en RBC Emergency Market Update: "Big Trouble For Consensus Trades" <p><em>Markets may not be turmoiling yet, but as per this "emergency" Sunday night "hot take" from RBC's cross-asset head Charlie McElligott notes, things are certainly starting to break. </em></p> <p><span style="text-decoration: underline;"><strong>SPECIAL EDITION RBC Big Picture: BIG TROUBLE FOR CONSENSUS 'REFLATION' TRADES AS 'FISCAL POLICY' FEARS CONFIRMED </strong></span><br />&nbsp;<br />#HOTTAKE: ‘<strong>Risk-off’ in a sloppy Asian opening to start the week (ES1 -18 handles, $/Y -100pips to 110.34, UST 10Y ylds at 2.36), as markets digest the scope and viability of the US ‘fiscal policy’ narrative going-forward off the tremors of Friday’s failed healthcare repeal vote.&nbsp; </strong></p> <p>“<strong>Reflation” themes were already staggering in recent weeks off-the-back of the recent the crude oil sell-off (and the implications for weakened ‘inflation expectations’)—<span style="text-decoration: underline;">but to now see the longer-term ‘US fiscal policy upside kicker’ looking especially threatened, it is likely that the ‘big three’ trade expressions (longs in US Dollar US Banks and shorts in US Rates) are looking very exposed for an acceleration of recent drawdowns</span></strong> (in conjunction with longs in HY, ‘cyclicals / defensives’ L/S pairs, equities ‘value’ factor, equities high beta, US equities small cap).</p> <p><a href=""><img src="" width="500" height="268" /></a></p> <p>‘<strong>Long Dollar’ trades are currently seen unwinding ‘real-time’ as ‘the world’s most crowded trade’ and ‘reflation’ proxy earlier this evening broke the convergence of both its 200dma and the 76.4% Fibo Retracement of the entire Dollar move since the US election—exposing significant downside</strong>.&nbsp; Legacy shorts held against the US Dollar in Euro (making 2017 highs vs USD), Yen (making 2017 highs vs USD), Pound and Canadian Dollar are being painfully squeezed as traders are liquidating after ‘processing’ the implications of the Trump Administration’s failed ACA repeal Friday, with many ‘late-comers’ to these trades significantly ‘under water’ already and looking to ‘tap out’ on losers.&nbsp; <strong>Tactical funds and discretionary macro were already pivoting ‘short USD’ last week on the new “policy CONVERGENCE” dynamic, and now with momentum having clearly pivoted in the other direction, one would expect systematic / trend / CTA to be heavily-involved now as well on the short-side of USD trades.</strong></p> <p>The story that we were getting Friday from some buyside traders and sellside strategists (by-and-large) was that a “no” vote was almost irrelevant to risk-assets, as market participants want the US Administration to ‘move on’ and ‘focus its efforts’ on tax policy anyhow (versus being mired in further debate with the ‘repeal and replace’ of the ACA).&nbsp; <span style="text-decoration: underline;"><strong>What many were missing here though (and noted by Mark Orsley Friday afternoon) is that the sequencing of ‘healthcare’ and ‘budget’ before ‘taxes’ was intentional and critical, as spending cuts from a repeal of the ACA were effectively a ‘requirement</strong></span>’ against the pending new administration’s tax-plan which will only further increase the deficit.&nbsp; <strong>This is obviously an impediment then to efforts to keep any new tax plan ‘deficit neutral,’ so essentially, the GOP is starting in a bigger hole, some say to the tune of $1T dollars….</strong>and this of course is not including the extremely controversial BAT component, which too has lost much momentum over the past two months, despite projections that it could provide upwards of $1T of revenues over a 10 year period in order to fund the individual and corporate tax cut proposals (ironically, the same ‘Freedom Caucus’ of GOP’ers which symbolically defeated the ‘new’ healthcare plan on Friday are also against the BAT…yikes). </p> <p>What does it all mean?&nbsp; Some of the talk emanating from DC policy-circles is now of the view that this now means an almost certainty of<strong> a ‘watered down’ tax plan, which instead of deep ‘headline’ cuts planned will now feature much more modest cuts (corporates as priority over individuals) and focus on “streamlining” tax code / loopholes.</strong>&nbsp; This is not the ‘joy’ that many of those 2500 S&amp;P targets ‘signed-up’ for.</p> <p>What is at risk?&nbsp; I noted many of the ‘consensual longs’ which have already showed significant signs of being de-grossed in recent weeks.&nbsp; But as we now see a high likelihood of the <strong>potential for a rates reversal to accelerate and long duration’ rallies in the face of the ‘rates short’ crowd</strong>, there will be major implications within equities too, <strong>as ‘low vol’ defensives (REITS / Utes / Staples / Telcos) and ‘anti-beta’ market neutral strategies are certain to see further escalation of their recent strength.&nbsp;</strong> The good news for equities-longs&nbsp; is that ‘secular growers’ like tech, consumer discretionary and biotech is too likely to benefit from money rotating out of ‘deep cyclicals’and ‘value.’&nbsp;&nbsp; </p> <p>Stay tuned…<br />&nbsp;<br />&nbsp;</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="2126" height="1138" alt="" src="" /> </div> </div> </div> Business Canadian Dollar Crude Crude Oil Economic policy Economy Fiscal policy Reflation REITs Republican Party Trump Administration US Administration Yen Mon, 27 Mar 2017 03:02:06 +0000 Tyler Durden 591788 at Trump "Endorses" Jeanine Pirro's Call For Paul Ryan To Step Down <p>Fox News host Judge Jeanine Pirro, whose show President Trump urged his followers on Twitter to watch earlier in the day, opened her program at 9pm on Saturday by calling for Speaker Paul Ryan's resignation. </p> <p>"Ryan needs to step down as Speaker of the House. The reason, he failed to deliver the votes on his healthcare bill, the one trumpeted to repeal and replace ObamaCare, the one that he had 7 years to work on; the one he hid under lock and key in the basement of Congress; the one that had to be pulled to prevent the embarrassment of not having enough votes to pass." Pirro said in her opening statement. </p> <p><iframe src="" width="500" height="281" frameborder="0"></iframe></p> <p>"Speaker Ryan, you come in with all your swagger and experience and sell them a bill of goods which ends up a complete and total failure and you allow our president, in his first 100 days, to come out of the box like that, based on what?" Pirro said. </p> <p>What made Pirro's fiery comments about Ryan especially notable is that they came hours after Trump tweeted to encourage his followers to watch "Justice with Judge Jeanine."