en The Crazy-Making Fed <p><em>Submitted by <a href="">Charles Hugh-Smith of OfTwoMinds blog</a>,</em></p> <p><em>The Federal Reserve&#39;s communications and policies are a form of crazy-making double bind.</em></p> <p>Systems theorist/anthropologist <a href="">Gregory Bateson</a> developed (with others) the concept of <a href="">double bind</a>, a psychological and social conflict in which contradictory demands generate a form of schizophrenia:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Unlike the usual no-win situation, the subject has difficulty in defining the exact nature of the paradoxical situation in which he or she is caught. The contradiction may be unexpressed in its immediate context and therefore invisible to external observers, only becoming evident when a prior communication is considered. Typically, a demand is imposed upon the subject by someone who they respect (such as a parent, teacher or doctor) but the demand itself is inherently impossible to fulfill because some broader context forbids it. For example, this situation arises when a person in a position of authority imposes two contradictory conditions but there exists an unspoken rule that one must never question authority.</p> </blockquote> <p><strong>The Federal Reserve&#39;s communications and policies are a form of crazy-making double bind. </strong>No wonder the economy and everyone participating in it are beset by various manifestations of mental and physical illness.</p> <p><strong>On the one hand, the Fed insists the economy is expanding and all is well. </strong>If this is true, then the Fed should allow interest rates to normalize, i.e. be unleashed from the Fed&#39;s financial prison and allowed to rise to whatever the market of borrowers and lenders sets as fair in the current climate.</p> <p><strong>But the Fed also insists that it cannot allow rates to rise. </strong>If this is true, then it means the economy is weaker than the Fed would have us believe.</p> <p><strong>These are contradictory, but the Fed would have us believe both conditions are true.</strong> The Fed&#39;s job as the authority figure is to convince us the economy is expanding at a healthy clip, but interest rates cannot be allowed to rise because the economy is fragile and ill.</p> <p>This makes no sense, but the Fed insists on maintaining this crazy-making double bind<strong> because the stock market depends on both conditions being true at the same time</strong>: the economy must be expanding so profits can loft ever higher, but the economy must also be weak and ill so the Fed will continue its policies of zero interest rates (ZIRP) and free money for financiers that have pumped trillions of dollars into &quot;risk-on&quot; assets like stocks.</p> <p><strong>If either of these contradictory conditions is erased, the stock market will tumble</strong>,as neither a weak, recessionary economy nor zero interest rates (ZIRP) alone is sufficient to maintain the stock market&#39;s current sky-high valuations: profits must continue rising and rates must stay zero to enable carry trades, stock buy-backs, and all the other financial finagling that has driven stocks into the stratosphere.</p> <p><strong>The Fed is attempting to bridge the schizophrenic contradictions of its policies and communications by blaming the &quot;poor labor market&quot;. </strong>Just as in families that choose one child--usually the &quot;misbehaving&quot; or &quot;rebellious&quot; one--to be the scapegoat for all the family&#39;s sociopathologies, the Fed has designated the labor market as the scapegoat for the economy&#39;s schizophrenia: If only the labor market was as strong as the rest of the economy, we could allow rates to normalize.</p> <p><strong>But this is as bogus and crazy-making as everything else the Fed says and does</strong>: how can an economy in which wage-earners are losing purchasing power and jobs growth lags population growth be expanding as robustly as the Fed claims?</p> <p><strong>The Fed&#39;s crazy-making double bind serves to enforce obedience without overt coercion.</strong> Nobody made you buy those risk-on assets, buddy; if the bubbles all pop, you&#39;ve got nobody to blame but yourself.</p> <p>But this is crazy-making in the extreme, as the Fed has done everything in its considerable power to push everyone into speculative risk-on assets while funneling a steady skim to the big banks at the expense of savers and households.</p> <p><strong>The ultimate Fed crazy-making double-bind is this: </strong>you can&#39;t live without us, your financial Overlords who keep you safe from recession and the volatility of creative destruction, but you can&#39;t be free or prosperous with us in control.</p> <p>And so the crazy-making continues, a steady drip of contradictory communications and claims, one masterful display of schizophrenic-inducing propaganda after another, month in, month out, year in, year out.</p> <p><strong>Thus we can anticipate Crazy-Maker in Chief Janet Yellen will lace her speech at the Jackon Hole confab</strong> with enough contradictory contexts and explanations to maintain the nation&#39;s sad schizophrenic malaise. And like all the other poor souls trapped in a double bind, we will love our servitude to the Fed even as it slowly strangles our clarity, purpose, liberty and ability to navigate an unmanipulated world.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="245" height="316" alt="" src="" /> </div> </div> </div> Federal Reserve Free Money Janet Yellen Purchasing Power Recession Volatility Thu, 21 Aug 2014 12:26:33 +0000 Tyler Durden 493282 at U.S. Doctor Infected With Ebola To Be Released From Atlanta Hospital After Treatment <p>It was nearly three weeks ago when American missionary doctor Kent Brantly, who contracted Ebola treating victims of the deadly virus in Liberia, was brought to Atlanta's Emory University Hospital. Today, following a treatment with an experiment drug ZMapp made by Mapp Biopharma, it appears that Brantley has recovered enough that he will be discharged later on Thursday. </p> <p><a href="">According to Reuters</a>, Emory University Hospital said it would hold a news conference to discuss Brantly's case and that of a second American, Nancy Writebol, being treated there with ZMapp. Mapp says its supplies of the drug have been exhausted. However, it is unclear if it was the ZMapp treatment that may have cured Brantley: as <a href="">Bloomberg notes</a>, Brantly had also received a blood transfusion from a 14-year-old survivor, according to Samaritan’s Purse. In any event, this is surely welcome news if not so much to the world, then certainly to west Africa, where the epidemic is raging at an unprecedented pace and claiming a record number of victims.</p> <p>Brantly will leave Emory hospital after the news conference, a spokesperson for the charity Samaritan's Purse said. "I have marveled at Dr. Brantly's courageous spirit as he has fought this horrible virus with the help of the highly competent and caring staff at Emory University Hospital," Samaritan's Purse president Franklin Graham said in a statement.</p> <p>The World Health Organization said on Wednesday that 2,473 people have been infected and 1,350 have died since the Ebola outbreak was identified in remote southeastern Guinea in March.</p> <p>So far, the WHO has said that no cases of the disease had been confirmed outside of Guinea, Sierra Leone, Liberia and Nigeria - the countries affected by the outbreak - despite cases having been suspected elsewhere, which could include the second largest African country, the 60+ million populous Democratic Republic of Congo, as well as Togo, which revealed on Thursday that two suspected cases, including a sailor from the Philippines, were being tested for the virus.</p> <p>Three African doctors, also treated with ZMapp in Liberia, have shown remakable signs of improvement, Liberia's Information Minister Lewis Brown told Reuters on Tuesday.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="970" height="959" alt="" src="" /> </div> </div> </div> Reuters Thu, 21 Aug 2014 12:03:11 +0000 Tyler Durden 493281 at Frontrunning: August 21 <ul> <li>FTW: <strong>Europe Stocks Rise as Data Signals Need for Stimulus </strong>(<a href="">BBG</a>)</li> <li>More de-escalation: Dozens die in Ukraine in street battles, Donetsk shelling (<a href="">Reuters</a>)</li> <li>Calm largely holds in Missouri after grand jury opens shooting investigation (<a href="">Reuters</a>)</li> <li>Attorney General Eric Holder Vows Thorough Probe of Ferguson Shooting (<a href="">WSJ</a>)</li> <li>World’s Biggest Wealth Fund Slows Emerging Market Investment (<a href="">BBG</a>)</li> <li>Market Chilly to Argentine Debt Proposal (<a href="">WSJ</a>)</li> <li>Israeli air strike kills three Hamas commanders in Gaza (<a href="">Reuters</a>)</li> <li>Retooled Hamas Bloodies Israel With Help From Hezbollah (<a href="">BBG</a>)</li> <li>Investors Pour Into Vanguard, Eschewing Stock Pickers (<a href="">WSJ</a>)</li> <li>Fed Debates Early Rate Increases (<a href="">WSJ</a>)</li> <li>Hong Kong’s Rich Get Richer as Economy Shrinks (<a href="">BBG</a>)</li> <li>Millennial Bankers Get Raises as Firms Fight Defections (<a href="">BBG</a>)</li> <li>Bank of America to Pay $17 Billion in Justice Department Settlement (<a href="">WSJ</a>)</li> <li>Dollar General Says It Was Misled During Family Dollar Talks (<a href="">BBG</a>)</li> </ul> <p>&nbsp;</p> <p><strong>Overnight Media Digest</strong></p> <p><em><span style="text-decoration: underline;">WSJ</span></em></p> <p>* U.S. Special Operations forces mounted an unsuccessful mission inside Syria earlier this summer to try to rescue several Americans held by Islamic extremists, including the journalist who was beheaded this week, senior Obama administration officials said. (<a href="" title=""></a>)</p> <p>* Bank of America Corp is expected to pay a record settlement of nearly $17 billion over its mortgage lending as early as Thursday, according to people familiar with the matter, capping a legal odyssey that has dogged it since the depths of the financial crisis. (<a href="" title=""></a>)</p> <p>* U.S. air strikes have driven some ground commanders of the Sunni radical group Islamic State from northern Iraq across the border into Syria, Iraqi officials say. (<a href="" title=""></a>)</p> <p>* Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and are not run by stock pickers or star managers. (<a href="" title=""></a>)</p> <p>* Wall Street banks, under pressure to improve working conditions for junior employees, are raising salaries. A host of big banks including Goldman Sachs Group Inc, JPMorgan Chase &amp; Co and Morgan Stanley have decided to lift pay or are seriously considering the move for many junior bankers. The pay increases, which are coming in the form of salaries as opposed to year-end bonuses, could hit 20 percent to 25 percent at some firms. (<a href="" title=""></a>)</p> <p>* Russia temporarily closed four McDonald's Corp restaurants in Moscow, citing sanitary violations, amid the country's most-serious confrontation with the West since the Cold War. (<a href="" title=""></a>)</p> <p>* Law enforcement's battle against Symantec Corp's Norton, Intel Corp McAfee brands and others gained new attention this month after anonymous activists published documents from FinFisher GmbH, a secretive German firm that sells computer code to help governments snoop on targets. Amid customer names and secret price lists, the cache exposed complaints from authorities that antivirus programs had thwarted their planned surveillance. (<a