Given fears expressed by a number of major strategists on our show that the Fed made a policy mistake by waiting too long to hike rates, BofA Merrill Lynch's Global Liquidity Tracker is going to be a very interesting chart to keep an eye on. In the past two economic cycles...
I'm going full-nerd with the "Lord of the Rings" introduction to today's Epsilon Theory note, but I think this scene—where Denethor, the mad Steward of Gondor, orders his son Faramir to take on a suicide mission against Sauron's overwhelming...
If you want to know what's spooking the market and why some big names are quite concerned about global financial stability, Worth Wray, Chief Economist at Evergreen Gavekal, recently explained the entire situation in a very timely and important interview...
The capital markets are cranking this morning with newsflow, opting at this time to favor all of the seemingly positive developments. The S&P futures are up 13 points and are trading 0.9% above fair value. The biggest news item of note...
The rumors of a coordinated production cut between OPEC and Russia continue to grow more serious. The latest comes from the Russian energy minister Alexander Novak, who insisted that Russia will hold talks with OPEC in February...
The total and utter failure of The BoJ continues to accelerate...
- *JAPAN 10-YEAR GOVERNMENT BOND YIELD FALLS BELOW ZERO FIRST TIME
Stocks have crashed the most since Black Monday erasing all QQE2 gains..
With Japanese Bank stocks leading the way, now down 25% since NIRP was unleashed (and 32% since the start of the year)...
- *NOMURA EXTENDS DECLINE, FALLS AS MUCH AS 12%
And USDJPY is in freefall...
* * *
As we detailed earlier..
Following earlier comments from yet another Japanese talking head that deflation will be fixed any day now, the Japanese bond curve continues to collapse with yields hitting record lows across the entire spectrum. Most notably, 10Y JGBs - which were trading 24bps before BoJ NIRP - just traded with a 0bp handle for the first time ever, ready to join Switzerland as the only nations with negative rates at 10Y. As bonds rally, and JPY surges to strongest since 2014, so Japanese stocks are crashing (NKY down 1000 points from intraday highs).
Bond yields are plunging...
- *JAPAN 10-YEAR GOVERNMENT BOND YIELD FALLS TO ZERO FOR 1ST TIME
- *JAPAN'S 5-YEAR YIELD FALLS TO RECORD -0.205%
And stocks are crashing as USDJPY tumbles...
- *YEN CLIMBS PAST 115 PER DOLLAR TO STRONGEST SINCE 2014
Jose Canseco will not be happy.
“If you can’t say ‘Fuck’ you can’t say, ‘Fuck the government.’” ? Lenny Bruce
Not only has free speech become a four-letter word - profane, obscene, uncouth, not to be uttered in so-called public places - but in more and more cases, the government deems free speech to be downright dangerous and in some instances illegal.
The U.S. government has become particularly intolerant of speech that challenges the government’s power, reveals the government’s corruption, exposes the government’s lies, and encourages the citizenry to push back against the government’s many injustices.
Indeed, there is a long and growing list of the kinds of speech that the government considers dangerous enough to red flag and subject to censorship, surveillance, investigation and prosecution: hate speech, bullying speech, intolerant speech, conspiratorial speech, treasonous speech, threatening speech, incendiary speech, inflammatory speech, radical speech, anti-government speech, right-wing speech, extremist speech, etc.
Yet by allowing the government to whittle away at cherished First Amendment freedoms - which form the backbone of the Bill of Rights - we have evolved into a society that would not only be abhorrent to the founders of this country but would be hostile to the words they used to birth this nation.
Don’t believe me?
Conduct your own experiment into the government’s tolerance of speech that challenges its authority, and see for yourself.
Stand on a street corner—or in a courtroom, at a city council meeting or on a university campus—and recite some of the rhetoric used by the likes of Thomas Jefferson, Patrick Henry, John Adams and Thomas Paine without referencing them as the authors.
For that matter, just try reciting the Declaration of Independence, which rejects tyranny, establishes Americans as sovereign beings, recognizes God as a Supreme power, portrays the government as evil, and provides a detailed laundry list of abuses that are as relevant today as they were 240 years ago.
My guess is that you won’t last long before you get thrown out, shut up, threatened with arrest or at the very least accused of being a radical, a troublemaker, a sovereign citizen, a conspiratorialist or an extremist.
Try suggesting, as Thomas Jefferson and Benjamin Franklin did, that Americans should not only take up arms but be prepared to shed blood in order to protect their liberties, and you might find yourself placed on a terrorist watch list and vulnerable to being rounded up by government agents.
“What country can preserve its liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance. Let them take arms,” declared Jefferson. He also concluded that “the tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.” Observed Franklin: “Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote!”
Better yet, try suggesting as Thomas Paine, Marquis De Lafayette, John Adams and Patrick Henry did that Americans should, if necessary, defend themselves against the government if it violates their rights, and you will be labeled a domestic extremist.
“It is the duty of the patriot to protect his country from its government,” insisted Paine. “When the government violates the people’s rights,” Lafayette warned, “insurrection is, for the people and for each portion of the people, the most sacred of the rights and the most indispensable of duties.” Adams cautioned, “A settled plan to deprive the people of all the benefits, blessings and ends of the contract, to subvert the fundamentals of the constitution, to deprive them of all share in making and executing laws, will justify a revolution.” And who could forget Patrick Henry with his ultimatum: “Give me liberty or give me death!”
