer and terms of use below by clicking HERE      
SUBSCRIBER ACCESS - THESIS 2014

Bookmark and Share      

HOME   || Kryptoszene Zeigt, Wie Krypto Wallet Erstellen   || A/V Presentations || Trigger$ ||   Commentary   ||  Understanding Abstraction  ||    Meet Gordon   ||  Subscription Services || SUBSCRIBER ACCESS

JOHN RUBINO'S
LATEST BOOK
Read More
CHARLES HUGH SMITH'S
LATEST BOOK

Read More

NEW SERIES RELEASE

 

"DOW 20,000 "
Read the Series...

 

HELD OVER

Currency Wars

Euro Experiment

Sultans of Swap

Extend & Pretend

Preserve & Protect

Innovation

Showings Below
  

 

 

 


Bookmark and Share


 

"PRESERVE & PROTE

CT"
Read the series...

archives open
in a new window


PRESERVE & PROTECT:  The Jaws of Death

 

RECAP

Weekend Dec. 20th, 2015

 

Follow Our Updates

 

onTWITTER

https://twitter.com/GordonTLong

 

 

REPLAY

 

 

 

 

 

         

ARCHIVES 

DECEMBER
S M T W T F S
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    

Today's Tipping Points Page
Complete Archives

KEY TO TIPPING POINTS

1- Bond Bubble
2 - Risk Reversal
3 - Geo-Political Event
4 - China Hard Landing
5 - Japan Debt Deflation Spiral
6- EU Banking Crisis
 
7- Sovereign Debt Crisis
8 - Shrinking Revenue Growth Rate
9 - Chronic Unemployment
10 - US Stock Market Valuations
11 - Global Governance Failure
12 - Chronic Global Fiscal ImBalances
13 - Growing Social Unrest
14 - Residential Real Estate - Phase II
15 - Commercial Real Estate
16 - Credit Contraction II
17- State & Local Government
18 - Slowing Retail & Consumer Sales
19 - US Reserve Currency
 
20 - US Dollar
21 - Financial Crisis Programs Expiration
22 - US Banking Crisis II
23 - China - Japan Regional Conflict
24 - Corruption
25 - Public Sentiment & Confidence
26 - Food Price Pressures
27 - Global Output Gap
28 - Pension - Entitlement Crisis
29 - Central & Eastern Europe
 
30 - Terrorist Event
31 - Pandemic / Epidemic
32 - Rising Inflation Pressures & Interest Pressures
33 - Resource Shortage
34 - Cyber Attack or Complexity Failure
35 - Corporate Bankruptcies
36 - Iran Nuclear Threat
37- Finance & Insurance Balance Sheet Write-Offs
38- Government Backstop Insurance
39 - Oil Price Pressures
40 - Natural Physical Disaster

 

Reading the right books?
No Time?

>> Click to Browse <<

We have analyzed & included
these in our latest research papers Macro videos!

OUR MACRO ANALYTIC

CO-HOSTS

John Rubino's Just Released Book

Charles Hugh Smith's Latest Books

 

 

Our Macro Watch Partner

Richard Duncan Latest Books

MACRO ANALYTIC

GUESTS

F William Engdahl

 

 

 

 

 

OTHERS OF NOTE


Book Review- Five Thumbs Up
for Steve Greenhut's Plunder!

 

 

 

pdf Download

 

Have your own site? Offer free content to your visitors with TRIGGER$ Public Edition!

Sell TRIGGER$ from your site and grow a monthly recurring income!

Contact [email protected] for more information - (free ad space for participating affiliates).


