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Why’s France so Worried about Italy’s Showdown with Brussels?

Why’s France so Worried about Italy’s Showdown with Brussels?

The French megabanks are on the hook.

France was just served with a stark reminder of an inconvenient truth: €277 billion of Italian government debt — the equivalent of 14% of French GDP — is owed to French banks. Given that Italy’s government is currently locked in an existential blinking match with both the European Commission and the ECB over its budget plan for 2019, this could be a big problem for France.

On Friday, France’s finance minister, Bruno Le Maire, urged the commission to “reach out to Italy” after rejecting the country’s draft 2019 budget for breaking EU rules on public spending. Le Maire also conceded that while contagion in the Eurozone was definitely contained, the Eurozone “is not sufficiently armed to face a new economic or financial crisis.” As Maire well knows, a full-blown financial crisis in Italy would eventually spread to France’s economy, with French banks serving as the main transmission mechanism.

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

While the exposure of German lenders to Italian debt has waned over the last few years, that of French lenders has actually grown, belying the ECB’s long-held claim that its QE program would help reduce the level of interdependence between European sovereigns and banks.

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

Why I think the Ugly October in Stocks Is Just a Preamble

Why I think the Ugly October in Stocks Is Just a Preamble

Yet, the crybabies on Wall Street are already clamoring for the “Powell put.”

Let me just say right up front: The stock market did not “collapse.” It has experienced a sell-off that made some people’s ears ring, as sell-offs normally do, and October has been ugly so far, but it wasn’t a “collapse.”

This matters because the crybabies on Wall Street are already clamoring for the “Powell put.” But the folks at the Fed have been around, and they know what a routine sell-off looks like and what a crash looks like, and they’re glancing at these numbers, and they yawn. Because in the grander scheme of things, not much has happened yet. The next uptick lurks around the corner, powered by the dip buyers and massive corporate share-buybacks.

After the dotcom bubble, the Nasdaq plunged 78%. Wave after wave of dip buyers were rewarded with small goodies and then taken out the back and shot. Many companies disappeared entirely. That was an example of a collapse. That’s when the Fed got nervous.

Today there are only some segments that have gotten hit very hard, though it’s still no collapse, and we’ll get to a few of them.

The Dow was well-behaved. It fell about 3% for the entire week and is about flat year-to-date. Nothing special. The Dow is only 8.4% off its peak. And compared to a year ago, it’s still up 5.4%.

It’s not a crime for stocks to be flat year-to-date. Stocks might actually be down for the year, and they might be down for years. But people have forgotten, and younger people have never experienced it in their life, after a decade of blatant market manipulations by central banks that have created this centrally planned Everything Bubble that is now “gradually” deflating.

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

The Wolf Street Report

THE WOLF STREET REPORT

When will the Fed buckle?

In this podcast, I ask: Where are interest rates headed, when will the Fed buckle, and who are the new winners and losers? (10 minutes)

“Everyone is worried where things are headed.” Read…  Fed’s Medicine “Gradually” Pricking the Commercial Real Estate Bubble?

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Swedish Central Bank Makes U-Turn on Cash as NIRP is Ending

Cash is less of a threat to central bank policies when interest rates rise above zero.

Sweden’s Riksbank has become the first central bank in the 21st century to take concrete measures to ensure that cash does not disappear as a means of payment from the financial system. To that end, the Riksbank proposes, in a document published on its website, to make it mandatory for all banks and financial institutions to offer cash services.

The pronouncement comes in response to a recent policy suggestion by the Riksbank Committee that only the country’s six major banks should be obligated to continue offering cash services.

That prompted a backlash from Sweden’s competition watchdog, which argued that the plan would distort competition as it would affect only a few of the nation’s banks. In response, the Riksbank has opted to apply the rule to “all banks and other credit institutions that offer payment accounts.”

There was also a difference of opinion between the Riksbank Committee and the central bank’s senior management on the issue of deposit facilities. While the Committee recommended that banks should only be obligated to provide deposit facilities to businesses, the Riksbank believes it is important for banks to also offer deposit services to individual citizens:

“This is a service that consumers can reasonably expect of credit institutions. There must also be symmetry between withdrawal and deposit facilities. In the Riksbank’s view, there is otherwise a risk that the possibilities for individuals to make deposits will decrease even further in the future. For most consumers, it would also be difficult to understand why they can withdraw cash from an account but not make deposits.”