</p> <blockquote class="twitter-tweet"><p dir="ltr" lang="en">Watch <a href="">@JudgeJeanine</a> on <a href="">@FoxNews</a> tonight at 9:00 P.M.</p> <p>— Donald J. Trump (@realDonaldTrump) <a href="">March 25, 2017</a></p></blockquote> <script src="//"></script><p>While Trump has urged people to watch TV shows in the past, typically it was when the president himself was appearing on them. However in a twist, Pirro suggested that she had not coordinated her statement with Trump in advance. </p> <p>"I have not spoken with the president about any of this," Pirro said of her call for Ryan to step down on her show, where president's counter-terrorism adviser Sebastian Gorka also appeared on Saturday evening. </p> <p>On Friday Trump told Ryan to pull the Republican healthcare bill, upon learning there were not enough votes in support among House Republicans. The move marked Trump's first legislative defeat as president and followed seven years of rhetoric from Republicans who campaigned on a pledge to repeal and replace former President Barack Obama's signature healthcare law. </p> <p>In the initial round of fingerpointing, Trump blamed Democrats for not backing the GOP healthcare bill, warning that Obamacare would "explode" on its own, and signaled that he would move on to other priorities such as tax reform. On Saturday, the <a href="">NYT reported </a>that the blame among Trump's closest circles had fallen on Reince Priebus and Health and Human Services Secretary Tom Price, while Ryan was spared Trump's anger. Trump and White House press secretary Sean Spicer also indicated that they appreciated Ryan's effort to get the bill passed, amid criticism from some Trump allies over the failed effort.</p> <p>Following the Pirro statement, the blame now appears to have shifted back to Ryan, as <a href="">Bloomberg originally </a>reported on Friday. </p> <p>Pirro insisted in her first segment that the failure was on Ryan and not on Trump. <strong>"Folks, I want to be clear. This is not on President Trump," </strong>she said. "No one expected a businessman to completely understand the nuances, the complicated ins and outs of Washington and its legislative process. How would he know on what individuals he could rely?" </p> <p>"Ryan has hurt you going forward, and he's got to go," Pirro said.</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="1252" height="676" alt="" src="" /> </div> </div> </div> American people of German descent Congress Donald Trump Donald Trump presidential campaign Fox News Jeanine Pirro Obamacare Paul Ryan Politics Presidency of Donald Trump Reince Priebus Republican Party Republican Party United States) Sean Spicer Twitter Twitter United States White House White House Mon, 27 Mar 2017 02:58:29 +0000 Tyler Durden 591756 at Michael Hudson: Trump Is Obama's Legacy - Is This The End Of The Democratic Party? <p><a href=""><em>Authored by Michael Hudson via,</em></a></p> <p><strong>Nobody yet can tell whether Donald Trump is an agent of change with a specific policy in mind, or merely a catalyst heralding an as yet undetermined turning point.</strong> His first month in the White House saw him melting into the Republican mélange of corporate lobbyists. Having promised to create jobs, his &ldquo;America First&rdquo; policy looks more like &ldquo;Wall Street First.&rdquo; His cabinet of billionaires promoting corporate tax cuts, deregulation and dismantling Dodd-Frank bank reform repeats the Junk Economics promise that giving more tax breaks to the richest One Percent may lead them to use their windfall to invest in creating more jobs. What they usually do, of course, is simply buy more property and assets already in place.</p> <p><strong>One of the first reactions to Trump&rsquo;s election victory was for stocks of the most crooked financial institutions to soar, hoping for a deregulatory scythe taken to the public sector. </strong>Navient, the Department of Education&rsquo;s knee-breaker on student loan collections accused by the Consumer Financial Protection Bureau (CFPB) of massive fraud and overcharging, rose from $13 to $18 now that it seemed likely that the incoming Republicans would disable the CFPB and shine a green light for financial fraud.</p> <p>Foreclosure king Stephen Mnuchin of IndyMac/OneWest (and formerly of Goldman Sachs for 17 years; later a George Soros partner) is now Treasury Secretary &ndash; and Trump is pledged to abolish the CFPB, on the specious logic that letting fraudsters manage pension savings and other investments will give consumers and savers &ldquo;broader choice,&rdquo; e.g., for the financial equivalent of junk food. Secretary of Education Betsy DeVos hopes to privatize public education into for-profit (and de-unionized) charter schools, breaking the teachers&rsquo; unions.<strong> This may position Trump to become the Transformational President that neoliberals have been waiting for.</strong></p> <p><strong>But not the neocons.</strong> His election rhetoric promised to reverse traditional U.S. interventionist policy abroad. Making an anti-war left run around the Democrats, he promised to stop backing ISIS/Al Nusra (President Obama&rsquo;s &ldquo;moderate&rdquo; terrorists supplied with the arms and money that Hillary looted from Libya), and to reverse the Obama-Clinton administration&rsquo;s New Cold War with Russia. But the neocon coterie at the CIA and State Department are undercutting his proposed rapprochement with Russia by forcing out General Flynn for starters. It seems doubtful that Trump will clean them out.</p> <p><strong>Trump has called NATO obsolete, but insists that its members up their spending to the stipulated 2% of GDP &mdash; producing a windfall worth tens of billions of dollars for U.S. arms exporters.