HOTTEST TIPPING POINTS
   
Theme Groupings

We post throughout the day as we do our Investment Research for:

LONGWave - UnderTheLens - Macro

Scroll TWEETS for LATEST Analysis

 

 

"BEST OF THE WEEK "

MOST CRITICAL TIPPING POINT ARTICLES TODAY

 

   

 

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK -Dec 13th, 2015 - Dec 19th, 2015      
BOND BUBBLE     1
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates     2
GEO-POLITICAL EVENT     3
CHINA BUBBLE     4
JAPAN - DEBT DEFLATION     5

EU BANKING CRISIS

   

6

INTEREST & INFLATION PRESSURES

What The Market Chose To Ignore In Yesterday's Fed Announceent

Submitted by Tyler Durden on 12/17/2015 - 05:45

The hard part now is how to ween the market away from the old narrative, the one which has pushed the S&P to record highs over the past 7 years on bad economic news, and to renomralize the market's own "reaction function" to that of the Fed. The problem is that from day one there is a major discrepancy between the two: as previouslly observed, the Fed did not deliver the desired dovish hike, and kept its 2016 year-end fed funds rate unchanged at 1.4% suggesting 4 rate hikes in the coming year, and which as Breslow notes means "being less dovish than the meeting previews suggested is now a sign of bullishness on the economy." This sets the Fed on a collision course with the market because "with the market pricing fewer hikes than the Fed suggests, someone is going to end up being wrong."

In First Post-Hike Reverse Repo, Fed Removes $105Bn Liquidity From 49 Banks

Submitted by Tyler Durden on 12/17/2015 - 13:35

In what appears to be an orderly process, The NY Fed's first Reverse Repo operation since The FOMC 'raised' rates released $105.185 billion of Treasury collateral to 49 banks at a rate 25bps, draining the same amount of system liquidity.  This is being greeted as good news by many as no major disprutions appear to have occurred... aside from, of course, a 6bps plunge in long-end bond yields, 250 point drop in The Dow, and notable weakness in high-yield bonds. While some had feared up to $1 trillion would need to be withdrawn to achieve The Fed's goals, the size of this initial RRP suggests there is considerably less excess liquidty in the system than many would believe... indicating a notably more fragile system than we are being led to believe.

 

12-17-15  

32

Submitted by Tyler Durden on 12/16/2015 

Fed Reveals Rate Hike "Plumbing" Details: Removes Cap On Reverse Repos, Limits Each Counterparty To $30 Billion

Perhaps even more important than the actual rate hike announcement, the one statement the market was particularly focused on was the Fed's "implementation note", which lays out the Fed's thought process on how it will actually raise rates in order to maintain the Fed Funds in the 0.25%-0.50% range. What it reveals is

  • that in addition to removing the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion (recall that according to Citi, the Fed may need to drain up to $1 trillion in excess liquidity to effect the 25 bps hike), it will have a per counterparty limit of $30 billion per day, which may or may not be enough.
  • Separately, the Simon Potter's desk at the NY Fed announced "that the Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC’s domestic policy directive."

What is missing from the analysis is how the Fed will approach the fact that securities pledged to the Fed remain outside of the traditional repo pathway, and thus the liquidity shortage among the treasury market is likely to continue if not worsen. Most of these are in line with expectations. Now it remains to be seen if these theoretically necessary measures will also be practically sufficient.

The full details from the FED:

Decisions Regarding Monetary Policy Implementation

  • The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015:
  • The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015

As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting.

The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."

More information regarding open market operations may be found on the Federal Reserve Bank of New York's website.

In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.

And from the NY Fed:

During its meeting on December 15–16, 2015, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective December 17, 2015, to undertake open market operations as necessary to maintain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day.

To determine the value of Treasury securities available for ON RRP operations, several factors need to be taken into account, as not all Treasury securities held outright in the SOMA will be available for use in such operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts. Second, some Treasury securities are needed to support the securities lending operations conducted by the Desk. Additionally, buffers are needed to provide for possible changes in demand for these activities and for possible changes in the market value of the SOMA’s holdings of Treasury securities.

Taking these factors into account, the Desk anticipates that around $2 trillion of Treasury securities will
be available for ON RRP operations to fulfill the FOMC’s domestic
policy directive
. In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available securities, the Desk will allocate awards using a single-price auction based on the stop-out rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate.

These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website.