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

Friday Hasn’t Even Started Yet, But It’s Already Ugly

Friday Hasn’t Even Started Yet, But It’s Already Ugly

The FANGMAN stocks went to heck afterhours.

Just a note to show how decrepit and ephemeral the enthusiasm for stocks is.

So far in October, the S&P 500 has booked 13 losing days, including October 10, when the index dropped 3.3%, and October 24, when it dropped 3.1%. Then came today, with the feel-good moment of a boisterous 1.9% gain. And then came after-hours trading, and nearly everything went to heck, particularly the FANGMAN stocks that weigh so heavily on the index with their $4-trillion market cap. And Friday morning looks already ugly. All of the FANGMAN stocks were in the red in late trading:

  • Facebook [FB]: -2.3%
  • Amazon [AMZN]: -7.4%
  • Netflix [NFLX]: -2.8%
  • Google’s parent Alphabet [GOOG]: -3.7%
  • Microsoft [MSFT]: -1.5%
  • Apple [AAPL]: -0.4%
  • NVIDIA [NVDA]: -2.8%

There were some standout reasons:

Amazon plunged after it reported record profit but missed on revenues and guided down Q4 expectations for sales and profits, a sign of slowing revenue growth. It was down as much as $150 a share, or almost 9%.

Google’s parent Alphabet reported that revenues grew 22%, which missed expectations. Earnings beat, but a considerable slice – $1.38 billion! – of those earnings came from the gains in its portfolio of equity securities. CFO Ruth Porat warned that traffic acquisition costs would increase further as consumers are shifting search activity from desktop computers to mobile devices. Shares plunged up to 5%.

Intel [INTC] reported earnings that beat expectations, and shares initially jumped, but during the earnings call, things got muddled fast, and shares gave up their gains.

Advanced Micro Devices [AMD], an Intel competitor, had plunged 15% during the day despite the big rally in tech shares, after reporting results and discussing a graphics-chip glut resulting from the collapse of the crypto-mining business. It lost another 3% after hours.

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

This Stock Market Is “Gradually” Rotting Under the Covers

This Stock Market Is “Gradually” Rotting Under the Covers

And some of the rot is oozing to the surface.

The sell-off on Tuesday didn’t weigh on the scale of sell-offs: The Dow, the S&P 500, and the Nasdaq were down only around 0.5%, give or take a little. But in the broader sense, declines of individual stocks were widespread, and this situation has been going on for months.

On the surface, it still looks hunky-dory. For the 52-week period, the Dow is up 7.5%, the S&P 500 is up 6.7%, and the Nasdaq is up 12.7%.

Yet, even as major indices rose so nicely over the 52-week period, 1,256 individual stocks of those on the New York Stock Exchange dropped to new 52-week lows today, while only 21 reached 52-week highs. How many stocks are listed or traded on the NYSE depends on who you ask. The WSJ data section shows 2,080; others go just over 2,400. If there are 2,080 stocks actively traded on the NYSE, this means 60% hit new 52-week lows today.

And according to my own math, 176 stocks on the NYSE have by now plunged at least 50% from their 52-week highs.

Despite the small drop on Tuesday of the major indices, here is what a random page in alphabetical order of the NYSE listings looks like in terms of red for the day – there is a lot of it, and it doesn’t even include Caterpillar, which dropped 7.6%:

In terms of the S&P 500 – which tracks the largest stocks in their industries, regardless of what exchanges they trade on – a whopping 353 stocks are down at least 10% from their 52-week highs, and 179 of them (that’s over a quarter) have dropped by at least 20%.

Why are the overall indices not down more? Well, Apple is a big reason.

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

Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch

Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch

But it’s going to be tough; he’ll need more than luck to pull it off.

Moody’s has rated the $2 billion of senior unsecured notes due 2029 that Mexico’s state-owned oil company Pemex is in the process of issuing one notch above junk. Pemex is offering to pay a coupon interest rate of 6.5%. In its report on Friday, Moody’s blamed the company’s “weak liquidity, a heavy tax burden and the resulting weak free cash flow, high financial leverage and low interest coverage; and challenges related to crude production and reserve replacement.”

Moody’s is also worried about the large amounts of debt coming due in 2020 and beyond. And Pemex will continue to be “dependent on debt capital markets to fund negative free cash flow,” it said.

Fitch Ratings downgraded the outlook for Pemex’s debt from stable to negative amid concerns about the incoming government’s proposed energy policies. It rates Pemex three notches above “junk” (BBB+), but only because the company is state-owned. Its standalone credit profile — if Pemex were not backstopped by the Mexican state — is junk, seven notches into junk (CCC).

