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Big Banks Win, You Lose (Volume 32,836)
Big Banks Win, You Lose (Volume 32,836)
Part of the 2010 Dodd-Frank Act, the “Volcker Rule” was intended to prevent big banks from taking irresponsible risks.
It’s named after a former Fed Chair, the late Paul Volcker, who used this concept to curb out-of-control inflation in the 1980s.
But in spite of an already-uncertain economy, regulators are now proposing to ease these rules. According to CNBC:
The Volcker Rule was designed to prevent banks from acting like hedge funds. The general principle is that they are allowed to facilitate trades for clients, but not allowed to strap on risk for big proprietary bets.
The amount of risk a big bank can take on is about to change, thanks to the easing of these regulations.
The same CNBC article points out: “The change, which was floated earlier this year, will allow banks to invest more of their own capital in venture capital funds that invest in start-ups and small businesses alongside clients.”
So basically, the money you deposit into your bank account can be used by your bank for riskier investments that have greater potential of backfiring.
According to a ThinkAdvisor article, one of the reasons these changes were proposed in the first place was the difficulty in deciding which investments did or did not pass the Volcker Rule:
FDIC Chairwoman Jelena McWilliams argued when the final changes passed that simplifying the post-crisis Volcker Rule, ushered in by the Dodd-Frank Act in 2010, was needed, as Volcker has been “the most challenging to implement” for regulators and the industry. “Distinguishing between what qualifies as proprietary trading and what does not has proven to be extremely difficult,” she said.
Now that the changes are finalized, an estimated $40 billion could be freed up. It gives the impression of a “backdoor bank bailout” being given to banks, which were feeling financial pressure thanks to COVID-19 lockdowns.
…click on the above link to read the rest of the article…
Fed Warns of High Downside Risks
Fed Warns of High Downside Risks
In its semiannual monetary report to the Senate Finance Committee the Fed warns of six downside risks.
The risks are not spread evenly. Low wage earners and small businesses are particularly vulnerable.
Please consider the Fed’s Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.
The report is 66 pages long and is full of interesting charts and comments.
Let’s start with Powell’s statement on risk: “Despite aggressive fiscal and monetary policy actions, risks abroad are skewed to the downside.”
Six Downside Risks
- The future progression of the pandemic remains highly uncertain.
- The collapse in demand may ultimately bankrupt many businesses.
- Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors.
- Disruptions to global trade may result in a costly reconfiguration of global supply chains.
- Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.
- Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.
Labor Market
The severe economic repercussions of the pandemic have been especially visible in the labor market. Since February, employers have shed nearly 20 million jobs from payrolls, reversing almost 10 years of job gains. The unemployment rate jumped from a 50-year low of 3.5 percent in February to a post–World War II high of 14.7 percent in April .
Unemployment Rate by Race
Labor Force Participation Rate
Employment Declines by Wage Group
Low Wage Earner Employment
…click on the above link to read the rest of the article…
The Oil Crisis Puts The Entire U.S. Economy At Risk
The Oil Crisis Puts The Entire U.S. Economy At Risk
Job losses, well shut-ins, and bankruptcies have replaced the praise surrounding the shale oil boom that greatly enhanced America’s energy independence and gave President Trump a reason to tout energy dominance. Now, the federal government is mulling over ways to help the industry curb its losses amid historically low prices and little chances of their improvement anytime soon. And the crisis will have much wider repercussions.
The trough of the oil industry cycle always harms the broader economy, usually on a regional level. During the last crisis, for example, once-thriving towns in Texas and New Mexico shrunk as mass layoffs dealt a blow to the local economies. This is bound to repeat again and already is: the Wall Street Journal reports state economies from Wyoming to Alaska, Oklahoma, and North Dakota are taking a hit from the oil industry’s crisis.
According to the American Petroleum Institute, the oil and gas industry in the United States supports as many as 10.3 million jobs and generates close to 8 percent of gross domestic product. This is, of course, nowhere near the over 50 percent that oil makes up in the Saudi GDP, but it is a portion sizeable enough to suggest that a crisis in the oil industry could have a ripple effect on the national economy. The question is, how strong this ripple effect would be.
According to a Goldman Sachs analyst, it has the potential to be quite strong. “Typically, oil price fluctuations have a small aggregate impact on U.S. growth, with roughly offsetting effects from the energy capex and consumption channels,” Paul Choi wrote in a note cited by Axios. “However, the sharp rise in the likelihood of bankruptcies in the energy sector and spending constraints due to the virus suggest that the decline in oil prices might be a larger drag on growth this time.”