href="" title=""></a>)</p> <p>* Argentina's options are dwindling after its latest proposal to exit default by sidestepping a U.S. court order met with skepticism in financial markets on Wednesday. Argentine bond prices slipped and the black-market peso tumbled to a record low against the dollar the day after Argentine President Cristina Kirchner proposed that investors holding defaulted bonds swap them for new debt governed by Argentine law. (<a href="" title=""></a>)</p> <p>* African governments are on pace to issue a record amount of bonds in 2014 for a second consecutive year, jumping at the opportunity to borrow at low interest rates to fund infrastructure and other spending. But global investors' appetite for African bonds may be testing its limit. (<a href="" title=""></a>)</p> <p>* U.S. Federal Reserve officials debated at their July policy meeting whether they might need to raise interest rates sooner than expected in light of a strengthening recovery, but they were restrained by lingering doubts about whether the economy's gains would persist. (<a href="" title=""></a>)</p> <p>* North Carolina lawmakers on Wednesday passed a new legislation to regulate coal-ash pits and clean up decades of toxic waste generated by coal-burning electricity plants. (<a href="" title=""></a>)</p> <p>* A handful of private-equity firms are vying to buy American Tire Distributors Holdings Inc in an auction that could fetch more than $3 billion, according to people familiar with the matter. (<a href="" title=""></a>)</p> <p>* Glencore Plc said it would buy back $1 billion in shares and avoid expensive expansion projects. But Chief Executive Ivan Glasenberg signaled possible interest in mining assets that BHP Billiton Plc plans to spin off. (<a href="" title=""></a>)</p> <p>* A federal judge handed a legal victory to drugmaker Hospira Inc by suspending the U.S. Food and Drug Administration's decision this week to allow the marketing of certain generic copies of Hospira's top product, the sedative Precedex. (<a href="" title=""></a>)</p> <p>* Activist investor Carl Icahn on Wednesday disclosed an 8.5 percent stake in Hertz Global Holdings Inc and said he may seek board representation. (<a href="" title=""></a>)</p> <p>* Hong Kong investor Tony Fung's bet on Australia's gambling industry has won support from the country's competition regulator, which said it would not block the planned 216.8 million Australian dollar ($200.5 million) acquisition of a casino in tropical Cairns. (<a href="" title=""></a>)</p> <p>* Dong Nguyen, the man behind the world-wide mobile gaming sensation "Flappy Bird" has unleashed his newest effort. The Vietnamese developer whose famously challenging title winged its way to the top of the App Store and Google Play earlier this year, on Thursday released his newest work, called "Swing Copters." (<a href="" title=""></a>)</p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;">FT</span></em></p> <p>After an unprecedented three years of unanimity on interest rates, two out of the Bank of England's Monetary Policy Committee's nine members decided to vote in favour of raising interest rates.</p> <p>Germany broke with post-war tradition in saying it would arm Iraqi Kurdish security forces fighting Islamic State militants in northern Iraq.</p> <p>The European Central Bank and eight national regulators, including the eurozone's five largest economies, will pay up to 487.7 million euros ($646.8 million) on fees to external advisers for their work on the region's health check of its biggest banks, according to Financial Times research.</p> <p>Commodities group Glencore will return $1 billion to investors the first share buyback by a large miner since the commodities boom began to cool.</p> <p>Carillion abandoned hopes of creating a 3 billion pound construction powerhouse after it gave up its month-long pursuit of larger rival Balfour Beatty, which thrice rejected its offer.</p> <p>Goldman Sachs is hiking salaries of junior bankers in the U.S. by about 20 percent in a move to attract and retain young graduates.</p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;">NYT</span></em></p> <p>* Online lender AvantCredit is expected to announce early on Thursday that it has secured a $200-million credit facility led by the investment bank Jefferies, doubling its capacity to lend to consumers. (<a href="" title=""></a>)</p> <p>* First Investors Financial Services Group has agreed to pay a $2.75 million penalty over accusations that it consistently gave giant credit reporting agencies like Experian and Equifax flawed reports about thousands of car buyers. (<a href="" title=""></a>)</p> <p>* The Justice Department is poised to announce a $16.65 billion settlement with Bank of America Corp over accusations that it duped investors into buying toxic mortgage securities, say people briefed on the matter - the single largest government settlement by a company in American history. (<a href="" title=""></a>)</p> <p>* An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly from its stimulus campaign, arguing that the bank has largely exhausted its ability to improve economic conditions. (<a href="" title=""></a>)</p> <p>* An experimental drug has completely protected monkeys from lethal doses of a virus related to Ebola, bolstering confidence that a similar medicine might be effective if deployed in the current outbreak in Africa, researchers reported on Wednesday. (<a href="" title=""></a>)</p> <p>* UPS Stores, a subsidiary of United Parcel Service Inc , said on Wednesday that a security breach may have led to the theft of customer credit and debit data at 51 UPS franchises in the United States. (<a href="" title=""></a>)</p> <p>* Nestle SA, one of the world's largest food companies, is adopting animal welfare standards that will affect 7,300 of its suppliers around the globe, and their suppliers. (<a href="" title=""></a>)</p> <p>* As Europe faces the prospect of its third recession in five years, France is quickly emerging as one of the weakest links among the 18 nations that share the euro. (<a href="" title=""></a>)</p> <p>* Dollar General Corp, which on Monday offered $8.9 billion for Family Dollar Stores Inc, trumping an existing offer from Dollar Tree Inc, is contending that Family Dollar's chief executive may have let personal interest cloud his judgment. (<a href="" title=""></a>)</p> <p>* Carl Icahn, the longtime activist investor, disclosed in a regulatory filing on Wednesday that he had accumulated an 8.48 percent stake in Hertz Global Holdings Inc, with plans to put pressure on the rental car company's management. (<a href="" title=""></a>)</p> <p>* Virtual currency start-up Chain, which aims to make it easier for developers to build Bitcoin applications, announced on Wednesday that it had closed a $9.5 million investment round led by Khosla Ventures, bringing its total funding to $13.7 million. (<a href="" title=""></a>)</p> <p>* Argentina has proposed a way to pay its bondholders in a move that would bypass a United States court ruling that has blocked its payments and sent the country spiraling into default last month. (<a href="" title=""></a>)</p> <p>* Infineon Technologies AG, the German chip maker, agreed on Wednesday to buy the International Rectifier Corp, a specialty semiconductor producer, for about $3 billion in cash to bolster its international presence and gain greater scale. (<a href="" title=""></a>)</p> <p>* Berkshire Hathaway Inc has agreed to pay $896,000 to settle accusations by the Justice Department that it did not follow antitrust guidelines before acquiring additional shares in the USG Corp in December, according to a filing in the Federal District Court in Washington on Wednesday. (<a href="" title=""></a>)</p> <p>* SoundCloud will begin incorporating advertising and, for the first time, let artists and record labels collect royalties as part of a new licensing deal with entertainment companies.(<a href="" title=""></a>)</p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;">Canada</span></em></p> <p>THE GLOBE AND MAIL</p> <p>* Community centers in the Metro Vancouver area are opening up registration for day camps and other child-care programs for the fall, signaling expectations for a continued teachers' strike come September. Parents are anxiously awaiting news as the expected start of school draws closer, but neither the British Columbia Teachers' Federation nor the education ministry will comment on negotiations, citing a media blackout. The government maintains that it has no plans to legislate teachers back to work. (<a href="" title=""></a>)</p> <p>* The new leader of the Canadian Medical Association, Chris Simpson, is calling out the government of Stephen Harper for its inaction on healthcare, saying the medicare system is floundering and Canadians are "tired of excuses as to why the federal government can't take action." Simpson said given the challenges posed by the aging baby-boomer demographic, the starting point for healthcare reform needs to be creating a comprehensive seniors' strategy. (<a href="" title=""></a>)</p> <p>Reports in the business section:</p> <p>* Robert Hogue, an economist at Canada's biggest bank Royal Bank of Canada, says home prices could start falling in 2016 if interest rates return to more normal levels. And he warned that, in the meantime, what goes up will likely come down if salaries and incomes don't keep pace. (<a href="" title=""></a>)</p> <p>NATIONAL POST</p> <p>* New Democratic Party Member of Parliament Sana Hassainia has quit the caucus over what she felt was an excessively pro-Israel stance on the current conflict in Gaza and demeaning party demands to toe the line. Hassainia, who represents the Montreal-area riding of Vercheres-Les Patriotes, alleged that she was "punished" for supporting Mulcair rival Brian Topp for the party leadership, including losing her position on the Commons committee on the status of women. (<a href="" title=""></a>)</p> <p>* Toronto Mayor Rob Ford said he had "no problem" submitting to drug and alcohol tests if all other mayoral candidates do as well, but then went on to suggest it should extend to all political candidates and possibly civil servants. (<a href="" title=""></a>)</p> <p>FINANCIAL POST</p> <p>* Fitch Ratings has affirmed Canada's AAA credit rating and says the outlook is stable. The New York-based global ratings agency, in a report issued on Tuesday, said its assessment was based, among other factors, on Canada's political stability and track record of prudent fiscal management. (<a href="" title=""></a>)</p> <p>* Target Corp Canada executives are under the gun to make improvements to the money-losing retailer by Christmas after unwrapping a not-so-pretty set of second-quarter results on Wednesday. Target Corp Chief Executive Brian Cornell is making the mass merchant's troubled start in Canada a top priority after the fledgling unit reported an 11.4 percent slide in second-quarter sales at established stores and a growing operating loss. (<a href="" title=""></a>) </p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;">China</span></em></p> <p>CHINA SECURITIES</p> <p>- State-owned energy, electricity and transportation companies from three provinces in northeast China will launch a mixed ownership pilot program in the near future, sources told the official newspaper.</p> <p>SHANGHAI DAILY</p> <p>- China has begun the trial of the former director of Beijing Zoo over corruption charges after investigators found close to 6 million yuan ($977,278) in cash at his home last year.