</strong> That is to be the price Europe must pay if it wants to endorse Germany&rsquo;s and the Baltics&rsquo; confrontation with Russia.</p> <p><strong>Trump is sufficiently intuitive to proclaim the euro a disaster, and he recommends that Greece leave it.</strong> He supports the rising nationalist parties in Britain, France, Italy, Greece and the Netherlands, all of which urge withdrawal from the eurozone &ndash; and reconciliation with Russia instead of sanctions. In place of the ill-fated TPP and TTIP, Trump advocates country-by-country trade deals favoring the United States. Toward this end, his designated ambassador to the European Union, Ted Malloch, urges the EU&rsquo;s breakup. The EU is refusing to accept him as ambassador.</p> <h3><u><strong>Will Trump&rsquo;s Victory Break Up the Democratic Party? </strong></u></h3> <p>At the time this volume is going to press, there is no way of knowing how successful these international reversals will be. What is more clear is what Trump&rsquo;s political impact will have at home. His victory &ndash; or more accurately, Hillary&rsquo;s resounding loss and the <em>way</em> she lost &ndash; has encouraged enormous pressure for a realignment of both parties. Regardless of what President Trump may achieve vis-à-vis Europe, his actions as celebrity chaos agent may break up U.S. politics across the political spectrum.</p> <p><strong>The Democratic Party has lost its ability to pose as the party of labor and the middle class. Firmly controlled by Wall Street and California billionaires, the Democratic National Committee (DNC) strategy of identity politics encourages any identity <em>except</em> that of wage earners. </strong>The candidates backed by the Donor Class have been Blue Dogs pledged to promote Wall Street and neocons urging a New Cold War with Russia.</p> <p><strong>They preferred to lose with Hillary than to win behind Bernie Sanders.</strong> So Trump&rsquo;s electoral victory is their legacy as well as Obama&rsquo;s.<strong> Instead of Trump&rsquo;s victory dispelling that strategy, the Democrats are doubling down. It is as if identity politics is all they have.</strong></p> <p><strong>Trying to ride on Barack Obama&rsquo;s coattails didn&rsquo;t work. </strong>Promising &ldquo;hope and change,&rdquo; he won by posing as a transformational president, leading the Democrats to control of the White House, Senate and Congress in 2008. Swept into office by a national reaction against the George Bush&rsquo;s Oil War in Iraq and the junk-mortgage crisis that left the economy debt-ridden, they had free rein to pass whatever new laws they chose &ndash; even a Public Option in health care if they had wanted, or make Wall Street banks absorb the losses from their bad and often fraudulent loans.</p> <p>But it turned out that Obama&rsquo;s role was to <em>prevent</em> the changes that voters hoped to see, and indeed that the economy needed to recover: financial reform, debt writedowns to bring junk mortgages in line with fair market prices, and throwing crooked bankers in jail. Obama rescued the banks, not the economy, and turned over the Justice Department and regulatory agencies to his Wall Street campaign contributors. He did not even pull back from war in the Near East, but extended it to Libya and Syria, blundering into the Ukrainian coup as well.</p> <p><strong>Having dashed the hopes of his followers, Obama then praised his chosen successor Hillary Clinton as his &ldquo;Third Term.&rdquo; Enjoying this kiss of death, Hillary promised to keep up Obama&rsquo;s policies.</strong></p> <p>The straw that pushed voters over the edge was when she asked voters, &ldquo;Aren&rsquo;t you better off today than you were eight years ago?&rdquo; Who were they going to believe: their eyes, or Hillary? National income statistics showed that only the top 5 percent of the population were better off. All the growth in Gross Domestic Product (GDP) during Obama&rsquo;s tenure went to them &ndash; the Donor Class that had gained control of the Democratic Party leadership. Real incomes have fallen for the remaining 95 percent, whose household budgets have been further eroded by soaring charges for health insurance. (The Democratic leadership in Congress fought tooth and nail to block Dennis Kucinich from introducing his Single Payer proposal.)</p> <p><strong>No wonder most of the geographic United States voted for change &ndash; except for where the top 5 percent, is concentrated: in New York (Wall Street) and California (Silicon Valley and the military-industrial complex).</strong> Making fun of the Obama Administration&rsquo;s slogan of &ldquo;hope and change,&rdquo; Trump characterized Hillary&rsquo;s policy of continuing the economy&rsquo;s shrinkage for the 95% as &ldquo;no hope and no change.&rdquo;</p> <h3><u><strong>Identity Politics as Anti-Labor Politics</strong></u></h3> <p><strong>A new term was introduced to the English language: Identity Politics. </strong>Its aim is for voters to think of themselves as separatist minorities &ndash; women, LGBTQ, Blacks and Hispanics.<strong> The Democrats thought they could beat Trump by organizing Women for Wall Street (and a New Cold War), LGBTQ for Wall Street (and a New Cold War), and Blacks and Hispanics for Wall Street (and a New Cold War). </strong>Each identity cohort was headed by a billionaire or hedge fund donor.</p> <p><strong>The identity that is conspicuously excluded is the working class. </strong>Identity politics strips away thinking of one&rsquo;s interest in terms of having to work for a living. It excludes voter protests against having their monthly paycheck stripped to pay more for health insurance, housing and mortgage charges or education, or better working conditions or consumer protection &ndash; not to speak of protecting debtors.</p> <p>Identity politics used to be about three major categories: workers and unionization, anti-war protests and civil rights marches against racist Jim Crow laws. These were the three objectives of the many nationwide demonstrations. That ended when these movements got co-opted into the Democratic Party. Their reappearance in Bernie Sanders&rsquo; campaign in fact threatens to tear the Democratic coalition apart. As soon as the primaries were over (duly stacked against Sanders), his followers were made to feel unwelcome. Hillary sought Republican support by denouncing Sanders as being as radical as Putin&rsquo;s Republican leadership.