Then again, perhaps you don’t need to test the limits of free speech for yourself. One such test is playing out before our very eyes in Portland, Oregon, where radio “shock jock” Pete Santilli, a new media journalist who broadcasts his news reports over YouTube and streaming internet radio, is sitting in jail.
Santilli, notorious for his controversial topics, vocal outrage over government abuses, and inflammatory rhetoric, is not what anyone would consider an objective reporter. His radio show, aptly titled “Telling You the Truth...Whether You Like It or Not,” makes it clear that Santilli has a viewpoint (namely, that the government has overstepped its bounds), and he has no qualms about sharing it with his listeners.
It was that viewpoint that landed Santilli in jail.
In early January 2016, a group of armed activists, reportedly protesting the federal government’s management of federal lands and its prosecution of two local ranchers convicted of arson, staged an act of civil disobedience by occupying the Malheur National Wildlife Refuge in Burns, Oregon. Santilli, who has covered such protests in the past, including the April 2014 standoff in Nevada between the Bundy ranching family and the federal government over grazing rights, reported on the occupation in Burns as an embedded journalist, albeit one who was sympathetic to the complaints (although not the tactics) of the occupiers.
When asked to clarify his role in relation to the occupation, Santilli declared, “My role is the same here that it was at the Bundy ranch. To talk about the constitutional implications of what is going on here. The Constitution cannot be negotiated.”
Well, it turns out that the Constitution can be negotiated, at least when the government gets involved.
Long a thorn in the side of the FBI, Santilli was arrested by the FBI following its ambush and arrest of key leaders of the movement. He was charged, along with the armed resistors, with conspiracy to impede federal officers from discharging their duties by use of force, intimidation, or threats—the same charge being levied against those who occupied the refuge—which carries a maximum sentence of six years in prison.
Notably, Santilli is the only journalist among those covering the occupation to be charged with conspiracy, despite the fact that he did not participate in the takeover of the refuge, nor did he ever spend a night on the grounds of the refuge, nor did he ever represent himself as anything but a journalist covering the occupation.
Of course, the government doesn’t actually believe that 50-year-old Santilli is an accomplice to any criminal activity.
Read between the lines and you’ll find that what the government is really accusing Santilli of is employing dangerous speech. As court documents indicate, the government is prosecuting Santilli solely as a reporter of information. In other words, they’re making an example of him, which is consistent with the government’s ongoing efforts to intimidate members of the media who portray the government in a less than favorable light.
This is not a new tactic.
During the protests in Ferguson, Missouri, and Baltimore, Maryland, numerous journalists were arrested while covering the regions’ civil unrest and the conditions that spawned that unrest. These attempts to muzzle the press were clearly concerted, top-down efforts to restrict the fundamental First Amendment rights of the public and the press.
As The Huffington Post reports:
The Obama administration's treatment of reporters has caused controversy before. In 2009, the Department of Justice targeted a Fox News reporter in an investigation. Three years later, DOJ seized Associated Press reporters’ phone records. After that, former Attorney General Eric Holder ordered a review of the Justice Department's news media policies. DOJ employees must consult with a unit within the Criminal Division before they arrest someone when there is a “question regarding whether an individual or entity is a ‘member of the news media,’” according to a January 2015 memo from Holder to DOJ employees.”
That the government is choosing to target Santilli for prosecution, despite the fact that they do not recognize new media journalists as members of the mainstream media, signals a broadening of the government’s efforts to suppress what it considers dangerous speech and stamp out negative coverage.
The message is clear: whether a journalist is acting alone or is affiliated with an established news source, the government has no qualms about subjecting them to harassment, arrest, jail time and trumped up charges if doing so will discourage others from openly opposing or exposing the government.
You see, the powers-that-be understand that if the government can control speech, it controls thought and, in turn, it can control the minds of the citizenry.
Where the government has gone wrong is in hinging its case against Santilli based solely on his incendiary rhetoric, which is protected by the First Amendment and which bears a striking resemblance to disgruntled patriots throughout American history.
Here’s what Santilli said: “What we need, most importantly, is one hundred thousand unarmed men and women to stand together. It is the most powerful weapon in our arsenal.”
Now compare that with the call to action from Joseph Warren, a leader of the Sons of Liberty and a principal figure within the American Revolution: “Stain not the glory of your worthy ancestors, but like them resolve never to part with your birthright; be wise in your deliberations, and determined in your exertions for the preservation of your liberties. Follow not the dictates of passion, but enlist yourselves under the sacred banner of reason; use every method in your power to secure your rights.”
Indeed, Santilli comes across as relatively docile compared to some of our nation’s more outspoken firebrands.
Santilli: “I’m not armed. I am armed with my mouth. I’m armed with my live stream. I’m armed with a coalition of like-minded individuals who sit at home and on YouTube watch this.”
Now compare that to what George Washington had to say: “Unhappy it is, though, to reflect that a brother's sword has been sheathed in a brother's breast and that the once-happy plains of America are either to be drenched with blood or inhabited by slaves. Sad alternative! But can a virtuous man hesitate in his choice?”
And then there was Andrew Jackson, a hothead if ever there was one. He came of age in the early days of the republic, served as the seventh president of the United States, and was not opposed to shedding blood when necessary: “Peace, above all things, is to be desired, but blood must sometimes be spilled to obtain it on equable and lasting terms.”