</p> <p>CHINA DAILY</p> <p>- The price of shark fin, one of China's most expensive delicacies, has dropped from 2,800 yuan per kg to 1,200 yuan in some seafood markets in the southern city of Guangzhou, following a crackdown against official extravagance and luxury.</p> <p>- Chinese airplane pilots will have to refine heavy accents by 2016 or miss out on jobs, according to the country's civil aviation authority. The Civil Aviation Administration of China is trying to avoid communication lapses between pilots and controllers.</p> <p>SHANGHAI SECURITIES NEWS</p> <p>- China's railway development fund is looking at ways to attract a wider base of investors, including setting up preferential shares.</p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;">Britain</span></em></p> <p>The Guardian</p> <p>BRITISH ISIS MILITANT IN JAMES FOLEY VIDEO 'GUARDS FOREIGN HOSTAGES IN SYRIA'</p> <p>The English jihadist who beheaded the American journalist James Foley is believed to be the leader of a group of British fighters holding foreign hostages in Syria, sources have told the Guardian.</p> <p>SNP ACCUSED OF EXAGGERATING NORTH SEA OIL RESERVES BY UP TO 60 PCT</p> <p>Sir Ian Wood, the most influential figure in the Scottish oil industry, has accused Alex Salmond's government of exaggerating North Sea oil reserves by up to 60 percent.</p> <p>The Times</p> <p>MPs REBUKE CARNEY OVER CONFLICT OF INTEREST FEARS</p> <p>MPs have issued a veiled rebuke to the governor of the Bank of England after it failed to disclose a sensitive shareholding of Richard Sharp, one of Mark Carney's former Goldman Sachs colleagues, who now sits on the Bank's powerful Financial Policy Committee.</p> <p>OSBORNE DECLINES TO SHARE DETAILS OF CO-OP MEETINGS</p> <p>George Osborne has declined to hand over details of meetings between Treasury officials and senior bankers to discuss the Co-op Bank's failed attempt to buy 631 branches from Lloyds Banking Group.</p> <p>The Telegraph</p> <p>LIDL TO LAUNCH NEW FASHION RANGE Lidl, the discount retailer, takes on Primark, George and high street with cut-price clothing. </p> <p>&nbsp;</p> <p><strong>Fly On The Wall Pre-Market Buzz</strong></p> <p>ECONOMIC REPORTS</p> <p>Domestic economic reports scheduled for today include:<br />Jobless claims for the week of 8/16 at 8:30am -- consensus 300,000<br />PMI manufacturing index flash at 9:45am<br />Philadelphia Fed survey for August at 10am -- consensus 20.0<br />Existing home sales for July at 10am -- consensus 5.00M<br />Leading indicators for July at 10am -- consensus 0.6%<br />EIA natural gas report at 10:30am<br />Money supply at 4:30pm</p> <p>ANALYST RESEARCH</p> <p>Upgrades</p> <p>American Eagle (AEO) upgraded to Buy from Neutral at Janney Capital<br />American Eagle (AEO) upgraded to Buy from Neutral at SunTrust</p> <p>Downgrades</p> <p>Cameco (CCJ) downgraded to Market Perform from Outperform at Cowen<br />InterMune (ITMN) downgraded to Market Perform from Outperform at Wells Fargo<br />International Rectifier (IRF) downgraded to Market Perform at Raymond James<br />Planar Systems (PLNR) downgraded to Neutral from Buy at B. Riley<br />WhiteWave Foods (WWAV) downgraded to Neutral from Buy at Longbow </p> <p>Initiations</p> <p>AllianceBernstein (AB) initiated with a Hold at Jefferies<br />Federated Investors (FII) initiated with a Buy at Jefferies<br />MDC Partners (MDCA) initiated with an Outperform at FBR Capital<br />MeetMe (MEET) initiated with an Outperform at JMP Securities<br />PNM Resources (PNM) initiated with a Hold at KeyBanc<br />Summit Hotel Properties (INN) initiated with an Outperform at JMP Securities<br />Tesla (TSLA) initiated with an Outperform at CLSA</p> <p>COMPANY NEWS</p> <p>UPS (UPS) notified customers of potential data compromise, incident resolution.&nbsp; Based on the current assessment by The UPS Store and the IT security firm, certain customers' information, who used a credit or debit card at the 51 impacted franchised center locations between January 20 and August 11, may have been exposed<br />Dollar General (DG) sent a letter to Family Dollar's (FDO) board, said "now forced to favtor a $305M breakup fee into offer." Dollar General said it was "surprising" that Family Dollar was considering a proposal in that range from Dollar Tree, and that no representative of Family Dollar followed up with any representative of Dollar General before entering into the merger agreement with Dollar Tree (DLTR)<br />Hertz (HTZ) said it remains focused on executing its operating initiatives<br />HP (HPQ) said it delivered YoY revenue growth for first time in three years in Q3<br />Sally Beauty (SBH) authorized a new $1B share repurchase program<br />Kindred Biosciences (KIN) said its pivotal field study of CereKin did not meet its primary endpoint</p> <p>EARNINGS</p> <p>Companies that beat consensus earnings expectations last night and today include:<br />Hormel Foods (HRL), L Brands (LB), (WUBA), America's Car-Mart (CRMT), CACI (CACI), Synopsys (SNPS)</p> <p>Companies that missed consensus earnings expectations include:<br />Sears (SHLD), Kirkland’s (KIRK), Stage Stores (SSI)</p> <p>Companies that matched consensus earnings expectations include:<br />HP (HPQ)</p> <p>HP (HPQ) sees FY14 adjusted EPS $3.70-$3.74, consensus $3.72<br />HP (HPQ) sees Q4 adjusted EPS $1.03-$1.07, consensus $1.05<br />CACI (CACI) backs 2015 EPS view $5.10-$5.51, consensus $5.33<br />Synopsys (SNPS) sees FY14 EPS $2.48-$2.50, consensus $2.48<br />Synopsys (SNPS) sees Q4 EPS 59c-61c, consensus 63c<br />Semtech (SMTC) sees Q3 EPS ex-items 42c-48c, consensus 46c<br />L Brands (LB) raises FY14 EPS guidance to $3.03-$3.18 from $3.00-$3.15<br />L Brands (LB) sees Q3 EPS 26c-31c, consensus 30c</p> <p>NEWSPAPERS/WEBSITES</p> <p>Allergan (AGN) talks with Salix (SLXP) in defense tactic said to be dormant, Bloomberg says<br />Verizon (VZ) says not in talks to set up another app store, Re/code reports<br />Galena (GALE) fired CEO over stock promotion scandal, The Street reports<br />CBS (CBS) seeking bigger share of pay-television revenue from affiliates, WSJ reports<br />Toyota (TM) slices China Lexus part costs amid anti-trust worries, Reuters says<br />JetBlue (JBLU) shares can continue higher, Barron's says</p> <p>SYNDICATE</p> <p>Five Oaks (OAKS) files to sell 6.49M shares, 3.13M warrants for holders<br />Golub Capital (GBDC) enters $75M at-the-market equity distribution agreement<br />Medley Capital (MCC) 5M share Spot Secondary priced at $13.02<br />Medley Capital (MCC) files to sell 5M shares of common stock<br />Motorcar Parts (MPAA) files to sell 2M shares of common stock<br />NGL Energy Partners (NGL) files to sell $300M of common units<br />National General (NGHC) files to sell $100M of preferred stock</p> 8.5% AllianceBernstein Australian Dollar B+ Bank of America Bank of America Bank of England Berkshire Hathaway Bitcoin Bond Cameco Carl Icahn China Corruption default Dollar General European Central Bank Federal Reserve Fitch Ford France Gambling Germany Goldman Sachs goldman sachs Google Hertz Hong Kong Iraq Israel JetBlue JPMorgan Chase Lloyds Medicare Monetary Policy Money Supply Morgan Stanley Natural Gas Newspaper Obama Administration ratings Raymond James Recession recovery Reuters Sears Toyota Ukraine Verizon Wells Fargo Yuan Thu, 21 Aug 2014 11:46:30 +0000 Tyler Durden 493280 at Futures Levitate To Fresh Record Highs On Just Right Mix Of Bad News <p>With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.</p> <p>Depending on who you ask, the overnight levitation (clearly on virtually no volume) in S&amp;P futures to new record highs took place on either good news, namely a supposedly strong German PMI and a looming ‘de-escalatory’ meeting between Putin and Poroshenko, which would mean that the global economy is recovering which is bullish, or on bad news, namely China PMI missing and sliding, as well as Eurozone Mfg PMI which dropped from 51.8 and at 50.8, was below the 51.3 expected, Services PMI also missing expectations of 53.7, and declining from 54.2 to 53.5, leading to a 1 point drop in the Composite PMi from 53.8 to 52.8, which would mean that the global economy is stalling and more liquidity stimulus from central banks will be needed, which is also bullish. Bottom line: nobody knows what continues to push futures relentlessly higher (hint: moral hazard and endless stock buybacks), but whatever the news is, it's good for stocks.</p> <p>Regarding that Ukraine de-escalation, don't tell that to local bonds, which continue to drop as the civil war death toll rises, and government seeks faster aid. The yield on the USD note maturing 2017 has risen 8 bps to 9.9%, after Ukraine yday asked to merge 3rd, 4th tranches of IMF loan. The obligatory spin: request to expedite IMF aid is positive as reduces liquidity risks, Bank of America analyst Vadim Khramov writes in e- mailed report today. Alternatively, it also means that the government may be about to run out of money.</p> <p>A few notes on the latest European PMI from Goldman: The Euro area Composite Flash PMI contracted in August from 53.8 to 52.8, below our and consensus expectations, which pointed to a smaller contraction (Cons: 53.4, GS: 53.5). The decline was driven by weaker data in both the manufacturing and services components across the Euro area. The sizeable gap between the French and German composite PMIs narrowed 1.4pt on the back of an easing in the German PMI and an improvement in the French PMI. </p> <ol> <li>The Manufacturing PMI eased 0.9pt to 50.8. The services PMI declined slightly less (by 0.6pt) to reach a level of 53.5. The consensus expectation was for a smaller decline in both these components of the PMI. </li> <li>The breakdown was weak overall. The order-to-stocks ratio in the manufacturing survey eased 1.2pt on the back of stable stocks and weaker new orders. The forward-looking components in the Services PMI (where the headline figure is not aggregated up from the subcomponents) posted weak signals with 'Business Expectations' falling 3.2pt and 'Incoming New Business' improving marginally by 0.6pt. </li> <li>The details of the Flash PMIs for Germany and France showed a reduction in the divergence between the two countries (Chart 1). In France, the composite PMI edged 0.6bp higher and now stands at 50.0. In Germany, the composite PMI eased 0.8bp (to 54.9).This helped to narrow slightly the sizeable gap that has existed between the two countries since mid-2013 (Chart 2). As with the Euro area aggregate, manufacturing developed weaker than services in August in France and Germany. </li> <li>The area-wide figure released today (as well as the German and French equivalents) suggests a 2pt decrease in the services PMI in Spain/Italy and a decline of just below -1pt in the manufacturing PMI outside Germany/France. </li> <li>At 52.8, the Euro area composite PMI is consistent with around +0.4%qoq of GDP growth. For Q3 so far, the Composite PMI has averaged 53.3, similar to the Q2 average. At +0.0%qoq, Euro area Q2 GDP printed notably weaker than what the average PMIs in Q2 indicated. </li> </ol> <p><img src="" width="375" height="320" style="float: left;" /><img src="" width="375" height="320" /></p> <p>&nbsp;</p> <p>Asian equities are trading generally lower across the board probably affected by the disappointing PMI data out from China. The HSBC China Manufacturing flash PMI for August fell more than expected to 50.3. The market was looking for a decline to 51.5 from 51.7 in July. The Shanghai Composite, Hang Seng, and the HSCEI indices are down -0.9%, -0.9% and -1.3%, respectively as we type. Other Chinese growth proxies such as the AUD and spot Copper are also weaker. Those with a bullish persuasion may say that a softer PMI print creates room for more stimulus but the market is clearly in profit-taking mode this morning after the strong run-up over the past few months. Japan is offering some shelter with local equities doing better this morning. Weighed by the FOMC statement yesterday the Dollar strength against the JPY is helping the Nikkei and TOPIX are both around +0.7% higher overnight. Treasuries are broadly stable overnight with the 10yr still being wrapped around 2.43% as we type. The stability in rates and the lack of new issue supply are offering some support for Asian credit overnight. Supply remains dry in that part of the world as Chinese and HK corporates carry on with their earnings affairs. Staying on EM, Fitch in an overnight report said that the external funding needs for EM Asian sovereigns with more vulnerable external finances are moderating. This is supporting the credit profiles of the likes of India, Indonesia, and Sri Lanka. In other news, in Thailand the general who led the coup has been named the new PM overnight.