The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of RRPs are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6.

 

INTEREST & INFLATION PRESSURES

12-16-15  

32

Submitted by Tyler Durden on 12/16/2015

Fed May Have To Drain As Much As $1 Trillion In Liquidity To Push Rates 25 bps Higher

It's 2:00:01 pm and the Fed has just announced it will hike rates by 25 bps while using very dovish language to convey that just like "tapering was not tightening" in 2013, so "tightening isn't really tightening", and unleashing a massive buying order.

So far so good. But the real question is what does this mean for post-kneejerk market dynamics, and the one most important variable of all: liquidity.

The all too crucial, and overdue, answer to this question will be delivered when the Fed releases its "implementation note" concurrently with the FOMC statement which should explain all the nuances of just how the Fed will adjust the IOER-Reverse Repo piping that will be crucial to pull of the rate hike in practice, something which has been stumping 

Two weeks ago, we cited repo-market expert E.D. Skyrm who calculated that moving general collateral higher by 25bps would require the Fed draining up to $800 billion in liquidity:

"In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity."

That may be conservative.

According to Citigroup's latest estimate, the liquidity drain could be substantially greater. Here is the take of Jabaz Mathai

There will be a separate document from the NY Fed with details around the operational aspects of the liftoff. Of primary interest will be the size of the overnight reverse repo facility that the Fed will put in place to pull short rates higher. We don’t think it will be unlimited, but a size large enough that will keep short rates from falling below the 25bp floor – and the size could be as high as $1tn.

Putting this liquidity drain in context, the entire QE2 injected "only" $600 billion in liquidity in the span of many months, suggesting that as of tomorrow, the Fed may drain as much as 166% of its entire second quantitative easing operation overnight.

Whether that liquidity is inert and can be easily released by banks, and more importantly, non-banks without resulting in any additional risk tremors is the first $640 billion question that the Fed is facing. The second, third and fourth? Assuming a linear relationship and another 3 rate hikes until the end of 2014, this means that by the time short term rates hit 1%, the Fed may have soaked up as much $4 trillion in liquidity. Here one thing is certain: a $1 trillion drain may not have a material impact when starting from a $2.6 trillion excess reserve base. $4 trillion, however, will leave a mark (the Fed's entire balance sheet is $4.5 trillion) especially once the market starts to discount just how the rate hike plumbing takes place.

 

INTEREST & INFLATION PRESSURES

12-15-15  

32

Submitted by Tyler Durden on 12/14/2015

Will The Fed Hike Rates This Week?

The Only 'Data' That Matters

This is the real "data" that The Fed is "dependent" on...

As Deutsche Bank notes, The Fed is “right” to be raising rates. If they had done it earlier all the problems they now have to face, they wouldn’t have had to. If they do it later, those same problems will be even worse. Of course had they done it earlier there may well have been other problems. Like for example, no growth and a much higher unemployment rate. But that’s all water under the bridge. Fact is this Fed is ready to go. And markets know it!

But, what would it take for the Fed not to hike this coming meeting?

We think SPX through 1860.

Right through the 1900s, the Fed is likely to be complacent that this is normal market volatility.Pre-Prom nerves, if you will. It took the SPX just seven trading days to drop from 2102 to 1867 in August, an average of over 30 points a day. It could do the same but the pace would have to be closer to double. Possible but one wouldn’t make that a central forecast. More likely, the debate will quickly shift to how quickly the Fed stops tightening.

It appears, we have discussed previously,  that the logic of the median dots is to raise rates to dampen a would be credit bubble (and 'disable' the record leverage that low risk premia have allowed). It’s hard to know how far rates have to rise for that outcome but we suspect it's more than one hike and less than what our adjusted Taylor rule model for terminal funds suggests, which is around 2.5 percent. Plus or minus 1 percent therefore seems a reasonable first proxy, which would have the Fed hiking say through to September, 2016.

And then what...

It looks like the market is already pricing in the next inevitable round of QE.

