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Another big miss for non-farm payrolls, with September’s 194,000 jobs gain less than half the 500,000 forecast. But with the Unemployment Rate down to 4.8% and Average Hourly Earnings up 4.6% y-o-y (not to mention almost 11 million job openings), there’s ample evidence that much of the labor market has turned exceptionally tight. The Senate passed debt ceiling legislation that should kick the can until early December. But let’s skip immediately to the week’s pressing developments.

It’s turning into a debacle. Evergrande bonds ended the week at 20 cents on the dollar, with yields surging to 72.5%. China’s real estate sector was hammered this week following the surprise default by mid-sized developer Fantasia Holdings.

October 6 – Bloomberg (Rebecca Choong Wilkins): “China’s property industry has suffered its first default on a dollar bond since China Evergrande Group sank deeper into crisis in recent weeks, fueling investor concerns over other highly leveraged borrowers and about global contagion. Fantasia Holdings Group Co., which develops high-end apartments and urban renewal projects, failed to repay a $205.7 million bond that came due Monday. That prompted a flurry of rating downgrades late Tuesday to levels signifying default. Creditors are now scanning debt repayment calendars as they try to suss out where the next flashpoints across the increasingly strained property industry may be — nearly a dozen firms have debt maturing through early 2022.”

October 7 – Wall Street Journal (Frances Yoon and Quentin Webb): “Fantasia’s nonpayment surprised investors because the… developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years…

…click on the above link to read the rest of the article…

Goldman Issues Shocking Warning On Systemic Threat From Supply-Chain Collapse

February 24, 2020

Goldman Issues Shocking Warning On Systemic Threat From Supply-Chain Collapse

Having desperately avoided any discussion of a worst-case coronavirus scenario – or frankly any scenario that did not involve all time highs for stocks – for over a month, suddenly the market is obsessing with what a complete paralysis of China could mean for the world, not just in terms of millions in small and business companies shuttering and the financial sector collapsing under the weight of trillions in bad loans, but specifically how global supply chain linkages could cripple commerce across the world as corporations suddenly find themselves unable to find economic alternatives if China indeed goes dark.

However, as long-time readers may recall, the problem with trying to model supply chains shocks, especially in today’s “Just In Time” world, is that this task is virtually impossible as such a simulation very quickly reaches impossible complexity, something we first described in 2012 in our article “A Study In Global Systemic Collapse“, which referred to the FEASTA article titled “‘Trade-Off: Financial System Supply-Chain Cross-Contagion” which showed that contagion within supply chains could quickly lead to wholesale, systemic collapse due to non-linear bifurcations between sequential phase states.

Not for nothing, this is how we described the study back in 2012: “think of the attached 78-page paper as Nassim Taleb meets Edward Lorenz meets Malcom Gladwell meets Arthur Tansley meets Herman Muller meets Werner Heisenberg meets Hyman Minsky meets William Butler Yeats, and the resultant group spends all night drinking absinthe and smoking opium, while engaging in illegal debauchery in the 5th sub-basement of the Moulin Rouge circa 1890.”

And while there was far more in the report, one section was notable – the one discussing how relentless central bank intervention has made the global system far more brittle, or as Taleb would call it, extremely not anti-fragile:

…click on the above link to read the rest of the article…

Children With “Stealth” Coronavirus Infections Raise Fears Of ‘Community Outbreaks’

January 29, 2020

Children With “Stealth” Coronavirus Infections Raise Fears Of ‘Community Outbreaks’

Over the past week, as China has shared data about the novel coronavirus with foreign partners who quickly mapped its genome as the world races to develop a vaccine for the virus which can develop into a potentially deadly case of pneumonia. But several experts, including the drug company Novartis, warned that developing a vaccine might take a year.

In the meantime, epidemiologists are still struggling to understand the mysterious new virus (a virus that some fear was once studied as a potential biological weapon). So far, researchers have determined that the average incubation period for the virus is between five and six days. But as more cases are confirmed, researchers are finding a surprisingly large number of young people and children infected with the virus who display few or no symptoms – yet they’re still contagious.

