en Malaysia Bans The Color Yellow As Protests Swell Into The Hundreds Of Thousands <p>The anti-government protests that swept through the Malaysian capital of Kuala Lumpur on Saturday continued unabated on Sunday after tens of thousands of demonstrators camped in the streets overnight.&nbsp;</p> <p>Emboldened by the presence of influential former Prime Minister Mahathir Mohamad, protesters chanced being confronted with water cannons and tear gas, which police used to disperse crowds at previous Bersih rallies. </p> <p><a href=""><img src="" width="500" height="285" /></a></p> <p>As we <a href="">detailed on Saturday</a>, <strong>calls for the ouster of Prime Minister Najib Razak have grown louder in recent months after the government appeared to be obstructing an investigation into how more than $600 million in funds from a Goldman-backed development bank ended up in Najib’s personal bank account.</strong> Mahathir Mohamad, who many say still hasn’t accepted the fact that he hasn’t been Prime Minister since 2003, has called for a no-confidence vote and insists that the man he handpicked to govern "has to go."</p> <p>Estimates of Sunday’s crowd varied <em>slightly</em> depending on who you listen to. Police, for instance, say the gathering attracted around 20,000 protesters while <a href="">Bersih insists</a> the number was closer to 300,000. </p> <p><a href=""><img src="" width="500" height="322" /></a></p> <p><a href=""><img src="" width="500" height="322" /></a></p> <p><a href=""><img src="" width="500" height="333" /></a></p> <p>Whatever the number, it was large enough to cause the police to move tonight’s Independence Eve celebrations from Kuala Lumpur’s Merdeka Square to a location outside the city, Bloomberg said, citing local officials.&nbsp;</p> <p>As for Najib, the premier blasted the protesters in comments made to the media on Sunday. "What is 20,000? We can gather hundreds of thousands. The rest of the Malaysian population is with the government."&nbsp;</p> <p>Perhaps, but that too could change should the country plunge further into financial crisis. As we've documented extensively (<a href="">here</a> and <a href="">here</a>, for instance), a plunging currency, falling FX reserves, and a collapsing stock market threaten to push Malaysia over the edge and many fear a repeat of the capital controls the country introduced to stem the 1997/98 crisis may be just around the corner.</p> <p>And the punchline - because there's <em>always</em> a punchline - the government has banned the color yellow...</p> <p><img src="" width="537" height="594" /></p> <p><a href=""><em>Source: Malaysia Ministry of Home Affairs</em></a></p> <p><em>* &nbsp;* &nbsp;*</em></p> <p><em>For those interested in the backstory, we have included it below</em></p> <p>1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. <strong>$6.5 billion of that debt came from three bond deals underwritten by Goldman, whose Southeast Asia chairman Tim Leissner is married to hip hop mogul Russell Simmons’ ex-wife Kimora Lee who, in turn, is good friends with Najib’s controversial wife Rosmah Manso. </strong></p> <p><a href=""><img src="" width="318" height="650" /></a></p> <p>You really cannot make this stuff up. </p> <p>What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit (more <a href="">here from FT</a>). Somewhere in all of this, $700 million allegedly landed in Najib’s bank account and the going theory is that 1MDB is simply a slush fund.&nbsp;</p> <p>So you can see why some folks are upset, especially considering Rosmah has a habit of having, how shall we say, rich people problems, like <a href="">being gouged</a> $400 for a home visit by a personal hairstylist. Here’s <a href="">The New York Times</a> with more on the protests:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>Tens of thousands of demonstrators in Malaysia defied police orders on Saturday, massing in the capital in a display of anger at the government of Prime Minister Najib Razak, who has been accused of corruption involving hundreds of millions of dollars.</em></strong></p> <p>&nbsp;</p> <p><em>The demonstration in central Kuala Lumpur, which has been planned for weeks, has been declared illegal by the Malaysian police, and the government on Friday went as far as to pass a decree banning the yellow clothing worn by the antigovernment protesters.</em></p> <p>&nbsp;</p> <p><em>But the demonstrators, who represent a broad coalition of civic organizations in Malaysia, including prominent lawyers, asserted their right to protest on Saturday.</em></p> <p>&nbsp;</p> <p><em>The government has acknowledged that Mr. Najib received the money in 2013 and said it was a donation from undisclosed Arab royalty.&nbsp;</em></p> <p>&nbsp;</p> <p><strong><em>One group of protesters on Saturday carried the image of a giant check in the amount of 2.6 billion ringgit, with a sign that read, “You really think we are stupid?”</em></strong></p> <p>&nbsp;</p> <p><em>The group organizing the protest goes by the name Bersih, which means clean in Malay.</em></p> <p>&nbsp;</p> <p><em>Calls for Mr. Najib to resign have come both from within his party, which is divided, and from the opposition. One junior member of Mr. Najib’s party, the United Malays National Organization, filed a lawsuit against Mr. Najib on Friday asking for details of how the money was spent.</em></p> </blockquote> <p>Of course the most prominent voice calling for Najib’s ouster is that of the former Prime Minister Mahathir Mohamad. "I don’t believe it is a donation. I don’t believe anybody would give [that much], whether an Arab, or anybody," he says.&nbsp;</p> Bond Corruption New York Times Sun, 30 Aug 2015 15:46:10 +0000 Tyler Durden 512597 at The End Of "The Permanent Lie" Looms Large <p><a href=""><em>Submitted by Satyajit Das via The Sydney Morning Herald,</em></a></p> <p>Like the characters in Samuel Beckett&rsquo;s Waiting for Godot,<strong> the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.</strong></p> <p>Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.</p> <p><strong>Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.</strong></p> <p>Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.</p> <p><strong>The 2008 global financial crisis was a warning of the unstable nature of these arrangements. </strong>But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world&rsquo;s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.</p> <p><u><strong>Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.</strong></u></p> <p><strong>The official policy is &ldquo;extend and pretend&rdquo;,</strong> whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.</p> <p><strong>Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions. </strong>Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity.</p> <p>For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. <strong>Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.</strong></p> <p><u><strong>Governments are unwilling to tell the truth about the magnitude of the economic problems, the lack of solutions and cost of possible corrective actions to the electorate. </strong></u>Politicians have taken regard of historian Simon Schama&rsquo;s comment that no one ever won an election by telling voters it had come to the end of its &ldquo;providential allotment of inexhaustible plenty&rdquo;. The official policy articulated, in a moment of unusual candour, by Jean-Claude Juncker, the current head of the European Commission, was that when the situation becomes serious it is simply necessary to lie.</p> <p>Ordinary people are complicit; refusing to acknowledge that maybe you cannot have it all. <strong>They sense that the ultimate cost of the inevitable adjustments will be large.</strong> It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride. It is a pervasive sense of powerlessness.</p> <p><strong>The political and social response is likely to be volatile</strong>. It was the fear and disaffection of the middle class who had lost their savings in the events of Great Depression that gave rise to totalitarianism.</p> <p>For the moment, to paraphrase Alexander Solzhenitsyn, <em><u><strong>the &ldquo;permanent lie [has become] the only safe form of existence&rdquo;. But the world cannot postpone, indefinitely, dealing decisively with the economic, resource management, social and political challenges we face.</strong></u></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="262" height="165" alt="" src="" /> </div> </div> </div> China Germany Global Economy Great Depression Gross Domestic Product Real estate recovery Totalitarianism Unemployment Sun, 30 Aug 2015 15:05:23 +0000 Tyler Durden 512595 at The Crisis in Which Central Banks Lose Control Has Already Begun <p>For six years, the world has operated based on faith and hope that Central Banks somehow fixed the issues that caused the 2008 Crisis.</p> <p>&nbsp;</p> <p>All of the arguments supporting this defied common sense. A 5<sup>th</sup> grader knows that you cannot solve a debt problem by issuing more debt. If the below chart was a problem BEFORE 2008&hellip; there is no way that things are better now. After all, we&rsquo;ve just added another $10 trillion in debt to the US system.</p> <p>&nbsp;</p> <p><img alt="" src="" style="width: 500px; height: 332px;" /></p> <p>&nbsp;</p> <p>Similarly, anyone with a functioning brain could tell you that a bunch of academics with no real-world experience, none of whom have ever started a business or created a single job can&rsquo;t &ldquo;save&rdquo; the economy. Indeed, few if any of the Fed Presidents have even run a bank before. And yet they&rsquo;re in charge of the banking system.