This is how freedom rises or falls.
There have always been those willing to speak their minds despite the consequences. Where freedom hangs in the balance is when “we the people” are called on to stand with or against individuals who actually exercise their rights and, in the process, push the envelope far enough to get called out on the carpet for it.
Do we negotiate the Constitution, or do we embrace it, no matter how uncomfortable it makes us feel, no matter how hateful or ugly it gets, and no matter how much we may dislike its flag-bearers?
Comedian Lenny Bruce laid the groundwork for the George Carlins that would follow in his wake: foul-mouthed, insightful, irreverent, incredibly funny, and one of the First Amendment’s greatest champions who dared to “speak the unspeakable” about race, religion, sexuality and politics. As Village Voice writer Nat Hentoff attests, Bruce was “not only a paladin of free speech but also a still-penetrating, woundingly hilarious speaker of truth to the powerful and the complacent.”
Bruce died in 1966, but not before being convicted of alleged obscenity for challenging his audience’s covert prejudices by brandishing unmentionable words that, if uttered today, would not only get you ostracized but could get you arrested and charged with a hate crime. Hentoff, who testified in Bruce’s defense at his trial, recounts that Lenny used to say, “What I wanted people to dig is the lie. Certain words were suppressed to keep the lie going. But if you do them, you should be able to say the words.”
Not much has changed in the 50 years since Bruce died. In fact, it’s gotten worse.
What we’re dealing with today is a government that wants to suppress dangerous words—words about its warring empire, words about its land grabs, words about its militarized police, words about its killing, its poisoning and its corruption—in order to keep its lies going.
As I document in my book Battlefield America: The War on the American People, what we are witnessing is a nation undergoing a nervous breakdown over this growing tension between our increasingly untenable reality and the lies being perpetrated by a government that has grown too power-hungry, egotistical, militaristic and disconnected from its revolutionary birthright.
The only therapy is the truth and nothing but the truth.
Otherwise, there will be no more First Amendment. There will be no more Bill of Rights. And there will be no more freedom in America as we have known it.
As the insightful and brash comedian George Carlin observed:
“Rights aren’t rights if someone can take them away. They’re privileges. That’s all we’ve ever had in this country, is a bill of temporary privileges. And if you read the news even badly, you know that every year the list gets shorter and shorter. Sooner or later, the people in this country are gonna realize the government does not give a fuck about them! The government doesn’t care about you, or your children, or your rights, or your welfare or your safety. It simply does not give a fuck about you! It’s interested in its own power. That’s the only thing. Keeping it and expanding it wherever possible.”
Two years ago, just before Michael Lewis released Flash Boys starting a sharp if brief revulsion against parasitic, predatory High Frequency Trading frontrunners, which delayed Virtu's IPO by one year, we broke down Virtu's 2013 net trading income by product line. We were not surprised to find that of the $45 million in total growth, the largest income category, US stocks growth was a tiny 5% of all, rising by $2.3 million in 2013. In fact, between EMEA, APAC and US Equities, there was very limited growth in 2013, while commodities posted an outright trading income decline. It appeared to be the case that growth in conventional products has indeed plateaued, as more and more HFT competitors rush in. And yet, one product stood out. It is highlighted on the chart below: FX.
This is how we summarized this observations almost exactly two years ago:
With increasingly more homo sapiens-type banker FX traders being laid off left and right for pervasive and ubiquitous manipulation of currencies (who can forget the infamous "Cartel" chat room, JPM's head of spot trading presiding), what this means is that more and more algos will rush into this product to fill the voids left by carbon-based traders.
Two years later, Bloomberg caught up to the fate of what it calls Wall Street's "dying breed", the once proud FX traders who over the past two years have become an endangered species between losing their jobs to Virtu's algos, and to countless FX rigging scandals which revealed that the world's biggest market was nothing but one grand conspiracy in which a handful of banks schemed illegally in so-called chat rooms.
First the numbers: there were 2,300 people working in currency-market front-office jobs at the world’s biggest banks in 2014, a 23 percent drop from four years earlier, according to Coalition Development Ltd., an analytics firm.
Bloomberg also discovers Virtu: "Humans are up against formidable
opponents across the industry. Take Virtu Financial Inc. Deploying
sophisticated technology in the business, the company’s computers can
trade more than 11,000 securities and other products on more than 225
trading platforms in 35 countries. Because automation is so deeply
ingrained in its business, it had only about 150 employees last year --
generating more than $5 million per worker."
And here are some of the people behind the numbers:
Charlie Stenger, a currency-broker-turned-recruiter, has seen it all. One fired trader wept in his office. Another admitted he hadn’t told his wife he was unemployed, and left the house every day in a suit to sneak off to a coffee shop. Then there are the delusional guys, who carefully explain how they’re not interested in jobs that don’t pay as well as those they just lost.
Stenger, who was laid off from ICAP Plc in 2013 and now works for Sheffield Haworth Ltd., tells the men and women he counsels: Take the pay cut. Oh, and don’t wait for the phone to ring.
“This is crunch time -- it’s not looking good,” Stenger said. “This is a shrinking pond.”
It is, and not just for the people: the size of the overall FX market itself is collapsing.