</p> <p>In contrast to Sanders&rsquo; attempt to convince diverse groups that they had a common denominator in needing jobs with decent pay &ndash; and, to achieve that, in opposing Wall Street&rsquo;s replacing the government as central planner &ndash; the Democrats depict every identity constituency as being victimized by every other, setting themselves at each other&rsquo;s heels. Clinton strategist John Podesta, for instance, encouraged Blacks to accuse Sanders supporters of distracting attention from racism. Pushing a common economic interest between whites, Blacks, Hispanics and LGBTQ always has been the neoliberals&rsquo; nightmare. No wonder they tried so hard to stop Bernie Sanders, and are maneuvering to keep his supporters from gaining influence in their party.</p> <p>When Trump was inaugurated on Friday, January 20, there was no pro-jobs or anti-war demonstration. That presumably would have attracted pro-Trump supporters in an ecumenical show of force. Instead, the Women&rsquo;s March on Saturday led even the pro-Democrat <em>New York Times</em> to write a front-page article reporting that white women were complaining that they did not feel welcome in the demonstration. The message to anti-war advocates, students and Bernie supporters was that their economic cause was a distraction.</p> <p>The march was typically Democratic in that its ideology did not threaten the Donor Class. As Yves Smith wrote on <em>Naked Capitalism</em>: &ldquo;the track record of non-issue-oriented marches, no matter how large scale, is poor, and the status of this march as officially sanctioned (blanket media coverage when other marches of hundreds of thousands of people have been minimized, police not tricked out in their usual riot gear) also indicates that the officialdom does not see it as a threat to the status quo.&rdquo;</p> <p><strong>Hillary&rsquo;s loss was not blamed on her neoliberal support for TPP or her pro-war neocon stance, but on the revelations of the e-mails by her operative Podesta discussing his dirty tricks against Bernie Sanders (claimed to be given to Wikileaks by Russian hackers, not a domestic DNC leaker as Wikileaks claimed) and the FBI investigation of her e-mail abuses at the State Department.</strong> Backing her supporters&rsquo; attempt to brazen it out, the Democratic Party has doubled down on its identity politics, despite the fact that an estimated 52 percent of white women voted for Trump. After all, women do work for wages. And that also is what Blacks and Hispanics want &ndash; in addition to banking that serves <em>their</em> needs, not those of Wall Street, and health care that serves <em>their</em> needs, not those of the health-insurance and pharmaceuticals monopolies.</p> <p><strong>Bernie did not choose to run on a third-party ticket. Evidently he feared being accused of throwing the election to Trump. </strong>The question is now whether he can remake the Democratic Party as a democratic socialist party, or create a new party if the Donor Class retains its neoliberal control. It seems that he will not make a break until he concludes that a Socialist Party can leave the Democrats as far back in the dust as the Republicans left the Whigs after 1854. He may have underestimated his chance in 2016.</p> <h3><u><strong>Trump&rsquo;s Effect on U.S. Political Party Realignment</strong></u></h3> <p>During Trump&rsquo;s rise to the 2016 Republican nomination it seemed that he was more likely to break up the Republican Party. Its leading candidates and gurus warned that his populist victory in the primaries would tear the party apart. The polls in May and June showed him defeating Hillary Clinton easily (but losing to Bernie Sanders). <strong>But Republican leaders worried that he would not support what they believed in: namely, whatever corporate lobbyists put in their hands to enact and privatize.</strong></p> <p>The May/June polls showed Trump and Clinton were the country&rsquo;s two most unpopular presidential candidates.<strong> But whereas the Democrats maneuvered Bernie out of the way, the Republican Clown Car was unable to do the same to Trump. </strong>In the end they chose to win behind him, expecting to control him. As for the DNC, its Wall Street donors preferred to lose with Hillary than to win with Bernie. They wanted to keep control of their party and continue the bargain they had made with the Republicans: The latter would move further and further to the right, leaving room for Democratic neoliberals and neocons to follow them closely, yet still pose as the &ldquo;lesser evil.&rdquo; That &ldquo;centrism&rdquo; is the essence of the Clintons&rsquo; &ldquo;triangulation&rdquo; strategy. It actually has been going on for a half-century. &ldquo;As Tanzanian President Julius Nyerere quipped in the 1960s, when he was accused by the US of running a one-party state, &lsquo;The United States is also a one-party state but, with typical American extravagance, they have two of them&rsquo;.&rdquo;</p> <p><strong>By 2017, voters had caught on to this two-step game. </strong>But Hillary&rsquo;s team paid pollsters over $1 billion to tell her (&ldquo;Mirror, mirror on the wall &hellip;&rdquo;) that she was the most popular of all. It was hubris to imagine that she could convince the 95 Percent of the people who were worse off under Obama to love her as much as her East-West Coast donors did. It was politically unrealistic &ndash; and a reflection of her cynicism &ndash; to imagine that raising enough money to buy television ads would convince working-class Republicans to vote for her, succumbing to a Stockholm Syndrome by thinking of themselves as part of the 5 Percent who had benefited from Obama&rsquo;s pro-Wall Street policies.