</p> <p>European equities trade in minor positive territory, with minor outperformance in the Italian FTSE-MIB as markets buy into comments from a Kremlin spokesman, who stated that August 26th’s Minsk meeting with the Russian President Putin and Ukraine President Poroshenko is a step toward de-escalation. The IT sector is outperforming, as Infineon Technology benefit from the confirmation of their acquisition of International Rectifier for USD 3bln. Separately, the Austrian bank index trades higher after Raiffeisen Bank’s particularly strong earnings release. US stock futures trade higher, with the e-mini S&amp;P briefly touching an all-time high of 1987.25.</p> <p>Looking to the day ahead the main focus will likely be on the latest European flash PMIs, particularly in light of the weak Q2 numbers we've had over the past couple of weeks. Today also sees the US Mark-it flash manufacturing PMI, which is expected to be marginally lower (55.7 vs. 55.8). Other data out in the US includes the Phily Fed and existing homes sales as well as the usual weekly jobless claims. The Phily Fed is expected to drop to 19.5 from 23.9, which was its highest reading since March 2011, while existing home sales are also expected to drop slightly. Finally in light of the outcome of the latest BoE minutes we have UK retail sales to look forward to with July expected to have seen a +0.4% rise in the headline number.</p> <p><strong>Headline bulletin summary from Bloomberg and RanSquawk</strong></p> <ul> <li>Treasuries fell as market awaits Yellen’s speech on labor markets at Jackson Hole tomorrow, followed by ECB’s Draghi.</li> <li>USD-index touched a fresh 11-month high overnight, with September 2013’s high of 82.67 now within sight after yesterday’s hawkish FOMC minutes </li> <li>E-Mini S&amp;P hits an all-time high of 1987.25 as strong German PMI and the looming ‘de-escalatory’ meeting between Putin and Poroshenko lifted global equities </li> <li>Many FOMC participants said it might be appropriate to begin removing accommodation sooner than they anticipated, almost all agreed to keep fed funds rate as key policy rate, minutes of their July 29-30 meeting show</li> <li>A Chinese manufacturing gauge fell below analysts’ estimates in August, as credit slowdown and property slump add to risks that the world’s second-largest economy will miss its growth target this year</li> <li>German services and manufacturing activity fell to 54.9 (est. 54.6) in August from 55.7 in July; French manufacturing contracted for a fourth month while a measure of services growth rose to a five-month high</li> <li>Euro-area manufacturing and services activity slowed in August, signaling that region’s economy remains vulnerable to weak inflation and rising tensions with Russia</li> <li>U.K. retail sales rose 0.5% in July, more than forecast, as demand for clothing helped lead a rebound from a drop in the previous month</li> <li>Japan is considering earmarking 1t yen for stimulus measures in fiscal 2015 budget to boost the economy if the consumption tax is increased to 10% in Oct. next year as scheduled, Nikkei newspaper reports, without attribution</li> <li>BofA plans to boost salaries by at least 20% next year for junior staff in trading and investment banking globally, while Goldman increases salaries for junior U.S. workers by about that much, according to people briefed on the decisions </li> <li>JPM and Citi are considering similar plans, people with knowledge of those deliberations said; Morgan Stanley also decided this year to raise salaries for&nbsp; some mid- level bankers</li> <li>Norway’s $880b sovereign wealth fund, the world’s largest, is slowing its expansion into emerging markets as it scales back a two-year mission to tap&nbsp; into the fastest growing markets</li> <li>Argentina’s plan to pay holders of foreign bonds from local accounts looks doomed to fail even before it gets off the ground given concern that investors who participate could be&nbsp; held in contempt of a U.S. court ruling, according to KBC Asset Management and JPM</li> <li>The death toll mounted in the conflict between Ukraine’s armed forces and pro-Russian separatists in the east as the military said it continues to push back the rebels</li> <li>Obama, interrupting his vacation on Martha’s Vineyard to speak to reporters, said the beheading of a U.S. journalist by Islamic radicals won’t deter him from a bombing campaign aimed at halting their advances</li> <li>U.S. special forces made a failed attempt to rescue journalist James Foley and other Americans held hostage by Islamic extremists in Syria earlier this summer, the White House said in a statement</li> <li>Sovereign yields rise. Asian stocks mixed, European equities gain. U.S. stock futures higher. WTI crude, gold and copper fall</li> <li>Weekly jobless data, existing home sales figures and the beginning of<br /> Jackson Hole due today – but no speeches scheduled until tomorrow</li> </ul> <p><strong>US Event Calendar</strong></p> <ul> <li><strong>Kansas City Fed symposium at Jackson Hole, Wyo. (runs&nbsp; through Aug. 23)</strong></li> <li>8:30am: Initial Jobless Claims, Aug. 16, est. 303k (prior 311k) <ul> <li>Continuing Claims, Aug. 9, est. 2.520m (prior 2.544m)</li> </ul> </li> <li>9:45am: Markit U.S. Manufacturing PMI, Aug. preliminary, est. 55.7 (prior 55.8)</li> <li>9:45am: Bloomberg Consumer Comfort, Aug. 17 (prior 36.8); Bloomberg Economic Expectations, Aug. (prior 46)</li> <li>10:00am: Philadelphia Fed Business Outlook, Aug., est. 19.5 (prior 23.9)</li> <li> 10:00am: Existing Home Sales, July, est. 5.02m (prior 5.04m)</li> <li>Existing Home Sales m/m, July, est. -0.5% (prior 2.6%)</li> <li>10:00am: Index of Leading Economic Indicators, July, est. 0.6% (prior 0.3%)</li> <li>11:00am POMO: Fed to purchase $2.05b-$2.50b notes in 2021-2024 sector</li> </ul> <p><strong>ASIAN HEADLINES </strong></p> <p>The USD’s surge after the hawkish FOMC minutes markedly weakned the JPY, benefiting the Nikkei 225, which finished higher by 0.9%, marking the 9th consecutive gain. Elsewhere, Chinese equities (Shanghai Composite -0.5%, Hang Seng -0.7%) underperformed after Chinese HSBC Manufacturing PMI slumped to a three-month low of 50.3 vs. Exp. 51.5, new orders fell both domestically and internationally. </p> <p><strong>FIXED INCOME </strong></p> <p>T-notes remained on the back foot overnight after the hawkish FOMC minutes and the particularly large block trades in Eurodollars (77.5k purchase of short EDH5 puts) pressed fixed income lower. As such, Bund futures opened weaker, with the downside exacerbated by better-than-expected German manufacturing, services and composite PMI readings. Furthermore, a seller of 66k Dec14/Mar15 Euribor weighed on the short-end. In analyst forecasts, Citi cut their year-end German 10yr yield forecast to 0.75% from 1.45%, and cut year-end US 10yr yield forecasts to 2.70% from 2.90% previously. </p> <p><strong>EQUITIES </strong></p> <p>European equities trade in minor positive territory, with minor outperformance in the Italian FTSE-MIB as markets buy into comments from a Kremlin spokesman, who stated that August 26th’s Minsk meeting with the Russian President Putin and Ukraine President Poroshenko is a step toward de-escalation. The IT sector is outperforming, as Infineon Technology benefit from the confirmation of their acquisition of International Rectifier for USD 3bln. Separately, the Austrian bank index trades higher after Raiffeisen Bank’s particularly strong earnings release. US stock futures trade higher, with the e-mini S&amp;P briefly touching an all-time high of 1987.25.</p> <p><strong>FX </strong></p> <p>The surging USD has lifted the index to the highest levels seen since Sep’13, pressing EUR/USD below 1.3250 and GBP/USD below 1.6600 as the short-lived strength in GBP dissipates after the minutes release yesterday. GBP saw further weakness after a mixed set of retail sales (Incl Auto 0.1% vs Exp. 0.4%) with downward pressure in non-store retailing and petrol stations hitting July consumer purchases. Finally, AUD/USD remains lower after the poor Chinese PMI data but still remains in close proximity to an option expiry at 0.9250 with bids below at 0.9220.</p> <p><strong>COMMODITIES</strong></p> <p>WTI and Brent Crude futures trade markedly softer, WTI now just USD 1/bbl off YTD lows of USD 91.24 as the Kirkuk/Ceyhan pipeline re-opens after almost doubling capacity to 200,000bpd from 120,000bpd. This, alongside easing geopolitical tensions (Russia/Ukraine de-escalation meeting), has weighed on energy prices. Furthermore, the stronger USD has pushed commodities lower across the board, with spot gold breaking below the 200DMA earlier this morning, pushing gold to multi-month lows.</p> <p><strong>Deutsche Bank concludes the overnight summary with Jim Reid's team filling in the blanks</strong></p> <p>Consensus can be a marvelous thing when it comes to group decision making. It can also be difficult to maintain. We saw glimpses of quite how difficult getting broad consensus might become for two of the world’s major central bank governors yesterday as in the Bank of England’s August minutes we saw the first split rate vote in over three years whilst the July FOMC minutes indicated that debate in the Fed as to the tone of rate guidance and the timing of the first rate hike is heating up. </p> <p>Yesterday’s July Fed minutes seemed to have a slightly more hawkish tone than previous meetings although they continued to stress that the Fed sees the risks to their outlook as balanced. Taken together these minutes seemed to indicate a slight shift of the Committee’s centre ground towards the hawks even as that centre remained in dovish territory. The minutes highlighted how, “the staff’s near term forecast for inflation was revised up a little, as recent data showed somewhat faster-than-anticipated increases that were judged to be only partly transitory.” They went on to suggest that, “many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.” Following on from this, two statements probably best highlighted the debate that seems to have occurred at the Fed’s meeting. First, “some participants viewed the actual and expected progress toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting,” the Fed’s unemployment and inflation objectives in the medium term. And second some participants were said to be, “increasingly uncomfortable with the Committee’s forward guidance,” as, “in their view it suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate.” Whilst to our eye there certainly seems to have been a pick up in the debate at the last meeting it shouldn’t be overemphasised. As the minutes went on they noted how, “most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labour market and inflation.” As we flagged at the start of this paragraph, our key take-away is that whilst the centre-ground at the Fed may have shifted a little towards the hawks at the July meeting, it remains firmly in dove territory and crucially future action remains heavily data dependant. As our US economists noted before the release, “Much of the recent economic data have fit conveniently with Fed Chair Yellen’s assessment of an economy that is improving, but not overheating,” including the back-up in the July unemployment rate, the moderate pace of recent hiring and the tame July CPI print. We will possibly get more colour on the debate in the Fed and on how to match up the Fed’s July minutes with more recent data releases during Chair Yellen’s Jackson Hole speech on Friday.