The death of the FX market has not been greatly exaggerated: the layoffs have continued and are unlikely to stop in the $5.3 trillion-a-day market. Revenue from from foreign-exchange divisions hasn’t bounced back after falling to $6.5 billion in 2014, down almost 45 percent from 2009, Coalition data show. Currency trading in the U.K. and North America shrank by more than 20 percent in October from a year earlier, according to central banks in those regions. London is the biggest center for foreign-exchange trading.
For some being replaced by an algo was not how they had envisioned the conclusion to their Wall Street careers:
“The business has to be downsized,” said Keith Underwood, a foreign-exchange consultant who ended a 25-year trading career, including at Lloyds Banking Group Plc, in 2014. But it’s not easy “for people who have been in a market for many, many years to see that they’ve been replaced by an algorithm.”
Others who have not been fired yet, and are just counting the days to that closed doors conference room meeting:
Some ex-traders have moved to smaller houses or pulled kids out of private school. Those waiting for the ax to fall hoard paychecks. Stenger was out of regular work for a year after he lost his job; he was told about the lay-off four days after he learned his wife was pregnant with their first child. “There were periods where I wouldn’t make money for 90 days at a time,” he said, “and the insurance bill was still due every month, and the rent and the car payments.”
For many, however, the feeling of escaping Wall Street's clutches is an unexpected one: liberation.
Underwood, the consultant, said he left the market because regulators were cracking down on his niche by implementing stricter derivatives rules after the financial crisis. “My style of trading went out of vogue,” he said. So the former head of foreign exchange trading for the Americas at Lloyds, who also led teams at Credit Agricole SA and Lehman Brothers in London and New York, reinvented himself.
“I couldn’t be more happy,” said Underwood, who described the hourly rates he charges as comparable to those of a senior lawyer. “There is more empowerment, with control of my future.”
Many traders have discovered they have transferable skills. Some have landed work as salespeople or executives at financial technology companies, payment providers or trading platforms and exchanges. Others are using their knowledge to bolster banks’ risk-management operations. Franz Gutwenger, a recruiter in New York, said one of his financial-institution clients has expanded its regulatory-compliance staffing by a factor of five.
“I don’t think there’s a whole lot from my generation that are still in the industry,” said Guy Piserchia, who during a three-decade career led North-American foreign-exchange trading at Bank of America Corp. and Paribas, a precursor to BNP Paribas SA, in Asia. He left Wall Street in 2012 to become mayor of the 8,700-person township of Long Hill, New Jersey. Now he’s deputy mayor, but said he wants to get back into the business in a role that combines his financial and government experience.
What happens next:
“With automation and electronic dealing, I think there are going to be fewer people” on foreign-exchange desks, Piserchia said. “The ones that have evolved and survived may be some of the better ones -- or, as in life, may be some of the lucky ones.”
As the realization that there is a life away from finance, more will leave the confines of Wall Street for ever. Who will remain: just the central bankers who pretend the market is the economy, and pretend there is such as thing as a "market" in the first place, and the algos which however without humans to frontrun, will soon be extinct soon as well.
Well, no one ever accused Jeremy Siegel of being bearish, but now he is at least less bullish after witnessing one of the worst Januarys for stocks in history.
"I was far too bullish last December," Siegel told CNBC on Monday, on the way to asking if central banks had the firepower to “counteract all of the deflationary forces.”
“That’s clearly spooking the markets right now,” the vaunted Wharton school professor said of the deflationary boogeyman the world just can’t seem to shake despite trillions in global QE.
To be sure, Siegel didn’t say anything new. It’s all about the yuan and plunging commodity prices.
Oh, and the fact that the entire US O&G sector is about to go belly up and banks aren’t even close to being adequately provisioned.
“Those deflationary forces ... from China, from commodities are really, in the presence of debt that so many of these energy and other companies have, ... causing the market turmoil right now,” he says.
And while Siegel admits that he may have been foolish to predict that “valuations can stay on the high side” in the near-term, he’s sticking with the idea that equities are where you want to be over the long haul. “In the long-run, you're going to be rewarded [in stocks]," he concludes.
To borrow a phrase from Bill Gross, we’d ask Siegel this with regard to his infamous Dow 20,000 call: “Hows that workin’ out for ya?”
In a recent article, “How to Defeat Your Enemies,” we maintained that governments and their people were natural enemies, and that the most powerful adversarial tactic is “getting one’s enemies to fool themselves.” The article detailed the effective use of this tactic by Osama bin Laden and al Qaeda. The question arises: how can the American people use it against their natural adversary, the US government?
Lies are always misrepresentations of reality, and reality always wins. The US government rests on an inherently unstable foundation of whoppers—big lies so huge they would make big lie proponent Adolf Hitler blush—some of which were detailed in the earlier article. The first trick to defeating an enemy is to ascertain its biggest weaknesses and the lies, which it feeds itself, flowing from those weaknesses.
Every government craves as much of its country’s resources as it can borrow, swindle, and steal. Our government’s finances are a series of lies. The first is that most people who pay taxes do so voluntarily. That’s a testable proposition. Make tax payments truly optional and voluntary, with no penalty and no civil or criminal liability for nonpayment. How much taxes do you think the government would collect? The taxes collected as a percentage of the taxes formerly collected would be an exact measure of the “voluntariness” of the tax system.
