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At the end of November, we showed a troubling observation for China – and global – macro watchers from Axiom’s Gordon Johnson: for the first time ever, record Chinese credit creation had failed to stimulate the economy, and in fact the exact opposite appeared to be unfolding – economic growth is slowing across a number of data points despite massive new credit injected into the economy over the past year.

In economic terms, this meant that China’s credit impulse had hit rock bottom, and was perhaps at its lowest level ever, something UBS hinted at over the summer when it showed that no matter how much credit China creates, it can no longer keep the first derivative, i.e. impulse, surging at is had in the past despite record amounts of nominal debt created. Quite the contrary.

And while one can debate the definition of credit impulse, and its impact on the global economy, one thing is clear: China’s credit creation – the growth dynamo of the entire world – is rapidly slowing. We got the latest confirmation of this earlier this week, before last night’s battery of economic data which painted a very mixed picture of the Chinese economy, with retail sales missing, while IP and CapEx barely met expectations…

… when the PBOC reported November new loans of Rmb1.12Trillion and Total Social Financial of Rmb1.6Trillion. While on the surface both numbers appeared solid, beating consensus, a careful read between the lines showed some very troubling details which confirmed that not only was November not the upward “turning point” for monetary policy some expected it to be, worse, China’s credit slowdown was accelerating.

For one, adjusting for municipal bonds and equity raising, as Deutsche Bank did, showed that system credit growth slowed further to 14.4% yoy from 14.9% the prior month.

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

How A North Korean Electromagnetic Pulse Attack Could Kill Millions And Turn America Into A Post-Apocalyptic Wasteland

November 29, 2017

How A North Korean Electromagnetic Pulse Attack Could Kill Millions And Turn America Into A Post-Apocalyptic Wasteland

This is why North Korea’s test of an intercontinental ballistic missile is so important. North Korea had test fired a total of 22 missiles so far this year, but this latest one showed that nobody on the globe is out of their reach. In fact, General Mattis is now admitting that “North Korea can basically threaten everywhere in the world”, and that includes the entire continental United States. In addition to hitting individual cities with nukes, there is also the possibility that someday North Korea could try to take down the entire country with an EMP attack. If the North Koreans detonated a single nuclear warhead several hundred miles above the center of the country, it would destroy the power grid and fry electronics from coast to coast.

I would like you to think about what that would mean for a few moments. Suddenly there would be no power at home, at work or at school. Since nearly all of our vehicles rely on computerized systems, you wouldn’t be able to go anywhere and nobody would be able to get to you. And you wouldn’t be able to contact anyone because all phones would be dead. Basically, pretty much everything electronic would be dead. I am talking about computers, televisions, GPS devices, ATMs, heating and cooling systems, refrigerators, credit card readers, gas pumps, cash registers, hospital equipment, traffic lights, etc.

For the first couple of days life would continue somewhat normally, but then people would soon start to realize that the power isn’t coming back on and panic would begin to erupt.

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

Are markets Really as Calm as They Seem?

November 28, 2017

ARE MARKETS REALLY AS CALM AS THEY SEEM?

Indicators for financial market “stress” have reached their lowest levels in decades. For instance, stock market volatility has never been this low since the early 1990s. Credit spreads have been shrinking, and prices for credit default swaps have fallen to pre-crisis levels. In fact, investors are no longer haunted by concerns about the stability of the financial system, potential credit defaults, and unfavourable surprises in the economy or financial assets markets. How come?

Monetary policy plays the significant role. By slashing interest rates and ramping up the quantity of money in the banking system, central banks around the world have kick-started the economies following the 2008/2009 crash. But this is not the full story. The fact that investors expect central banks to stand at the ready to fend off a slowdown of the economy and price declines in stock and housing markets is by no means less important.

The truth is that investors expect central banks to provide a “safety net.” This expectation encourages them to make risky investments again (which they would otherwise have declined). That said, central banks have caused a colossal ‘moral hazard’: Investors feel pretty much assured that the risk-reward profile of their investments has become more favorable — that they can enjoy a considerable upside, while the downside is limited.

As a result, investors drive asset prices upwards. As stock prices rise, firms’ cost of capital falls, encouraging risky investments. Consumers, with their real estate assets appreciating, go into even more debt. Maturing debt is rolled over at low interest rates, and borrowers’ spending capacity increases. In other words: The downward manipulation of interest rates and the decline in risk aversion translates into a cyclical strengthening of the economy.