</p> <p>On the other side of the Atlantic, yesterday’s Bank of England minutes showed that two MPC members voted for a 25bp increase in rates (the other members voted for no change). Whilst some members argued that, “It was possible that, given the strength of the headwinds faced by the economy, even the current extraordinarily low level of Bank Rate was not providing a great deal of stimulus to activity,” the dissenters noted that, “the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market” along with the possibility that, “wages were lagging developments in the labour market” and “monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them.” In a world which continues to have mixed and fluctuating data and in which the atmosphere of the crisis years is dissipating such debates seem a natural outcome and will likely be repeated as time goes on. </p> <p>Back to markets Asian equities are trading generally lower across the board probably affected by the disappointing PMI data out from China. The HSBC China Manufacturing flash PMI for August fell more than expected to 50.3. The market was looking for a decline to 51.5 from 51.7 in July. The Shanghai Composite, Hang Seng, and the HSCEI indices are down -0.9%, -0.9% and -1.3%, respectively as we type. Other Chinese growth proxies such as the AUD and spot Copper are also weaker. Those with a bullish persuasion may say that a softer PMI print creates room for more stimulus but the market is clearly in profit-taking mode this morning after the strong run-up over the past few months. Japan is offering some shelter with local equities doing better this morning. Weighed by the FOMC statement yesterday the Dollar strength against the JPY is helping the Nikkei and TOPIX are both around +0.7% higher overnight. Treasuries are broadly stable overnight with the 10yr still being wrapped around 2.43% as we type. The stability in rates and the lack of new issue supply are offering some support for Asian credit overnight. Supply remains dry in that part of the world as Chinese and HK corporates carry on with their earnings affairs. Staying on EM, Fitch in an overnight report said that the external funding needs for EM Asian sovereigns with more vulnerable external finances are moderating. This is supporting the credit profiles of the likes of India, Indonesia, and Sri Lanka. In other news, in Thailand the general who led the coup has been named the new PM overnight.</p> <p>Back to yesterday's session and beyond the central bank minutes yesterday was a relatively quiet day for data with the most notable number being German PPI inflation which disappointed on the downside. Expectation was for a 0% MoM growth rate in July however it actually slipped to -0.1%. Small changes but in a European economy which at the moment is struggling with worryingly low and falling inflation it is worth watching. Markets seemed to be in wait-and-see mode yesterday with the FOMC minutes in view as European equities closed slightly down, US equities marginally up and non-US fixed income broadly flat. The Stoxx 600 closed the day -0.1% down whilst the CAC and FTSE 100 fell -0.42% and -0.38% respectively. In the US, after a weak open the S&amp;P500 closed up +0.25% on the day at 1986.5 near its all time high close of 1988, hit in late July. Outside of the US, fixed income was largely unchanged yesterday, although in the UK the 10Y Gilt initially widened 4bps on the BoE before ending the day almost 2bps wider at 2.41%, whilst in the US the 10Y rate did end the day over 2.5bps higher at 2.43% after ticking higher on the release of the Fed minutes. </p> <p>In other news yesterday developments in the Argentina default saga saw bonds fall to a two month low as President Fernandez de Kirchner said her government would submit a bill that lets overseas bond holders swap into new dollar bonds governed by domestic law allowing the government to pay the foreign-currency debt locally (Bloomberg). This would sidestep the US court ruling and goes against that ruling in which the Judge said any swap would be illegal and reduces the chances of a deal with the holdout creditors. In Gaza Israel continued its air strikes as both sides blame one another for the collapse of peace talks whilst Israeli PM Netanyahu stated he was, “determined to continue the campaign with all means and as is needed” (BBC). In Ukraine government forces have continued their assault on rebels in the east with both sides claiming to control the town of Ilovaisk in Donetsk. It also seems that Russia’s aid convoy has now moved into the Ukrainian customs zone near the border. </p> <p>Looking to the day ahead the main focus will likely be on the latest European flash PMIs, particularly in light of the weak Q2 numbers we've had over the past couple of weeks. The overall Eurozone composite is expected to have fallen marginally to 53.4 from 53.8 with the consensus for the German number expected to be around a point lower at 54.6 while in France the market estimate is for a marginal rise to 49.6. Today also sees the US Mark-it flash manufacturing PMI, which is expected to be marginally lower (55.7 vs. 55.8). Other data out in the US includes the Phily Fed and existing homes sales as well as the usual weekly jobless claims. The Phily Fed is expected to drop to 19.5 from 23.9, which was its highest reading since March 2011, while existing home sales are also expected to drop slightly. Finally in light of the outcome of the latest BoE minutes we have UK retail sales to look forward to with July expected to have seen a +0.4% rise in the headline number.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="375" height="320" alt="" src="" /> </div> </div> </div> Bank Index Bank of America Bank of America Bank of England BOE Bond Central Banks China Continuing Claims Copper CPI Creditors Crude default Deutsche Bank Eurozone Fail Fitch fixed France Germany Global Economy headlines India Initial Jobless Claims Israel Italy Japan Leading Economic Indicators Markit Monetary Policy Moral Hazard Morgan Stanley Newspaper Nikkei POMO POMO Raiffeisen Sovereigns Ukraine Unemployment White House Yen Thu, 21 Aug 2014 11:17:29 +0000 Tyler Durden 493279 at It's Official: "We Are All Terrorists Now" <p>On the heels of <a href="">the gruesome and disgraceful ISIS clip of the beheading of American journalist James Foley</a>, The UK's Scotland Yard, <a href="">according to The Guardian</a>, warned the public that</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"<strong>viewing, downloading or disseminating the video within the UK might constitute a criminal offence under terrorism legislation</strong>."</p> </blockquote> <p>In other words</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><span style="text-decoration: underline;"><em>'if you watch terrorism, you're also a terrorist'.</em></span></p> </blockquote> <p><em>*&nbsp; *&nbsp; *</em><span style="text-decoration: underline;"><em>&nbsp;</em></span></p> <p>Of course, <a href="">there is always this test...</a></p> <p><a href=""><img src="" width="600" height="991" /></a></p> <p>&nbsp;</p> <p><strong><a href="">and the definitive chart of identfying terrorists...</a></strong></p> <p><a href=""><img src="" style="width: 600px; height: 900px;" /></a></p> <p>&nbsp;</p> <p>*&nbsp; *&nbsp; *</p> <p>Simply put - we are all terrorists now.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="576" height="502" alt="" src="" /> </div> </div> </div> Thu, 21 Aug 2014 03:15:41 +0000 Tyler Durden 493263 at Ferguson Tonight: Thunder Storms, Peaceful Protests, "Go Kill ISIS And Leave Us Alone" - Live Feed <p>One glimpse at the ominous clouds approaching Ferguson this evening was enough to suggest the end of the world was approaching but for now <strong>peacfeul protesters are once again walking (not allowed to stand)</strong> chanting "No Justice, No Peace" amidd dramatic lightning storms. <strong>The weather, for now, appears to have subdued the crowds</strong> but one protesters banner proclaiming "<strong>Go kill ISIS and leave us alone</strong>" caught our eye. Police presence is evident but not forceful for now as protesters proclaim <strong>"We want justice, here's your peace" suggesting tensions are de-escalating</strong>.</p> <p>&nbsp;</p> <p>Live Feed:</p> <p><iframe src=";height=315&amp;autoPlay=true&amp;mute=false" width="560" height="315" frameborder="0" scrolling="no"> </iframe></p> <p>&nbsp;</p> <p>The clouds...</p> <blockquote class="twitter-tweet" lang="en"><p>OMG LOOK AT THIS CLOUD <a href="">#Ferguson</a> with <a href="">@ryanjreilly</a> <a href=""></a></p> <p>— Amanda Terkel (@aterkel) <a href="">August 21, 2014</a></p></blockquote> <script src="//"></script><p> <blockquote class="twitter-tweet" lang="en"> <p>Nice try RT <a href="">@ryanjreilly</a>: I&#39;m way behind <a href="">@aterkel</a>, but here is my crazy cloud photo: <a href=""></a>”</p> <p>&mdash; Amanda Terkel (@aterkel) <a href="">August 21, 2014</a></p></blockquote> <script async src="//" charset="utf-8"></script></p> <p>The crowds...</p> <p><a href=""><img src="" width="542" height="304" /></a></p> <p>&nbsp;</p> <p>The thoughts...</p> <blockquote class="twitter-tweet" lang="en"><p>"Go kill ISIS and leave us alone:" <a href=""></a></p> <p>— Danny Gold (@DGisSERIOUS) <a href="">August 21, 2014</a></p></blockquote> <script src="//"></script><p>*&nbsp; *&nbsp; *</p> <p>Eric Holder has left the town...</p> <p>&nbsp;</p> <blockquote class="twitter-tweet" lang="en"><p>ERIC HOLDER IN <a href="">#FERGUSON</a> - ITS PERSONAL<br /> <a href=""></a><br /> <a href="">@gatewaypundit</a> <a href=""></a></p> <p>— Ministry Of Truth (@USABillOfRights) <a href="">August 21, 2014</a></p></blockquote> <script src="//"></script><p>&nbsp;</p> <p>* * *</p> <p>Let's hope it remains calm.