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Lega Popularity Rises With Each EU Confrontation: Major Event Coming

October 11, 2018

Lega Popularity Rises With Each EU Confrontation: Major Event Coming

The EU conspiracy to oust Berlusconi succeeded because his popularity was on the skids. Lega is a far different story.

Eurointelligence has an interesting on rising Italian yields, Italy’s budget deficit, and the inability of the EU and ECB to do any thing about it.

One of the lessons of 2012 is that rising spreads in the eurozone can create a self-fulfilling dynamic once they breach a certain (unknown) level. For Italy, we don’t think spreads have reached that point at the current levels of just above 300bp. But another 50bp or 100bp could trigger a crisis. A rating downgrade is certain, but the markets are watching whether the downgrade will come with a stable or negative outlook. If it is negative, Italian bonds would be on the brink of losing their investment-grade status.

The nervousness is fuelled by defiant comments from Italian ministers. Paolo Savona said that, if the EU opts to reject the Italian budget, it will be up to the people of Italy to decide what to do next. This is where the situation today is so different from that of 2011 when an Italian president colluded with the ECB to remove Silvio Berlusconi. By then, Berlusconi had lost his majority in the chamber of deputies – and the support of the public at large. The Lega, by contrast, is currently seeing its support rise. And this continues with every row with the EU. It is therefore far from clear that a financial crisis would necessarily play into the hands of the EU and produce a more compliant Italian government, or at least a more compliant budget. The opposite might be the case. As of now, we see no signs of the Italian government backing down.

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

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

October 8, 2018

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

On Sunday, the Bank of China cut the level of cash that banks must hold as reserves. The Yuan continued its slide.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.

Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

Reserve requirement ratios (RRRs) – currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks – would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Trade War

China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.

The CNH is once again dangerously close to the PBOC’s redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.

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

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

October 3, 2018

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

A UN report has everything wrong as to the cause of current problems. Yet, the report mentions central bank liquidity.

Seldom does one see a report that “debt is the problem” while being 180 degrees wrong as to the cause of the buildup in debt.

The United Nations’ Trade and Development Report for 2018 blames the “Free Trade Delusion” for what ails the word.

International trade in the late nineteenth century was managed through an unholy mixture of colonial controls in the periphery and rising tariffs in the emerging core, often, as in the case of the United States, pushed to very high levels. But like today, talk of free trade provided a useful cover for the unhindered movement of capital and an accompanying set of rules – the gold standard, repressive labour laws, balanced budgets – that disciplined government spending and kept the costs of doing business in check.

Wow. There’s more:

But if there is one lesson to take from the interwar years, it is that talking up free trade against a backdrop of austerity and widespread political mistrust will not hold the centre as things fall apart. And simply pledging to leave no one behind while appealing to the goodwill of corporations or the better angels of the super-rich are, at best, hopeful pleas for a more civic world and, at worst, willful attempts to deflect from serious discussion of the real factors driving growing inequality, indebtedness and insecurity.

With such an ass-backward premise, one might expect the entire report to be wrong. Far from it.

Liquidity Driven Bubbles

Unlike their progressive MMT brethren, the authors understand some things:

  • There’s an unsustainable buildup of debt
  • There are huge asset bubbles
  • Cheap liquidity stretched valuations to extreme levels

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

Rethinking the Fed’s 2% Inflation Target: Spotlight On an Absurd Debate

September 25, 2018

Rethinking the Fed’s 2% Inflation Target: Spotlight On an Absurd Debate

Is the Fed’s 2% inflation target too high or too low? That’s the big debate now amongst central bankers.

The Wall Street Journal reports Policy Makers Rethink a 2% Inflation Target.

From Ottawa to Oslo, policy makers have been considering whether that level of consumer-price growth, a Holy Grail for the world’s major central banks over the past quarter-century, is still relevant.

The 2% target was always an arbitrary figure, some economists argue, and even if it was optimal two decades ago, that is no longer the case given deep changes that have since reshaped the global economy.

Trouble is, it isn’t clear what inflation rate would be better. Dozens of academic studies that considered that question have produced answers ranging from 6% to less than zero, according to a survey published last year by Federal Reserve economist Anthony M. Diercks.