Fitch has also warned earlier that if Pemex’s credit rating drops, so, too, will Mexico’s sovereign debt rating. Even a small deterioration in credit risk could exact a heavy toll on both the company and the country.

The outlook revision to negative from stable “reflects the increased uncertainty about Pemex’s future business strategy coupled with the company’s deteriorating standalone credit profile,” Fitch said in its report.

Fitch’s downward revision was cited by analysts as one possible factor in the fall of the peso last week to its lowest level in over a month. CI Banco analyst James Salazar said that Fitch’s Pemex assessment is a reminder that the company’s “finances should continue to be handled with great caution so as not to cause additional imbalances that will increase its debt.”

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

It’s the Banks Again

It’s the Banks Again

US bank stock index down 17% from January. EU bank stocks crushed, crushed, crushed since Financial Crisis.

Monday early afternoon, the US KBW Bank index, which tracks large US banks and serves as a benchmark for the banking sector, is down 2.5% at the moment. It has dropped 17% from its post-Financial Crisis high on January 29. If the index closes at this level, it would be the lowest close since September 18, 2017:

While that may be a nerve-wracking decline for those who have not experienced bank-stock declines, it comes after a huge surge that followed the collapse during the Financial Crisis:

The second chart is on a different scale than the first chart above. So this year’s decline is small fry compared to the movements since 2006, including the dizzying plunge toward zero in early 2009, and the subsequent boom when it became clear that the Fed would pull out all stops to save the banks with all kinds of mechanisms, including ruthless financial repression – forcing interest rates to 0% – that it waged on depositors and savers for a decade. Profits derived from these mechanisms effectively recapitalized the banks.

The 55% jump in bank stocks after the 2016 election through the peak in January 2018 was a reaction to promises for banking deregulation and tax cuts from the new Trump administration along with signs of lots of goodwill toward Wall Street, as top positions in the new administration were quickly being filled with Wall Street insiders. However, the “Trump bump” for banks is now being gradually unwound.

But unlike their American brethren, the European banks have remained stuck in the miserable Financial Crisis mire – a financial crisis that in Europe was followed by the Euro Debt Crisis. The Stoxx 600 bank index, which covers major European banks, including our hero Deutsche Bank, has plunged 27% since February 29, 2018, and is down 23% from a year ago:

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

Backlash Against War on Cash Reaches the Bank of Canada

Backlash Against War on Cash Reaches the Bank of Canada

A cashless society could have “adverse collective outcomes.”

In recent months, a slew of political and financial institutions have raised concerns about the march toward a cashless economy. They include:

  • The ECB warned that a phase-out of cash could pose a serious risk to the financial system. Depending too heavily on electronic payment systems could expose financial systems to catastrophic failures in the event of power outages or cyber attacks. The European Commission has also backed off is war on cash.
  • The People’s Bank of China announced that all businesses in China that are not e-commerce must resume accepting cash or risk being investigated, and cautioned businesses against hyping the “cashless” idea when promoting non-cash payments.
  • In Sweden, one of the most cashless societies, the central bank and parliament have spoken out in support of cash.
  • Cities too have spoken out, including Washington D.C., whose City Council introduced a bill that sought to ban restaurants and retailers from not accepting cash or charging a different price to customers depending on the method of payment they use.

Now, it’s the Bank of Canada’s turn to sound the alarm. In a paper — “Is a Cashless Society Problematic?” — it outlines a number of risks that could arise if the country went fully cashless.

The premise underpinning the analysis is that at some point in the future individuals and firms decide, of their own volition, to cease using cash altogether. In response, the central bank stops printing physical money because of the large fixed costs inherent in supplying bank notes.

In such a scenario, even though most individuals and firms freely choose to abandon cash, there could be “adverse collective outcomes,” the study warns.

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

Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

Spain’s Supreme Court Flip-Flops on Mortgage Ruling After Just 1 Day Amid Bank Stocks Bloodbath, Legal Shitstorm Erupts

Plunging bank stocks got the Court’s attention, or something.

That was fast: Spain’s Supreme Court on Friday flip-flopped on its own ruling announced on Thursday that had sent bank stocks plunging.

It started like this: Thursday morning, Spain’s Supreme Court did something nobody was expecting. It ruled that the country’s banks must pay stamp duty on mortgage loans, which would set them back billions of euros in legal fees and compensation while heaping further pressure on their lending business. News of the ruling sent many of the banks’ shares tumbling to new lows for the year while also heaping pressure on Spain’s ten-year bonds.