</p> <p><strong>Hillary&rsquo;s election strategy was to make a right-wing run around Trump. While characterizing the working class as white racist &ldquo;deplorables,&rdquo; allegedly intolerant of LBGTQ or assertive women, she resurrected the ghost of Joe McCarthy and accused Trump of being &ldquo;Putin&rsquo;s poodle&rdquo; for proposing peace with Russia. </strong>Among the most liberal Democrats, Paul Krugman still leads a biweekly charge at <em>The New York Times</em> that President Trump is following Moscow&rsquo;s orders. Saturday Night Live, Bill Maher and MSNBC produce weekly skits that Trump and General Flynn are Russian puppets. A large proportion of Democrats have bought into the fairy tale that Trump didn&rsquo;t really win the election, but that Russian hackers manipulated the voting machines. No wonder George Orwell&rsquo;s <em>1984</em> soared to the top of America&rsquo;s best-seller lists in February 2017 as Donald Trump was taking his oath of office.</p> <p><strong>This propaganda paid off on February 13, when neocon public relations succeeded in forcing the resignation of General Flynn, whom Trump had appointed to clean out the neocons at the NSA and CIA.</strong> His foreign policy initiative based on rapprochement with Russia and hopes to create a common front against ISIS/Al Nusra seemed to be collapsing.</p> <h3><u><strong>Tabula Rasa Celebrity Politics</strong></u></h3> <p><strong>U.S. presidential elections no longer are much about policy.</strong> Like Obama before him, Trump campaigned as a <em>rasa tabla</em>, a vehicle for everyone to project their hopes and fancies. What has all but disappeared is the past century&rsquo;s idea of politics as a struggle between labor and capital, democracy vs. oligarchy.</p> <p>Who would have expected even half a century ago that American politics would become so post-modern that the idea of class conflict has all but disappeared. Classical economic discourse has been drowned out by their junk economics.</p> <p><strong>There is a covert economic program, to be sure, and it is bipartisan. It is to make elections about just which celebrities will introduce neoliberal economic policies with the most convincing patter talk. That is the essence of <em>rasa tabla</em> politics.</strong></p> <h3><u><strong>Can the Democrats&nbsp;Lose&nbsp;Again in 2020?</strong></u></h3> <p><strong>Trump&rsquo;s November victory showed that voters found <em>him</em> to be the Lesser Evil, but all that voters really could express was &ldquo;throw out the bums&rdquo; </strong>and get a new set of lobbyists for the FIRE sector and corporate monopolists. Both candidates represented Goldman Sachs and Wall Street. No wonder voter turnout has continued to plunge.</p> <p>Although the Democrats&rsquo; Lesser Evil argument lost to the Republicans in 2016, the neoliberals in control of the DNC found the absence of a progressive economic program to less threatening to their interests than the critique of Wall Street and neocon interventionism coming from the Sanders camp. <strong>So the Democrat will continue to pose as the Lesser Evil party not really in terms of policy, but simply <em>ad hominum</em>. They will merely repeat Hillary&rsquo;s campaign stance: They are <em>not</em> Trump.</strong> Their parades and street demonstrations since his inauguration have not come out for any economic policy.</p> <p><strong>On Friday, February 10, the party&rsquo;s Democratic Policy group held a retreat for its members in Baltimore. </strong>Third Way &ldquo;centrists&rdquo; (Republicans running as Democrats) dominated, with Hillary operatives in charge. <strong>The conclusion was that no party policy was needed at all. &ldquo;President Trump is a better recruitment tool for us than a central campaign issue,&rsquo; said Washington Rep. Denny Heck, who is leading recruitment for the Democratic Congressional Campaign Committee (DCCC).&rdquo;</strong></p> <p>But what does their party leadership have to offer women, Blacks and Hispanics in the way of employment, more affordable health care, housing or education and better pay? Where are the New Deal pro-labor, pro-regulatory roots of bygone days? The party leadership is unwilling to admit that Trump&rsquo;s message about protecting jobs and opposing the TPP played a role in his election. Hillary was suspected of supporting it as &ldquo;the gold standard&rdquo; of trade deals, and Obama had made the Trans-Pacific Partnership the centerpiece of his presidency &ndash; the free-trade TPP and TTIP that would have taken economic regulatory policy out of the hands of government and given it to corporations.</p> <p>Instead of accepting even Sanders&rsquo; centrist-left stance, the Democrats&rsquo; strategy was to tar Trump as pro-Russian, insist that his aides had committed impeachable offenses, and mount one parade after another. &ldquo;Rep. Marcia Fudge of Ohio told reporters she was wary of focusing solely on an &ldquo;economic message&rdquo; aimed at voters whom Trump won over in 2016, because, in her view, Trump did not win on an economic message. &ldquo;What Donald Trump did was address them at a very different level &mdash; an emotional level, a racial level, a fear level,&rdquo; she said. &ldquo;If all we talk about is the economic message, we&rsquo;re not going to win.&rdquo;<strong> This stance led Sanders supporters to walk out of a meeting organized by the &ldquo;centrist&rdquo; Third Way think tank on Wednesday, February 8.</strong></p> <p>By now this is an old story. Fifty years ago, socialists such as Michael Harrington asked why union members and progressives still imagined that they had to work through the Democratic Party. It has taken the rest of the country half a century to see that Democrats are not the party of the working class, unions, middle class, farmers or debtors. They are the party of Wall Street privatizers, bank deregulators, neocons and the military-industrial complex. Obama showed his hand &ndash; and that of his party &ndash; in his passionate attempt to ram through the corporatist TPP treaty that would have enabled corporations to sue governments for any costs imposed by public consumer protection, environmental protection or other protection of the population against financialized corporate monopolies.