</p> <p>&nbsp;</p> <p>However, there is an AWFUL lot of money at stake in maintaining the illusion of Central Banking omniscience. So the media and the banks and the politicians were happy to promote them. Indeed, one could very easily argue that nearly all of the wealth and power held by those at the top of the economy stem from this fiction.</p> <p>&nbsp;</p> <p>So it&rsquo;s little surprise that no one would admit the facts: that the Fed and other Central Banks not only don&rsquo;t have a clue how to fix the problem, but that <strong><em>they actually have almost no incentive to do so.</em></strong></p> <p>&nbsp;</p> <p>So here are the facts:</p> <p>&nbsp;</p> <p style="margin-left: 40px;">1)&nbsp;&nbsp; The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.</p> <p style="margin-left: 40px;">&nbsp;</p> <p style="margin-left: 40px;"><strong>2)</strong><strong>The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.</strong></p> <p style="margin-left: 40px;">&nbsp;</p> <p style="margin-left: 40px;"><strong>3)</strong>Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. <strong>NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it&rsquo;s likely a significant amount.</strong></p> <p style="margin-left: 40px;">&nbsp;</p> <p style="margin-left: 40px;">4)&nbsp;&nbsp; Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion&hellip; today they are $7 trillion: an amount equal to nearly 50% of US GDP.</p> <p style="margin-left: 40px;">&nbsp;</p> <p style="margin-left: 40px;">5)&nbsp;&nbsp; The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.</p> <p style="margin-left: 40px;">&nbsp;</p> <p style="margin-left: 40px;">6)&nbsp;&nbsp; The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 <strong>show Janet Yellen was worried about how to exit when the Fed&rsquo;s balance sheet was $1.3 trillion (back in 2009)</strong>. Today it&rsquo;s over $4.5 trillion.</p> <p>&nbsp;</p> <p>We are heading for a crisis that will be exponentially worse than 2008. The global Central Banks have literally bet the financial system that their theories will work.&nbsp; They haven&rsquo;t. All they&rsquo;ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.</p> <p>&nbsp;</p> <p>This process has already begun abroad.</p> <p>&nbsp;</p> <p>In January 2015, the Swiss National Bank (SNB), backed into a corner by the ECB&rsquo;s QE program, had a choice: print an obscene amount of money to defend the Franc&rsquo;s peg or break the peg.</p> <p>&nbsp;</p> <p>The SNB chose to break the peg. In a single day, the bank lost an amount of money equal to somewhere between 10% and 15% of Swiss GDP. More than that, it let the Franc appreciate&hellip; in a country in which 54% of the GDP is based on exports.</p> <p>&nbsp;</p> <p>The next bank to lose its grip is the Central Bank of China.</p> <p>&nbsp;</p> <p>With an economy in free-fall (GDP is growing by 3% <strong><u>at best</u></strong>), a dual house and stock bubbles bursting simultaneously, China&rsquo;s regulators went on the offensive: freezing the markets, banning short-selling, arresting short-sellers, and pumping tens of billions of Dollars into the market<strong><u> per day</u></strong>.</p> <p>&nbsp;</p> <p>Despite this, Chinese stocks continue to crater. And the economy hasn&rsquo;t budged.</p> <p>&nbsp;</p> <p>The fact of the matter is that despite public opinion, there <em>are</em> problems that are so big that the Central Banks cannot fix them. We&rsquo;ve seen this in Switzerland and China. It will be spreading to other countries in the near future.</p> <p>&nbsp;</p> <p>If you&#39;ve yet to take action to prepare for this, we offer a <strong>FREE</strong> investment report called the <strong><em>Financial Crisis &quot;Round Two&quot; Survival Guide </em></strong>that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.</p> <p>&nbsp;</p> <p>We are making only <u>100 copies</u> available for FREE the general public.</p> <p>&nbsp;</p> <p>To pick up yours, swing by&hellip;.</p> <p>&nbsp;</p> <p><u><strong><a href="">Click Here Now!!!</a></strong></u></p> <p>&nbsp;</p> <p>Best Regards</p> <p>&nbsp;</p> <p>Graham Summers</p> <p>Chief Market Strategist</p> <p>Phoenix Capital Research</p> <p>&nbsp;</p> <p>Our FREE daily e-letter: <strong><a href=""></a></strong></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> Bond Central Banks China fixed Janet Yellen Lehman Lehman Brothers None Swiss National Bank Switzerland Sun, 30 Aug 2015 14:29:38 +0000 Phoenix Capital Research 512594 at Austrian Economics Is Now Equivalent To Terrorism Thanks To Latest Islamic State "Gold Standard" Propaganda Clip <p>What better way to mute demands for a return to sound money and the gold standard, than by making them equivalent to jihadist terrorism? Why, there are none, which is why some were thoroughly amused to see that yesterday the Islamic State's so called media center, the al Hayat, released a video whose production qualities are nothing short of Hollywood (or San Fernando valley at worst), in which the latest and greatest "jihadist terrorist group" that was a <a href="">byproduct of US intervention in the Middle East</a>, announces it is preparing to take on the Fed itself with, drumroll, "<strong>the return of the gold dinar</strong>."</p> <p>As <a href="">Bloomberg reminds </a>us, the Islamic State’s Shura Council last year tasked its Beit al Mal, or treasury, with minting the coins, which come in several denominations made of gold, silver and copper. </p> <p>The coins may not be there, but instead ISIS released a 55-minute propaganda video with the latest in straight to YouTube special effects, in which the ISIS voiceover actor says, in perfect English, "<strong>as history repeated itself, one of the great forms of corruption that the earth came to witness was the dark rise of bank notes, borne out of the satanic conception of banks, which mutated into a fraudulent system of enslavement orchestrated by the Federal Reserve in America - a private corporation and system that would, through the use of deceit and force, deprive people of their due, by imposing upon them the usage of the piece of paper that came to be known as the dollar bill</strong>."</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>It is the Federal Reserve bank note that they alone print, and that would go on to replace gold and silver which Allah created as the standard mediums of exchange for the purchase of goods and services. Allah blessed the songs of the Khilafah and gave them the ability and foresight to break from the shackles of the Federal Reserve system and to restore the gold dinar, and the silver dirham as the ultimate measure of goods and services beginning in the birth place of the Islamic State. </p> </blockquote> <p>The punchline: <strong>"the currency is meant to break the shackles of “the capitalist financial system of enslavement, underpinned by a piece of paper called the Federal Reserve dollar note." </strong></p> <p>It just gets better from there and for the next hour, the video basically goes through the failings of not only the dollar as the Fed's currency of choice, which since 1971 is no longer backed by any hard asset, but does a surprisingly good job of explaining the pitfalls of fractional reserve banking (30 minutes into the clip), which as many have witnessed first hand, nearly resulted in the collapse of capitalism, then several years ago, the Lehman failure showed that should financial counterparties fail, there is not nearly enough underlying assets to satisfy existing credit claims. It gets so funny, ISIS even bashes the petrodollar system (38 minutes in), and quotes Jim Rickards (39 minutes into the clip) as supportive of its "evil" observations.</p> <p><strong>What is implied, is that it does all this by making such observations and thoughts indicative of affiliation with ISIS, and hence, terrorism.</strong></p> <p>As <a href="">Bloomberg </a>adds, "the group first announced its intention to issue its own money in November 2014, about five months after it seized the northern Iraqi city of Mosul and its leader Abu Bakr al-Baghdadi announced a caliphate. In the video released Saturday, it gave no reasons for the delay in issuing the coins. It didn’t explain where the coins were being minted, nor how they’ll be distributed or replace currencies circulating in the territory the group occupies in parts of Iraq and Syria."</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Minting the coins is relatively easy ... as goldsmiths in Mosul imported machines from Italy in recent years, each one able to produce about 5,000 coins a day. The metals probably come from banks the group seized, ransoms, the homes of Christians and other minorities who fled, he said.</p> <p>&nbsp;</p> <p>In the video, Islamic State refers to Caliph Abd al Malik ibn Marwan, who introduced the first Arabic-script coinage of the Islamic empire, free of figural representation, in around 696 AD.</p> <p>&nbsp;</p> <p>The militant group said its 21-carat 1-dinar coin weighs 4.25 grams, while the 21-carat five-dinar coin weighs double that. Three dominations of silver dirhams and two of copper coins were minted for smaller transactions, it said.