Closely linked to voluntary tax compliance is people’s willingness to back the government’s and the central bank’s debt. Creditors loan the US government money because the government has first call on the income and wealth generated by the world’s most productive economy. Besides the provision of a legal framework (currently a tiny part of its budget) the government has little to do with actual production, and often impedes it. Producers produce, and the decision to produce more than what’s necessary for subsistence is voluntary. Conduct a test similar to the tax test: ask producers to voluntarily send in money to pay the government’s debt bill, and see how much it receives. It would be even less than what it received in voluntarily paid taxes.
The government’s revenues are coerced exactions. A portion of those revenues are then redistributed from highly productive, low-vote groups to less or non-productive, high-vote groups, and that process is riddled with prevarication. Social security and Medicare employ the fiction that the taxes they extract are like contributions to a pension or medical insurance plan that is invested and builds value over the years. In fact, those “contributions” are paid out as they come in; there are no trust funds building equity for their “contributors.” The trust fund nomenclature is the mark of a swindle. The lies associated with the government’s newest foray into medicine, Obamacare, are numerous and well-documented. Similar lies can be untangled from virtually all the government’s redistribution schemes and social spending, but only by the stout of heart and strong of stomach.
The US government’s—virtually all governments’—biggest weakness is that it produces nothing on its own and must either borrow, swindle, or steal what it spends from those who do produce. Government is thus dependent on the voluntary choice of producers to produce and creditors to lend. Economic collapse and bankruptcy have felled far more governments than revolutions or invasions, although revolutionaries or invaders often administer the coup de grâce.
Yet, those who consider themselves modern American revolutionaries often envision manning barricades and mass revolt as the undoing of the government.That attacks the government at its greatest strength—its capacity to use force and violence. The US government has at its disposal the most potent military and surveillance capabilities ever assembled. Most of its warriors (the military, and federal and local police forces) are brainwashed and would open fire on, imprison, or kill anyone they are told is a threat to the state. If it so chose, the government could destroy some or all of this country with nuclear weapons, and it cannot be ruled out that we may someday have psychopathic “leaders” who would do just that if they felt sufficiently threatened, or maybe just for fun.
The idea that some sort of mass movement will rise and by force of its inferior arms throw off the yoke of oppression is the stuff of weak novels, not a real life strategy that has a chance of success. Those who buy into it and attempt implementation commit the biggest strategic failure: they have fooled themselves. Consequently, their enemy—the government—profits. It uses their failure to justify further tyranny and repression.
There is surprisingly little written about attacking the government at its weakest point: its financial dependence (see, however, “Revolution in America,”). An offensive would require a mass movement far less massive than that required for armed revolt, and its tactics would be legal. A few million simultaneous phone calls and requests via websites for the withdrawal of balances from banks, money market funds, and stock and bond mutual funds would precipitate a financial panic. None of those institutions keep enough cash on hand to meet a tsunami of redemption and withdrawal requests. They’d have to sell their assets to raise cash. The prices of those assets would drop, begetting further selling; negative crowd psychology and wealth effects would kick in as markets crash, and debt and economic activity would contract.
The biggest loser in all this would be the government. As prices for bonds drop, interest rates rise, increasing its debt service. As economic activity contracts, tax receipts drop, safety net spending rise, crony capitalists must be bailed out, and deficits expand. Except for interest on government debt rising (it was perceived as a safe haven) all of this happened during the last financial crises. A massive increase in government debt and central bank debt monetization forestalled complete disaster last time. Even some of their proponents admit that those palliatives are now exhausted. During the next crisis, interest rates will rise on government debt to reflect its increasing credit risk.
Which will leave the government confronting, and being defeated by, one of its biggest whoppers: that the pieces of paper and computer notations its Treasury and central bank generate ultimately have value after decades of determined efforts to depreciate them. They’re simply pieces of paper and computer entries, and eventually they’re not going to buy any groceries for all those warriors and police the government’s counting on, or for anyone else. Currencies collapse just before governments do; witness Venezuela, with its Bolivar and its government in extremis.
This outcome does not require a plan; it’s going to happen. Indeed, it’s already happening. Anyone who wants to hasten the process in their own small way can stop lending governments money in the Treasury and municipal bond markets. Politically, they should vote for the politician who will promote more foreign military intervention, domestic spending, taxation, redistribution from the productive to the nonproductive, and economically destructive regulation. A vote for any of the candidates still standing will serve that purpose. As the government crumbles and chaos stages an upside breakout, other tactics to opportunistically capitalize on system failure and reinstate liberty will be feasible.
From omnipotence to impotence... Peter Pan(ic) is here...
NKY is 1000 points below pre-NIRP levels and USDJPY is 4 handles lower (JPY stronger)...
Simply put - not only are words not enough to create the only effect that Central Banks care about but their actions are now worse than doing nothing...
Japanese Bank stocks are down 25% since NIRP was unleashed (and 32% since the start of the year)...
Back in the 1970’s as recession gripped the world for a decade, stocks stagnated and commodities crashed, investor Jim Rogers made a fortune. His understanding of markets, capital flows and timing is legendary.
As crisis struck in late 2008, he did it again, often recommending gold and silver to those looking for wealth preservation strategies – move that would have paid of multi-fold when precious metals hit all time highs in 2011. He warned that the crash would lead to massive job losses, dependence on government bailouts, and unprecedented central bank printing on a global scale.