</p> <p><strong>Against this backdrop, Trump&rsquo;s promises and indeed his worldview seem quixotic. The picture of America&rsquo;s future he has painted seems unattainable within the foreseeable future. It is too late to bring manufacturing back to the United States, because corporations already have shifted their supply nodes abroad, and too much U.S. infrastructure has been dismantled.</strong></p> <p>There can&rsquo;t be a high-speed railroad, because it would take more than four years to get the right-of-way and create a route without crossing gates or sharp curves. In any case, the role of railroads and other transportation has been to increase real estate prices along the routes. But in this case, real estate would be torn down &ndash; and having a high-speed rail does not increase land values.</p> <p>The stock market has soared to new heights, anticipating lower taxes on corporate profits and a deregulation of consumer, labor and environmental protection. <strong>Trump may end up as America&rsquo;s Boris Yeltsin, protecting U.S. oligarchs (not that Hillary would have been different, merely cloaked in a more colorful identity rainbow). The U.S. economy is in for Shock Therapy. Voters should look to Greece to get a taste of the future in this scenario.</strong></p> <p>Without a coherent response to neoliberalism, Trump&rsquo;s billionaire cabinet may do to the United States what neoliberals in the Clinton administration did to Russia after 1991: tear out all the checks and balances, and turn public wealth over to insiders and oligarchs. So Trump&rsquo;s his best chance to be transformative is simply to be America&rsquo;s Yeltsin for his party&rsquo;s oligarchic backers, putting the class war back in business.</p> <h3><u><strong>What a Truly Transformative President Would Do/Would Have Done</strong></u></h3> <p><strong>No administration can create a sound U.S. recovery without dealing with the problem that caused the 2008 crisis in the first place: over-indebtedness. </strong>The only one way to restore growth, raise living standards and make the economy competitive again is a debt writedown. But that is not yet on the political horizon. Obama&rsquo;s doublecross of his voters in 2009 prevented the needed policy from occurring. Having missed this chance in the last financial crisis, a progressive policy must await yet another crisis. But so far, no political party is preparing a program to juxtapose to Republican-Democratic austerity and scale-back of Social Security, Medicare and social spending programs in general.</p> <p>Also no longer on the horizon is a more progressive income tax, or a public option for health care &ndash; or for banking, or consumer protection against financial fraud, or for a $15-an-hour minimum wage, or for a revived protection of labor&rsquo;s right to unionize, or environmental regulations.</p> <p><strong>It seems that only a new party can achieve these aims. </strong>At the time these essays are going to press, Sanders has committed himself to working within the Democratic Party. But that stance is based on his assumption that somehow he can recruit enough activists to take over the party from Its Donor Class.</p> <p>I suspect he will fail. In any case, it is easier to begin afresh than to try to re-design a party (or any institution) dominated by resistance to change, and whose idea of economic growth is a pastiche of tax cuts and deregulation. Both U.S. parties are committed to this neoliberal program &ndash; and seek to blame foreign enemies for the fact that its effect is to continue squeezing living standards and bloating the financial sector.</p> <p>If this slow but inexorable crash does lead to a political crisis, it looks like the Republicans may succeed in convening a new Constitutional Convention (many states already have approved this) to lock the United States into a corporatist neoliberal world. Its slogan will be that of Margaret Thatcher: TINA &ndash; There Is No Alternative.</p> <p><em><strong>And who is to disagree? As Trotsky said, fascism is the result of the failure of the left to provide an alternative.</strong></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="190" height="184" alt="" src="" /> </div> </div> </div> American people of German descent Baltics Barack Obama Bernie Sanders Central Intelligence Agency Climate change skepticism and denial Clinton administration Congress Consumer Financial Protection Bureau Consumer protection Democratic Congressional Campaign Committee Democratic National Committee Democratic Party Democrats Dennis Kucinich Department of Education Department of Justice Department of State Donald Trump Donald Trump European Union European Union Eurozone Fail FBI Federal Bureau of Investigation France George Orwell George Soros Germany goldman sachs Goldman Sachs Greece Gross Domestic Product Hillary Clinton Iraq Italy Krugman Kucinich Lesser Evil party Medicare Medicare MSNBC Naked Capitalism Near East Neocons Netherlands New York New York Times Nomination North Atlantic Treaty Organization NSA Obama Administration Obama administration Obama-Clinton administration Ohio Paul Krugman Politics Politics of the United States President Obama Real estate recovery Republican Party Senate Socialist Party The Apprentice United States West Coast White House White House WWE Hall of Fame Mon, 27 Mar 2017 02:50:00 +0000 Tyler Durden 591781 at Your Pension Will Be At The Center Of America's Next Financial Crisis <p dir="ltr"><em><a href="">Authored by Jeff Reeves via The Hill</a></em></p> <p>I’m not a fan of the “greed is good” mentality of Wall Street investment firms. <strong>But the next financial crisis that rocks America won’t be driven by bankers behaving badly. It will in fact be driven by pension funds that cannot pay out what they promised to retirees.</strong> According to one pension advocacy organization, nearly <a href="">1 million working and retired Americans</a> are covered by pension plans at the risk of collapse.</p> <p dir="ltr">The looming pension crisis is not limited by geography or economic focus. These including former public employees, such as members of South Carolina’s government pension plan, which covers roughly <a href="">550,000 people</a> — one out of nine state residents — and is a staggering <a href="">$24.1 billion in the red</a>. These include former blue collar workers such as roughly <a href="">100,000 coal miners</a> who face serious cuts in pension payments and health coverage thanks to a nearly <a href="">$6 billion shortfall</a> in the plan for the United Mine Workers of America. <strong>And when the bill comes due, we will all be in very big trouble.