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

EU Preparing for the Banking Crisis

November 16, 2017

EU Preparing for the Banking Crisis

Subtly, the EU is looking to establish preparations for the coming banking crisis and how to protect the banks from massive withdrawals. The solution? The EU wants to be able to temporarily free up credits for the banks and at the same time to freeze bank deposits, In other words, like Greece, you just won’t be able to withdraw funds. Obviously, everything will be frozen. The current EU plan envisages blocking account disbursements for five working days and with the authority to extend any suspension to up to 20 days. They may need longer!

I recommend that you have 30 days worth of cash on hand. What the authorities do not understand is that if they freeze one bank, a run will unfold on all banks. The public will not believe whatever the government says. Therefore, banks that are not in crisis can be pushed into a crisis by a contagion. That is simply how it all unfolded in 1931-1933. The only way to stop a contagion will be a bank holiday and you have to close them all.

Ron Paul: We Are Reaching A Point Of No Return

November 6, 2017

Ron Paul: We Are Reaching A Point Of No Return

When the system will break no matter what the Fed tries

Dr. Ron Paul has long been a leading voice for limited constitutional government, low taxes, free markets, sound money, civil liberty, and non-interventionist foreign policies.

Dr. Paul served as the US Representative for Texas’s 27^th Congressional District from 1976 to 1985. He then represented the 14^th district from 1977 to 2013. He ran for the office of US President, three times, most recently in the 2012 Republican primaries. Dr. Paul also had a long career as an OBGYN over which he delivered more than 4,000 babies.

The recent author of the book, The Revolution At Ten Years, Dr. Paul looks ahead at the future of the movement he helped launch — tackling central planning, the military empire, cultural Marxism, the surveillance state, the deep state, and the real threats from these institutions to our civil liberties.

As a multi-term member of Congress, Dr. Paul knows the players and policies responsible for the growing unfairness and inequality now rampant in society. He does not expect the offenders will reform willingly. Instead, he predicts the system will collapse under its own unsustainability — offering a rare and valuable chance then for more sound and fair solutions to prevail:

Wealth doesn’t come from the creation of money, especially a fiat system. With too much fiat money and all this credit, eventually the economy becomes exhausted and engulfed with debt and mal-investments. The treatment for this is a correction; you have to allow the debt to be liquidated. You have to get rid of the mal-investment and you have and to allow real economic growth to start all over again. But that wasn’t permitted in ’08 and ’09, which is why there’s been stagnation.

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

Deutsche Asks A Stunning Question: “Is This The Beginning Of The End Of Fiat Money?”

November 1, 2017

Deutsche Asks A Stunning Question: “Is This The Beginning Of The End Of Fiat Money?”

One month ago, Deutsche Bank’s unorthodox credit analyst, Jim Reid published a phenomenal report, one which just a few years ago would have been anathema, as it dealt with two formerly taboo topics: is a financial crisis coming (yes), and what are the catalysts that have led the world to its current pre-crisis state, to which Reid had three simple answers: central banks, financial bubbles and record amounts of debt.

Just as striking was Reid’s nuanced observation that it was the modern fiat system itself that has encouraged and perpetuated the current boom-bust cycle, and was itself in jeopardy when the next crash hits:

We think the final break with precious metal currency systems from the early 1970s (after centuries of adhering to such regimes) and to a fiat currency world has encouraged budget deficits, rising debts, huge credit creation, ultra loose monetary policy, global build-up of imbalances, financial deregulation and more unstable markets.

The various breaks with gold based currencies over the last century or so has correlated well with our financial shocks/crises indicator. It shows that you are more likely to see crises/shocks when we break from hard currency systems. Some of the devaluation to Gold has been mindboggling over the last 100 years.

The implications of this allegation were tremendous, especially coming from a reputable professional who works in a company which only exists thanks to the current fiat regime: after all, much has been said about Deutsche Bank’s tens of trillions in gross liabilities, mostly in the form of various rate derivatives, backed by hundreds of billions in deposits and, implicitly, the backstop of the German government as Deutsche Bank discovered the hard way one year ago.