“Whatever [inflation] rate was thought to be optimal in 2006 or before is now too low,” says Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., who has called for a 4% target.

Factors such as aging populations, low economic growth and higher savings rates are working to push down the neutral interest rate, at which the economy is growing at a sustainable rate for the long run and inflation is stable. As a result, central banks run a greater risk of taking benchmark interest rates to zero or below when seeking to support growth.

Demographics

Logic would dictate that if demographics work to hold the inflation target lower, then the target ought to be lower not higher.

Lesson from Japan, ECB

Japan provides ample evidence of what happens to savers when the central bank holds down rates hoping for higher inflation. All Japan did was accumulate debt. Inflation went nowhere.

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

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

September 22, 2018

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

As a single country, China is the US’s largest trading partner but Canada is the largest export partner.

As Trump struggles to get a NAFTA deal going on account of Canada, the above chart puts things into perspective.

Canada is the US’s largest export partner. Moreover, when it comes to goods (as opposed to goods and services), the US consistently runs a trade surplus with Canada.

​

The US has had a goods surplus with Canada every month since 1985. Nonetheless, Trump is incredibly annoyed at Canada and threatens to put tariffs on Canadian cars.

Here’s the broad picture.

US Balance of Trade 2011-2017

I created the above chart from downloads of these three Census Department files.

Notes

  • Hong Kong, Singapore, and Taiwan were added in 2015.
  • The format of the reports changed in 2014, but that link has annual totals that date back to 2011.
  • Prior to 2014 there was no Exhibit 20 (selected countries).

2018 Subtotals

Mid-year 2018, the US is still running an overall trade surplus with Canada, so this will likely be the fourth year the US records a trade surplus with Canada (total the first two highlighted columns).

Nonetheless, Trump is moaning. And the global chart shows it’s over very insignificant totals.

This is the true nature of the “worst trade deal in history” where Canada is now more important than Mexico.

NAFTA negotiations are at an impasse.

As President Trump threatens to ink a deal with Mexico by Sept. 30 and leave Canada behind, the New York Times asks Can Nafta Be Saved? These Two Negotiators Are Trying.

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

Trump Unwisely Escalates Trade War: Expect a “Rare Earth” Response From China

September 18, 2018

Trump Unwisely Escalates Trade War: Expect a “Rare Earth” Response From China

Trump’s imposed more tariffs on China. If China retaliates, Trump will respond with tariffs on all imports from China

President Trump, emboldened by America’s economic strength and China’s slowdown, escalated his trade war on Monday, saying the United States would impose tariffs on $200 billion worth of Chinese goods as punishment over Beijing’s trade practices.

The fresh round of tariffs comes on top of $50 billion worth of Chinese products already taxed earlier this year, meaning nearly half of all Chinese imports into the United States will soon face tariffs. The new wave is scheduled to go into effect on Sept. 24, with tariffs starting at 10 percent before climbing to 25 percent by the end of the year. The timing will partially reduce the toll of price increases for holiday shoppers buying Chinese imports in the coming months.

The White House also said that the United States was prepared to “immediately” place tariffs on another $267 billion worth of imports “if China takes retaliatory action against our farmers or other industries.”

Unlike the first round of tariffs, which were designed to minimize the impact on American consumers, this wave could raise prices on everyday products including electronics, food, tools and housewares.

American businesses — which have warned that tariffs could hurt profits, force job cuts and, in some cases, destroy companies, said the taxes were going to hurt the United States more than the administration realized. The National Association of Chemical Distributors released a study this month that predicted nearly 28,000 chemical distributor and supplier jobs would be eliminated because of higher prices from the $200 billion round of tariffs.

Response Coming

The question not whether China responds, but how.

I would expect China to immediately pull out of Trump’s recently initiated trade talks.

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

State of European Banks: The ECB View vs Reality

September 15, 2018

State of European Banks: The ECB View vs Reality

The ECB would like you to believe the European banking system is sound and banks are better regulated. They aren’t.

Ten years after Lehman there are numerous statements from bureaucrats, academics, media and others that banks are now better regulated, more solid and liquidity problems vanished.

Reader Lars from Norway Emailed this assessment today.