</p> </blockquote> <p>What is surprising is that despite all the talk there is actually zero such coins in circulation: "Each coin bears an inscription that reads, “The Islamic State, a caliphate based on the doctrine of prophecy.” The 1-dinar coin also shows seven stalks of wheat, which the group said is meant to represent “the blessing of spending in the path of Allah.” The five-dinar coin bears the image of a map of the world.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Residents interviewed by phone from Mosul and Ramadi, the western Iraqi city captured by Islamic State in May, said so far they hadn’t seen any coins, received details of how the currency swap would work, or been told what the prevailing exchange rate might be. They said families have been preparing for this moment for some time.</p> </blockquote> <p>“They’ll only be used in these areas and people will only buy these coins for their daily needs and expenses,” said Baghdad-based economist Basim Jameel. “Nobody outside their control will accept the currency and I don’t know how they’ll keep up with demand, as they are losing resources day after day,” he said. “At the end of the day, this is a media propaganda tool.”</p> <p>Actually no, they won't: as Bloomberg also notes, "since Islamic State is classified as a terrorist group, the coins can’t be traded legally." But the point of the propaganda video is not to promote ISIS coinage, which will never exist;&nbsp; <strong>the point - as the nuanced, C-grade made in Hollywood propaganda goes, is to pitch an anti-Fed, anti-fractional reserve, pro-gold standard ideology, and make it equivalent to the evil terrorist thoughts spread by the Islamic Jihadist group. </strong></p> <p>And just like that, Austrian Economics has been reduced to a terrorist ideology, and anyone harboring the same "evil" misconceptions as those spread by the "Islamic State's" media propaganda outlet have become an enemy of the US state. </p> <p>So how to avoid becoming accidental drone fodder? Why by renouncing all evil, terrorist thoughts of a "satanic conception of banks" and a "<em>capitalist financial system of enslavement, underpinned by a piece of paper called the Federal Reserve note</em>." In fact, just swear on any given Keynesian Economics 101 textbook and you should be ok. </p> <p>And just remember: BTFD, and have faith in the Fed, and you won't be suspected of harboring pro-ISIS thoughts!</p> <p><em>The video that was "made by ISIS" and which is really just a 55 minutes crash course in Austrian Economics - which is now apparently equivalent to terrorism - can be seen below, at least until the website administrator removes it because it is too evil, and anyone caught watching its evil anti-Fed message deserves to be droned.</em></p> <p><iframe src="//" width="560" height="315" frameborder="0"></iframe><br /><a href="" target="_blank">The Rise of the Khilafah and the Return of the...</a> <em>by <a href="" target="_blank">golddinar</a></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="592" height="288" alt="" src="" /> </div> </div> </div> Copper Corruption Counterparties Fail Federal Reserve Federal Reserve Bank Fractional Reserve Banking Iraq Italy Jim Rickards Keynesian economics Lehman Middle East None Sun, 30 Aug 2015 14:16:48 +0000 Tyler Durden 512593 at Three Drivers of the Capital Markets in the Week Ahead <p>There are three things that will command investors' attention in the week ahead. &nbsp;The first, and most important, is whether the global capital markets will continue to move toward stability after the huge drama over the past week or two. The instability appears to have shaken the confidence of some Fed officials and market participants that a September lift-off is the most likely scenario. &nbsp;</p> <p>&nbsp;</p> <p>Our assessment of the technical condition of the market is that the panic is over, some capitulation was seen, and equities, interest rates, and currencies took a big step toward returning to status quo ante in the second half of last week. We recognize the technical condition as a reflection of market psychology. It is as if Mr. Market was shaken out of its melodramatic response with an ostensibly refreshing slap. &nbsp;While the precipitous drop of the magnitude we experienced was indeed scary on many levels, the system showed a comforting resilience, both operationally and psychologically. &nbsp;</p> <p>&nbsp;</p> <p>The markets had not reached the point of breakdown in which everyone was forced to be short-term traders. &nbsp;Speculators capitulated (e.g., the gross short yen futures position were slashed by more than 37k contracts, which in percentage terms is the biggest short squeeze in three years). &nbsp;Margin calls were made. &nbsp;Yet there were medium and longer-term investors that recognized the exaggerated sell-off as a new opportunity. &nbsp;The break of dramatic momentum was able to feed on itself. &nbsp;Those short-term momentum traders then were forced to cover</p> <p>&nbsp;</p> <p>The second is the ECB meeting. &nbsp;The updated staff forecasts will likely point to slower growth and less price pressures than had been expected in the June forecasts. &nbsp;Rather than end early as some had previously speculated, the ECB's asset purchases may be increased. &nbsp;This could happen through increasing the monthly amount from the current 60 bln euros, or it could extend beyond September 2016. &nbsp;</p> <p>&nbsp;</p> <p>It seems unreasonable to expect any such announcement now. &nbsp;ECB President Draghi is likely to emphasize the flexible nature of its asset purchases. &nbsp; Draghi has often cautioned that the cyclical upswing would be contained by the lack of structural reforms. &nbsp;Also, financial conditions have become somewhat less accommodative. &nbsp;</p> <p>&nbsp;</p> <p>On a trade-weighted basis, the euro has risen by 4.7% since March, and most of it has been recorded since the middle of July. &nbsp;Indeed, since July 6, the euro has been the strongest of the major currencies. &nbsp;European equity markets have continued to surrender the year's earlier impressive gains. &nbsp;</p> <p>&nbsp;</p> <p>With a 9% bounce off the extreme low recorded on August 24, the Dow Jones Stoxx 600 is still off a little more than 10% since the August 5 high. &nbsp;The DAX had risen more than 25% in the first part of the year, but it has all been wiped out. &nbsp;It spent the first part of last week in negative territory for the year. &nbsp;It finished last week up 5%. &nbsp;</p> <p>&nbsp;</p> <p>Bond yields have risen in recent months. &nbsp;Over the last six months, the 10-year benchmark bund yield has risen by 41 bp. &nbsp;Spain's benchmark yield is up 80 bp. &nbsp;Italy is up 60 bp. &nbsp;More than half (25 bp) of the bund increase has taken place over the past three months. &nbsp;The backing up of Spanish and Italian yields occurred earlier. &nbsp;In the past three months, Spanish and Italian 10-year yields have risen by 22 bp and seven bp respectively.&nbsp;</p> <p>&nbsp;</p> <p>Market measures of inflation expectations have fallen, and although headline consumer prices are rising on a year-over-year basis, the risk is on the downside. &nbsp;Similarly, core inflation has risen from 0.6% in March and April to 1.0% in July, but the best news may be behind it. &nbsp; &nbsp; The final August reading will be published on Monday, August 31, and it is expected to be unchanged from the preliminary estimate of 0.9%. &nbsp;</p> <p>&nbsp;</p> <p>Even with mild downgrades in the staff forecasts, it is unreasonable to expect the ECB to respond this week by increasing the quantity of assets being purchased, or extending the current program beyond September 2016. &nbsp;A consensus must be forged to implement the former, and it is too early for this. There is no urgency for the latter. &nbsp;It can be used as a signal to the market, but the incremental advantage over Draghi noting this is a policy option may be minimal given the political capital likely needed to be expended. &nbsp;</p> <p>&nbsp;</p> <p>Draghi's press conference will likely be a timely reminder ahead of the third key event next week, US jobs data, that both sides drive the divergence of monetary policy between the Federal Reserve and the ECB. &nbsp;As we have noted before, every central bank that has tried purchased assets to expand its balance sheet, to compliment near-zero interest rates or even negative deposit rates, has chosen to do more than one round. &nbsp;ECB may break this pattern, but it is not a certainty, even if the German representatives on the ECB object. &nbsp;</p> <p>&nbsp;</p> <p>US nonfarm payrolls are notoriously difficult to forecast. &nbsp;There are few meaningful inputs. &nbsp;The ADP report does a good job of catching the important trends, but on a month-to-month basis can be wide of the mark. &nbsp;Still, it has stolen some of the thunder from the monthly BLS report. &nbsp;The consensus expected the ADP to show a 200k increase in private sector jobs in August, up from its 185k estimate for July. &nbsp;</p> <p>&nbsp;</p> <p>August is particularly problematic, especially given that this is the last jobs report before the FOMC meeting. &nbsp;The historic pattern is for August to disappoint on the initial release and subsequently be revised higher. &nbsp; This is not a secret, and Fed officials likely are cognizant of it. &nbsp;This suggests that some headline weakness may be tolerable, especially if some of the internals is robust.