Now, Rogers says that investors around the world are realizing that the jig is up. Stocks are over bloated and central banks will have little choice but to take action again. But this time, says Rogers in his latest interview with CrushTheStreet.com, there will be no stopping it and people all over the world are going to feel the pain, including in China and the United States.
We’re all going to suffer… I can think of very few places that won’t suffer. But most people are going to suffer the next time around.
Central banks will panic. They will do whatever they can to save the markets.
It’s artificial… it won’t work… there comes a time when no matter how much money you have, the market has more money.
I don’t know if they’ll even call it QE (Quantitative Easing) in the future… who knows what they’ll call it to disguise it… they’re going to try whatever they can… printing more money or lowering interest rates or buying more assets… but unfortunately, no matter how much P.R. or whitewashing they use, the market knows this is over and we’re not going to play this game anymore.
The entire world is about to get hammered and the average person on the street is the one who will pay the price, as is usually the case.
We can expect more losses in markets, more losses in jobs and more losses to freedom as governments and central banks point the finger at everyone but themselves.
Late last month, in what amounted to a tacit admission that nothing is working when it comes to pulling Japan out of its decades’ long stint in the deflationary doldrums, the BoJ adopted negative rates.
Haruhiko Kuroda’s move to plunge Japan into the NIRP twilight zone (where it joins Denmark, Sweden, Switzerland, and the whole of Europe) comes just as the BoJ effectively runs out of room when it comes to implementing further QE. The central bank is already monetizing the entirety of gross JGB issuance and is on pace to own nearly the entire Japanese ETF market.
In short, there’s nothing left to buy. Everything that can be monetized without completely breaking/distorting markets has been monetized and yet inflation remains stubbornly low.
So, in a last ditch effort to provide the spark Japan needs to hit the elusive 2% inflation target, Kuroda went NIRP. Subsequently, he promised to take rates even further into negative territory if necessary, a declaration which a year ago would have been good for a sharp equity and USDJPY rally but which now, much like other central banker jawboning, has a market half-life of about an hour.
Of course it’s not just the deflationary impulse that Japan is struggling to combat. There’s also a persistent lack of wage growth. “Wages need to rise at a 3 percent annual pace to achieve stable 2 percent inflation,” Bloomberg reminds us.
In short, Japan is nowhere near 3% when it comes to rising worker pay. In fact, data out on Monday shows that wage growth for 2015 was just 0.1%, down from an already abysmal 0.4% in 2014.
In other words: wages have flatlined.
For December, real wages fell 0.1% Y/Y. That's the second straight month of decline. "Total wages in Japan haven’t risen more than 1 percent in any year since 1997 and they fell for the past four years once inflation is accounted for," Bloomberg adds, in an extremely amusing indictment of the country's complete failure to put the "lost decade" behind it.
Here's the complete breakdown from Goldman:
Preliminary data show winter special wages down 0.4% yoy: Nominal cash wages in December came in at +0.1% yoy, a slight increase from 0.0% in November. Basic wages continued the uptrend, coming in at +0.7% yoy (November: +0.3%), but overtime wages slowed to +0.8% (+1.2%). Special wages, which include winter bonuses and can account for around 50% of nominal cash wages, were down in December, coming in at -0.4% (preliminary data basis).
Over 2015, nominal cash wages rose 0.1% yoy, a slowdown from growth of 0.4% in 2014. Basic wages improved a sharp 0.3% (2014: -0.4%), but special wages were down 0.8%, and overtime wages also slowed.
Real wages negative for second straight month: December real wages fell 0.1% yoy, for the second straight month of decline, reflecting the small increase in total nominal cash wages of only 0.1%, and a rise of 0.2% yoy in the CPI excluding imputed rent (which is used in the calculation of real wages) in December. While basic wages remain on a growth path, albeit modestly, wage conditions in general, including bonuses and overtime wages, have deteriorated.
Obviously, none of that bodes particularly well for the Japanese consumer. Domestic consumption is expected to have shrunk in Q4, marking the second quarter of contraction for the year.
"The pace of wage gains has been very slow when you think about how much labor shortage there is," Hisashi Yamada, chief economist at the Japan Research Institute in Tokyo lamented on Monday.
Perhaps Japan's beleaguered workerkers should take a page out of Abenomics architect Akira Amari's book and just resort to taking bribes when they need a few extrra yen.
Unfortunately for Japan, Kuroda has very nearly reached the Keynesian endgame. That is, the BoJ's counter-cyclical capacity is exhausted. Expanding QE any further risks seriously impairing liquidity and market function and taking rates further into negative territory risks more cancelled JGB auctions which in turn inhibit QE. There's simply nothing else the central bank can do.
With Abenomics having thus failed miserably, we'll sit back and wait for the day when Abe and Kuroda finally take a long bow and fall (figuratively speaking we hope) on their swords.
The United States Preventive Services Task Force recently recommended mandatory depression screening for all Americans. The task force wants to force health insurance companies to pay for the screening. Basic economics, as well as the Obamacare disaster, should have shown this task force that government health insurance mandates harm Americans.
Government health insurance mandates raise the price of health insurance. Consumers will respond to this increase by either choosing to not carry health insurance or by reducing their consumption of other goods and services. Imposing new health insurance mandates will thus make consumers, many of whom are already suffering from Obamacare’s costly mandates, worse off by forcing them to deviate from their preferred consumption patterns.