Bloomberg shared the story of a 10-year-old boy from Wuhan whose entire family including his grandparents fell ill. Yet he displayed no symptoms, and wasn’t tested for the virus until both his parents insisted.

The boy’s case was first made public by the Lancet medical journal, which received attention from the international press after publishing research on the outbreak last week. Only five members of the family, including the boy, were infected during a trip to Wuhan. They infected a sixth relative after returning to their unnamed hometown.

A professor of microbiology who spoke with Bloomberg said the case of the 10-year-old boy is extremely concerning because it suggests that many of those infected with the virus might be able to evade typical screening techniques. This could easily fuel a community outbreak if the original case isn’t quickly discovered.

…click on the above link to read the rest of the article…

“Contagion Runs The Risk Of Spreading” In India’s Financial Sector, Rating Agency

October 24, 2019

“Contagion Runs The Risk Of Spreading” In India’s Financial Sector, Rating Agency

India, one of the largest emerging markets in the world, is at serious risk of widespread contagion ripping through its banking sector as many large financial companies have already seen their equity value halved over the last 12 months, S&P Global Ratings said in a report on Wednesday, also reported by Bloomberg.

India’s shadow lenders, also called non-banking finance companies, have been under severe pressure since the collapse of Infrastructure Leasing and Financial Services (IL&FS) last Sept., which was on the 10th anniversary of the bankruptcy of Lehman Brothers.

“India’s finance companies are among the country’s largest borrowers. A substantial part of this funding comes from banks. The failure of any large non-banking financial company or housing finance company may deliver a solvency shock to lenders,” said S&P Global Ratings credit analyst Geeta Chugh.

According to the report, the next big banking failure in India could run the risk of disrupting local credit markets, interbank markets, payments, and even damage economic growth.

“This contagion runs the risk of spreading to real estate companies too. Finance companies are the largest lenders to this segment and any failure among such institutions could jeopardize credit flows to developers,” Chugh said.
“The credit profile of a bank could deteriorate sharply due to outsized exposure to weak entities, huge market or operational losses, or significant deposit withdrawals if the depositors lost confidence in the bank,” Chugh added. “A governance deficit could also quickly turn to a trust deficit, hurting the stability of a bank.”

It’s likely that if one Indian bank fell, “the contagion could spread to other banks perceived to be struggling with the same problems as the failing bank,” S&P warned.

…click on the above link to read the rest of the article…

Is Turkey “City Zero” in Global Contagion

March 30, 2019

Is Turkey “City Zero” in Global Contagion

Last year Turkey’s lira crisis quickly morphed into a Euro-zone crisis as Italian bond yields blew higher and the euro quickly reversed off a major Q1 high near $1.25.

It nearly sparked a global emerging market meltdown and subsequent melt-up in the dollar.

This week President Erdogan of Turkey banned international short-selling of the Turkish lira in response to the Federal Reserve’s complete reversal of monetary policy from its last rate hike in December.

The markets responded to the Fed with a swift and deepening of the U.S. yield curve inversion. Dollar illiquidity is unfolding right in front of our eyes.

Turkish credit spreads, CDS rates and Turkey’s foreign exchange reserves all put under massive pressure. Unprecedented moves in were seen as the need for dollars has seized up the short end of the U.S. paper market.

Martin Armstrong talked about this yesterday:

The government [Turkey] simply trapped investors and refuses to allow transactions out of the Turkish lira. Turkey’s stand-off with investors has unnerved traders globally, pushing the world ever closer to a major FINANCIAL PANIC come this May 2019.
There is a major liquidity crisis brewing that could pop in May 2019.

Martin’s timing models all point to May as a major turning point. And the most obvious thing occurring in May is the European Parliamentary elections which should see Euroskeptics take between 30% and 35% of seats, depending on whether Britain stands for EU elections or not.

That depends on Parliament and the EU agreeing to a longer extension of Brexit in the next two weeks.

Parliament has created “Schroedinger’s Brexit,” neither alive nor dead but definitely bottled up in a box no one dares open. And they want to keep it that way for as long as possible. Their hope is outlasting Leavers into accepting staying in the gods-forsaken fiscal and political black hole that is the European Union.