&nbsp;</p> <p>&nbsp;</p> <p>There is, for example, a reasonable chance that the unemployment rate dips to 5.2%, which is the upper end of the Fed's estimate of full employment. &nbsp; Economists did not expect hours worked to have increased in July and hence expect it to fall back in August. &nbsp;There is potential for a surprise here. &nbsp; It will be more difficult for hourly earnings to surprise. &nbsp;Last August hourly earnings rose 0.3%. &nbsp;If it is not matched now (consensus 0.2%), there is a risk that the year-over-year rate slips back to 2.0% where it was in June. &nbsp;</p> <p>&nbsp;</p> <p>We suspect that the outcome of next month's FOMC meeting does not rest on one high-frequency report. &nbsp;The underlying trends in the US economy have been persistent. &nbsp;Growth on a year-over-year basis has been largely stable. &nbsp;It may not be an impressive pace, but it has been sufficient to gradually close the output gap and absorb slack in the labor market.</p> <p>&nbsp;</p> <p>While the nonfarm payroll change is difficult to forecast, it has been amazingly stable. &nbsp;The 12-month average stands at 243k; the 24-month average is 236k, and the 36-month average is 222k. &nbsp;That is nearly eight mln net new jobs created over the past three years. &nbsp;</p> <p>&nbsp;</p> <p>It is the price stability mandate that is more elusive that the full employment goal. &nbsp; For the past two decades, the core PCE deflator has also been amazingly stable. &nbsp;It has been confined to a 1.0%-2.5% range, with some brief exceptions to the downside (June 1998 0.95%, July 2009 0.97% and December 2010 0.94%). &nbsp;It has averaged about 1.7% over the past 20 years. &nbsp;The report at the end of last week indicated it stood at 1.2% in July. &nbsp;</p> <p>&nbsp;</p> <p>Fed officials would clearly prefer a bit higher of inflation. &nbsp;However, the consensus, especially among the leadership, is that 1) most of the elements dampening prices are transitory and 2) the key to core inflation is the continued absorption of slack in the economy, especially the labor market. &nbsp;It also seems clear that the Fed's leadership does not want to wait for the core PCE deflator to rise to 2% before beginning to normalize monetary policy. &nbsp;</p> <p>&nbsp;</p> <p>In the market's panic, and arguably aided by NY Fed President Dudley's admission that a September rate hike had become less compelling over the last couple of weeks, the market slashed the odds of a hike. &nbsp;The effective Fed funds rate has been averaging 14-15 bp. &nbsp;At its extreme last week, the implied effective funds rate next month in the September Fed funds futures contract was 15.5 bp. &nbsp;It finished the week at 17.5 bp. &nbsp;</p> <p>&nbsp;</p> <p>The risk is that there is a greater chance than this implies of a rate hike. &nbsp;This is also what the 2-year note seems to be saying. &nbsp;It had closed the first half yielding 64 bp. &nbsp;It reached 75 bp in July though finished the month at 66 bp. &nbsp;At the low water mark last week it fell to almost 53 bp and finished the week near 72 bp. &nbsp; Fed comments at and around Jackson Hole are also consistent with this view. &nbsp;&nbsp;</p> <p>&nbsp;</p> <p>At the risk of oversimplifying, the domestic US situation makes a rate hike very likely, but the Chinese international developments and the apparent panic in the financial markets are of concern. &nbsp;The situation is fluid, and a decision will be made when it has to (September 16-17).&nbsp;</p> <div class="field field-type-filefield field-field-image-blog"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_blog" width="453" height="562" alt="" src="" /> </div> </div> </div> BLS Bond Capital Markets Consumer Prices Equity Markets Federal Reserve Italy Monetary Policy Output Gap Unemployment Yen Sun, 30 Aug 2015 14:05:49 +0000 Marc To Market 512592 at The Value-At-Risk Fiasco <p><em>Submitted by Salil Mehta of <a href="">Stiatistical Ideas</a></em><a href=""></a></p> <p><strong>The Value-At-Risk Fiasco</strong></p> <p>If you were a looking at a simple portfolio that was a mix of 1 unit&nbsp;S&amp;P 500 and 1 unit&nbsp;Shanghai Stock Exchange (SSE), then you are likely to consider value-at-risk (VAR) to feel cozy with your overall portfolio risk. &nbsp;This measure however is not considered a <strong style="font-style: italic;">coherent</strong>&nbsp;risk measure that satisfies all of the properties of interest: monotonicity, translation invariance, homogeneity, and subadditivity. We'll explain the first three in a future article, but only focus here on how VAR violates the last of these four properties. </p> <p>Subadditivity is where the risk associated with multiple holdings, in a portfolio, <strong><em>should not be </em></strong><em><strong>greater</strong></em> than the sum of the individual holdings' risk. &nbsp;This construes the hallmark of diversification, and yet combined with the inappropriateness of VAR to measure market risk we see subadditivity levels violated. &nbsp;Risk events that should have only happened say one month every 1.5 years have occurred in each of the past three summer months.</p> <div>VAR (invented at J.P. Morgan well before both the global financial crisis and their entertaining&nbsp;<a href="" target="_blank" rel="nofollow">London Whale</a> drubbing) is an expression of the largest possible loss, contained within a specified confidence interval. &nbsp;We can for example explore the history of <a href=""><strong><em>worst weekly losses</em></strong></a>&nbsp;in the S&amp;P, for each month starting more than 5 years ago in January 2010 (and through May 2015). &nbsp;A total of 65 months. &nbsp;We can set a probability tolerance of just over 6%, and state that the probability of seeing a <strong><em>loss greater </em></strong>than this VAR should be <em><strong>less than or equal to</strong></em> ~6% (or 1 in 16 months). &nbsp;We can vary this level about, but this is simply a foothold to initiate our analysis. <p> VAR in this case, for the S&amp;P, would come to a worst weekly loss of <strong>6.0%</strong>. &nbsp;Bear in mind that the <em><strong>average </strong></em>worst weekly loss over the 65 months for the S&amp;P was a 1.9% loss. &nbsp;Now we do&nbsp;the same exercise for the SSE, and with the same probability tolerance of ~6% we get a VAR loss of <strong>5.3%</strong>. &nbsp;Here the <em><strong>average</strong></em> worst weekly loss over the 65 months for the SSE is a 2.6% loss. &nbsp;Note that the parametric mathematical relationship to estimate the overall VAR from blending two equally volatile stocks (or indexes) does relate to the correlation between those 2 indexes.<br /> <strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;"><span class="Apple-style-span" style="color: #999999;">&nbsp;</span></em></strong></p></div> <div><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;"><span class="Apple-style-span" style="color: #999999;">VAR<sub>overall </sub></span></em></strong></div> <div> <div class="MsoNormal"><span class="Apple-style-span" style="color: #999999;"><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;">= VAR<sub>index</sub></em></strong></span><span class="Apple-style-span" style="color: #999999;"><strong><em>?[</em></strong></span><span class="Apple-style-span" style="color: #999999;"><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;">(1/number of indexes) + (1-1/number of indexes)</em></strong><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;"><span style="font-family: Symbol; mso-ascii-font-family: Cambria; mso-ascii-theme-font: minor-latin; mso-char-type: symbol; mso-hansi-font-family: Cambria; mso-hansi-theme-font: minor-latin; mso-symbol-font-family: Symbol;"><span style="mso-char-type: symbol; mso-symbol-font-family: Symbol;">r</span></span>]</em></strong></span></div> <div class="MsoNormal"><span class="Apple-style-span" style="color: #999999;"><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;">= VAR<sub>index</sub></em></strong><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;">?[½ + ½</em></strong><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;"><span style="font-family: Symbol; mso-ascii-font-family: Cambria; mso-ascii-theme-font: minor-latin; mso-char-type: symbol; mso-hansi-font-family: Cambria; mso-hansi-theme-font: minor-latin; mso-symbol-font-family: Symbol;"><span style="mso-char-type: symbol; mso-symbol-font-family: Symbol;">r</span></span>]</em></strong></span></div> <div class="MsoNormal"><strong style="mso-bidi-font-weight: normal;"><em style="mso-bidi-font-style: normal;"><br /></em></strong></div> </div> <div> The reason it seems as if the VAR for SSE is set at an easier <strong><em>loss level</em></strong>, versus that for the S&amp;P, is a reflection of the nonparametric nature of equity returns. &nbsp;This turns out to be critical as we go through this article. &nbsp;Also keep in mind that these VAR express a fixed week period, and not any continuous range beyond that. &nbsp;We know the maximum-VAR was higher if we simply augment to the trading week, ending August 21,&nbsp;the following "Black Monday". &nbsp;And most also know by now, that these stock returns are not related to the normal distribution (or elliptical distributions for that matter), and now we also see these fat tails are not even related to one another. For more on the Student <strong><em>t</em></strong> distribution, see <a href="">here</a>, <a href="">here</a>. </div> <div></div> <div>The number of months where the worst weekly losses should exceed the VAR over 65 months is no more than 3 (roughly an integer &lt;6%*65). &nbsp;For the S&amp;P, the changes have been (in order of severity): <em><strong>-6.6%</strong></em>, -6.8%, and the worst weekly loss before the summer of 2015 was <em><strong>-7.5%</strong></em>. <p> For the SSE, the changes were: <strong>-5.3%</strong>, <em><strong>-6.6%</strong></em>, and <em><strong>-6.9%</strong></em>. &nbsp;The 3 months associated with the S&amp;P above, and the 3 months associated here with the SSE, have one month in common (May 2010). &nbsp;The four <strong style="font-style: italic;">bolded</strong>&nbsp;months of the six months noted (3 S&amp;P and 3 SSE) are part of the worst 3&nbsp;<strong style="font-style: italic;">joint</strong>,&nbsp;"worst weekly losses". &nbsp;We show these 3 joint losses below, where again the portfolio constitutes 1 unit&nbsp;S&amp;P and 1 unit SSE (for a portfolio that is 50% in both indexes you would take&nbsp;½ of every loss and VAR for the purposes of comparison):</p></div> <div></div> <div><span class="Apple-style-span" style="color: #999999;"><em><strong>-7.5%</strong> &nbsp; + (-2.8%) = -10.3%<br />(-5.2%)&nbsp;+&nbsp;<strong>-6.9%</strong> &nbsp; = -12.1%<br /><strong>-6.6%</strong> &nbsp; + <strong>-6.6%</strong> &nbsp; = -13.2% (this is May 2010)</em></span></div> <div><span class="Apple-style-span" style="color: #999999;"><em><br /></em></span></div> <div><span class="Apple-style-span" style="color: #999999;"><em>Note values in () are the paired worst weekly loss for the </em><strong><em>bolded</em></strong><em> S&amp;P or the SSE worst weekly losses.