 

Submitted by Martin Armstrong via ArmstrongEconomics.com,

 

IntRate-Manipulate

Those in power never understand markets. They are very myopic in their view of the world. The assumption that lowering interest rates will “stimulate” the economy has NEVER worked, not even once. Nevertheless, they assume they can manipulate society in the Marxist-Keynesian ideal world, but what if they are wrong?

By lowering interest rates, they ASSUME they will encourage people to borrow and thus expand the economy. They fail to comprehend that people will borrow only when they BELIEVE there is an opportunity to make money. Additionally, they told people to save for their retirement. Now they want to punish them for doing so by imposing negative interest rates (tax on money) to savings. They do not understand that lowering interest rates, when there is no confidence in the future anyhow, will not encourage people to start businesses and expand the economy. It wipes out the income of savers and then the only way to make and preserve money becomes ASSET investment, as in the stock market — not creating business startups.

So lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income. This is particularly true for the elderly who are forced back to work to compete for jobs, which increases youth unemployment.

Since the only way to make money has become ASSET INFLATION, they must withdraw money from banks and buy stocks. Now, they are in the hated class of the “rich” who are seen as the 1% because they are making money when the wage earner loses money as taxation rises and the economy declines. As taxes rise, machines are replacing workers and shrinking the job market, which only fuels more deflation. Then you have people like Hillary who say they will DOUBLE the minimum wage, which will cause companies to replace even more jobs with machines.

Democrats, in particular, are really Marxists. They ignore Keynes who also pointed out that lowering taxes would stimulate the economy. Keynes, in all fairness, did not advocate deficit spending year after year nor never paying off the national debt. Keynes wrote regarding taxes:

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

Keynes obviously wanted to make it clear that the tax policy should be guided to the right level as to not discourage income. Keynes believed that government should strive to maximize income and therefore revenues. Nevertheless, Democrats demonized that as “trickle-down economics.”

Keynes explained further:

“For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

This is the logic employed by those in power. They are raising taxes and destroying the economy; when revenues decline, they raise taxes further. The evidence that politicians are incompetent of managing the economy is simply illustrated here. Now, we have Hillary claiming that she will raise taxes on corporations, but that will reduce jobs for she will only attack small businesses and never the big entities and banks who fund her campaign.

Bill Murry on Taxes

So when it comes to sanity on interest rates or taxes, we really need to throw out of office anyone who is a professional career politician before they wipe out everything. The balance sheet is, as Keynes said, “ZERO on both sides.”

TO TOP
MACRO News Items of Importance - This Week

GLOBAL MACRO REPORTS & ANALYSIS

     

US ECONOMIC REPORTS & ANALYSIS

     
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES      
     
Market
TECHNICALS & MARKET

 

   
COMMODITY CORNER - AGRI-COMPLEX   PORTFOLIO  
SECURITY-SURVEILANCE COMPLEX   PORTFOLIO  
     
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
2015 - FIDUCIARY FAILURE 2015 THESIS 2015
2014 - GLOBALIZATION TRAP 2014

2013 - STATISM

2013-1H

2013-2H

2012 - FINANCIAL REPRESSION

2012

2013

2014

 

PROF. THOMAS COLEMAN & LARRY SIEGEL: The Hidden Cost of Zero Interest Rate Policies – $1 TRILLION or 5% per Year Taken From US Savers

FRA’s Co-Founder Gordon T. Long interview Thomas Coleman and Larry Siegel on their paper, The Hidden Cost of Zero Real Interest Rates. Thomas Coleman is the executive director of the center of economic policy at the University of Chicago Harris School of Public Policy and has spent most of his career in the financial industry mainly in research, trading and model development for derivatives and trading other fixed income derivatives. Larry Siegel is the research director at the research foundation of the CFA institute and also the senior advisor at Ounavarra Capital. He is also an author and public speaker.