…click on the above link to read the rest of the article…
Backwards into the Future
Backwards into the Future
No, I’m still not over the fact that they all initially missed the virus when they should have seen it most of all. The reasons why must be evaluated in every single location, in governments, CDC equivalents and obviously the WHO. A main reason is that they were all focusing on their economy, not the virus, -at least somewhat- ironically damaging their economies in the process.
I’m just afraid that you’re not going to prevent the next time, the next huge and deadly miss, as long as elections are popularity contests ultimately controlled by special interests. But at the same time, we’re past that first moment, which was somewhere in November or December (31st at the latest), and the next major threats loom.
After the Big Miss came the lockdowns, and as I said in Little Managers, that’s the one thing all these politicians may actually be somewhat good at. They stink at initial detection and reaction time, they stink at forward vision, but they can get people to stay home for a bit, and sell them that in the media.
They even get praised for it. Which is understandable, since their role is to set old ladies’ minds at ease, and most people, whatever age they are, have such minds, understandable but unfortunate, because 1) we’re about to leave the lockdowns phase as well and 2) they’re sure to screw up this one as royally as the first detection moment.
It would be good if everyone by now understood why lockdowns become inevitable after, but only after, initial detection has failed and the virus has been allowed to enter a society, if you face a highly contagious and deadly -to humans- virus that you don’t know anything about, but there are plenty people today who claim the lockdowns are what does the damage.
…click on the above link to read the rest of the article…
Banks Will Not Bail Out The Economy
Banks Will Not Bail Out The Economy
These days, we hear a lot that banks were the problem in the 2008 crisis and now they are the part of the solution.
Banking was not the main problem of the 2008 crisis, but one of the symptoms that indicated a more serious disease, the excess risk taken by public and private economic agents after massive interest rate cuts and direct incentives to take more debt coming from legislation as well as local and supranational regulation. Lehman Brothers was not a cause, it was a consequence of years of legislation and monetary policies that encouraged risk-taking.
The second part of the sentence, “now banks are the solution,” is dangerous. It starts from a wrong premise, that banks are stronger than ever and can bail out the global economy. Banking may be part of the solution, but we cannot place, as the eurozone is doing, the entire burden of the crisis on the banks’ balance sheet. I will explain why.
When economists in Europe talk endlessly about the differences in growth and success of monetary and fiscal policy between the United States and Europe, many ignore two key factors. In the United States, according to the St Louis Federal Reserve, less than 15% of the real economy is financed through the banking channel, in the European Union, it is almost 80%. In addition, in the United States, there is an open, diversified, more efficient and faster mechanism to clean non-performing loans and recapitalize the economy that adds to its high diversification in private non-bank financing channels.
It is, therefore, essential that in periods of crisis countries, particularly in Europe, do not relax risk analysis mechanisms, because the economic recovery may be slowed down by ongoing problems in the financial sector and even lead to a banking crisis in the midterm. The worst measure that countries can take in a crisis is to force incentives to take a disproportionate risk.
…click on the above link to read the rest of the article…
COVID 19 and Our Food Supply
COVID 19 and Our Food Supply
Though food is still plentiful, with only temporary and localized shortages, the threat of the COVID 19 crisis to the food supply is considerable. There is no evidence thus far that the disease can be transmitted via food or packaging (though the virus apparently remains viable on plastic for 2 to 4 days). The real danger is that chains of supply will be undermined by both sickness and the pre-cautionary measure we take. Already we are seeing a contraction of food imports from abroad. But the danger extends to even our own local supply.
The safety of shoppers and workers at supermarkets is the first worry that public officials and the general public have expressed. But the food at market comes from somewhere; and that “somewhere” is peopled by a vast array of workers, starting with farmers and farm workers. Will we continue to have the workforce necessary to produce our food, and will they be able to do it in conditions of health and safety for themselves?
We don’t know, but there are troubling concerns. Take fresh produce, for example. Already pressed by acute labor shortages, farms large and small in places like the Central Coast of California have scrambled to provide job security to their workers. But they also depend during crucial harvest periods on temporary labor, and as the border tightened under the Trump administration the H2-A visa system has become important. Florida, Georgia, Washington, and California all depend upon a sizeable workforce from Mexico and the Caribbean under the system. But the virus has meant the closing of consulates in Mexico and elsewhere that process these visas. The labor crunch will come soon for producers of lettuce and strawberries on the Central Coast.
…click on the above link to read the rest of the article…
Margin Call: You Were Warned Of The Risk
Margin Call: You Were Warned Of The Risk
I have been slammed with emails over the last couple of days asking the following questions:
“What just happened to my bonds?”