</em></span></div> <div></div> <div>Again the portfolio theoretical VAR should have been <strong><em>no greater</em></strong> than the sum of the two holdings' VARs. &nbsp;Or 11.3% (<strong>6.0%+5.3%</strong>). &nbsp; And empirically we see above that the portfolio VAR comes to smaller than a 10.3% loss.</div> <div> <div> Does this make everything feel good about your portfolio risk measures? &nbsp;Can you take comfort with the VAR model and diversification, and feel comfortable that you would only see a &lt;10.3% loss level once out of every 16 months? &nbsp;It's attractive, but look at what immediately happened next over the following 3 months of the summer: <p> <em><span class="Apple-style-span" style="color: #999999;">June 2015: &nbsp; &nbsp; -0.7%&nbsp;+ -14.3% = -15.0%</span></em><br /> <em><span class="Apple-style-span" style="color: #999999;">July 2015: &nbsp; &nbsp; &nbsp;-2.2%&nbsp;+ -12.9% = -15.1%</span></em><br /> <em><span class="Apple-style-span" style="color: #999999;">August 2015: -5.9% &nbsp;+ -12.3% = -11.9%</span></em></p> <p> In <strong><em>each</em>&nbsp;</strong>of these 3 months, the S&amp;P always stayed within VAR yet the overall losses still were <strong><em>always</em></strong> <strong><em>greater</em></strong> than the 10.3% VAR (and all were greater than the theoretical 11.3% VAR for that matter!) &nbsp;A 1 in 16 months event <strong><em>immediately</em></strong> happening 3 months straight is <strong style="font-style: italic;">not </strong>a<strong style="font-style: italic;">&nbsp;</strong>quirky &lt;0.02% (6%<sup>3</sup>) probability situation. &nbsp;It was a case of incorrectly using VAR as <strong><em>the preferred</em></strong> nonparametric risk measure for the market we are modeling (e.g., <a href="">"extreme" tail risk events</a>). &nbsp;Despite how commonly it is endeared anyway by investors and middling&nbsp;<a href="" target="_blank" rel="nofollow">stress testing regulators</a>.</p></div> </div> <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="280" height="180" alt="" src="" /> </div> </div> </div> fixed Sun, 30 Aug 2015 13:17:18 +0000 Tyler Durden 512591 at The Countdown To Europe’s Next Crisis Has Started: 28 Days To Go <p><a href=""><img src="" alt="Spain" width="599" height="443" style="display: block; margin-left: auto; margin-right: auto;" class="aligncenter size-full wp-image-9195" /></a></p> <p>The European Union has been experiencing a true rollercoaster of emotions lately. The Greek crisis has just been solved, but the next existential crisis is already silently and quietly erupting, and not in Greece. The mainstream media seems to be forgetting it isn’t just Greece which has announced snap elections, but the same thing has happened in Catalonia, an autonomous region in Spain.</p> <p><a href=""><img src="" alt="Catalonia Location" width="599" height="452" style="display: block; margin-left: auto; margin-right: auto;" class="aligncenter size-full wp-image-12162" /></a></p> <p>Source: Wikipedia</p> <p>After feeding the nationalistic feelings for quite a while, the Catalan president Artur Mas has called for new elections, hoping to get an even <a href="" target="_blank">stronger mandate</a>&nbsp;to secure the independency of Catalonia from Spain. As you might remember from last year, Catalonia has already held a <a href="" target="_blank">referendum</a>&nbsp;to find out the people’s sentiment about being independent, and the central government in Madrid has done everything it could do to sabotage the referendum. And Madrid was right, as almost 80% of the voters voted ‘yes’ on the question if they would like to see Catalonia as an independent nation. The turnout was pretty low, but we would expect the aye and nay-sayers to be very close to each other.</p> <p>Mas is very popular in the region and has proven to be a brilliant politician by quietly increasing and strengthening the ‘Catalan identity’, and the region has undergone a real metamorphosis in the past 10-15 years as it has quietly removed itself further and further away from the central government in Madrid.</p> <p>As part of creating/emphasizing the Catalan identity, the use of the Catalan language (which seems to be a weird mix of Spanish and French) has been encouraged and is now the standard language in Catalan schools (despite being challenged in front of the <a href="" target="_blank">Spanish Supreme Court</a>). Not only did Madrid not like this, the central government was also pretty furious the Catalan educational system isn’t even using Spanish as first language. Catalan is everywhere. Street signs? Catalan. Super market descriptions and bills? Catalan.</p> <p>And it didn’t stop with the language. Catalonia has slowly gained additional autonomy. Public transportation? It started with the buses, but in the past few years, Catalonia has actually taken the reigns of <a href="" target="_blank">railway transportation</a>&nbsp;as well and now operates all rail services inside the region. Needless to say the ‘Catalan identity’ is at its highest level since Barcelona was conquered by the Spanish army in the 15<sup>th</sup> century.</p> <p>It has even evolved to the point where cities and villages are now waving not just the Catalan flag, but the flag to symbolize the Catalan independency (with the white star in the blue area). We have seen this type of identity-creating before; in Germany during the interbellum. Will the separatist parties win? There’s a decent chance as the recent polls seem to indicate there’s no clear winner yet, but in a more surprising move, the pro-independency parties have now teamed up and will combine their forces in the September 27 election.</p> <p>Other autonomous regions are keeping an eye on further developments and the president of Aragon, a neighboring region, has already said he is open to investigate to include Catalan as an official language in his region.</p> <p>If the Catalan nationalists would win the election, Madrid will have some serious headaches as a clear vote for Catalan independency undermines the central government’s authority. On top of that, Madrid can’t really offer Catalonia much more autonomy as the majority of the most important domains have already been transferred to Catalonia (education, public transportation, allowing to use Catalan as the first language,…). So if the Catalans would want to push for more autonomy, Madrid will be paralyzed.</p> <p><a href=""><img src="" alt="Catalonia GDP" width="335" height="331" style="display: block; margin-left: auto; margin-right: auto;" class="aligncenter size-full wp-image-12161" /></a></p> <p>Source: The Economist</p> <p>And it can’t afford to be. Catalonia is one of the richest regions of <a href="" target="_blank">Spain</a>&nbsp;with the highest standard of living and lowest unemployment rate. So for the sake of statistics, Spain’s situation would be as bad as Greece’s situation without Catalonia.</p> <p>A constitutional crisis in Spain will also trigger a crisis on the European level, as a paralyzed Spain under the pressure of a push for independence will no longer be able to focus on meeting its debt and budget commitments. Spain will look for help from the European Union, but the latter won’t be able to do anything at all. Why? Pretty simple, the European Union cannot interfere in constitutional issues inside a sovereign country as long as there are no violations of the international right.</p> <p>Keep an eye on Spain, as we think this country will trigger the next identity crisis in the European Union, and this is a crisis which won’t be able to be resolved by switching on the printing presses.</p> <p><strong><a href="" target="_blank">&gt;&gt;&gt; Check Out Our Latest Gold Report!</a></strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Secular Investor</strong> offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the <a href=""><strong>Gold &amp; Silver Report</strong></a> and the <a href=""><strong>Commodity Report</strong></a>.