…click on the above link to read the rest of the article…

Bearish on Fake Fixes

November 28, 2018

Bearish on Fake Fixes

This systemic vulnerability is largely invisible, and so the inevitable contagion will surprise most observers and participants.

The conventional definition of a Bear is someone who expects stocks to decline. For those of us who are bearish on fake fixes, that definition doesn’t apply: we aren’t making guesses about future market gyrations (rip-your-face-off rallies, dizziness-inducing drops, boring melt-ups, etc.), we’re focused on the impossibility of reforming or fixing a broken economic system.

Many observers confuse creative destruction with profoundly structural problems. The technocrat perspective views the creative disruption of existing business models by the digital-driven 4th Industrial Revolution as the core cause of rising income inequality, under-employment, the decline of low-skilled jobs, etc.–many of the problems that plague the current economy.

I get it: those disruptive consequences are real. But they aren’t structural: the state-cartel system is structural, because cartels can buy political protection from competition and disruptive technologies. Just look at all the cartels that have eliminated competition: higher education, defense contractors, Big Pharma–the list is long.

The fake-fixes to the structural dominance of cartels and entrenched elites come in two flavors: political reforms that add complexity (oversight, compliance, etc.) but never threaten the insiders’ skims and scams, and monetary policies such as low interest rates and unlimited liquidity that enrich the already-wealthy by funneling whatever gains are being reaped to rentiers rather than to labor.

I explain how this neofeudal economy is the inevitable result of our system in my new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic.

Our political system, dependent on campaign contributions and lobbying, is easily influenced to protect and enhance the private gains of corporations and financiers. Combine this with the gains reaped by those with access to cheap credit and you have a financial nobility ruling a class of debt-serfs.

…click on the above link to read the rest of the article…

“A Daisy Chain Of Defaults”: How Debt Cross-Guarantees Could Spark China’s Next Crisis

November 20, 2018

“A Daisy Chain Of Defaults”: How Debt Cross-Guarantees Could Spark China’s Next Crisis

On November 8, China shocked markets with its latest targeted stimulus in the form of an “unprecedented” lending directive ordering large banks to issue loans to private companies to at least one-third of new corporate lending. The announcement sparked a new round of investor concerns about what is being unsaid about China’s opaque, private enterprises, raising prospects of a fresh spike in bad assets.

A few days later, Beijing unveiled another unpleasant surprise, when the PBOC announced that Total Social Financing – China’s broadest credit aggregate – has collapsed from 2.2 trillion yuan in September to a tiny 729 billion in October, missing expectations of a the smallest monthly increase since October 2014.

Some speculated that the reason for the precipitous drop in new credit issuance has been growing concern among Chinese lenders over what is set to be a year of record corporate defaults within China’s private firms. As we reported at the end of September, a record number of non-state firms had defaulted on 67.4 billion yuan ($9.7 billion) of local bonds this year, 4.2 times that of 2017, while the overall Chinese market was headed for a year of record defaults in 2018. Since then, the amount of debt default has risen to 83 billion yuan, a new all time high (more below).

Now, in a new development that links these seemingly unrelated developments, Bloomberg reports that debt cross-guarantees by Chinese firms have left the world’s third-largest bond market prone to contagion risks, which has made it “all the tougher for officials to follow through on initiatives to sustain credit flows”, i.e., the growing threat of unexpected cross- defaults is what is keeping China’s credit pipeline clogged up and has resulted in the collapse in new credit creation.

…click on the above link to read the rest of the article…

To One Bank, This Is The Flashing Red Warning That A Crash Is Dead Ahead

November 16, 2018

To One Bank, This Is The Flashing Red Warning That A Crash Is Dead Ahead

For much of 2018, the prevailing market theme was the one Morgan Stanley dubbed “rolling bear markets” when any time a given asset was hit, whether emerging markets, Italian bonds, or tech stocks, money would simply rotate from one place to another. However, at the end of September, when rates spiked amid concerns the Fed was prepared to push rates beyond neutral, things changed overnight.

Fast forward to now when what appeared to be somewhat orderly sequential blow ups have mutated into wholesale market panics in which everything starts to go wrong at once, or as Bloomberg describes it “everywhere you look, something’s blowing up.”