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

Chinese “Ghost Collateral” Scam Leads To Market “Shockwaves”, Huge Loss For Giant Commodity Trader

November 1, 2017

Chinese “Ghost Collateral” Scam Leads To Market “Shockwaves”, Huge Loss For Giant Commodity Trader

Back in 2014, a scandal erupted when media reports confirmed what many had previously speculated about China’s banking system: namely that much of China’s staggering loan issuance had been built (literally) upon air and that trillions in loan collateral had been “rehypothecated” between two, three or many more debtors – or never even existed – forcing banks to accept that they would never recover much if any of the pledged collateral – in most cases various commodities – if the economy were to suffer a hard-landing resulting in mass defaults. The most famous example involved collateral fraud at China’s 3rd largest port, Qingdao, where numerous borrowers were found to have “pledged” the same collateral of steel and copper to obtain funding from various banks.

For those unfamiliar there is an extensive selection of stories covering the topic, which peaked three years ago, and then quietly faded away as China did everything in its power to deflect attention from what some have said is the biggest threat facing its economy: a giant hole . Below we link to some of our more comprehensive articles on the topic:

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

Must Stop Digging

October 28, 2017

Must Stop Digging

Amazon, Google, Microsoft, Intel and Draghi all handily beat expectations. Booming technology earnings confirm the degree to which Bubble Dynamics have become entrenched within the real economy. Draghi confirms that central bankers remain petrified by the thought of piercing Bubbles.

There is a prevailing view that Bubbles reflect asset price gains beyond what is justified by fundamental factors. I counter with the argument that the inflation of underlying fundamentals – revenues, earnings, cash-flow, margins, etc. – is a paramount facet of Bubble Dynamics (How abruptly did the trajectory of earnings reverse course in 2001 and 2009?).

With extremely low rates, loose corporate Credit Availability, large deficit spending, inflating asset prices and a glut of “money” sloshing about, there is bountiful fodder for spending and corporate profits. And with technology one of the more beguiling avenues to employ the cash-flow bonanza – and tech start-ups, the cloud, AI, Internet of Things, robotic, cybersecurity, etc. white-hot right now – the Gargantuan Technology Oligopoly today luxuriates at the Bubble Core.

By this time, expanding global technology capacity is a straightforward endeavor, while the industry for now enjoys booming demand and outsized margins. This confluence of extraordinary attributes provides “tech” the latitude to operate as a powerful black hole absorbing global purchasing power (throughout economies as well as financial markets). As such, it has been a case of the greater the scope of the Bubble, the more supply of “tech” available to weigh on overall goods and services pricing pressures. Central bankers continue to misconstrue this dynamic, instead perceiving irrepressible disinflationary forces that they are compelled to counter (with year after year after year of flagrant monetary stimulus).
…click on the above link to read the rest of the article…

This is What it Looks Like When Credit Markets Go Nuts

October 20, 2017

This is What it Looks Like When Credit Markets Go Nuts

Pricing of risk kicks bucket in record central-bank absurdity.

As the days pass, the perverse effects of central bank policies on the financial markets are getting more and more amazing. This includes the record-setting nuttiness now reigning in the European bond market, compared to the mere semi-nuttiness in the US bond market.

The 10-year yield of US Treasury Securities closed at 2.34% yesterday and at 2.33% today. This is low by historical standards. It’s barely above the rate of consumer price inflation as measured by CPI, which was 2.2% in September. This means that coupon payments barely make up for the loss of purchasing power. If inflation ticks up just a little, bondholders will be left in the hole. And a yield this low doesn’t compensate bondholders for any other risks, including duration risk, which can be significant. In other words, this is a bad deal.

But in this strange world, it looks practically sane, compared to the Draghi-engineered negative-yield absurdity that has overtaken the Eurozone, where the average yield of euro junk bonds – the riskiest bonds out there – dropped to 2.16%.

This chart, based on the BofA Merrill Lynch Euro High Yield Index via the St. Louis Fed, shows how the average euro junk-bond yield (red line) has plunged so far this year, on the way to what? Zero? The 10-year US Treasury yield (black line) has started rising in past weeks and, in late September rose above the euro junk bond yield for the first time ever:

This average junk-bond yield is based on a basket of below-investment-grade corporate bonds denominated in euros. Among the issuers are European subsidiaries of junk-rated American companies. For them, it’s nearly free money.

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

Creditworthiness of New York and Illinois: One is Bankrupt

October 18, 2017

CREDITWORTHINESS OF NEW YORK AND ILLINOIS: ONE IS BANKRUPT

Summary

Unless used for capital improvements, any new Illinois State borrowing, regardless of security structure, will amount to nothing more than kicking the can further down the road.
Markets remain open to uncreditworthy government borrows longer than they should. In a low interest rate environment, investors will stretch credit standards.
Benchmark bond ratings are at variance with the rating agencies.