</strong></p> <p dir="ltr">It’s bad enough to consider the philosophical fallout here, with reneging on the promise of a pension and thus causing even more distrust of bankers and retirement planners. But I’m speaking about a cold, numbers-based perspective that causes a drag on many parts of the American economy. Consider the following.</p> <p dir="ltr"><strong>Pensioners have no flexibility</strong></p> <p dir="ltr">According to a Bureau of Labor Statistics <a href="">report from 2015</a>, <strong>the average household income of someone older than age 75 is $34,097 and their average expenses exceed that slightly, at $34,382.</strong> It is not an exaggeration, then, to say that even a modest reduction in retirement income makes the typical budget of a 75-year-old unsustainable — even when the average budget is far from luxurious at current levels. This inflexibility is a hard financial reality of someone who is no longer able to work and is reliant on means other than labor to make ends meet.</p> <p dir="ltr"><strong>Social Security is in a tight spot</strong></p> <p dir="ltr">So who will step up to support these former pensioners? Perhaps the government, via Social Security, except that program itself is in crisis and will see its trust fund go to zero just 17 years from now, in 2034, based on the <a href="">current structure of the program.</a> If millions of pensions go bust and retirees have no other savings to fall back on, it will be nigh impossible to cut benefits or reduce the drag on this program. But won’t a pension collapse mean we desperately need Social Security, even in an imperfect form, well beyond 2034?</p> <p dir="ltr"><img src="" alt="Pensions" width="600" height="428" /></p> <p dir="ltr">&nbsp;</p> <p dir="ltr"><strong>The guaranty is no solution</strong></p> <p dir="ltr">There is an organization, the Pension Benefit Guaranty Corporation (PBGC), which is meant to insure pensions against failure. However, it was created in 1974 as part of a host of financial reforms and is far from a perfect solution, primarily because it is funded by premiums from defined-benefit plan sponsors and assets seized from former plan sponsors that have entered bankruptcy.</p> <p dir="ltr">What happens when a handful of troubled pension funds turns into dozens or hundreds? <strong>Remember, the PBGC guarantees a certain amount that is decidedly lower than your full pension — as members of the Road Carriers 707 pension fund learned when the group “protected” their pensions by helping to pay benefits, which had been reduced from $1,313 per month to $570.</strong> That’s better than zero, but hardly encouraging.</p> <p dir="ltr">This is not about helping Baby Boomers fund an annual cruise to the Caribbean. Older, low-income pensioners are not saving their money. Instead, they’re spending it on necessities such as food, housing, healthcare and transportation. That means every penny you reduce from their budget means a penny in spending that is removed from the U.S. economy.</p> <p dir="ltr">Anyone who has taken Econ 101 knows about the “multiplier effect” where $1 in extra spending can produce a much larger amount of economic activity as that dollar circulates around businesses, consumers and banks … or in this case, how $1 less in spending causes a an equally powerful cascade of negative consequences.</p> <p dir="ltr">By helping ward against a pension crisis, America will be protecting its economy for everyone — plain and simple. But that requires some tough decisions on all sides. <strong>For instance, the U.S. Treasury denied a cut to New York Teamsters’ pension plan that was proposed last year. But now the fund is on the brink of collapse, and its recipients are facing benefits that are in some cases one-third what they were <a href="">15 years ago</a>.</strong></p> <p dir="ltr"><strong>Like Social Security, current workers can’t contribute enough to offset the big obligations owed to retirees. </strong>And as with the flagship entitlement program, it’s up to regulators and legislators to step in — even when it may not be easy — in order to keep the system from collapsing. Let’s hope they make both pension reform and Social Security reform a priority in the near future.</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="998" height="522" alt="" src="" /> </div> </div> </div> Bradley Belt Bureau of Labor Statistics Business Caribbean Charles E.F. Millard Economy Employee Retirement Income Security Act Finance Financial services Labor Money Pension Pension Benefit Guaranty Corporation Pension Crisis Pensions Reality Retirement Social Issues Social Security South Carolina’s government U.S. Treasury Mon, 27 Mar 2017 02:30:00 +0000 Tyler Durden 591725 at On The Edge Of An "Uncontrollable Liquidity Event": The Definitive Guide To China's Financial System <p>While most traders over the past month have been obsessing over developments in Washington, the real action - most of it under the radar - has played out in China, where as discussed over the past few weeks, domestic liquidity has tightened notably, culminating with an unexpected bailout by the PBOC of various smaller banks who <a href="">defaulted on their interbank loans</a> as interest rates, particularly on Certificates of Deposit (CD) - which have become a preferred funding conduit for many Chinese banks - but not only, spiked. Ironically, these mini PBOC bailouts took place only after the PBOC itself decided to tighten conditions sufficiently to choke off much of the shadow debt funding China's traditional banks.</p> <p>As a result, the interbank CD rate rallied strongly, leaving a narrower or negative spread for some smaller banks, whose legacy carry trades (see below for details) suddenly became unprofitable. Also, as reported last Tuesday, <a href="">several small banks failed to meet overnight repo obligations</a>. This liquidity tightness has been mainly due to escalating financial deleveraging, as the PBOC has lifted market rates and rolled out stricter macroprudential policy rules.