In commodities, it’s the record plunge in oil. In equities, it’s six weeks of turbulence in the S&P 500. Debt markets have been rattled by the turmoil engulfing General Electric and PG&E. Bitcoin just plunged 13 percent. And Goldman Sachs, the storied investment bank, is having the worst week since 2016.

As Bloomberg correctly notes, by themselves these sudden asset air pockets would be enough to incite panic, “but have them erupt all around and even the most grizzled Wall Street types can start to sound paranoid. Does GE have something to do with Goldman? How does Bitcoin sway the stock market? Wildfires have nothing to do with crude’s convulsions, but both are bad news for banks.”

“The risk of contagion is understood. What’s not understood is where and how connected things are,” Stewart Capital Advisors’ Malcolm Polley said by phone. “Just about anything can create panic, create contagion, and it doesn’t have to be something that makes sense.”

That bad things should congregate isn’t surprising to Donald Selkin, chief market strategist at Newbridge Securities, who sees it as a consequence of having it so good for so long. He’s waking up every night to check the futures.

…click on the above link to read the rest of the article…

“We’re Back In The Real World Where Bad News Is Bad News”: To $1 Trillion Fund Manager, Turmoil Is “New Normal”

October 31, 2018

“We’re Back In The Real World Where Bad News Is Bad News”: To $1 Trillion Fund Manager, Turmoil Is “New Normal”

For nearly a decade stocks enjoyed an environment of unprecedented bullishness, where good news was good news, and bad news was even better as it suggested central bank intervention via monetary stimulus, boosting asset prices. But that is no longer the case according to the head of Natixis SA’s $1 trillion asset-management arm who says that volatile equity markets are the “new normal.”

“We’re back to the basics: risk on, risk off,” Jean Raby, CEO of Natixis Investment Managers, said in an interview Tuesday at the Canada Fintech Forum in Montreal. “Over the past several years, in a way, bad news was good news because it meant a more accommodating monetary policy. Now we’re in the real world where bad news is bad news, and good news may not be such great news.”

The good news, according to Raby is that for now at least, the fundamental “bad news” is not quite as bad as markets have made it out in the past month, stressing that no single region is in contraction and emerging markets contagion from Turkey and Argentina is probably “overstated.”

“I have to believe, when I look at the fundamentals, that we are still on pretty sound footing.”

Natixis Investment, which is controlled by Groupe BPCE, France’s second-biggest bank, warned earlier this year that a global sell-off could hit its asset-management business, although higher volatility could benefit its trading operations.

While the recent Saudi turmoil has moved away from the front pages, Raby was asked about the longer-term impact on investment in Saudi Arabia, saying it’s too early to tell.

…click on the above link to read the rest of the article…

Contagion

October 30, 2018

Contagion

The word contagion is easy enough to understand. Whether the spread of disease or disaster, sometimes it is difficult if not impossible to contain. In financial terms, contagion is often thought of along the lines of 2011; Greece started it and it spread throughout the rest of Southern Europe. The euro was coming apart, and what “it” was didn’t seem to matter.

The eurodollar system is not a single, monolithic whole. It features many different pieces that sometimes don’t fit together at all. There is always something wrong somewhere, even during the best of times. It is eerie in hindsight, but there was a huge outbreak of repo fails, for example, in 2001 following September 11th. It kept up for months on end, until the middle of 2002. Outside of dot-com stocks, the system didn’t crash.

Quite the contrary, while the repo market was awash in trouble the recession which had begun months before ended. Economic recovery, though tepid and shameful, emerged out of those difficulties which were at times quite severe (there were more than $1 trillion in fails the week of February 13, 2002). The dollar, in fact, would start to fall and keep on falling consistent with rapid, massive eurodollar system growth and inflation.

Contagion is where funding issues in one part of the system spillover into another; and then another. Rather than operate like a seamless global money system, the parts break down and not always one by one. Parabolic contagion, which is what September 2008 really was, can be lurking.

The effects are not always financial and economic. Two examples from this weekend remind us of this fact.