Everyone knows Illinois’ financial condition is poor. Conventional thinking seems to be that a bond default, should that happen, would be many years in the future. Pardon me, but wasn’t that the thinking right up to Puerto Rico’s, “We can’t pay” announcement? To answer the question of just how badly off is Illinois, I assembled a list of key creditworthiness indicators and applied them to New York, a highly rated state, and Illinois.

COMMENTARY AND BENCHMARK PRIVATE BOND RATINGS

The State of New York is managing its financial resources and obligations in a better-than-average manner. Particularly, the State’s employee pensions are reported to be 90% funded, but the general fund deficit must be contained and then eliminated. Unfunded OPEB costs are too high and can be renegotiated. Funded and pro forma unfunded long-term contractual obligations equaled 23% of general fund revenue in FY ended June 30, 2017, and exceeds the 15% threshold for a Benchmark AA or AA+ credit rating.

*Both NYS income tax and sales tax bonds are payable from annual general fund appropriation. For additional information, click here.

COMMENTARY AND BENCHMARK PRIVATE BOND RATINGS

The State of Illinois, in my opinion, is past the point of no return. It does not have the ability to raise taxes or cut spending to the degree necessary to reduce the annual cost of bond and retiree benefits from 33% to a sustainable level. The amount of debt issued by Illinois requires a moderate 8% of general fund revenues to pay P&I.

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

How The Elite Dominate The World – Part 1: Debt As A Tool Of Enslavement

October 16, 2017

How The Elite Dominate The World – Part 1: Debt As A Tool Of Enslavement

Throughout human history, those in the ruling class have found various ways to force those under them to work for their economic benefit. But in our day and age, we are willingly enslaving ourselves. The borrower is the servant of the lender, and there has never been more debt in our world than there is right now. According to the Institute of International Finance, global debt has hit the 217 trillion dollar mark, although other estimates would put this number far higher. Of course everyone knows that our planet is drowning in debt, but most people never stop to consider who owns all of this debt. This unprecedented debt bubble represents that greatest transfer of wealth in human history, and those that are being enriched are the extremely wealthy elitists at the very, very top of the food chain.

Did you know that 8 men now have as much wealth as the poorest 3.6 billion people living on the planet combined?

Every year, the gap between the planet’s ultra-wealthy and the poor just becomes greater and greater. This is something that I have written about frequently, and the “financialization” of the global economy is playing a major role in this trend.

The entire global financial system is based on debt, and this debt-based system endlessly funnels the wealth of the world to the very, very top of the pyramid.

It has been said that Albert Einstein once made the following statement…

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

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

The 5 Biggest Bubbles In Markets Today

October 9, 2017

The 5 Biggest Bubbles In Markets Today

Bubbles aren’t new—they’ve been around since Dutch tulips—but it’s only recently that they’ve worked their way into the average investor’s lexicon. That’s probably because bubbles happen much more frequently these days.

We never used to get a giant speculative bubble every 7–8 years. But that has been the case since the new millennia.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously (I delve deeper into this topic in my free exclusive special report, Investing in the Age of the Everything Bubble).

Let’s look at some of them.

Real Estate

You can spot real estate bubbles all around the world now. Canada, Australia, Sweden, Hong Kong, China—and California—to name a few.

Home prices in California have risen by 69% since 2010. Meanwhile, Canadian housing has shot up 1040% over the same period.

Why do these bubbles exist? For starters, ultra-loose monetary policy (which is also the reason that the bitcoin bubble exists).

What will be the catalysts that deflate these real estate bubbles? I’m not sure, but usually there isn’t a catalyst. The marginal house price just gets too expensive.

It seems pretty nutty that another real estate bubble is forming just ten years after the last one that nearly wiped out the planet. But real estate has been part of the food fight in asset prices and it appears to be peaking.

Cryptocurrencies

You have probably heard about the madness in cryptocurrencies, like Bitcoin, Ethereum, and ripple. Ethereum is up about 3,600% this year. As for bitcoin, it is old and boring and up only 343% this year.

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

An Accountant Smells a Rat – Peter Diekmeyer

October 2, 2017

An Accountant Smells a Rat – Peter Diekmeyer

Twenty years ago Doug Noland was so worried about imbalances surrounding the dot.com boom that he began to title his weekly reports “The Credit Bubble Bulletin. Years later, he warned the world about the impending 2008 crisis.