12-04-15-FRA-Coleman-Siegel-00-3

$1 TRILLION or 5% per Year Taken From US Savers

On financial repression Larry describes it as the use of market prices, in particular interest rate to transfer resources from party A to party B in this case from savers to government. According to him the government can then borrow at rates that are extraordinarily low and not a reflection of the true value of the money to the lenders.

On the paper, Thomas explains that there are 3 highlights. The First is detailed from a historical perspective. He says that from looking at history we can see that nominal rates are low by historical standards. According to him what really matters are real interest rates. He mentions that when taking into account nominal interest rate and inflation we currently have real interest rates as minus one percent. This means that the real value of saving in a zero rate deposit would be a loss in value at about one percent a year.

“Financial repression is a disastrous ongoing strategy”.

Thomas mentions that one of the costs of a negative real interest policy is that negative real rates potentially distort decision making. He explains that the real interest rate is the price that determines how much we consume or how much we want to consume, the price of consumption today versus consumption in the future and how such a policy disrupts such decisions. Thomas stresses that it is the real interest rates that matter and that one of the reasons nominal rates has gone down below zero especially in Europe is because inflation has trended lower.

“Businesses decide whether to undertake a project based on whether the return they expect to make on the project is greater than the cost of capital. If you force the apparent cost of capital low enough through a low interest rate policy a lot of projects will look good and profitable that aren’t if you applied a normal cost of capital to that product so this motivates businesses and consumers to do a lot of things they shouldn’t be doing”.  –Larry

On trying to understand the wealth transfer from savers to borrowers, Thomas likens it to an implicit tax. He says that it is more than just a transfer from households to government but also from one set of households to another, from older to younger there by reinforcing the idea that negative real interest rates are potentially a distortion to  the price of consumptions today and consumptions tomorrow and also what we save today versus spend today. The troubling thing with all this according to him is the potential distortions that arise as a result of a negative real interest policy.

Abstract written by Chukwuma Uwaga – [email protected]

PAPER:   The Hidden Cost of Zero Interest Rate Policies

 

 

2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS

2011

2012

2013

2014

2010 - EXTEND & PRETEND

   
THEMES - Normally a Thursday Themes Post & a Friday Flows Post
I - POLITICAL
     
CENTRAL PLANNING - SHIFTING ECONOMIC POWER - STATISM   THEME  

- - CORRUPTION & MALFEASANCE - MORAL DECAY - DESPERATION, SHORTAGES.

  THEME
- - SECURITY-SURVEILLANCE COMPLEX - STATISM M THEME  
- - CATALYSTS - FEAR (POLITICALLY) & GREED (FINANCIALLY) G THEME  
II-ECONOMIC
     
GLOBAL RISK      
- GLOBAL FINANCIAL IMBALANCE - FRAGILITY, COMPLEXITY & INSTABILITY G THEME  
- - SOCIAL UNREST - INEQUALITY & A BROKEN SOCIAL CONTRACT US THEME  
- - ECHO BOOM - PERIPHERAL PROBLEM M THEME  
- -GLOBAL GROWTH & JOBS CRISIS      
- - - PRODUCTIVITY PARADOX - NATURE OF WORK   THEME

MACRO w/ CHS

- - - STANDARD OF LIVING - EMPLOYMENT CRISIS, SUB-PRIME ECONOMY US THEME
MACRO w/ CHS
STANDARD OF LIVING - SUB-PRIME ECONOMY US THEME
MACRO w/ CHS
III-FINANCIAL
     
FLOWS -FRIDAY FLOWS

MATA

RISK ON-OFF

THEME
12-04-15 THEMES

Submitted by Tyler Durden on 12/17/2015

Markets Brace For More Fund Liquidations As Record Outflows Slam Debt Fund

Among the fixed income community, this week's most important number, more so than the pre-telegraphed 25 bps increase in the Fed's interest rate, was the weekly report of capital flows in and out of bond funds by Lipper/EPFR, which came out moments ago and which following last week's junk bond fund fireworks involving Third Avenue and several other gating or liquidating funds, was expected to be a doozy.