“What happened to my gold position, shouldn’t it be going up?”
“Why are all my stocks being flushed at the same time?”
As noted by Zerohedge:
“Stocks down, Bonds down, credit down, gold down, oil down, copper down, crypto down, global systemically important banks down, and liquidity down…
Today was the worst day for a combined equity/bond portfolio… ever…”
This Is What A “Margin Call,” Looks Like.
In December 2018, we warned of the risk. At that time, the market was dropping sharply, and Mark Hulbert wrote an article dismissing the risk of margin debt. To wit:
“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.
According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below.
Why, then, do I suggest not becoming overly pessimistic? For several reasons:
1) The margin debt indicator issues many false signals
2) There is insufficient data
3) Margin debt is a strong coincident indicator.”
I disagreed with Mark on several points at the time. But fortunately the Federal Reserve’s reversal on monetary policy kept the stock market from sinking to levels that would trigger “margin calls.”
As I noted then, margin debt is not a technical indicator that can be used to trade markets. Margin debt is the “gasoline,” which drives markets higher as the leverage provides for the additional purchasing power of assets. However, that “leverage” also works in reverse as it provides the accelerant for larger declines as lenders “force” the sale of assets to cover credit lines without regard to the borrower’s position.
…click on the above link to read the rest of the article…
Supply Chain Disruptions Impact on Global Growth
Supply Chain Disruptions Impact on Global Growth
In a previous post, we mentioned that stagflation is a risk that central planners are ignoring. However, this risk is not just an isolated challenge focused on economies like Mexico, India or Argentina. Even in countries like Germany and Japan the trend of inflation, particularly in non-replicable goods, is diverging from economic growth. Inflation is picking up, while growth is slowing down.
Central banks continue to pump liquidity to disguise the rising risks to the global economy, but the coronavirus epidemic is showing to investors three important lessons:
Containment of the epidemic is taking significantly more time than what many market participants estimated. Calls fro a rapid recovery that would not only offset the first-quarter impact but improve it, are disproved.
The impact on supply chains is significantly larger than most analysts expected. China is now 17% of the global economy and provinces that count for 89% of the country’s exports remain in lockdown.
Global excess capacity is a mitigating factor on rising inflation only for replicable and highly competitive goods. There is clearly ample capacity to offset supply chain disruptions in energy commodities, metals, and industrial goods but there are severe problems surfacing in sectors that are very dependent on Chinese supply, particularly auto parts and technology components.
Market participants started to realize last week that the coronavirus effect was not going to be a two-month issue that would be followed by strong growth. In a recent PriceWaterhouse Coopers report, it showed that the global impact could reach at least 0.7% of GDP. This estimate uses Eric Toner´s infected and casualty estimates (John Hopkins Center for Health Security) and the economic impact using McKibbins & Lee methodology (the ones that estimated the SARS impact).
…click on the above link to read the rest of the article…
‘Calm Before The Storm’ – How Will The Coronavirus Really Impact The Markets?
‘Calm Before The Storm’ – How Will The Coronavirus Really Impact The Markets?
PeakProsperity’s Adam Taggart that, officials, the media, and globalist-driven organisations are downplaying Wuhan coronavirus risk, even as models suggest infections will soon soar.
The sudden slowdown in new information coming out of China has Chris Martenson spooked.
He walks us through the math here, showing how if the coronavirus follows its current geometric growth, over 100 million people could be infected by the end of February:
Don’t take the recent lack of ‘news’ as meaning the threat from this virus is dying down. This could very likely just be the calm before the storm.
In fact, as Martenson explains, it’s a true Black Swan event that stocks haven’t yet priced in.
The 2019-nCoV “coronavirus” outbreak remains serious and fluid.
Over the past several days, we’ve been publishing a steady stream of videos, reports and podcasts to keep you as up-to-date and informed as possible on the science behind this fast-developing situation. You can follow our full coverage of the coronavirus here.
But the TL;DR version is this:
The first order of business is stopping the spread of the disease, which means prevention. Your immediate and top concern should be readying yourself and your household and loved ones for the arrival of 2019-nCoV. We cover the most useful practices in this report.
Second, help your co-workers and students, passengers, or other such dependents become aware and prepared by practicing good hygiene and educating them about how the virus spreads.
IMPORTANT: Anyone who is sick, whether with nCoV or a standard flu/cold, needs to be isolated for the duration of the disease, which means 24 hours after their last fever. They should always, always, always wear a surgical mask to block virus particles before they are expelled into the air. Masks can be worn by everyone, but do the most good when worn by those who are ill.