Price/Book Ratio

Deutsche Bank trades at 0.30 on the low side and BNP Paribas at 0.70 on the high side. In between we have Commerzbank at 0.40, Unicredit at 0.50, and Society General at 0.50.

The verdict is negative.

Target2

​Italian and Spanish bank require € 900 billion in liquidity support on a permanent basis. ​

This element is mostly ignored by academics and others because they do not understand the implications of Target 2 as a capital flight phenomenon. This is a hidden crisis.

​The verdict is negative.

Nonperforming Loans

Italian banks would all be insolvent if NPLs were to be written off. In order to keep the facade, NPLs are kept on the books as if it’s not a problem.​

The verdict is negative.

​Proprietary Trading and Derivatives

Some of the banks have huge portfolios, led by Deutsche Bank and BNP Paribas. As much as 45% of total assets. ​

Nobody knows what a strict mark-to-market exercise would lead to. Most of the derivatives are interest rate swaps that might suffer should rates rise.

​The verdict is negative.

Emerging Market and Troubled Bank Exposure

French banks have huge exposures to Italy, and Italian banks have big exposure to Turkey.

​The verdict is negative.

Contagion Risk

We learned from 2008 that interbank markets can freeze. Liquidity is no longer available. How much more than the € ,400 billion is the eurosystem willing to provide to insolvent Spanish, Italian and Greek banks?

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

Yellen Wants Fed to Commit to Future Booms to Make Up for Busts

September 15, 2018

Yellen Wants Fed to Commit to Future Booms to Make Up for Busts

Former Fed Chair Yellen promotes “Lower for Longer”, a policy in which the Fed knowingly keeps interest rates too low.

Here’s the asinine policy proposal of the day: Fed Should Commit to Future ‘Booms’ to Make Up for Major Busts.

The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.

Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.

“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”

What We Are Doing Already

The official policy is what we are doing already. May as well make a policy out of it.

The caveat, of course, is the Fed does not realize what it’s already doing.

Ass Backward

There is one more major flaw. It’s ass Backward. We have major busts because the Fed blew major bubbles.

The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.

The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.

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

Warren Buffett Explains Bubbles: But He Doesn’t Know We Are In One

September 13, 2018

Warren Buffett Explains Bubbles: But He Doesn’t Know We Are In One

Buffet explains bubbles: “People see neighbors ‘dumber than they are’ getting rich.”

Warren Buffett explains Why Bubbles Happen

Buffett was asked by CNBC’s Andrew Ross Sorkin if he is worried another crisis will happen again.

“Well there will be one sometime,” Buffett said in an interview for CNBC’s “Crisis on Wall Street: The Week That Shook the World” documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.

“People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t,” he said. “And their spouse is saying can’t you figure it out, too? It is so contagious. So that’s a permanent part of the system.”

That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.

Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.

Symptom or Cause?

Buffett confuses a symptom (rampant speculation) with the true cause

  • The Fed (central banks in general), keep interest rates too low, too long
  • Fractional reserve lending
  • Moral hazards like bank bailouts
  • Poor fiscal policies and massive government debt

In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.

“Monetary Buffers Depleted” Boston Fed: Concerns Over Next Recession Mount

September 11, 2018

“Monetary Buffers Depleted” Boston Fed: Concerns Over Next Recession Mount

In a recession, the Fed typically slashes interest rates 5 PP. No such buffer exists. A Fed study looks at the impact.

One of the reason the Fed seems desperate to hike rates is they want ammunition to cut rates when the recession hits. Typically, the Fed cuts rates by 5 percentage points, but when the next recession hits, no such buffer will exist.

A Boston Fed simulation shows the central bank’s inability to cut rates by the usual amount would disproportionately hit certain states.

“Monetary buffers have been depleted,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which sponsored the conference this weekend where the research was released. A decline in rates over the past decade means the Fed’s recent experience of running out of room to cut them after lowering them to zero will not be “a one-time event,” he said.

Mr. Rosengren and his co-authors, Boston Fed economists Joe Peek and Geoffrey Tootell, ran an experiment that shows how a recession might affect states assuming a traditional monetary-policy response, in which the Fed could cut its short-term benchmark rate by 5 percentage points.