First:

Both the parties in German Chancellor Angela Merkel’s governing coalition have suffered heavy losses in a regional election, early results show.

…click on the above link to read the rest of the article…

Spanish Yields Blow Out Amid Italy Contagion As Italian Banks Scramble For Dollar Funding

October 19, 2018

Spanish Yields Blow Out Amid Italy Contagion As Italian Banks Scramble For Dollar Funding

Contagion from the recent surge in Italian yields has spread, and is hitting Spanish 10Y yields which over the past 3 days have blown out from 1.65% to as high as 1.82% this morning, before paring some of the move, printing at 1.77% last which is still the highest level since October 2017.

There are also Spain-specific news that have pushed yields wider, to wit yesterday’s ruling by the nation’s Supreme Court they must pay a one-time tax of about 1% on mortgage loans that traditionally was passed to their clients. The report sent Spanish banks tumbling as much as 6.3% at Banco de Sabadell while banking giant BBVA dropped 1.8%, thanks to its larger international business that cushions the impact of the ruling.

The Supreme Court revised an earlier ruling, deciding now that the levy on documenting mortgage loans must be paid by the lenders, and since mortgages are one of the biggest businesses for domestic banks, analysts have been grappling with how big the hit to income would be. As Bloomberg notes, the sentence is one of a string from Spanish and European Union courts in recent years in favor of home buyers and at the expense of banks.

“The decision implies a severe setback for the Spanish financial system and joy for every mortgage-payer, who might get back a significant amount” of money, said Fernando Encinar, head of research at property website Idealista. In the short term, banks will likely raise their mortgage arrangement fees to compensate for their new cost, he said.

The levy is applied to the mortgage guarantee – the loan amount plus possible foreclosure costs – and could be roughly 1,500 euros ($1,728) on a 180,000-euro loan in Madrid, according to Angel Mejias, an attorney at M de Santiago Abogados in the capital.

…click on the above link to read the rest of the article…

Asian Markets Crushed By Capitulation Carnage

October 11, 2018

Asian Markets Crushed By Capitulation Carnage

No “National Team”… No “Plunge Protection Team”… No RRR Cuts… and not a word from Powell. The US equity market massacre is extending overnight as the liquidation crisis smashes into Asia…

The initial red box is the after-hours drop and the second drop is as Asian cash markets opened… (Nasdaq is now down over 6%)

Nasdaq’s plunge led by a bloodbath in FANGs (NFLX -10% now)…

From yesterday’s cash close at 26,449, Dow futures are now down almost 1300 points…

AsiaPac markets are a sea of red…

MSCI AsiaPac is plunging almost 4% to its lowest since May 2017…

Taiwan is getting monkey-hammered…

China is opening in freefall…

And it’s not just equity markets.

Currencies are tumbling…led by the Won and Taiwanese Dollar…

Yuan is back near cycle lows…

And cryptocurrencies are crashing too…

There is some green in the world, however…

US Treasuries are bid with 10Y now down 12bps from Tuesday’s highs…

…click on the above link to read the rest of the article…

Loans Sour in Turkey, Inflation Hits 25%, Interest Rates Spike, Fears of Contagion Rise

October 6, 2018

Loans Sour in Turkey, Inflation Hits 25%, Interest Rates Spike, Fears of Contagion Rise

The economic miracle fueled by foreign-currency debt.

The Bank of Turkey’s decision mid-September to hike its policy rate from 17.75% to 24% may have temporarily stemmed the rout in the Turkish lira, but the hiatus is now over. This week, the pressure is back on the nation’s currency, which is down almost 40% against the US dollar year to date, as well on its beleaguered banks, 20 of which were slapped with another downgrade by Fitch Ratings.

The lenders, Fitch said, are “more likely to come under pressure as a result of the further depreciation of the Turkish lira (by about 20% against the US dollar since the last rating review), the spike in interest rates (driven by the increase in the policy rate to 24% from 17.75% on 13 September) and the weaker growth outlook.”