It did not disappoint: in the words of Bank of America, there was  "Carnage in Fixed Income" as a result of the largest outflows from bond funds since Jun’13 ($13bn) with outflows concentraing, as expected, in illiquid & low-quality assets.

The details showed a broad revulsion to all aspects of the fixed income space, from Investment Grade, to Junk to bank loans. To quote Bank of America:

  • Huge $5.3bn outflows from HY bond funds (largest in 12 months)
  • $3.3bn outflows from IG bond funds (outflows in 4 of past 5 weeks) (2nd biggest in 2 years)
  • $2.2bn outflows from EM debt funds (largest in 15 weeks) (outflows in 20 of 21 weeks)
  • Huge $1.8bn outflows from bank loan funds (largest in 12 months) (outflows in 19 of past 20 weeks

Bloomberg, which cited BofA numbers, and yet which had different totals was nonetheless close enough. It reported that investors "pulled $3.81 billion from U.S. high-yield bond funds in the past week, the biggest withdrawal since August 2014, according to Lipper."

The FT's numbers were even more different:

Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.

Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.

The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.

Whatever the real number, the result is clear: investors have launched a feedback loop where lower bond prices lead to more redemptions which force more selling, leading to more redemptions and so on.

As Bloomberg reminds us, the average yield on junk bonds jumped to more than 9 percent on Dec. 14 for the first time since 2011, according to Bank of America Merrill Lynch indexes. And yet despite endless laments that there is "not enough yield", investors couldn't get out fast enough. It appears investors aren't "starved for yield"... they are simply "starved for safety in numbers."

"The negative headline feeds upon itself," Ricky Liu, a money manager at HSBC Global Asset Management told Bloomberg. "And if you are in a poorly performing retail fund, there is also the concern that there could be more pain to follow. The commodities space is still a pretty big part of high yield and there is no relief there yet."

The visual breakdown: junk bonds.

 

Bad news for buybacks: Investment Grade outflows soared in the last week to the highest in over a year driven entirely by redemptions from mutual funds, and offset by a small injection in IG ETFs.

 

Total fixed income fund flows.

But the one category that was certainly the most interesting, is the one we highlighted earlier today when we said "the one asset class that has so far slipped through the cracks, but which will be very closely scrutinized in the coming weeks now that rates are rising: leveraged loans." The reason: the underperformance in leveraged loans so far this year is on par if not worse than that of junk bonds.

 

Result: bank loan funds just recorded their 2nd biggest outflow since August 2011.

And longer term.

 

The bottom line: as new investor liquidity evaporates and as billions are redeemed first from the junk bond universe, then investment grade and then loans, the debt crisis which was unleashed in anticipation of the Fed's rate hike, is about to get much worse, and lead to even more prominent hedge fund "gates" and liquidations, while in the equity space, the lack of Investment Grade dry powder means that buybacks are about to grind to a halt.

 

CRACKUP BOOM - ASSET BUBBLE   THEME  
SHADOW BANKING - LIQUIDITY / CREDIT ENGINE M THEME  
GENERAL INTEREST

 

   
THEMES - 2016 RECESSION

11-26-15

   
 
STRATEGIC INVESTMENT INSIGHTS - Weekend Coverage

 

RETAIL - CRE

 

 

  SII

 

US DOLLAR

 

 

  SII

 

YEN WEAKNESS

 

 

  SII

 

OIL WEAKNESS

 

 

  SII
     

OIL WEAKNESS

FACTOIDS:

  • OPEC is producing roughly 31.70 mbpd
  • up 1 percent from November, and more than 5 percent from a year ago.
  • Record volumes from Saudi Arabia and Iraq have buoyed production to date,
  • Iran’s oil industry is heating up as the country, and global investors, prepare for life after sanctions.
  • The cartel’s 2016 supply surplus could reach 860,000 bpd if current production rates hold.

Globally, signs of the glut are everywhere, and growing.