“The Supreme Court states that the person who must pay the stamp duty in the public deeds of loans with mortgage guarantees is the lender, not the one who receives the loan,” the court said in a document. The court ruling on Thursday, which overturned a previous ruling in the banks’ favor earlier this year, was final, the Supreme Court said on Thursday.

But by lunchtime Friday, the court had decided to suspend the ruling in light of the acute “economic and social impact” it was having — meaning the banks were in trouble!

The chart shows the shares of Bankia, which is 90% state-owned. Following the Thursday announcement, the already beaten down shares plunged 10% at one point. The Friday flip-flop repaired some but not all of the damage:

It’s impossible to tell just how much the total compensation bill would have come to, since stamp duty varies across Spain’s regions. As many as 8 million mortgage customers would have been affected by the court ruling, said the Spanish consumer association Adicae.

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

What Truckers & Railroads Are Saying About the US Economy

What Truckers & Railroads Are Saying About the US Economy

They’re a measure of the goods-based economy.

Freight shipment volume across all modes of transportation – truck, rail, air, and barge – rose 8.2% in September, compared to a year earlier, according to the Cass Freight Index. While this is still a big jump, it’s down from the five double-digit increases earlier this year. The index covers merchandise for the consumer and industrial economy but does not include bulk commodities, such as grains or chemicals.

The chart below shows how the index changed from the same month a year earlier. Note the notorious cyclicality of the business, the peak increase in January of 12.5%, and the trend since then. Growth in shipments continues to be strong, indicating a strong goods-based economy, but that growth is leveling off somewhat:

This blistering boom in early 2018 may have run its course, with growth in shipments still strong, but showing the first signs of leveling off. At the same time, trucking capacity-constraints, while still an issue, are abating.

The DAT Dry Van Barometer, cited in the Cass report, tracks demand for van trailers compared to available capacity. It highlights the cyclicality in the business, including the “transportation recession” in 2015 and 2016. The horizontal blue line (50) indicates equilibrium between demand for vans and capacity. Values above the line indicate demand exceeds capacity. Demand-capacity imbalances drive pricing power (click to enlarge):

Demand from the industrial sector shows up in demand for flatbed trailers that haul equipment and supplies for manufacturing, oil-and-gas drilling, construction, etc. As demand for flatbed trailers surged late last year capacity suddenly tightened in January in part due to the required use of Electronic Logging Devices (ELDs), and the DAT Flatbed Monthly Barometer, cited by Cass, spiked to historic highs. But the demand-capacity imbalances are now abating (click to enlarge):

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

Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling

Implosion of Stock Market Double-Bubble in China Hits New Lows, Authorities Busy Elsewhere Keeping China Miracle from Unraveling

Bigger issues than propping up the stock market beckon.

Today, the Shanghai Composite Index dropped another 2.9% to 2,486.42. In the bigger picture, that’s quite an accomplishment:

  • Lowest since November 27, 2014, nearly four years ago
  • Down 30% from its recent peak on January 24, 2018, (3,559.47)
  • Down 52% from its last bubble peak on June 12, 2015 (5,166)
  • Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
  • And back where it had first been on December 27, 2006, nearly 12 years ago.

The chart of the Shanghai Stock Exchange Composite Index (SSE) shows the 2015-bubble and its implosion, followed by a rise from the January-2016 low, which had been endlessly touted in the US as the next big buying opportunity to lure US investors into the China miracle. Investors who swallowed this hype got crushed again:

Over the longer view, the implosion is even more spectacular. Today’s close puts the SSE back where it had first been nearly 12 years ago, on December 27, 2007. This dynamic has created a double-bubble and a double-implosion, with every recovery rally in between getting finally wiped out. The index is now down 59% from its all-time high in October 2007, the super-hype era in the run-up to the Beijing Olympics.

It is not often that a stock market of one of the largest economies in the world is whipped into two frenetically majestic bubbles that implode back to levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

During the 2015 implosion, there had been big efforts by Chinese authorities to prevent the market from collapsing further, ranging from arresting wrong-headed market participants to forcing large brokerages and funds to buy the shares.

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

Italy’s Debt Crisis Thickens

Italy’s Debt Crisis Thickens

But outside Italy, credit markets are sanguine, and no one says, “whatever it takes.”