Mandatory depression screening will not just raise insurance costs. In order to ensure that the screening mandate is being properly implemented, the government will need to create a database containing the results of the screenings. Those anti-gun politicians who want to forbid anyone labeled “mentally ill” from owning a firearm will no doubt want to use this database as a tool to deprive individuals of their Second Amendment rights.
If the preventive task force has its way, Americans could lose their Second Amendment, and possibly other, rights simply because they happened to undergo their mandatory depression screening when they were coping with a loved one’s passing or a divorce, or simply having a bad day. As anyone who has been mistakenly placed on the terrorist watch list can attest, it is very difficult to get off a government database even when the government clearly is in error. Thus, anyone mistakenly labeled as depressed will have to spend a great deal of time and money in what may be a futile attempt to get his rights back.
Mandatory depression screening will endanger people’s health by increasing the use of psychotropic drugs. These drugs often have dangerous side effects. Their use has even been linked to suicide. The fact that almost every mass shooter was on psychotropic drugs is another good reason to oppose any policy that will increase reliance on these medicines.
The Preventive Services Task Force’s mandatory depression screening mandate is based on the fallacy that diagnosing mental health problems is analogous to diagnosing cancer or diabetes. Even mental health professionals acknowledge that there is a great deal of subjectivity in mental health diagnosis.
Consider that until 1973 homosexuality was considered a mental disorder by the American Psychiatric Association. Today, some mental health professionals think that those who believe in limited government, free-market economics, or traditional values suffer from mental disorders. If mandatory depression screening becomes a reality, it is likely this mental health screening will be expanded to cover screening for other mental illnesses. This could result in anyone with an unpopular political belief or lifestyle choice being labeled as “mentally ill.”
Even if mandatory health screening could be implementing without increasing costs or threatening liberty it would still be a bad idea. Government health care mandates undermine the basic principles of a free society. If it is legitimate for government to tell us what types of health care we must receive, then it is also legitimate for the government to tell us what to eat, when to exercise, and even how to raise our children.
To paraphrase C.S. Lewis, a tyranny imposed for our own good is the worst form of tyranny because it is a tyranny without limits. All who love liberty must therefore oppose mandatory depression screening, or any other health care mandate.
Being "paid to wait" in high-yielding stocks last year was a death by 394 cuts. As Bloomberg reports, the number of dividend reductions far surpassed 2008, almost 100 more than at the outset of the Great Recession - a time when the implosion of Lehman caused equity markets to plummet in the later stages of the third quarter.
Just ignore it - it's transitory!!
The ratcheting down of payouts to shareholders is a function of weak commodity prices, sluggish growth dampening corporate profits, and a tightening of credit conditions. This combination—and in particular the stingier lending—could exacerbate the carnage already seen this year in financial markets, further dampening economic activity.
Because of the stigma associated with cutting dividends, management is loath to go down that path unless the need is dire. The trend toward trimmed payouts hasn't let up so far in 2016, especially among companies under stress from soft commodity prices. In recent days, ConocoPhillips slashed its dividend by 66 percent and Potash Corp. of Saskatchewan Inc. reduced its payout by 34 percent.
And as credit markets shut off the source for economically rational shareholder-friendliness, the situation is only going to get worse...
Back in the summer of 2011, when we reported that Canadian banks appear dangerously undercapitalized on a tangible common equity basis...
... the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit:
Were the folks at Zerohedge.com looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks?
In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.
But there's an argument that looking at that ratio is the wrong way to judge a bank's strength because it ignores the composition of the assets.
Sadly, the folks at Zerohedge.com were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada's banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.
The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day.
Sadly for Canada, it's not only raining, it's pouring for the country's energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks' balance sheets, where we find something very troubling, and something which prompts us to wonder if the time of freaking out about European banks is about to be replaced with comparable panic about Canadian banks.
The following chart from an analysis by RBC shows that when compared to US banks' (artificially low) reserves for oil and gas exposure, Canadian banks are...not.
Here is the one chart showing why the time to panic about Canadian banks may have finally arrived:
To be sure, last week we presented a full breakdown of the public U.S. bank energy and commodity exposure courtesy of Janney: which woefully lacking in many aspects, most notably in the credibility of the presentation as a result of the recently noted discussions between the Dallas Fed and US banks, at least it provides a relative benchmark of who is exposed to what per management disclosures.
We would do the same for Canada's banks only... we can't. So where does that leave us? Here are some though from RBC, ironically a Canadian bank itself, on bank balance sheets:
Early small cracks – timing is uncertain – preparing for volatility
The small negative moves in credit would normally not even “register” were it not for plenty of evidence of issues surround the oil and gas sector and the impact it could have on the oil producing provinces in Canada. The timing of loan impairments and PCLs has been volatile on a quarterly basis during previous credit cycles for the Canadian banks (see Exhibit 7 and Exhibit 8). We forecast rising provisions over the next four quarters, but have low confidence of when these losses will materialize for the banks (see Exhibit 9). In other words, while we increased EPS estimates for three banks on account of lower loan losses in Q1/16, this change was due to the perceived timing of losses (e.g., we may still be “early” in the cycle) rather than a shift in our outlook for overall credit quality of the Canadian banks. As we touch upon in the next session – Canadian banks like to wait for impairment events to book PCLs rather than build reserves (called sectoral reserves in the past) for problematic industries.