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="403" height="455" alt="" src="" /> </div> </div> </div> Twitter Twitter Thu, 21 Aug 2014 03:02:39 +0000 Tyler Durden 493278 at Car Repos Soar 70% As Auto Subprime Bubble Pops; "It's Contained" Promises Fed <p>While on the surface the US economy has been chugging along from GDP-crashing "snow in the winter" to GDP-cratering "<em>warmer|cooler than expected weather in the spring|summer|fall</em>", with bouts of GDP-boosting inventory accumulation inbetween, in recent months two very disturbing trends about that all important dynamo behind the economy, the US consumer, have emerged. </p> <p>On one hand we wrote <a href="">three weeks ago </a>that a "shocking" 77 million, or one third, of Americans face debt collectiors: a statistic which crushes any suggestion that US household credit is substantially improving based on trends in 30, 60, or 90-day delinquency, as it means that the real pain is not at the near-end of the default/delinquency timetable, but the far end, which incidentally has just as dire an impact on one's credit score as a plain vanilla default (and explains why none other than <a href="">Fair Issac has jumped in to "adjust</a>" its credit methodology to artificially boost FICO scores of these millions of Americans). </p> <p>On the other hand, we have been closely following the ongoing deterioration of the car subprime loan bubble: something that both <a href="">Bloomberg </a>and <a href="">the Fed have </a>both also been paying close attention to recently, yet a bubble which nobody wants to burst, because as we wrote several days ago, it is none other than the subprime car loan bubble that <a href="">allowed car production </a>to surge the most last month since Obama's Cash for Clunkers capital misallocation program, in the process lifting overall manufacturing and Industrial Production, and thus GDP.</p> <p>Earlier today Experian released its latest, Q2, metrics that tie these two very worrying trends together, namely the trend in delinquencies, defaults and repossessions. </p> <p>As <a href="">NBC summarizes</a>: "<strong>The repo man is getting very busy as a growing number of car and truck owners are struggling to make their monthly auto loan payments</strong>. Experian, which analyses millions of auto loans, said Wednesday that the percentage of those loans that were delinquent or ended up in default with the vehicle being repossessed surged in the second quarter of this year." </p> <p>Hyperbole? Hardly. <strong>In fact, the auto loan subprime bubble may be the latest to burst (after student loans) as the rate of car repossessions jumped 70.2 percent in the second quarter, with much of that increase coming from finance companies not run by automakers, banks or credit unions. </strong>The good news: the percentage of auto loans that end in default is just 0.62% of all auto loans. However, as everyone but the Fed knows, what matters is the flow, not the stock, and the direction and acceleration in defaults simply means that the maximum saturation point has been reached and going forward lenders will experience ever greater losses, which in turn will limit their willingness to offer subprime loans to US consumers desperate to find a house (because clearly one doesn't need to home when one can sleep in their Chevy Tahoe).</p> <p>Experian also reported that the 30-day delinquency rate was up 0.2 percent and <strong>the 60-day rate rose 7 percent in the quarter</strong>. <strong>"We're starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time; however, we have to keep in mind that these percentages are still extremely low</strong>," said Melinda Zabritski, senior director of automotive finance for Experian Automotive.</p> <p><em>A chart of the Y/Y change in 60-day delinquency rates as of Q1:</em></p> <p><img src="" width="500" height="374" /></p> <p>Zabritski <a href="">added via CNBC </a>that "The number of delinquencies and repossessions rising is what we would expect as the auto industry sells more vehicles," "But this slight uptick is one to keep an eye on." <strong>The surge in delinquencies and repossessions is being driven primarily by borrowers with subprime and deep subprime credit scores. </strong></p> <p>The main reason to keep an eye on this "slight uptick" is that the underlying notional of total auto loan balances just hit a new all time high: <strong>in the second quarter climbed 11.7 percent to an all-time high of $839 billion, </strong>according to Experian. It doesn't take much of a deterioration in payment terms and credit quality before bad loans surge when the underlying debt is hitting record notionals quarter after quarter. </p> <p>Some data: the average charge-off was $8,149 in the second quarter up $932 compared to the same period of 2013, and rapidly rising.</p> <p>Of course, it wouldn't be a CNBC report if it didn't end on a positive note: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Zabritski knows many people are worried the industry is creating a financial storm that will end badly, but she says subprime sales are still far below normal.</p> <p>&nbsp;</p> <p>"The growth in subprime auto loans looks dramatic because it was so restricted in the last few years," she said. "But this is not mismanaged, rapid growth. We are still well below levels we saw during the recession."</p> </blockquote> <p>Because somehow one can compare a period in which the Fed has a $4.4 trillion in balance sheet leverage with a period in which... it doesn't? Good to know then that at least consumer subprime lending is not as bad as it was then, and instead all of the Fed's proceeds have simply made their way into the bubble of a stock market. </p> <p>Finally, for the curious, here are some charts from the most recent, Q1, Experian presentation on the matter. We will update these once the latest slides are unveiled by the credit company.</p> <p><em>The average credit score on top leased models:</em></p> <p><em><a href=""><img src="" width="502" height="372" /></a></em></p> <p>&nbsp;</p> <p><em>The average loan vs lease payment for the top 10 most popular car models.</em></p> <p><em><a href=""><img src="" width="500" height="374" /></a></em></p> <p>&nbsp;</p> <p><em>The top New loan lenders:</em></p> <p><em><a href=""><img src="" width="500" height="374" /></a></em></p> <p>&nbsp;</p> <p><em>And the top Used loan lenders:</em></p> <p><em><img src="" width="500" height="374" /></em></p> <p>&nbsp;</p> <p>But the one reason we know the subprime auto loan bubble has burst and is about to lead to another round of devastation around the nation is one <a href="">simple statement</a>: "<strong>The New York Fed dove into lending data, and its <em>economists found that the bubble fears may be misplaced</em></strong>." In other words, it is "<strong>contained."</strong></p> <p>Hm... where have we heard that before?</p> <p>*&nbsp; *&nbsp; *</p> <p>Don't worry though - it's not as bas as the peak of the recession!!!</p> <blockquote class="twitter-tweet"><p>"Not being as bad yet as the last bubble peak" = the new normal. <a href=""></a></p> <p>— Rudolf E. Havenstein (@RudyHavenstein) <a href="">August 20, 2014</a></p></blockquote> <script src="//"></script> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="480" height="310" alt="" src="" /> </div> </div> </div> Cash For Clunkers default NBC New Normal New York Fed None Recession Student Loans Twitter Twitter Thu, 21 Aug 2014 03:00:28 +0000 Tyler Durden 493245 at Goldman Warns Additional Chinese Stimulus Risks Global Financial Stability <p>The soft July data have once again generated expectations of monetary easing from China. <strong>Goldman however thinks further monetary easing would have incrementally less of an impact and would come at the cost of financial stability</strong>. This diminishing impact, they argue, would result as overcapacity/oversupply restricts long-term borrowing demand and due to interest rate deregulation, which tends to move the long-term risk-free interest rate to a higher equilibrium, as seen in recent data. As the tradable sector continues to recover on the back of an improved global outlook, Goldman believes that a combination of sectoral policies aimed at easing financial stress and structural adjustment would be a better policy option. <strong>They do not expect broad macro easing or an interest rate cut in what remains of this year.</strong></p> <p><em>Goldman&#39;s Li Cui Explains...</em></p> <p><span style="text-decoration: underline;"><strong>Better global growth has supported recovery, while domestic demand is still soft</strong></span></p> <p><strong>Recent data show that the impact of earlier policy easing was short-lived, and domestic demand has remained soft.</strong> For July, in particular, most indicators related to domestic demand &ndash; including investment, financing and imports &ndash; decelerated notably from the previous month. Industrial production held up but this was most likely a reflection of stronger exports rather than domestic momentum. While one monthly data point does not signify a trend, the underlying picture is clear: Chinese exports have seen a visible recovery since last year, cushioning the impact of the domestic slowdown, in line with our expectation.</p> <p><strong>Given soft domestic momentum, market attention has again turned towards the potential for further monetary easing, including liquidity easing and a cut in interest rates. However, <span style="text-decoration: underline;">recent experience suggests that monetary easing is likely to have a limited impact on the growth recovery</span>, as we have argued elsewhere. </strong>The credit rebound in May-June and the decline in July were entirely driven by short-term borrowing. Long-term borrowing corresponding to corporate capex and infrastructure construction has been muted, and stands at 15.5%yoy, compared with 17.3% at the end of 2013. Thus, long-term investment has continued to decelerate despite monetary easing. Along with the elevated long-term borrowing costs discussed below, this suggests that monetary easing has yet to produce a lasting impact on economic demand. The relief through higher short-term loans has mostly benefited enterprises with working capital needs, in particular companies in sectors with overcapacity.</p> <p><strong><span style="text-decoration: underline;">Monetary easing is likely to have incrementally less of an impact on growth, but a higher cost in terms of financial stability</span></strong></p> <p>Monetary conditions have eased since Q1. The 7 day repo has declined by over 200 bps from its peak in late 2013, The domestic component of our FCI index also eased, although the majority of the FCI easing still came through the weaker exchange rate from last year.</p> <p><strong>There are reasons to question the impact of monetary easing (liquidity easing or interest rate cuts, as some observers have recently proposed), not least given their limited impact on growth so far</strong>.</p> <p><strong>First, long-term interest rates have shifted towards a new &#39;equilibrium&#39; level.</strong> This is a powerful counterforce to near-term liquidity easing. Monetary policy affects the economy mostly through its effect on long-term borrowing costs. Despite the significant decline in front-end rates, the long-term risk-free rate has remained well above 4%, more than 100bp higher than in 2013, pointing to a rise in the term premium. (We calculate the term premium for 5-year government bond yields as the difference between the actual rate and the implied 5-year rate from the short-term rate forecast. See Exhibit 1, see Asia Economics Analyst: China: Higher term premium challenging monetary easing, May 16, 2014).</p> <p>In turn, bank lending rates have held up as banks faced higher funding costs. Lending rates on general loans rose from 7.0% to 7.3% between December and June (the latest data available).</p> <p>Higher long-term interest rates mostly reflect interest rate deregulation, in our view. As the government pursues incremental steps towards interest rate liberalisation and reduces financial repression, savers start to enjoy higher returns on their savings. This means increased funding costs for banks, and for the economy as a whole. Long-term interest rates thus show limited downward flexibility, despite the liquidity easing. This means that interest rate liberalisation tightens financial conditions, and hence a more supportive fiscal stance and exchange rate, as well as regulatory adjustments, are likely needed to compensate for the effect.