…click on the above link to read the rest of the article…
How the Fed Created a QE “Monster” for the Markets
How the Fed Created a QE “Monster” for the Markets
Like Victor Frankenstein, the Fed may have created its own monster. It’s been called many things, such as Quantitative Easing (QE), QE Lite, QE/Not QE, “Organic” Balance Sheet Growth, and more.
But no matter what you choose to call it, the bottom line is this:
The Fed is growing its official balance sheet at a frantic pace to provide liquidity to various banking operations, including the repo markets.
In fact, the balance sheet has grown about $400 billion since August, as reflected in the uptick at the far right of this chart:
Along with the Fed’s decision to increase its balance sheet is a rise in risky asset prices. According to a piece at Newsmax, this is raising eyebrows:
Prices for stocks and other risky assets are also rising at a fast clip – a state of affairs that a growing chorus of investors, economists and former Fed officials say is no coincidence, and potentially a problem.
This pattern of rising prices in risky assets is similar to what happened when the Fed initiated the first three rounds of QE.
The potential problem behind a pattern like this is the “monster” that the Fed is creating. Addressing the problem means answering a critical question…
When and how does the spigot of Fed cash flow get turned off?
Peter Boockvar, chief investment officer with Bleakley Advisory Group, thinks we will have to wait and see what happens:
The risk is what happens when the Fed stops increasing their balance sheet… What will stocks do when that liquidity spigot stops? We’ll have to see.
Of course, if we “wait and see”, any potential damage to the economy will already have started.
…click on the above link to read the rest of the article…
The Allure and Limits of Monetized Fiscal Deficits
The Allure and Limits of Monetized Fiscal Deficits
With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. When that happens, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it.
NEW YORK – A cloud of gloom hovered over the International Monetary Fund’s annual meeting this month. With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. Among other things, investors and economic policymakers must worry about a renewed escalation in the Sino-American trade and technology war. A military conflict between the United States and Iran would be felt globally. The same could be true of “hard” Brexit by the United Kingdom or a collision between the IMF and Argentina’s incoming Peronist government.
Still, some of these risks could become less likely over time. The US and China have reached a tentative agreement on a “phase one” partial trade deal, and the US has suspended tariffs that were due to come into effect on October 15. If the negotiations continue, damaging tariffs on Chinese consumer goods scheduled for December 15 could also be postponed or suspended. The US has also so far refrained from responding directly to Iran’s alleged downing of a US drone and attack on Saudi oil facilities in recent months. US President Donald Trump doubtless is aware that a spike in oil prices stemming from a military conflict would seriously damage his re-election prospects next November.
The United Kingdom and the European Union have reached a tentative agreement for a “soft” Brexit, and the UK Parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point.
…click on the above link to read the rest of the article…
Hedge Fund CIO: “The Biggest Market Player Is 15x Leveraged; That’s Why When It Starts Going Wrong, You’re Out”
Hedge Fund CIO: “The Biggest Market Player Is 15x Leveraged; That’s Why When It Starts Going Wrong, You’re Out”
“Wanted to make sure you’re seeing this,” texted a PM from one of those multi-manager monstrosities.
“8 standard deviation move in the Momentum Factor in 5-days,” he added. I heard his heart pounding all the way from Australia.
“Guys who defended positions in the Q4 selloff all got fired, so the message is real clear – when things start getting weird, take immediate corrective action.” And I imagined the quiet panic consuming firms that leverage their capital at multiples that would make a Lehman risk manager blush.
Hedge Fund Arrowgrass to Return Capital, Close After Fresh Redemptions
“I’m more convinced than ever that one of these days, this kind of 8 standard deviation event is going to crash the market,” he texted, having puked his position without the slightest idea why the move had even started.
- Factor Definitions (Momentum): Momentum is the empirically observed tendency for rising asset prices to rise further and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals (e.g., 52-week high) have been shown to be used by analysts in their buy and sell recommendations. The existence of momentum is a market anomaly, which finance theory struggles to explain.
- Factor Definitions (Value): The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier. the best-known work on the value factor was carried out by Fama and French in their 1992 paper (The cross-section of expected stock returns), which concluded that low price-to-book ratio was the most predictive definition of value.
…click on the above link to read the rest of the article…
The Risk of a Flash Crash is Rising
The Risk of a Flash Crash is Rising
Disclaimer: first of all, calm down. I’m not predicting anything. In fact mostly I’m just tying threads together between a bunch of market risks that have been highlighted by many for some time. Early perhaps they were, but not necessarily wrong. As investors become such increasingly one-sided in their macro outlook, these risks become more pronounced.