  • In the U.S., crude inventories are at their highest level in 80 years;
  • Stockpiles are at 97 percent of capacity in Western Europe;
  • OECD oil inventories are more than a quarter of a million barrels above their five-year average.
  • Onshore crude storage space may run out in the first quarter of 2016.

As a result, OPEC revenue is down some $500 billion a year, and counting.

And Energy spreads spike to recod highs...

As Energy Fwd P/Es begin to fall back to reality...

 

WATCH LIST - Shorts:

  1. Anglo American
  2. Freeport Mac (FCX)
  3. Kinder Morgan
  4. Glencore
12-19-15 SII

 

WTI CRUDE OVER THE LAST 5 DAYS

Falls to low of 34.29

 

Crude Crashes To Cycle Lows After Oil Rig Count Surges

WTI crude has collapsed to cycle lows after the US oil rig count surged by 17, the largest jump in 5 months. The total rig count was unchanged as the surge in oil rigs was perfectly countered by the collapse in natural gas rigs.

  • *U.S. GAS RIG COUNT DOWN 17 TO 168 , BAKER HUGHES SAYS
  • *U.S. OIL RIG COUNT UP 17 TO 541 , BAKER HUGHES SAYS

The oil rig count continues to track the lagged oil price...

 

And that has sent Jan WTI (expires Monday) to fresh cycle lows...

 

Submitted by Colin Chilcoat via OilPrice.com,

OPEC Members In Jeopardy, How Long Can They Hold Out?

Where’s the floor? Is this the new normal? Answers have proven elusive and predictions unreliable as the oil market continues to lurch to and fro, though mostly down; oil is at an 11-year low.

Looking forward, bears and bulls abound – panicky and glued to OPEC’s every, somewhat disjointed move. For its part, the oil-producing cartel is grappling with an existential crisis. To be sure, OPEC isn’t dead and it hasn’t lost its market moving capabilities, but disagreements over how to apply those means – and a creeping suspicion that OPEC and non-OPEC pain thresholds are not mutually exclusive – have fractured the group.

As it stands:

  • OPEC is producing roughly 31.70 mbpd
  • up 1 percent from November, and more than 5 percent from a year ago.
  • Record volumes from Saudi Arabia and Iraq have buoyed production to date,
  • Iran’s oil industry is heating up as the country, and global investors, prepare for life after sanctions.
  • The cartel’s 2016 supply surplus could reach 860,000 bpd if current production rates hold.

Globally, signs of the glut are everywhere, and growing.

  • In the U.S., crude inventories are at their highest level in 80 years;
  • Stockpiles are at 97 percent of capacity in Western Europe;
  • OECD oil inventories are more than a quarter of a million barrels above their five-year average.
  • Onshore crude storage space may run out in the first quarter of 2016.

As a result, OPEC revenue is down some $500 billion a year, and counting.

SAUDI OIL

Saudi Arabia’s troubles are well documented – the kingdom’s budget deficit is expected to come in around 20 percent of GDP this year, with a similar outlook for 2016. The International Monetary Fund estimates that Saudi Arabia will run out of cash in five years barring any oil price turnaround or drastic spending changes. That being said, they have cash – as do Kuwait, Qatar, and the United Arab Emirates, who possess relatively large fiscal buffers.

SOUTH AMERICAN OIL

Elsewhere, Venezuela is caught between China and a hard place. Inflation is in triple-digit territory and the country’s economy is primed for a world-worst 10 percent contraction this year. Recent elections have paved the way for major political reforms, but the country has few weapons in its arsenal to combat a prolonged period of low prices. Chinese financing has become a precarious crutch against stagnating production, and we can expect to see more of it as Venezuela feverishly attempts to boost production of heavy Orinoco oil.

Speaking of Chinese financing, OPEC minnow Ecuador owes the Asian giant upwards of $5 billion. Ecuador is faring better than Venezuela – it recently honored a bond payment in full for the first time in its history – but the country’s long-term relationship with China is a case study in toxic friendships. Low oil prices, a strong dollar, and faltering diversification efforts, further limit President Rafael Correa’s hedge opportunities against both Chinese money and a disgruntled populace at home.

