Central Banks

There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air, as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.

One of the Main Causes of Our Economic Problems

As so often happens, whenever there is a political spat in Europe, the rating agencies are quickly involved (thing S&P and Moody's downgrades and upgrades of Greece depending on how well the vassal nation is "behaving"), and moments ago S&P downgraded Poland from A- to BBB+ outlook negative, precisely due to Poland's new media law which has been the topic of so much consternation over the past week. In other words, S&P is now nothing more than a lackey for Brussels, threatening to send Polish yields higher if Poland does not fall in line.

This is just the beginning. The bond bubble will take months to completely implode. And eventually it will consume even sovereign nations. Globally the bond bubble is $100 trillion in size: larger than even global GDP.

A financial oligarchy has seized control of the country, and, since it can't control its own appetites, is running it into the ground. Thus, it would make sense for it to have some sort of back-up plan for when the whole financial house of cards falls apart. Ideally, this plan would effectively put down any chance of revolt of the downtrodden masses, and allow the oligarchy to maintain security and hold onto its wealth. Peacetime is fine for as long as it can placate the populace with bread and circuses, but when a financial calamity causes the economy to crater and bread and circuses turn scarce, a handy fallback is war.

Having made its warning to the Fed loud and clear ("if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD"), the PBOC continued the fragile ceasefure between the world's two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchaged, by weakening today's fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.

Yesterday's 10 Year auction was, despite the concurrent pricing of the world's biggest bond deal in the face of AB InBev's $45 billion issue, a blockbuster, with demand off the charts in every possible way. However, today's just concluded sale of $13 billion in 30 Year paper left quite bit to be desired.

China is untenable in its current financial position. That is the primary problem, and so long as it remains so whatever the PBOC does will have but a fleeting impact. In more immediate terms, that is being recognized by the “dollar” run which continues to savage not just China but South America (more than just Brazil), Africa, Asia (more than China) and you might even argue Canada and Mexico. From that, we see that it isn’t China that is the problem with the “dollar”, it is the whole damn system.

"To bottom on a Shiller PE of 7x would see the S&P falling to around 550. I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak."

Globally the bond bubble has grown by more than $20 trillion since 2008. Today it is north of $100 trillion, with an additional $555+ trillion in derivatives trading based on it.

Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.

As the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out below, it is clear that the 'Epocalypse' - encompassing the roots "economic, epoch, collapse" and "apocalypse" - is here, and it is everywhere. The Great Collapse has already begun. What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt.

Having apparently taken the day off from selling US Treasuries and buying Offshore Yuan (following yesterday's "murderous" short-squeeze"), completing a 40 handle round trip in the "stable" currency year-to-date, PBOC decided to hold Yuan flat for the 4th day but make a statement that they would "give policy support to exports" - in other words devalue more. The unintended consequence of their decision to withdraw liquidity and crush shorts in offshore Yuan is more problematic as it has reportedly left Chinese banks short of dollars at their ATMs (and are delaying withdrawals). Meanwhile, another of China's favorite outlets for capital outflows - Bitcoin - just got stomped.

Moments ago with the When Issued for today's $24 billion in 3 Year paper trading at 1.188%, we were confident that as a result of the substantial short overhang, the auction would price well through the WI. It did so, and by a mile: the final high yield print was a whipping 1.174%, stopping some 1.4 bps through the When Issued.

Recall how the worthless KaloBios stock soared from almost nothing first to $10, then to $20 before finally peaking in the mid-$40s: the reason for that is that Martin Shrekli, since arrested, proceeded to buy  ever more of the KBIO float, making shorting first prohibitively expensive, and ultimately, impossible when he owned virtually all of the float. The PBOC did just that overnight...