Then they looked at two other alternatives. In both scenarios, monetary policy couldn’t fully respond because the Fed had raised rates to only 2% before the hypothetical downturn. But in the last scenario, regulatory, state and local, and federal fiscal buffers were also depleted because they weren’t built up before the recession.

Per Capita Income Growth in Recession

​Some Unpleasant Stabilization Arithmetic

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

False Flag Stage Set: US, UK, France Threaten Syria with Much Stronger Action

September 11, 2018

False Flag Stage Set: US, UK, France Threaten Syria with Much Stronger Action

The US, UK and France threaten Syria with much stronger action if Assad uses chemicals. A rebel false flag stage is set.

The U.S. is working with France and the U.K. on plans for a coordinated military strike in Syria if the regime uses chemical weapons in an expected offensive against the country’s last major rebel haven, President Trump’s national security adviser said.

John Bolton warned Monday that a new attack by the Western allies would be much stronger than the two airstrikes launched in April 2017 and April 2018 after Syrian President Bashar al-Assad was accused of using chemical weapons that killed scores of civilians in the past 17 months.

“We’ve been in consultation with the British and the French, who joined us in the second strike, and they also agree that another use of chemical weapons will result in a much stronger response,” Mr. Bolton said after giving a speech in Washington.

The coordinated planning comes as the U.S. and its allies are trying to stave off a Syrian offensive in the country’s northwest, where more than 3 million civilians and as many as 70,000 militants are bracing for an attack.

U.S. officials estimate that 10,000 to 15,000 of the Syrian rebels in Idlib province are aligned with al Qaeda, and the Pentagon has urged Russia and Syria to carry out a targeted campaign against those forces. The two countries have rebuffed the appeal.

False Flag Official Denial

Mr. Bolton dismissed accusations made by Russia that the U.S. and its allies are working with Syrians to stage a chemical weapons attack as a pretext for Western military strikes.

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

Canada, the Petroyuan Thesis, and Balance of Trade Issues in Pictures

September 7, 2018

Canada, the Petroyuan Thesis, and Balance of Trade Issues in Pictures

As NAFTA negotiations linger on, let’s step back and see what Trump’s threats are all about.

The US has had a goods surplus with Canada every month since 1985.

Nonetheless, Trump is incredibly annoyed at Canada and threatens to put tariffs on Canadian cars.

Well, Trump better make that US cars because Canada does not have any Canadian car brands.

The US would lose far more from Canadian tariffs on cars than vice-versa. But both sides would lose in such a war.

Tariffs are a tax on consumers. No one wins from them.

Canadian Prime Minister Justin Trudeau indicated on Tuesday that Canada would not compromise on key demands at high-level talks this week with the United States to update the North American Free Trade Agreement.

“No NAFTA is better than a bad NAFTA deal for Canadians and that’s what we are going to stay with.”

U.S. President Donald Trump – who signed a NAFTA side deal with Mexico last week – has threatened to impose auto tariffs on Canada or exclude it from the three-nation pact unless an agreement can be struck quickly.

Trudeau made clear, however, he would insist on keeping the so-called Chapter 19 dispute-resolution mechanism that Washington wants to scrap.

“We will not sign a deal that is bad for Canadians, and quiet frankly, not having a Chapter 19 to ensure the rules are followed would be bad for Canadians,” he said.

He also said existing protections that ban U.S. media firms from buying Canadian cultural industries such as television stations and newspapers must be maintained.

Legitimate Gripes and Plain Silliness

Trump has a legitimate gripe about dairy products, but the US sugar, corn, an ethanol lobbies are just as bad if indeed not far worse.

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

Mortgage Prisoners Totally Screwed in Australia as Refinance Rejections Soar

August 29, 2018

Mortgage Prisoners Totally Screwed in Australia as Refinance Rejections Soar

Australia is flooded with “too good to be true” refinance offers. Rejections up 349% since April, 1426% from December.

Looking to refinance your Australian property you wish you didn’t buy?

Not to worry, I can help is the message banks are sending. Oops, strike that.

The total number of monthly rejections went from 2,031 in December 2017 to 30,986 in July 2018, a mere 1426% increase.

The rejection rate itself looks much better percentage-wise. It’s now 40%, up from 5% a year ago.