</p> <p><u><em>Exhibit 1: The increase in term premium* offsets the impact of liquidity easing on long-term borrowing costs</em></u><br /><a href=""><img alt="" src="" style="width: 422px; height: 239px;" /></a></p> <p><em>* The term premium is estimated as the difference between actual 5-year government bond yields and the yield implied by the short-term rate outlook estimated on the basis of Consensus Economics forecasts. For a detailed discussion, see Asia Economics Analyst: China: Higher term premium challenging monetary easing.</em></p> <p><strong>Second, the cost of monetary easing for financial stability is higher.</strong> A steeper yield curve tends to encourage interbank risk-taking (although such activities have declined due to the recent regulations). A cut in the benchmark deposit rate, which is already below the market rate, risks deposit outflows to higher-yield products (as observed most recently at end-June). This could increase liquidity and disintermediation risks for the banking system, without clear evidence that such a rate cut would help to bring down borrowing costs in the economy.</p> <p><strong>Third, long-term investment demand is constrained for reasons unrelated to funding costs. </strong>Domestic cyclical sectors (heavy industrials and property sectors) are still weighed down by overcapacity/oversupply, and fiscal measures have been selective and measured in general. The fiscal stance turned more supportive from May to June after the unusually contractionary stance in the January-to-April period, but the overall fiscal deficit is largely on par with the budget &ndash; there has been limited incremental expansion overall.</p> <p><u><strong>Policy balancing act has stayed on track, in part thanks to the higher cost of funding that has cooled leverage growth</strong></u></p> <p>We wrote at the start of the year that the macro policy agenda is unusually complex this year, and that the government needs to maintain stable growth, control credit expansion and curb tail risks, while at the same time pursuing structural reforms. On the positive side, the government has a large set of policy tools that allow it to address various policy priorities at the same time.</p> <p>So far, the score-card for this balancing act has generally been positive:</p> <ul> <li><strong>Leverage growth has continued to come down, while economic growth has held up</strong> (Exhibit 2). Higher long-term rates help to contain leverage growth and reduce inefficient investment. Growth in the non-leveraged sector &ndash; in particular, exports &ndash; has helped to support the economic recovery.</li> <li><strong>Financial stress has declined, even though interest rate deregulation has continued.</strong> Financial tail risks as perceived by the market have come down substantially, measured using our financial stress indicators, which are compiled on the basis of financial market prices and spreads. Such declines reflected the more dovish central bank signals and the new regulations aimed at limiting risk-taking in the interbank market (Exhibit 3).</li> </ul> <p><u><em>Exhibit 2: Total Social Financing (TSF) decelerates, while growth has remained stable</em></u><br /><a href=""><img alt="" src="" style="width: 407px; height: 261px;" /></a></p> <p>&nbsp;</p> <p><u><em>Exhibit 3: Market perception of tail risks** has declined sharply on the back of improved regulation</em></u><br /><a href=""><img alt="" src="" style="width: 427px; height: 263px;" /></a></p> <p><em>** These indices are combined on the basis of financial market prices and spreads, adjusting for economic cyclical positions. In particular, the interest rate risk index is the weighted average of the deposit rate and the 7-day repo rate. The credit risk index is the average of the yield spread for longer-term financing costs (corporate bond, AA-rated) over the government bond yield, and the yield spread of the short-term financing cost (bank acceptance bill rate) over the government bond yield. The liquidity risk index is the average of the spread of the 3-month interbank rate over the overnight repo rate, and the spread between bank bond financing and the risk-free rate. </em></p> <p><u><strong>Selective policy support to continue; we do not expect broad macro easing or an interest rate cut</strong></u></p> <p>On net, a tradable sector recovery, continued prudential rules to curb excessive risk-taking and targeted/selective policies should help to keep the balancing act on track, allowing the government to continue to pursue the structural agenda.</p> <p><strong>While we expect the general policy stance to remain accommodative, we do not expect significant further monetary easing.</strong> Indeed, as cyclical conditions improve, interbank rates are likely to drift up again and financial conditions could become tighter in H2. We do not expect an interest rate cut for the reasons discussed above.</p> <p>Meanwhile, targeted policies to assist SME/agricultural sector borrowing, as well as further easing in housing-purchase-related, restrictions will continue.<strong> The PBoC may elect to use the PSL &ndash; or Pledged Supplementary Lending (a newly created facility to provide long-term liquidity to selected banks) &ndash; for specific sector support.</strong> Bond issuance by local governments is also likely to pick up to offset the expected dwindling of local land sales.</p> <p>*&nbsp; *&nbsp; *</p> <p>Of course, Goldman has been modestly bearish on China for months and this merely confirms that view but their perspective (at a time when the Fed is pulling back) is notable in that it leaves the ECB as the only treaty-busting player in the room that can surprise (since the BoJ is hampered by both proven ineffectiveness, soaring misery, and inflation pain).</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="407" height="261" alt="" src="" /> </div> </div> </div> Bond Borrowing Costs China Monetary Policy Prudential recovery Yield Curve Thu, 21 Aug 2014 02:49:59 +0000 Tyler Durden 493277 at Ferguson Cop Points Gun At Protesters And Press, Screams "I Will F***ing Kill You", Has Been "Relocated" <p>In the aftermath of recent violent events and now that even the US Attorney General has arrived, one would assume that the Ferguson police had at least some "sensitivity" training about how to approach protesters, especially those "armed" with cameras. Not in this case. The footage below out of Ferguson shows a police officer pointing his gun directly at protesters and reporters while screaming "<strong>I’m going to f***ing kill you!</strong>"</p> <p><object width="600" height="450" data="//;version=3&amp;rel=0" type="application/x-shockwave-flash"><param name="data" value="//;version=3&amp;rel=0" /><param name="allowFullScreen" value="true" /><param name="allowscriptaccess" value="always" /><param name="src" value="//;version=3&amp;rel=0" /><param name="allowfullscreen" value="true" /></object></p> <p>The clip shows a Ferguson officer with his gun raised pointing it directly at a citizen journalist who was live streaming at the time: the incident was witnessed by Infowars reporter Joe Biggs who was also filming the incident. </p> <p>"My hands are up bro, my hands are up," states the journalist before the cop responds, "I’m going to f***ing kill you, get back, get back!"</p> <p>"You’re going to kill him?” asks another individual before the journalist asks, “did he just threaten to kill me?"</p> <p>When the cop is asked for his name he responds, "go fuck yourself."</p> <p></p> <object width="600" height="450" data="//;hl=en_US&amp;rel=0" type="application/x-shockwave-flash"><param name="data" value="//;hl=en_US&amp;rel=0" /><param name="allowFullScreen" value="true" /><param name="allowscriptaccess" value="always" /><param name="src" value="//;hl=en_US&amp;rel=0" /><param name="allowfullscreen" value="true" /></object> <p>It didn't end there. </p> <p>As <a href="">Infowars reports</a>, "another clip shows the officer pointing his gun as protesters demand he lower the weapon. A second cop intervenes to make the officer lower his weapon as more irate demonstrators demand to know the officer’s name."</p> <p>The officer’s response to people asking for his name almost immediately prompted the launch of the Twitter hashtag <em>#officergofuckyourself.</em></p> <p>Biggs live tweeted the incident, and also took this photograph of the cop.</p> <p><a href=""><img src="" width="600" height="874" /></a></p> <p>The incident is certain to provoke curiosity as to just how the local Police department is handling the de-escalation of local tensions. </p> <p>As for police officer #officergofuckyourself, it appears he is no longer "on location."</p> <blockquote class="twitter-tweet" lang="en"><p>Quick work by ACLU: Highway patrol called. They identified the cop. He will no longer be in ferguson. <a href=""></a></p> <p>— Vanita Gupta (@ACLUVanita) <a href="">August 20, 2014</a></p></blockquote> <script src="//"></script><p>One also wonders: if not in Ferguson, just where can this pleasant, if "relocated", individual be encountered?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="455" height="480" alt="" src="" /> </div> </div> </div> Twitter Twitter Thu, 21 Aug 2014 02:44:15 +0000 Tyler Durden 493262 at "The Financial System Is Vulnerable," NYFed Asks "Could The Dollar Lose Its Reserve Status?" <p>When a tin-foil-hat-wearing blog full of digital dickweeds suggest the <strong>dollar&#39;s reserve currency status is at best diminishing</strong>, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the <a href=";utm_medium=social&amp;;utm_campaign=buffer"><strong>New York Fed asks &quot;Could the dollar lose its status as the key international currency for international trade and international financial transactions,&quot;</strong></a> and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.</p> <p>&nbsp;</p> <p><em><a href=";utm_medium=social&amp;;utm_campaign=buffer">Via The World Economic Forum blog</a>,</em></p> <p style="color: #000000;"><u><strong>Could the dollar lose its status as the key international currency for international trade and international financial transactions, and if so, what would be the principal contributing factors?</strong></u></p> <p style="color: #000000;">Speculation about this issue has long been abundant, and views diverse. After the introduction of the euro, there was much public debate about the euro displacing the dollar <a href="">(Frankel 2008)</a>. The monitoring and analysis included in the ECB&rsquo;s reports on &ldquo;The International Role of the Euro&rdquo; (e.g. <a href="">ECB 2013</a>) show that the international use of the euro mainly progressed in the years prior to 2004, and that it has largely stalled since then. More recently, the euro has been displaced by the renminbi as the debate&rsquo;s main contender for reducing the international role of the dollar <a href="">(Frankel 2011)</a>.</p> <p style="color: #000000;">This debate has mainly argued in terms of &lsquo;traditional&rsquo; determinants of international currency status, such as country size, economic stability, openness to trade and capital flows and the depth and liquidity of financial markets (<a href="">Portes and Rey 1998</a>). Considerations regarding the strength of country institutions have more recently been added to the list. All of these factors influence the ability of currencies to function as stores of value, to support liquidity, and to be accepted for international payments. Inertia also plays a role (e.g. <a href="">Krugman 1984</a>, <a href="">Goldberg 2010</a>), raising the bar for currencies that might uproot the status quo.