As stocks rallied last week and the U.S.-China trade itinerary got a nice-sounding update, U.S. economic data continued to beat expectations and is now surprising estimates at a positive rate. One graphic I saw on Twitter caught my eye: SocGen’s take on the biggest event risks, in which they describe the probability and potential scope of a “sharp market repricing” as being low and small.
It’s consistent with what I see elsewhere. There is a view more consensus right now than any I’ve ever seen: the world economy is slowing and the Fed and other central banks will continue cutting rates. Everyone agrees on the basics, they just have different views on how to play it. Among bulls, there is also a strong consensus view that relentless bond-buying momentum is innocuous and central banks will provide an adequate safety net for whatever risks may be associated with the forces behind this market action. Moreover, the general line of thinking I hear is that, even if there is a big bond selloff, stocks will be immune from blowback.
I disagree. A sharp market repricing should be the fattest swan on that diagram.
The greatest risk to investors, the economy, and the tenuous state of geopolitics, is the price of the S&P 500. That does not mean it is the most likely risk — what it means is that the ripple effect of a sizable selloff in stocks right now is monstrous.
…click on the above link to read the rest of the article…
THE MASSIVE 46 STORY TALL STRUCTURE: The Penasquito Mine Tailings Dam
THE MASSIVE 46 STORY TALL STRUCTURE: The Penasquito Mine Tailings Dam
The colossal Penasquito Mine’s tailings dam will reach a stunning height of a 46 story skyscraper over the next decade. That is, if the mine reopens and is allowed to continue business as usual. Newmont-Goldcorp suspended operations at Mexico’s second largest silver mine on April 29th, due to a blockade stemming from issues with the local community in regards to water supply concerns and problems with a trucking contractor.
Last year, the Penasquito Mine produced 272,000 oz of gold and over 18 million oz of silver. However, it plans on producing over 5 million oz of gold and 400+ million oz of silver over the next decade.
After I published my article, MORE TROUBLE IN MEXICO: Second Largest Silver Mine Suspended Operations, I did some research on Penasquito’s tailings dam, and when I saw a photo of the dam, I was literally shocked by its massive size. I never really gave it much thought about where all the waste ended up after the processing of ore was finished. It’s a typical problem we all deal with today, OUT OF SIGHT, OUT OF MIND.
Let me start by saying that the tailings dam is so large; it surpasses the size of the Penasquito open-pit mine itself. For clarification, the tailings dam (or ponds) are used to store the processed waste slurry after the metals have been extracted. Here is a layout of the Penasquito Mining Operation:
(image courtesy of Goldcorp 2018 Tailings & Mine Waste Conference PDF report)
As you can see, the tailings dam is 4 kilometers long compared to the Penasquito open-pit mine, which is about half its size. However, this layout doesn’t give the epic scale of the tailings dam justice. According to the images in Goldcorp’s 2018 Tailings & Mine Waste Conference PDF, and data from the company’s Feb 2019 Penasquito Mine Tour Presentation, the tailings dam is currently 85 meters tall, or nearly 280 feet in height:
…click on the above link to read the rest of the article…
Social Security fund to go into the red in 2020; will be completely bankrupt by 2035… governments will desperately find a way to kill off populations around the world
Social Security fund to go into the red in 2020; will be completely bankrupt by 2035… governments will desperately find a way to kill off populations around the world
(Natural News) According to the 2019 annual report published by the Social Security and Medicare Board of Trustees, the Social Security fund will go in the red in 2020 and could potentially go bankrupt by 2035. If nothing is done to boost revenue or re-configure how the money will be distributed, then countless retirees, disabled persons, widows, and surviving children will be left with little to no funds to help them navigate through the most uncertain times in life.
The sad part about this shortage is that Social Security is not welfare; this trust fund is not dependent on tax money. Workers pay into the Social Security system during their working years. The system acts as an insurance once a person retires. The benefits are also paid out to disabled persons, widows, and dependents of deceased parents.
Due to the projected shortages, the U.S. government has a perfect opportunity to begin culling the population over the next three decades, restricting what is paid out through the Social Security safety net. As school textbooks teach children about the problem of “overpopulation,” the government obviously views humanity as a liability.
Social Security may not survive long past its 100th birthday
The Social Security program has been in place for 84 years and has collected approximately $21.9 trillion. In that time, the program has paid out roughly $19 trillion. The program currently has a reserve of about $2.9 trillion, which is divided among two trust funds. In 2020, the amount being paid out will supersede the amount coming in, forcing the program to dig into its reserves. With the trend continuing over the next decade, social security reserves will be dried up by 2035, drastically impacting vulnerable subsets of the population.
…click on the above link to read the rest of the article…