Debt Distress

Those who cannot refinance are in deep trouble. The Spike Exposes the Number of Australians in Debt Distress.

It’s being described as a “mortgage mirage”. It’s an offer from the bank that looks too good to be true and, as it turns out, for many it is. “About 40 per cent of people who tried to refinance were unable to do so,” Digital Finance Analytics principal Martin North said.”If you go back a year it was 5 per cent.”

The reason this is occurring is that, while those applicants cleared the bar for their original loans, that bar has now become a lot higher, following years of banking reform and the fallout from the banking royal commission. So, now, they simply don’t qualify for the same amount of debt they once did.

“When people took out the loans there was a lot of widespread fudging of the numbers,” chief investment officer with funds management firm, Forager Funds, Steve Johnson said.

“People were getting loans on the basis of a four person family having $30,000 a year of living costs living in Sydney. “And it’s quite clearly impossible to live in Sydney on that much money a year. “The biggest issue is that people have borrowed too much money relative to their income and that is a very difficult problem to unwind.”

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

So Bloody Predictable: Sydney Ground Zero in Interest-Only Mortgage Implosion

August 26, 2018

So Bloody Predictable: Sydney Ground Zero in Interest-Only Mortgage Implosion

Australia’s housing boom is over. A recession is not far away.

It’s “all so bloody predictable” says Australia Macro Business as Western Sydney Ground Zero in Interest-Only Mortgage Bust.

Selling agents are starting to reveal the truth behind recent listings in Sydney’s west with Belle Property Strathfield’s Jimmy Kang saying up to 50 per cent of his clients were asking him to sell their homes in Sydney’s western suburbs because they can no longer afford their new principal-and-interest mortgages.

…A couple asked him to sell a two-bedroom weatherboard home in Veron Street in Wentworthville, 27 kilometres west of Sydney, for $950,000 when it was only worth about between $820,000 and $830,000. They bought the home for $790,000, two years ago.

“I asked them where they got that number from and they said that was the number they need to pay back the $200,000 they borrowed from family to buy the home as well as repay their interest-only loan,” he said.

“A lot of them initially paid $2000 to $2500 a month on their interest-only loans, and now they have to pay $4000.”

Auctions in Western Sydney’s mortgage belt have collapsed. This is exactly what happened in the 2003 Sydney bust. Western Sydney is basically a low income ghetto that occasionally catches the house price bug then is astonished when its paltry income can’t support the prices.

This is going to melt down worse than 2003. Back then it was bailed out by the mining boom, rising rents and wages. As well, other city house prices took off and supported consumption. Today Western Sydney is the epicentre of the mass immigration wages crush and falling rents, and it’s increasingly national.

Correction Just Started

​Home prices are Just Starting to Decline.

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

Next Up: Global Synchronized Easing

August 24, 2018

Next Up: Global Synchronized Easing

Global economic tightening is a pipe dream. It hasn’t happened yet, and likely won’t.

Bloomberg writer Komal Sri-Kumar says, and I agree, Don’t be Surprised by a Switch Global Synchronized Easing.

Global investors are positioned for a coordinated tightening of monetary policy by the world’s major central banks. Although the U.S. Federal Reserve is already far down that path, the others are just getting started. The European Central Bank is set to end its bond purchase program by year-end. The Bank of England is leaning toward hiking interest rates for only the third time in 10 years. Concerns were rising that the Bank of Japan could end the zero yield target for 10-year government bonds at its meeting last month.

A factor that may induce the Fed to delay rate increases after September is the surging dollar. U.S. President Donald Trump has already complained that an appreciating dollar has blunted the “competitive edge” of U.S. exports. By increasing the cost of American exports to foreign buyers, a stronger dollar would increase the trade deficit that Trump considers to be an important measure of how other countries are taking unfair advantage of the U.S. On July 19, he openly criticized the Fed for increasing rates several times despite a long-held tradition that the executive branch avoids commenting on monetary policy.

The ECB has to contend with a deteriorating economic situation in Turkey, which owes $467 billion to foreign creditors, including a large exposure to some of the euro zone’s largest commercial banks. The banks may have to write off a portion of their loans to Turkey, requiring an ECB backstop for vulnerable financial institutions rather than tighten monetary policy into a crisis.

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

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