</p> </blockquote> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Follow us on Facebook <strong><a href="">@SecularInvestor</a> [NEW] </strong>and Twitter <a href=""><strong>@SecularInvest</strong></a></p> </blockquote> <div class="field field-type-filefield field-field-image-blog"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_blog" width="599" height="443" alt="" src="" /> </div> </div> </div> European Union Germany Greece The Economist Twitter Twitter Unemployment Sun, 30 Aug 2015 12:46:55 +0000 Secular Investor 512590 at No CNBC, It's Not Priced In <p style="text-align: justify;">When markets crash and prices readjust to a material level the masses begin to rational anything and everything. This week we heard a serious push by media and newspapers to not say "crash" and implore the use of "correction".&nbsp; The Fed launched so much crap on the fan that it spread far and nearly everyone's mental sensitivity to fact and fiction jumped out the window like the bankers back in 2013.</p> <p style="text-align: justify;">Luckily we didn't hear anything more about Vomiting Camel formations but there was certainly an ample amount of "it's priced in" blaring in the background.&nbsp; For those proclaiming technical levels on TV and rationalizing 400 to 5,000 P/E levels based on expected capabilities some 10-30 years out I wish you luck.</p> <p style="text-align: justify;">What happened recently that no one seems to be addressing is the explosion in OTC equity-linked derivatives.&nbsp; Recall in Q4 2014 when Zero Hedge <a href="">highlighted</a> content relating to the surge in WTI-linked structured paper.&nbsp; It was a disaster and look where we are now with oil, it's basically being blamed for the awesome life we thought we had $60 to this economy crushing, world ending level of $45 handles with 10% one-day moves.</p> <p style="text-align: justify;">Oil prices have nothing to do with supply/demand and everything to do with the contracts that are tied to the commodity incorporating interest rates, risk, insurance, and whatever else can be used to market these complex instruments to fearful participants.</p> <p style="text-align: justify;">If we have learned anything since Reg-NMS was implemented and HFT was able to run wild throughout our markets we've learned that derivatives now drive underlyings thanks to the ease of constituent snap-shots which help to calculate the NAV of the derivative instantly and arb the constituents.&nbsp; Now we have OTC equity linked derivatives that will be driving asset prices.</p> <p style="text-align: justify;">According to data from the Bank of International Settlements (the central bank of central banks) OTC equity-linked derivatives with maturity under 1 year have boomed well beyond the 1-5 year options and the 5 year plus option (higher than in 2007):</p> <p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: &quot;ITC Symbol Std medium&quot;,sans-serif;"><img src="" width="800" height="401" /><br /></span></p> <p style="text-align: justify;">Swaps, for those unversed, involve two parties exchanging payment streams directly related to some notional amount for a specified period.&nbsp; The Swaps market isn't much better though; it has stunted growth since the 2008 financial meltdown.&nbsp; The Swaps market has seen Notional expansion amid a decline in the real value of the products as shown by the divergence between Notional amount and Gross Market Value amount:<span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif;">&nbsp;</span></p> <p class="MsoNoSpacing" style="text-align: justify;"><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif;"><img src="" width="700" height="361" />&nbsp;</span></p> <p style="text-align: justify;">Next is the Forward Contract value. &nbsp;This contract offers to pay or receive a set rate on a specific obligation for a set time period and begins at some future date. &nbsp;While the Swaps are seeing some longer (6 years currently) of sideways action the Forward Contracts are seeing some hot action to the upside:</p> <p style="text-align: justify;"><img src="" width="800" height="414" /> </p> <p>The point here is that while TV and newspapers want us to think secondary common equities drive the Equity Indeces and that's the gauge of the broad market - they are all painfully wrong and late to this dramatic shift in how assets are priced.&nbsp; Equities and their demand by those watching TV or sitting on equity desks is not the end-all focus point on determining nation specific financial health (which many outlets do proxied through the Dow and S&amp;P 500 every single day, hourly). The notional value of the forward contracts exploded in 2008 as firms exchanged the steady drip of payment streams offered by Swaps for the lump-sum payment offered by Forward Contracts. &nbsp;This is evident when comparing the YoY Change in Forward Contract Notional Amounts to the 6-month return on the S&amp;P 500 Price Only Index and the FTSE 100 Index:</p> <p class="MsoNoSpacing" style="text-align: justify;"><strong>Total OTC Equity-Linked Derivatives:</strong><br /><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif;"><img src="" width="800" height="380" /></span><br /><strong>Notional Forward Contracts (Billion of USD) Vs. S&amp;P500 Price Only Index:</strong></p> <p class="MsoNoSpacing" style="text-align: justify;"><img src="" width="800" height="432" /></p> <p class="MsoNoSpacing" style="text-align: justify;"><strong>Notional Forward Contracts (Billion of USD) Vs. London's FTSE 100 Index (London is the derivatives wild west):</strong></p> <p class="MsoNoSpacing" style="text-align: justify;"><strong><img src="" width="800" height="432" /><br /></strong></p> <p style="text-align: justify;"> Looking at the 6-month change in the S&amp;P 500 and FTSE 100 against the YoY change in Forward Contract Notional Amount shows a unique relationship. &nbsp;When the Forward Contracts Notional Amount YoY Change exceeds 30.00 percent both indeces returns explodes over the next year. &nbsp;Sadly, the Forward Contract data for June 2015 will not be released until around November 15, 2015. &nbsp;&nbsp;The BIS does note in their most <a href="">recent report</a>&nbsp;<a href=""><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif; mso-bidi-font-family: Arial;">&nbsp;</span></a><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif; mso-bidi-font-family: Arial; color: black;"><span style="mso-spacerun: yes;">&nbsp;</span>that “</span><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif; mso-bidi-font-family: SegoeUI;">The gross market value of outstanding derivatives contracts – which provides a more meaningful measure of amounts at risk than notional amounts – rose sharply in the second half of 2014”.<span style="mso-spacerun: yes;">&nbsp; </span>Ok, here’s that data:</span></p> <p class="MsoNoSpacing" style="text-align: justify;"><strong>Gross Forward Contracts Vs. S&amp;P500 Price Only Index:</strong></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal; text-align: justify;"><span style="font-family: &quot;ITC Symbol Std Medium&quot;,sans-serif; mso-bidi-font-family: SegoeUI;"><img src="" width="800" height="499" /><br /></span></p> <p class="MsoNoSpacing" style="text-align: justify;"><strong>Gross Forward Contracts Vs. FTSE 100 Index:</strong></p> <p class="MsoNoSpacing" style="text-align: justify;"><strong><img src="" width="800" height="500" /></strong></p> <p>The industry took a major hit in 2008 and has been trying to manage the mess ever since.&nbsp; The derivatives run the underlyings nowadays, this is why it's not priced in, it's never priced in.&nbsp; The information contained in the OTC derivatives market is hidden from us all until 6-12 months later when the BIS lets the world know just what the hell is happening there.&nbsp; But I guess this isn't easy enough to cram into a 5 minute segment so let's just ask random people if "it's priced in" and we'll recommend Alibaba at $115 saying it's totally going $150 before the equity collapses to right before our commercial for trading the options runs for the 15th time before the lunch.&nbsp; Jamie Lissette, operator of <a href="">Hammerstone Chat</a>, reminded his followers:</p> <blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">remember this next time you turn up the volume on financial media...$BABA <a href=""></a></p> <p>— Jamie Lissette (@jamielissette) <a href="">May 5, 2015</a></p></blockquote> <script src="//"></script> Bank of International Settlements BIS Central Banks CRAP HFT Meltdown notional value OTC OTC Derivatives Twitter Twitter Sun, 30 Aug 2015 12:34:45 +0000 CalibratedConfidence 512589 at Citigroup Chief Economist Thinks Only "Helicopter Money" Can Save The World Now <p><a href="">Having recently explained (in great detail) why QE4 (and 5, 6 &amp; 7) were inevitable</a> (despite the protestations of all central planners, except for perhaps Kocharlakota - who never met an economy he didn&#39;t want to throw free money at), we found it fascinating that no lessor purveyor of the status quo&#39;s view of the world - Citigroup&#39;s chief economist Willem Buiter - that<strong> a global recession is imminent and nothing but a major blast of fiscal spending financed by outright &quot;helicopter&quot; money from the central banks will avert the deepening crisis</strong>. <a href="">Faced with China&#39;s &#39;Quantitative Tightening&#39;</a>, <a href="">the economist who proclaimed &quot;gold is a 6000-year old bubble&quot;</a> and <a href="">cash should be banned</a>, concludes ominously, <strong><em>&quot;everybody will be adversely affected.