AFRICAN OIL

Back across the Atlantic, top African producers Algeria, Angola, and Nigeria have an average fiscal break-even price of nearly $110 per barrel; and all three have called for production quotas to be restored amid tumbling government revenues. Planned spending cuts, decent foreign reserves, and little foreign debt ease Algeria’s struggle relative to its OPEC brethren, but its massive welfare program is worrying long-term. For its part, Angola is expanding its long-term sales deals with China, using its oil as collateral in return for infrastructure improvements.

Nigeria is in perhaps the most dire straits of the group – Libya aside. President Muhammadu Buhari would like to extract more revenue from the nation’s vital offshore oil fields, but his untimely review of the fiscal terms has sparked tensions among already anxious investors. The ongoing reform of the oil industry has already cost Nigeria more than $50 billion in investments, and threatens to deter some $150 billion more over the next 10 years. In all, Nigeria’s oil output could drop as much as 15 percent by 2017 as a result of cash shortages and investment gaps. Long-term, the focus is on the state’s non-oil economy, particularly its solid mineral sector, which has great potential for growth.

NON-OPEC OIL

The Saudi strategy has yet to bear itself out, but early indications suggest it is generating returns. Non-OPEC supply is expected to suffer its steepest decline in two decades in 2016, at a drop of nearly 0.5 mbpd.

US SHALE

Moreover, U.S. shale producers are among the hardest hit. Oil production across the seven most prolific shale plays is expected to plummet a combined 116,000 bpd in January 2016.

Still, the strategy is not without sacrifice, and several OPEC members are struggling to find – and, more importantly, endure – that magical balance between non-OPEC pain, market share retention/growth, and self-inflicted damage. 

Their tipping points are nearly impossible to predict, but there will be more losers than winners in this game of brinksmanship.

 

Canada's National Bank (not to be confused with the Bank of Canada central bank) essay on geo-politics & the oil market .. sees Saudi Arabia using its financial strength to outlast its competitors in the oil market given falling oil prices .. on the lack of agreement within OPEC to restrict output:

"There just isn’t as much of an incentive as before to cooperate and restrict output in an oil market which has become more competitive over the years thanks to new supply coming from outside of OPEC. Players understand that a strategy of restraining output is now more likely to result in lost market share than higher prices. So, what’s the (Nash) equilibrium in such a non-cooperative game? As today’s Hot Charts show, players will maximize output in an attempt at maintaining market share. The incentives to produce, coupled with tepid demand, explain why oil prices are under pressure. While it is not exactly happy about the situation ─ it is running budget deficits and issuing debt for the first time in years ─ Saudi Arabia is more willing than others for that game to continue. The current short-term strategy of maximizing revenues and allowing prices to fall is consistent with its longer-term strategy of eliminating non-OPEC competition ─ recall that its cost of production is among the lowest on the planet. And thanks to its massive sovereign wealth fund which it can tap to accommodate budgetary needs, Saudi Arabia can potentially outlast its competitors."

 

TO TOP
 

 


Tipping Points Life Cycle - Explained
Click on image to enlarge
   
TO TOP

 

 YOUR SOURCE FOR THE LATEST
GLOBAL MACRO ANALYTIC

THINKING & RESEARCH

 

 
 
 
 
   TO TOP
  HOME    ||    Audio   ||  Commentary    ||   Understanding Abstraction   ||   Meet Gordon   ||   Subscriptions  
TERMS OF USE

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

THE CONTENT OF ALL MATERIALS:  SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.

The Media is not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing  can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. The Media is not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Terms of Use Statement is a condition of access to it.  Furthermore, any investments you may make are your sole responsibility. 

THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he  encourages you confirm the facts on your own before making important investment commitments.
  

DISCLOSURE STATEMENT

Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

FAIR USE NOTICE  This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

 

If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.   

COPYRIGHT  © Copyright 2010-2011 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.