Italy’s government bonds are sinking and their yields are spiking. There are plenty of reasons, including possible downgrades by Moody’s and/or Standard and Poor’s later this month. If it is a one-notch downgrade, Italy’s credit rating will be one notch above junk. If it is a two-notch down-grade, as some are fearing, Italy’s credit rating will be junk. That the Italian government remains stuck on its deficit-busting budget, which will almost certainly be rejected by the European Commission, is not helpful either. Today, the 10-year yield jumped nearly 20 basis points to 3.74%, the highest since February 2014. Note that the ECB’s policy rate is still negative -0.4%:

But the current crisis has shown little sign of infecting other large Euro Zone economies. Greek banks may be sinking in unison, their shares down well over 50% since August despite being given a clean bill of health just months earlier by the ECB, but Greece is no longer systemically important and its banks have been zombies for years.

Far more important are Germany, France and Spain — and their credit markets have resisted contagion. A good indicator of this is the spread between Spanish and Italian 10-year bonds, which climbed to 2.08 percentage points last week, its highest level since December 1997, before easing back to 1.88 percentage points this week.

Much to the dismay of Italy’s struggling banks, the Italian government has also unveiled plans to tighten tax rules on banks’ sales of bad loans in a bid to raise additional revenues. The proposed measures would further erode the banks’ already flimsy capital buffers and hurt their already scarce cash reserves. And ominous signs are piling up that a run on large bank deposits in Italy may have already begun.

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

Who Bought the $1.6 Trillion of New US National Debt Over the Past 12 Months?

Who Bought the $1.6 Trillion of New US National Debt Over the Past 12 Months?

As a flood of US debt washes over the globe, someone has to buy.

So far in this fiscal year, which just started on October 1, the US gross national debt – the total debt issued by the US government – has jumped by $138 billion in just 11 business days, fueled by a stupendous spending binge and big-fat tax cuts, to a breath-taking $21.654 trillion, after having jumped $1.27 trillion in fiscal 2018. And these are the good times!

So who owns and buys all this debt? This is a critical question going forward, because the flood of new debt inundating the market is spectacular, and someone better buy it. Today we got another batch of answers from the US Treasury Department’s TIC data on this increasingly edgy topic.

In August, foreign private-sector investors (banks, hedge funds, individuals, etc. outside the US) and “foreign official” investors (central banks, governments, etc.) owned $6.287 trillion of marketable Treasury securities. This was up $37.6 billion from August last year but was about flat going back to the beginning of 2016.

Over the same 12-month period through August 31, 2018, the US gross national debt jumped by $1.614 trillion. So who bought it?

The biggest foreign holders didn’t buy; they shed.

China’s holdings of Treasury securities have been inching down ever so gingerly with its holdings at the end of August at $1.165 trillion, down $37 billion from a year earlier.

Japan’s holdings fell by $72 billion year-over-year to $1.03 trillion and are now down by $210 billion from the peak at the end of 2014:

China and Japan are still by far the largest foreign creditors of the US. But their role is diminishing, based on two factors: the ballooning US debt, and their declining holdings of this debt.

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

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

This will dog the stock market going forward.

Fixed-income investors – a financially conservative bunch buying Treasury securities, FDIC-insured CDs, and similar products that largely eliminate risk – have been getting crushed for a decade: Except for brief periods when inflation dipped to near zero or below zero, their minuscule returns have been eaten up by inflation, or worse, they lost money after inflation, as was the case with shorter-term Treasuries and just about all savings products. But it has ended.

The Consumer Price Index (CPI) rose 2.3% in September (2.27%), compared to September a year ago, the Bureau of Labor Statistics reported this morning. This was down from the 2.9% increase in July. These numbers are volatile, but the trend is pretty clear: Outside of the Oil Bust and a few quarters during the Financial Crisis, inflation is a fixture in the US economy:

The CPI without food and energy – “core CPI” – rose 2.2% in September. Cost of shelter rose 3.3%. Cost of transportation services rose 4.0%. So prices are going up as measured by CPI.

What has changed is that interest rates and yields are also going up, and they’re now higher than inflation as measured by CPI across nearly the entire spectrum of US Treasury securities – and if you shop around, across many CDs too.

This ends a decade of “financial repression” — a condition when the Fed repressed interest rates below the rate of inflation.

The chart below shows the US Treasury yield curve across the maturity spectrum, from 1-month to 30 years, at the close yesterday. The 1-month yield, at 2.18%, was the only yield still below the rate of inflation. The 3-month yield at 2.27% is right on top of CPI (green line). Every Treasury security with a maturity longer than three months is beating inflation.

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

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