&quot;</em></strong></p> <p><strong>China has bungled its attempt to slow the economy gently and is sliding into &ldquo;imminent recession&rdquo;, threatening to take the world with it over coming months, Citigroup has warned. </strong>As The Telegraph&#39;s Ambrose Evans-Pritchard reports, Willem Buiter, the bank&rsquo;s chief economist, said the country needs a major blast of fiscal spending financed by outright &quot;helicopter&quot; money from the bank to avert a deepening crisis.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Speaking on a panel at the Council of Foreign Relations in New York, Mr Buiter said<strong> the dollar will &ldquo;go through the roof&rdquo; if the US Federal Reserve lifts interest rates this year, compounding the crisis for emerging markets.</strong></p> <p>&nbsp;</p> <p>&quot;<strong><u>So why it matters is that the competence of the Chinese authorities as managers of the macro economy is really in question</u></strong> - the messing around with monetary policy, the hinting on doing things on the fiscal side through the policy banks. But I think <strong><u>the only thing that is likely to stop China from going into, I think, recession</u></strong> - which is, you know, 4 percent growth on the official data, the mendacious official data, for a year or so<strong><u> - is a large consumption-oriented fiscal stimulus, funded through the central government and preferably monetized by the People&rsquo;s Bank of China.</u></strong></p> <p>&nbsp;</p> <p>Well,<strong><u> they&rsquo;re not ready for that yet. Despite, I think, the economy crying out for it, the Chinese leadership is not ready for this.</u></strong></p> <p>&nbsp;</p> <p>So I think they will respond, but <strong><u>they will respond too late to avoid a recession,</u></strong> and which is <strong><u>likely to drag the global economy with it down to a global growth rate below 2 percent, which is my definition of a global recession</u></strong>. Not every country needs go into recession. The U.S. might well avoid it. <strong><u>But everybody will be adversely affected</u></strong>.&quot;</p> </blockquote> <p>Or translated from &#39;economist&#39; to English - a massive helicopter drop of cash (well 1s and 0s) into the inflating hands of Chinese soon-to-be-consumers is al lthat can the world from another recession... and The Chinese leadership may need to stare into the abyss before they actually pull the trigger.<a href=""><em> Just think of the pork prices?</em></a></p> <p>&nbsp;</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 404px;" /></a></p> <p>&nbsp;</p> <p>Mr Buiter had some more to add on the idiocy of Chinese Equity markets. He said<strong> the stock market crash in Shanghai and Shenzhen...</strong></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong> a sideshow. </strong>Consumption effects, you know, wealth effects, minor. <strong>Almost no capex in China is funded through share issue. And so it is a symbol of the policy failure rather than intrinsically economically important.</strong></p> <p>&nbsp;</p> <p><strong>China&rsquo;s problems are excessive leverage in the corporate sector, in the local government sector, and the very fragile banking system, and shadow banking system.</strong> As Chen pointed out, it won&rsquo;t be allowed to collapse because it is underwritten by the government, but it won&rsquo;t be a source of great funding strength.</p> <p>&nbsp;</p> <p>There is excess capacity and a pathetically low rate of return on capital expenditure, right?<strong> Invest 50 percent of GDP and get, even in the official data, 7 percent growth. The true data is probably something closer to 4 &frac12; percent or less.</strong> So it is an economy that, I think, is sliding into recession.</p> <p>&nbsp;</p> <p>And what the stock market reminds us of, I think, especially this sequence of the<strong> government first cheerleading the stock market boom and bubble</strong> - because quite<strong> a few of the local pundits believed that this was a great way of deleveraging without paying for the corporate sector, to have a stock market bubble</strong>. And then, of course, the<strong> rather panicky and incompetent reaction in response.</strong></p> <p>&nbsp;</p> <p><u><strong>So, once again, why it matters is that the competence of the Chinese authorities as managers of the macro economy is really in question.</strong></u></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>So, it seems, all of a sudden - despite the permabulls, asset-gatherers, and commission-takers saying otherwise - China matters! <a href="">As Bloomberg notes,</a> <strong>China&rsquo;s deepening struggles are starting to make a bigger dent in the global economic outlook.</strong></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>&ldquo;We&rsquo;re seeing evidence that the slowdown is broader than expected&rdquo; in China</strong>, saidMarie Diron, a London-based senior vice president at Moody&rsquo;s and one of the report&rsquo;s authors. &ldquo;It&rsquo;s long been clear that there&rsquo;s a slowdown in the manufacturing and construction sector, but the service sector was more resilient. That&rsquo;s still the case, but we&rsquo;re seeing some signs of weakness in the labor market.&rdquo;</p> <p>&nbsp;</p> <p>&ldquo;We continue to believe that the greatest risks to our growth forecasts remain to the downside,&rdquo; Schofield wrote. <strong><u>Actual growth is &ldquo;probably even lower&rdquo; because of &ldquo;likely mis-measurement in China&rsquo;s official data,&rdquo;</u></strong> he wrote.</p> </blockquote> <p>*&nbsp; *&nbsp; *<br /><strong>Which, is exactly what we have been saying for the last 2 years as the rolling collapse of China&#39;s ponzi becomes ever more evident (and hidden by ever more manipulation)...</strong></p> <p>Here, for those curious, are links to previous discussions:</p> <ul> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">China&#39;s Record Dumping Of US Treasuries Leaves Goldman Speechless</a></span></li> <li><a href="">How The Petrodollar Quietly Died And Nobody Noticed</a></li> <li><a href="">Why It Really All Comes Down To The Death Of The Petrodollar</a></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">What China&#39;s Treasury Liquidation Means: $1 Trillion QE In Reverse</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">It&#39;s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington</a></span></li> </ul> <p>And so on and so forth.</p> <p><strong>In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.&nbsp;</strong></p> <p>In the end, the estimated size of the RMB carry trade could mean that before it&rsquo;s all over, <strong>China will liquidate as much as $1 trillion in US paper, </strong>which, as we noted on Thursday evening, <span style="text-decoration: underline;"><strong>would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.&nbsp;</strong></span></p> <p>And don&#39;t forget, this is<strong> just China</strong>.</p> <p>...</p> <p><strong>The potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an &ldquo;asset&rdquo; in the international investment position data), China has around 2trillion of &ldquo;non-sticky&rdquo; liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.<span style="font-size: 1em; line-height: 1.3em; white-space: pre;"> </span></strong></p> <p>What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China&rsquo;s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates. The alternative would be for China&rsquo;s capital outflows to stop or at least slow down. Perhaps a combination of aggressive PBoC easing and more confidence in the domestic economy would be sufficient, absent a sharp devaluation of the currency to a new stable.<strong> Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China&rsquo;s evolving QT.</strong></p> <p><strong>* &nbsp;* &nbsp;*</strong></p> <p><strong><img height="302" src="" width="500" /></strong></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="500" height="303" alt="" src="" /> </div> </div> </div> Carry Trade Central Banks China Citigroup Equity Markets Evans-Pritchard Federal Reserve Free Money Global Economy Market Crash Monetary Policy Recession Shadow Banking Shenzhen The Economist Willem Buiter Sun, 30 Aug 2015 03:30:10 +0000 Tyler Durden 512583 at Why The Great Petrodollar Unwind Could Be $2.5 Trillion Larger Than Anyone Thinks <p>Last weekend, we explained <a href="">why it really all comes down</a> to the death of the petrodollar.&nbsp;</p> <p><img src="" width="600" height="284" /></p> <p>China’s transition to a new currency regime was supposed to represent a move towards a greater role for the market in determining the exchange rate for the yuan. That’s not exactly what happened. As BNP’s Mole Hau hilariously described it last week, "whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, <strong>[thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term." </strong>Of course a reduced role for the market means a greater role for the PBoC and that, in turn, means FX reserve liquidation or, more simply, the sale of <a href="">US Treasurys</a> on a massive scale.