Since the beginning of this year, Wall Street economists and analysts have been consistently prognosticating that following the Federal Reserve's latest bond buying campaign, economic growth would gather steam and interest rates would begin to rise. This has consistently been the wrong call. The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered; wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically at strong enough rates to sustain higher interest rates. This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption.
The import restrictions on gold that were imposed on Indians in August of 2013 were lifted at the end of last month. Despite the fact that the restrictions were still in place gold importation in November surged an incredible 571% relative to the same month last year at over 151.58 tonnes.
For those wondering if the CBR's intervention in the Russian FX market with its shocking emergency rate hike to 17% overnight calmed things, the answer is yes... for about two minutes. The USDRUB indeed tumbled nearly 10% to 59 and then promptly blew right back out, the Ruble crashing in panic selling and seemingly without any CBR market interventions, and at last check was freefalling through 72 74 76, and sending the Russian stock market plummeting by over 15%.
China faces epic unintended consequences in its efforts to 'manage' everything. As Bloomberg rhetorically asks, what if a central bank cut interest rates and borrowing costs rose?
Who said economics can’t be fun?! How is it not absolutely brilliant that in the face of a collapsing shale oil industry – or at least, for the moment, of its financing model -, and the worst week for the Dow since 2011, the Thomson Reuters/UofMichigan consumer sentiment index shows American consumers are more optimistic than they’ve been in 8 years, and that “more consumers volunteered good news than bad news than in any month since 1984?? 1984! How does one trump that as a contrarian signal? And that I don’t mean to sound funny: that is serious.
"Anything that becomes a mania -- it ends badly," warns one bond manager, reflecting on the $550 billion of new bonds and loans issued by energy producers since 2010, "and this is a mania." As Bloomberg quite eloquently notes, the danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt - as HY energy spreads near 1000bps - all thanks to the mal-investment boom sparked by artificially low rates manufactured by The Fed. "It's been super cheap," notes one credit analyst. That is over!! As oil & gas companies are “virtually shut out of the market" and will have to "rely on a combination of asset sales" and their credit lines. Welcome to the boom-induced bust...
If prices fall any further (and what’s going to stop them?), it would seem that most of the entire shale edifice must of necessity crumble to the ground. And that will cause an absolute earthquake in the financial world, because someone supplied the loans the whole thing leans on. An enormous amount of investors have been chasing high yield, including many institutional investors, and they’re about to get burned something bad. We might well be looking at the development of a story much bigger than just oil.
And the final punch in the gut on this bloodbathy Friday some from French Fitch which just downgraded France from AA+ to AA: "The weak outlook for the French economy impairs the prospects for fiscal consolidation and stabilising the public debt ratio. The French economy underperformed Fitch's and the government's expectations in 1H14 as it struggled to find any growth momentum, in common with a number of other eurozone countries. Underlying trends remained weak despite the economy growing more strongly than expected in 3Q, when inventories and public spending provided an uplift. Euro depreciation and lower oil prices will provide some boost to growth in 2015. Fitch's near-term GDP growth projections are unchanged from the October review of 0.4% in 2014 and 0.8% in 2015, down from 0.7% and 1.2% previously. Continued high unemployment at 10.5% is also weighing on economic and fiscal prospects."
Now that China is on the same boat as the rest of the world, and its stock market is a direct reflection of hopes for constant liquidity injections by the central banks, nothing could be better for stocks than bad news, which is precisely what it got. After the biggest crash in the Shanghai Composite in 5 years, what China got just the bad economic update it needed, when it reported a PPI of PPI (-2.7%, Exp. -2.4%), the 33rd consecutive decline and a CPI (1.4%, Exp. 1.6%), lowest since November 2009, when the big banks’ RRR rate stood at 15.5% vs. current 20%. And so hope of yet more PBOC interventions to halt China's deflation promptly reversed SHCOMP losses of over 4% on the session (at which point it was just shy of correction territory from recent highs hit just this week), and stocks surged to close up almost 3%, erasing half of yesterday's losses. This spike came despite reports Chinese regulators may limit brokerages' interbank borrowing.
With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury. Is everyone still wrong?
PBOC Tries To Pop Equity Bubble, Tightens FX & Slashes Collateral/Margin Availability; Yuan Crashes Most Since 2008Submitted by Tyler Durden on 12/08/2014 22:29 -0500
Unlike the Federal Reserve - which openly encourages speculative wealth creation/redistribution and has never seen an equity bubble it didn't believe was contained - the PBOC appears, by its actions tonight, to be concerned that things have got a little overheated in its corporate bond and stock markets as hot money ripped into the nation's capital markets on hints of further easing and QE-lite a few months ago. In a show of force, the PBOC simultaneously fixed CNY significantly stronger (implicit tightening) and enforced considerably stricter collateral rules on short-term loans/repos. With Chinese stocks concentrated is even fewer hands than in the US (and recently fearful of the surge in margin trading), it appears the PBOC is trying to stall the acceleration is as careful manner as possible. The result, as Bloomberg notes, is a major squeeze in CNY (biggest drop since Dec 2008), interest-rate swaps ripped higher along with corporate bond yields, and most Chinese stocks sold off (with two down for every one up) though the latter is stabilizing now.
America has created a moral hazard for all Americans in that we feel we always have a fail safe no matter what we do because we’ve always succeeded. But so too had every other great dynasty until it didn’t. If we do not force a change in our economic policies we are very close to and perhaps already past the point of no return. I have no witting quip to end this article. The economic landscape we face today is nothing short of dire. And at the risk of sounding overdramatic we either force a policy change, suffer the short term pain and restructure or we and all future generations will live in a very different America from the one our folks left us.
Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located. But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.
A desperate feeding frenzy takes its course.