</p> <p style="color: #000000;"><strong>We argue here &ndash; building on discussions we began during the World Economic Forum Summit on the Global Agenda 2013 &ndash; that the rise in global financial-market integration implies an even broader set of drivers of the future roles of international currencies. In particular, we maintain that the set of drivers should include the institutional and regulatory frameworks for financial stability.</strong></p> <p style="color: #000000;">The emphasis on financial stability is linked with the expanded awareness of governments and international investors of the importance of safety and liquidity of related reserve assets. For a currency to have international reserve status, the related assets must be useable with minimal transaction-price impact, and have relatively stable values in times of stress. If the risk of banking stress or failures is substantial, and the potential fiscal consequences are sizeable, the safety of sovereign assets is compromised exactly at times of financial stress, through the contingent fiscal liabilities related to systemic banking crises. <strong>Monies with reserve-currency status therefore need to be ones with low probabilities of twin sovereign and financial crises. Financial stability reforms can &ndash; alongside fiscal prudence &ndash; help protect the safety and liquidity of sovereign assets, and can hence play a crucial role for reserve-currency status.</strong></p> <p style="color: #000000;">The broader emphasis on financial stability also derives indirectly from the expanded awareness in the international community of the occasionally disruptive international spillovers of centre-country funding shocks <a href="">(Rey 2013)</a>. We argue that regulatory reforms can play a role in influencing these spillovers. Resilience-enhancing financial regulation of global banks can help reduce the volatility of capital flows that are intermediated through such banks.</p> <p><u><strong>On financial stability and reserve-currency status</strong></u></p> <p style="color: #000000;">International reserve assets tend to be provided by sovereigns, notably due to the fiscal capacity of the state and the credibility of the lender of last resort function of the central bank during liquidity crises (see also<a href=""> De Grauwe 2011</a> and <a href="">Gourinchas and Jeanne 2012</a>). Systemic financial events can be accompanied by pressures on the government budget, however. While provision of a fiscal backstop to the banking sector is not the best ex ante approach to policy, fiscal support will tend to be forthcoming if the risk and estimated welfare costs of a systemic fallout are otherwise deemed too high.</p> <p style="color: #000000;">Yet banking sector risks &ndash; and inadequate capacity within the banking sector to absorb these risks &ndash; can end up exceeding a government&rsquo;s ability to provide a credible fiscal backstop without adversely affecting the safety of its sovereign assets. The fiscal consequences of bailouts may result in increased sovereign risk and the loss of safe-asset status, with implications for the status of the currency in question in the international monetary system.</p> <p style="color: #000000;">To increase the likelihood that sovereign assets remain safe during systemic events, the sovereign can undertake financial and fiscal reforms that decouple the fiscal state of the sovereign from banking crises. Such reforms should achieve, in part, a reduction in the likelihood of and need for bailouts through increased resilience and loss absorption capacity of the financial system, and by ensuring sufficient fiscal space for credible financial-sector support (see also <a href="">Obstfeld 2013</a>).</p> <p><u><strong>Reform initiatives</strong></u></p> <p style="color: #000000;">A number of current reform initiatives already take steps in this direction. These include:</p> <ul style="color: #000000;"> <li>Reforms to bank capital and liquidity regulation, which reduce the likelihood that financial institutions, and notably systemically important ones (SIFIs), become distressed;</li> <li>Initiatives that seek to counteract the procyclicality of leverage, and to strengthen oversight; and</li> <li>Recovery and resolution regimes for distressed systemically important financial institutions (SIFIs) are being improved.</li> </ul> <p style="color: #000000;">Importantly, initiatives are underway to improve recovery and resolution in the international context. While a global agreement on cross-border bank resolution is currently not in place, bilateral agreements among some pairs of countries are being forged ex ante to facilitate lower-cost resolution ex post.&nbsp;Further, the resilience of the system as a whole is being strengthened, to better contain the systemic externalities of funding shocks. Examples include:</p> <ul style="color: #000000;"> <li>The strengthening of the resilience of central counterparties and other financial market infrastructures; and</li> <li>The foreign&nbsp;currency swap arrangements among central banks to provide access to foreign currency funding liquidity at times when market prices of such liquidity are punishingly high.</li> </ul> <p style="color: #000000;"><strong><u>Nevertheless, the financial system contains vulnerabilities &ndash; globally, as well as in individual currency areas.</u></strong> The negative sovereign banking feedback loop may be weakened in many countries, but has not been fully severed. Moreover, reforms are not necessarily evenly implemented across countries. Fiscal capacities to provide credible backstops of the financial sector during stress vary widely. The consequences of recent reforms for the future of key international currencies are therefore open. Scope remains for countries vying for reserve-currency status to use the tool of financial stability reform to protect the safety and liquidity of their sovereign assets from the contingent liabilities of financial systemic risk.</p> <p><u><strong>Financial stability reforms matter for spillovers and capital flows</strong></u></p> <p style="color: #000000;">International capital flows yield many advantages to home and host countries alike. Yet the international monetary system still faces potential challenges stemming from unanticipated volatility in flows, as well as occasionally disruptive spillovers of shocks in centre-country funding conditions to the periphery. With the events around the collapse of Lehman Brothers, disruption in dollar-denominated wholesale funding markets led to retrenchment of international lending activities. Capital flows to some emerging-market economies then recovered with a vengeance as investors searched for yield outside the countries central to the international monetary system, where interest rates were maintained at the zero lower bound. After emerging markets were buoyed by the influx of funds, outflows and repositioning occurred when markets viewed some of the expansionary policies in the US as more likely to be unwound.</p> <p style="color: #000000;">While macroprudential measures &ndash; and in extreme cases, capital controls &ndash; are some of the policy options available for addressing the currently intrinsic vulnerabilities of some capital-flow recipient periphery countries (<a href="">IMF 2012</a>), we point out that these vulnerabilities can also be addressed in part by financial stability reforms in centre countries.</p> <p style="color: #000000;">Consider, for example, the consequences of the regulatory reforms pertaining to international banks that are currently being proposed or implemented. Improvements in the underlying financial strength and loss-absorbing capacity of global banks could have the beneficial side-effect of reducing some of the negative spillovers associated with unanticipated volatility in international banking flows &ndash; especially those to emerging and developing economies. Empirical research suggests that better-capitalized financial institutions, and institutions with more stable funding sources and stronger liquidity management, adjust their balance sheets to a lesser degree when funding conditions tighten (<a href="">Gambacorta and Mistrulli 2004</a>, <a href="">Kaplan and Minoiu 2013</a>). The result extends to cross-border bank lending (<a href="">Cetorelli and Goldberg 2011</a>, <a href="">Bruno and Shin 2013</a>).</p> <p style="color: #000000;">While financial stability reforms may reduce the externalities of centre-country funding conditions, they retain the features of international banking that promote efficient allocation of capital, risk sharing and effective financial intermediation. By enhancing the stability of global institutions and reducing some of the amplitude of the volatility of international capital flows, they may address some of the objections to the destabilising features of the current system.</p> <p style="color: #000000;">Cross-border capital flows that take place outside of the global banking system have recently increased relative to banking flows (<a href="">Shin 2013</a>). Regulation of global banks does very little to address such flows, and may even push more flows toward the unregulated sector. At the same time, however, regulators are considering non-bank and non-insurer financial institutions as potential global systemically-important financial institutions (<a href="">Financial Stability Board 2014</a>).</p> <p><u><strong>Conclusions</strong></u></p> <p style="color: #000000;">We have argued that the policy and institutional frameworks for financial stability are important new determinants of the relative roles of currencies in the international monetary system. Financial stability reform enhances the safety of reserve assets, and may contribute indirectly to the stability of international capital flows. Of course, the &lsquo;old&rsquo; drivers of reserve currencies continue to be influential.<u><strong> China&rsquo;s progress in liberalising its capital account, and structural reforms to generate medium-term growth in the Eurozone &ndash; as examples of determinants of the future international roles of the renminbi and the euro relative to the US dollar &ndash; will continue to influence their international currency status.</strong></u> Our point is that such reforms will not be enough. The progress achieved on financial stability reforms in major currency areas will also greatly influence the future roles of their currencies.</p> <p style="color: #000000;"><em>Authors:&nbsp;Linda Goldberg,&nbsp;Vice President of International Research at the Federal Reserve Bank of New York and&nbsp;Signe Krogstrup,&nbsp;Assistant Director and Deputy Head of Monetary Policy Analysis, Swiss National Bank; Member of the World Economic Forum&rsquo;s Global Agenda Council on the International Monetary System</em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="442" height="282" alt="" src="" /> </div> </div> </div> Bank of New York Central Banks China Counterparties Eurozone Federal Reserve Federal Reserve Bank Federal Reserve Bank of New York Financial Regulation Financial Stability Reform Krugman Lehman Lehman Brothers Monetary Policy New York Fed recovery Renminbi Reserve Currency Sovereign Risk Sovereign Risk Sovereigns Swiss National Bank Volatility Thu, 21 Aug 2014 02:17:15 +0000 Tyler Durden 493276 at