The problem with that last bolded sentence, is that as it says, "Canadian banks like to wait for impairment events to book PCLs rather than build reserves", in effect throwing the entire process of reserving for future losses out of the window.
However, with oil prices now suffering from a worse crash than the one seen in 2008, waiting is no longer an option, which means approximating the magnitude of potential losses on Canadian oil and gas loans is of utmost importance, especially since as Exhibit 10 shown above demonstrates, no loss reserves have been built whatsoever.
RBC has done this exercise, and here is what it finds (for other banks, if not for itself):
Some large U.S. banks currently have or guided to loss reserves in the 5-9% range against oil and gas loan exposures (see Exhibit 10).
Small diversion…We note there are some differences between the recognition and reserving for loan losses between U.S. and Canadian banks that do not make for a perfect comparison between countries, nor can we control for underwriting discipline. Nevertheless, we believe loan loss accounting is similar in both countries with oversight from the regulator and from auditing firms.
In practice, however, it appears as though U.S. banks build collective (or “general”) loan loss reserves early and later release these reserves into earnings. In Canada, when we speak with management teams, they seem to stress that the event of impairment is what will trigger PCLs rather than a build of reserves before impairments. We show a summary of Canadian and U.S. bank allowances relative to total loans over time and note that U.S. bank allowances are still higher than Canadian banks, but have been trending down (see Exhibit 11). In fact, US banks have more than double the level of allowances against loans versus the Canadian banks. However, we should also point out that the US banks also have approximately double the level of impaired loans that the Canadian banks have and loan mixes are quite different.
Oddly, we often hear that US banks are applauded for “recognizing” the problem “early” and this too may play a role in their volatile reserve behavior and may be why US reserves for the oil and gas loan books are as high as they are. Conversely, we have had many past conversations with Chief Risk Officers in Canada about recovery methods and proactive management of loans that may be criticized or struggling and we found that a “through the cycle” best result is not necessarily tied to recording losses “early” through the income statement. In fact, one might argue that “arming” your recovery teams with large “reserves” ahead of the restructuring/loan workout phase may lead to sub-optimal recoveries…
So... it is preferential to not arm your recovery team to handle the truth, because it leads to sub-optimal recoveries. This is also known as the... well, in this case a picture is certainly worth a $1000 in loss reserves:
RBC continues with its attempt to show how much more pleasant having one's head stuck in the sand is:
We would note that Exhibit 10 only shows specific allowances for Canadian banks while the U.S. bank reserve levels in Exhibit 10 includes both specific and general allowances. In other words, the Canadian banks may have general allowances against oil and gas loans which are not captured in the below analysis. In Canada, general allowances are not explicitly disclosed by industry and hence we cannot quantify how much general allowance the Canadian banks may already set aside for oil and gas loans (so we exclude them from our analysis).
In other words, even more balance sheet obfuscation which means that nobody actually knows the full exposure of Canadian banks, something which has led Europe's largest bank to crash 10% today, seen its CDS more than double in the past month, and trade at levels not seen since the Lehman failure. But for Canadian banks, this is somehow... different.
Which brings us to the punchline:
Back to our loan loss calculation methodology in Exhibit 13… This method essentially holds all loan losses from 2015 as constant and then adds direct loan losses from the drawn oil and gas loan books. Effectively, we are assuming the US banks reserve levels are a “correct” estimation of loan losses from the direct oil and gas loans and the Canadian banks need to “catch up” to have similar levels of reserves. We like this method as it helps us determine a sort of “consensus” loss on oil and gas loans – but we admit this is very general and does not control for the investment grade ratings, geography, future drawdowns and/or specific industry exposures (like E&P lending versus mid-stream lending, etc.).
And here is what "panic" means in purely monetary terms:
- Canadian banks' (ex RBC) current loss allowance: $170MM
- Canadian banks' (ex RBC) pro-forma loss allowance assuming U.S. banks reserve levels are accurate: $2,529MM
The difference: $2,359MM, or an increase of 1,288%.
Clearly, the above RBC analysis assumes that 7% loss reserves are sufficient to offset loan losses in what is shaping up as the biggest commodity crash in history.
We wish we could be as confident as RBC that this is sufficient, however we are clearly concerned that if and when Canada's banks finally begin to write down their assets and flow the impariments though the income statement, that things could go from bad to worse very quickly, and not necessarily because Canada's banks are under or over provisioned, but for a far simpler reason - once the market focuses on Canadian energy exposure, it will realize just how little information is freely available, and if European banks are any indication, it will sell first and ask questions much later if at all.
However, indeed assuming a worst case scenario, one in which the banks will have to "eat" the losses and suffer impairments, then the question emerges just how much capital do these banks truly have, which in turn goes back full circle to our post from the summer of 2011 which led to much gnashing of teeth at the Globe and Mail.
We wonder what its reaction will be this time, and even more so, what its reaction will be if the market decides that when it comes to "the next domino to fall", it was indeed Canada which courtesy of a generous global central bank regime which flooded the world with excess liquidity, and which China is now actively soaking up, allowed Canada's banks to quietly skirt under the radar for many years; a radar that has finally registered a ping.