However a coming implosion, he says, could be the biggest yet.

“We are in a global finance bubble, which I call the grand-daddy of all bubbles,” said Noland. “Economists can’t see it. They can’t model money and credit. However, to those outside the system, the facts are increasingly clear.”

Noland points to inflating real estate, bond and equity prices as key causes for concern. According to the Federal Reserve’s September Z.1 Flow of Funds report, the value of US equities jumped $1.5 trillion during the second quarter to $42.2 trillion, a record 219% of GDP.

Noland’s Credit Bubble thesis

Noland may be right. A report by the International Institute of Finance released in June estimated that global government, business and personal debts totaled $217 trillion earlier this year. That’s more than three times (327%) higher than global economic output.

Adding to the complexity is the fact that not all debts are fully recorded. For example, according to a World Economic Forum study, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to experience a $224 trillion funding shortfall by 2050.

Noland’s warnings come during a time of exceptional public trust in governments, central banks, regulators and other institutions. Market volatility is trending at near record lows.

In June, Federal Reserve Chair Janet Yellen spoke for many when she said that she did not see a financial crisis occurring “in our lifetimes.”

Unburdened by “econometrics groupthink”

So why would Noland, who during his day job runs a tactical short book at McAlvany Wealth Management, see things that government, academic, and central bank economists don’t?

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

Fed Quack Treatments are Causing the Stagnation

September 30, 2017

Fed Quack Treatments are Causing the Stagnation

Bleeding the Patient to Health

There’s something alluring about cure-alls and quick fixes. Who doesn’t want a magic panacea to make every illness or discomfort disappear? Such a yearning once compelled the best and the brightest minds to believe the impossible for over two thousand years.

Instantaneous relief! No matter what your affliction is, snake oil cures them all. [PT]

For example, from antiquity until the late-19th century, bloodletting was used to treat nearly every disease. Reputable medical references recommended bloodletting as a cure for acne, asthma, cancer, epilepsy, gout, indigestion, insanity, leprosy, pneumonia, scurvy, tuberculosis, and everything in between. Bloodletting was even used to treat hemorrhaging.

The practice was simple enough. A surgeon, often a barber, would open a vein and drain blood from the patient. Somehow, this was supposed to cure them of disease.

The fundamental idea was that a sick person could be bled to health. Induced fainting, via bloodletting, was even considered beneficial. However, the results were often fatal.

On December 13, 1799, George Washington returned from a cold-winters horseback ride across his estate with a raspy throat. So, he requested bloodletting to make his sore throat better. Over a ten-hour period, roughly 126 ounces of blood was drained from his system.

The next day Washington’s treatment culminated in perfect success. Because of the bloodletting, Washington never suffered from a sore throat again. He had received a permanent cure. Namely, he croaked.

Wouldn’t a tablespoon or two of honey and lemon have been a better solution to the sore throat problem? Sure, it would have been less effective. But it would have been a great deal less terminal as well.

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

The Cardinal Sin Of Investing: Permanent Impairment Of Capital

September 16, 2017

Victor Moussa/Shutterstock

The Cardinal Sin Of Investing: Permanent Impairment Of Capital

How to avoid making it

The key message was: When smart analysts independently find the same patterns in the data, it’s time to take notice.

Well, many of you did, by participating in this week’s Dangerous Markets webinar, which featured Grant and Lance.

In it, both went much deeper into the structural fragility of today’s financial markets and the many reasons why economic growth will remain constrained for years to come.

The excessive build-up of debt in the system — and the absolute dependence on its continued expansion to keep the economy from imploding — is, of course, seen as the prime risk to future growth.

As Lance demonstrates here with several of his excellent charts, so much leverage has been taken on that its servicing is increasingly stealing capital that would otherwise go to savings, consumption and productive investment. Going forward, the demands of the debt service will simply result in less and less capital available left over to grow the economy:

As financial assets are (supposed to be) valued on future growth prospects, lower forecasted growth demands lower valuations. Grant calculates that, should the US see another decade of 2% average annual GDP growth (and it has averaged less than that over the past decade), stock prices should be roughly half of what they are today to be considered fairly valued:

And Lance builds further on this, explaining how this moribund growth, coupled with America’s aging demographic trend, will simply savage the nation’s (already troublesomely underfunded) pension and entitlement systems:

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

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