&nbsp;</p> <p>The liquidation of hundreds of billions in US paper made national headlines this week, as the world suddenly became aware of what it actually means when countries begin to draw down their FX reserves. But in order to truly comprehend what’s going on here, one needs to look at China’s UST liquidation in the context of the epochal shift that began to unfold 10 months ago. When it became clear late last year that Saudi Arabia was determined to use crude prices to bankrupt US shale producers and secure other "<a href="">ancillary diplomatic benefits</a>" (think leverage over Russia), it ushered in a new era for producing nations. Suddenly, the flow of petrodollars began to dry up as prices plummeted. These were dollars that for years had been recycled into USD assets in a virtuous loop for everyone involved. <strong>The demise of that system meant that the flow of exported petrodollar capital (i.e. USD recycling) suddenly turned negative for the first time in decades, as countries like Saudi Arabia looked to their stash of FX reserves to shore up their finances in the face of plunging crude.</strong> Of course the sustained downturn in oil prices did nothing to help the commodities complex more broadly and as commodity currencies plunged, the yuan’s dollar peg meant China’s export-driven economy was becoming less and less competitive. Cue the devaluation and subsequent FX market interventions.</p> <p>In short, China’s FX management means that Beijing has joined the global USD asset liquidation party which was already gathering pace thanks to the unwind of the petrodollar system. To understand the implications, consider what BofAML said back in January:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>During the oil-boom era, oil-exporters used oil earnings to finance imports of goods and services, and channeled a portion of surplus savings into foreign assets. ‘Petrodollar’ recycling has in turn helped boost global demand, liquidity and asset prices. With the current oil price rout, external and fiscal balances of oil exporters are undermined, and the threat of lower imports and repatriation of foreign assets is cause for concern.</em></p> <p><em><br /></em></p> <p><em><strong>Recycling of Asia-dollars might partly replace the recycling of petrodollars. </strong>&nbsp;Asian sovereign wealth funds ($2.8tn) account for about 39% of total sovereign wealth funds, and will likely see their size increase at a faster clip. Sovereign wealth funds of China (CIC &amp; SAFE), Hong Kong (HKMA), Singapore (GIC &amp; Temasek) and Korea (KIC) rank in the Top-15 globally</em></p> </blockquote> <p>Yes, the "recycling of Asia-dollars might partly replace the recycling of petrodollars." Unless of course a large Asian country is suddenly forced to become a seller of USD assets and on a massive scale. In that case, not only would the recycling of Asian-dollars not replace petrodollar recycling, but the "Eastern liquidation" (so to speak) would simply add fuel to the fire - and a lot of it. That’s precisely the dynamic that’s about to play out.&nbsp;</p> <p>A careful reading of the above from BofA also seems to suggest is that <strong>looking strictly at official FX reserves might underestimate the potential size of the petrodollar effect.</strong>&nbsp;<span style="font-size: 1em; line-height: 1.3em;">Sure enough, a quick check across sellside desks turns up a Credit Suisse note on the "secular downtrend in EM reserves" which the bank says could easily be understated by focusing on official reserves.&nbsp;</span></p> <p>First, note the big picture trends (especially Exhibit 2):</p> <p><a href=""><img src="" width="600" height="345" /></a></p> <p><a href=""><img src="" width="600" height="254" /></a></p> <p>And further, here’s why the scope of the unwind could be materially underestimated.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Taken into context, the year-to-date fall in EM reserves accounts for only 2% of the total stock of EM reserves. However, the change in the behavior of EM central banks from persistent buyers to now sellers of reserve assets carries important implications. Importantly, official reserves will likely underestimate the full scale of the reversal of oil exporters’ “petrodollar” accumulation. </em></p> <p>&nbsp;</p> <p><em style="font-size: 1em; line-height: 1.3em;"><strong>Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ “petrodollar” accumulation. This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs)</strong>, which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).</em></p> <ul> <li><strong><em style="font-size: 1em; line-height: 1.3em;">Currently, oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets.</em></strong><em style="font-size: 1em; line-height: 1.3em;"><span style="white-space: pre;"> </span></em></li> <li><em style="font-size: 1em; line-height: 1.3em;">In the 2009-2014 period, oil exporters accumulated about $0.5trn in official reserves but as much as $1.8trn of SWF assets.</em><em style="font-size: 1em; line-height: 1.3em;"><span style="white-space: pre;"> </span></em></li> </ul> <p><em><strong>Now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses. </strong>SWF selling may be a slower process as assets tend to be less liquid, but the opportunity might still be taken to repatriate some investments, for instance to boost domestic rather than foreign infrastructure projects.&nbsp;</em></p> <p>&nbsp;</p> <p><em><a href=""><img src="" width="600" height="316" /></a></em></p> </blockquote> <p><strong>In other words, looking at the total amount of official reserves for oil exporters understates the potential for petrodollar draw downs by around $2.5 trillion. </strong>Now obviously, it's unlikely that exporters will exhaust the entirety of their SWFs. Having said that, the fact that EM FX reserve accumulation turned negative for the first time in history during Q2 underscores how quickly the tide can turn and how sharp reversals can be. If one fails to at least consider the SWF angle then the effect is to underestimate the worst case scenario by $2.5 trillion, and if 2008 taught us anything, it's that failing to understand just how bad things can get leaves everyone unprepared for the fallout in the event the situation actually does deteriorate meaningfully.&nbsp;</p> <p>So that's the big picture. <strong>In other words, the above is a discussion of the pressure on accumulated petrodollar investments and is an attempt to show that the pool of assets that could, in a pinch, be sold off to finance things like massive budget deficits (Saudi Arabia, for instance, is <a href="">staring down a fiscal deficit</a> that amounts to 20% of GDP) is likely being underestimated by those who narrowly focus on official reserves. </strong>Switching gears briefly to consider what $50 crude means for the <em>flow</em> of petrodollars (i.e. what's coming in), RBS' Alberto Gallo has the numbers:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em><strong>If petroleum prices continue in to year end at their current YtD average&nbsp;<span style="font-size: 1em; line-height: 1.3em;">($52), this would represent a 60% decline in Petrodollar generated in 2015 vs between&nbsp;</span><span style="font-size: 1em; line-height: 1.3em;">2011 and 2014. Assuming that 30% of gross Petrodollars generated per year are&nbsp;</span><span style="font-size: 1em; line-height: 1.3em;">invested in financial markets, this would imply $288bn ready for investments in 2015 vs&nbsp;</span></strong><span style="font-size: 1em; line-height: 1.3em;"><strong>a $726bn average between 2011 and 2014.</strong> Lower purchasing power from oil-exporting&nbsp;</span><span style="font-size: 1em; line-height: 1.3em;">countries may in turn reduce demand for $-denominated fixed income assets, including&nbsp;</span><span style="font-size: 1em; line-height: 1.3em;">$ IG and $ HY. US IG and HY firms have issued $918bn and $220bn YtD, which in total&nbsp;</span><span style="font-size: 1em; line-height: 1.3em;">marks a record-high vs past years.&nbsp;</span></em></p> <p>&nbsp;</p> <p><em><span style="font-size: 1em; line-height: 1.3em;"><img src="" width="600" height="309" /></span></em></p> <p><em><span style="font-size: 1em; line-height: 1.3em;"><a href=""><img src="" width="494" height="520" /></a></span></em></p> <p>&nbsp;</p> </blockquote> <p><span style="font-size: 1em; line-height: 1.3em;">And while all of this may seem complex, it's actually quite simple: <strong>less petrodollars coming in without a commensurate reduction in what's going out means the difference has to be made up somewhere and that somewhere is in the sale of USD reserve assets which are prone to being understated if one looks only at official FX reserves.</strong> Contrast this with the status quo which for years has been more petrodollars coming in than what's going out (in terms of expenditures) with the balance being reinvested in USD assets. </span></p> <p><span style="font-size: 1em; line-height: 1.3em;">Simplifying even further: the virtuous circle (for the dollar and for USD assets) has not only been broken, but it's now starting to reverse itself and the potential scope of that reversal must take into account SWF assets.&nbsp;</span></p> <p><span style="font-size: 1em; line-height: 1.3em;">Where we go from here is an open question, but what's clear from the above is that between China's FX reserve drawdowns in defense of the yuan and the dramatic decrease in petrodollar flow, the self-feeding loop that's sustained the dollar and propped up USD assets is now definitively broken and we are only beginning to understand the consequences.&nbsp;</span></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="500" height="288" alt="" src="" /> </div> </div> </div> Central Banks China Credit Suisse Crude fixed headlines Hong Kong Purchasing Power Saudi Arabia Yuan Sun, 30 Aug 2015 02:04:49 +0000 Tyler Durden 512587 at