The banks affected include foreign-owned subsidiaries such as Turkiye Garanti Bankasi A.S. (half-owned by Spain’s BBVA), Yapi ve Kredi Bankasi A.S. (part owned by Italy’s Unicredit), ING Bank A.S. and HSBC Bank A.S., which were downgraded to BB- from BB, as well as large state-owned banks (B+ from BB-), all with negative outlooks. As Fitch warns, the recent interest rate hike is likely to hurt lira borrowers’ debt service capacity, while exposures to the construction and energy sectors and high borrower concentrations are also “significant sources of risks at many banks.”

As long as the current climate of economic and financial instability continues, these problems are not going to go away. According to data recently published by the Turkish Statistical Institute, economic confidence in Turkey has sunk to a decade-low. Last week the country’s Finance Minister (and President Erdogan’s son-in-law) desperately tried to assure investors that he would, in classic Draghi fashion, do “whatever it takes” to support local banks, but few seem to believe that he has such means at his disposal.

…click on the above link to read the rest of the article…

“It Will End In Tears”: World Stocks, Euro Slide As Italian Contagion Spreads

October 2, 2018

“It Will End In Tears”: World Stocks, Euro Slide As Italian Contagion Spreads

World stocks slumped, European assets sold off and the Euro dropped to a three week low on Tuesday after anti-euro comments from an Italian party official sent renewed shockwaves across Europe and the globe, and pushed Italy’s bond yields up to multi-year highs.

Italian asset tumbled for a second day, after the economic head of the ruling League party and head of lower house budget committee – and a well-known euroskeptic – Claudio Borghi said that most of Italy’s problems could be solved by having its own currency: “I am more than convinced that Italy, with its own currency, would be able to resolve its problems,” Borghi said in an interview on Radio Anch’io, adding that the euro as common currency “is not sufficient” for Italy to solve fiscal issues. In kneejerk response, Italian 10Y yield continued their Monday selloff, spiking to 3.438%, the highest level since early 2014.

Borghi also said that like France, Italy shouldn’t be subject to attack from EU officials, adding that if France’s spread started widening, “at a certain point they would raise their hands and say ‘OK let’s intervene’.” He concluded that Italy would have declared a 3.1% budget deficit for 2019 instead of the 2.4% it has set, if it had wanted to go up against the EU, adding that the govt is aiming for a level that’s “enough for our country to feel a bit better.”

Borghi’s comments followed a statement by European Commission President Jean-Claude Juncker who compared Italy with Greece, saying “after the toughest management of the Greece crisis, we have to do everything to avoid a new Greece – this time an Italy – crisis.”

The latest comments shook markets in early trading, pushing Italian 10-year bond yields to a new 4 1/2 year high…

…click on the above link to read the rest of the article…

The Real Contagion Threat is Political

September 12, 2018

The Real Contagion Threat is Political

The real danger to the current institutional order was just demonstrated in Sweden. While I’ve talked at length about the potential financial contagion stemming from the implosion of multiple emerging market currencies it is the growing political crisis in Europe that will shape our future.

Sweden is The Land where Socialism Works, or so I keep getting told by ignorant leftists who cling to the power fantasy that central planning is the only way to make the trains run on time.

Central planning does do that, but only to deliver people into the nightmare of social disorder brought on by the disruption of the natural flow of capital.

Venezuela, South Africa, Soviet Union, post WWII Britain … you get the idea.

But, the effects of the collectivist mindset are far more pernicious than those extreme examples. And it is important we understand how little policies grow into big problems over time due to shaping people’s decisions through government edicts.

Corps Insanity

There is no better example for what I’m talking about than the U.S. Army Corps of Engineers. A completely useless organization which sucks up billions in tax money to straighten rivers, build dams and alter the landscape to fit the needs of whoever paid Congress the most in lobbying money that year.

They engage in projects that cannot easily be done in the free market, nor should be done. But their activity creates downstream effects from their meddling which multiply over years and lead to problems which are orders of magnitude larger than they would have ever become naturally.

The Red Tides occurring off the Florida coast now are a political cudgel being swung at Governor Rick Scott to prevent him from moving up to U.S. Senator over his ‘environmental record.’ Now I’m no fan of Skeletor, as we call him down here, but these charges are simply grandstanding.

…click on the above link to read the rest of the article…

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