</p> <p>But all those events in isolation seem as merely noise against what otherwise appears to be a relatively benign, even boring, backdrop: after all, neither China's stock, nor bond markets, has seen even remote volatility in recent months, and certainly nothing compared to what was experienced one year ago, when the Chinese turmoil nearly led to a bear market across developed markets. Then again, maybe the markets are simply once again behind the curve due to all the inherent complexity of China's unprecedented, financialized and extremely complex pre-Minsky moment ponzi scheme.</p> <p>Last last week, Deutsche Bank analysts led by Hans Fan released what is the definitive research report summarizing all the latest troubling trends facing China, which judging by capital markets, nobody is paying any attention to. They should, because as Deutsche Bank puts it, if taken too far, they threaten an "<strong>uncontrollable liquidity event</strong>", i.e., the financial cataclysm that Kyle Bass and other perma-china-bears have been waiting for.</p> <p>And, as usual, it all started with rising interest rates, which in turn is leading to increasing funding pressure, which if left unchecked, could lead to dire consequences for China's underfunded banking system.</p> <p>Here is a fantastic explanation of everything that has happened in China in recent weeks, and more importantly, what <strong>may </strong>happen next, courtesy of Deutsche Bank. We urge readers to familiarize themselves with the content as we will refer back to this article in future posts.</p> <p>* * *</p> <p><strong>Only in early stage of financial deleveraging</strong></p> <p>China’s monetary policy has been shifting gradually towards a tightening stance since 2H16. Targeting the liabilities side of the banking sector, the PBOC hiked rates of monetary tools, such as MLF, SLF and OMO (Figure 1), and withdrew liquidity on a net basis after the Chinese New Year (Figure 2). At the same time, it targeted the asset side of the banking sector when it rolled out stricter MPA rules by including off-BS WMP credit in broader credit assessment and imposing stricter-than-expected penalties on banks that fail to comply.</p> <p><a href=""><img src="" width="500" height="182" /></a></p> <p>As a result, the key indicators in the money market, including repo and CD rates, all suggest stretched domestic liquidity. For example, the 7-day repo rate, which is the most representative liquidity indicator, has exceeded the interest rate corridor ceiling of 3.45% several times this year (Figure 3). Moreover, the interbank CD rate spiked to 4.6% on 20 Mar 2017, up c.180bps from last year’s low (Figure 4).</p> <p><a href=""><img src="" width="500" height="190" /></a></p> <p>We summarize in the below diagram recent financial deleveraging efforts by regulators.</p> <p><a href=""><img src="" width="500" height="334" /></a></p> <p>&nbsp;</p> <p><strong>Why push forward financial deleveraging?</strong></p> <p>We believe the PBOC aims mainly to contain the fast-growing leverage in China’s financial sector. In our view, the country’s financial leverage basically relates to speculators borrowing excessive wholesale funding to grow assets and chase yield, rather than relying on vanilla deposits. To measure this, we believe one of the good indicators of financial leverage is the credit-to-deposit ratio, calculated as total banking credit as a percentage of total deposits. The higher the ratio, the more fragile the financial sector, and the more likely the banking system will run into difficulties to finance unexpected funding requirements. Traditionally the loan-to-deposit ratio was widely used to measure system liquidity risk, but has become increasingly irrelevant in China, as banks are growing their bond investments and shadow banking books to extend credit.</p> <p>As shown in Figure 6, the credit-to-deposit ratio in China’s banking system has risen sharply by 27ppts since 2011 to reach 116% as of February 2017. We see the rising credit-to-deposit ratio basically is a function of increasing reliance on wholesale funding to support strong credit growth. As of end 2016, borrowing from banks and NBFIs accounted for 17% of total liabilities, against 8% 10 years ago (Figure 7).</p> <p><a href=""><img src="" width="500" height="214" /></a></p> <p><strong>Which banks are more leveraged? Joint-stock banks and city/rural banks</strong></p> <p>As we have long argued, the risks are not evenly distributed in China’s banking system; there are notable differences in the balance sheet structures of different types of banks. As shown in Figure 8, medium-sized banks, which mainly include joint-stock banks, recorded the highest credit-to-deposit ratios and hence are most reliant on wholesale funding. At the same time, small banks, which mainly include city/rural commercial banks, also delivered notable increases in credit-to-deposit ratios, despite a lower absolute level. The credit-to-deposit ratio for small banks has increased by 30ppts since 2010, vs. 14ppts for the big-four banks in the same period.</p> <p>On the liabilities side, medium-sized and small banks mainly rely on wholesale funding, i.e. borrowing from banks and NBFIs. As of 1H16, wholesale funding made up 31% and 23% for medium-sized and small banks, respectively, against only 13% for big-four banks, as shown in Figure 9.</p> <p><a href=""><img src="" width="500" height="247" /></a></p> <p><strong>A closer look into interbank CDs – funding pressure ahead</strong></p> <p>Wholesale funding for smaller banks has been obtained mainly by issuing CDs in the interbank market. Interbank CDs have supported 20% of smaller banks’ assets expansion over the past 12 months. Since the introduction of interbank CDs in 2014, CD issuance recorded strong growth and the balance jumped 89% yoy to Rmb7.3tr in Feb 2017 (Figure 10), or 3.4% of total banking liabilities.</p> <p><a href=""><img src="" width="500" height="182" /></a></p> <p>Joint-stock and city/rural banks account for 99% of issuance (Figure 12). In the coming months these banks have ambitious CD pipelines. <strong>More than 400 banks announced plans to issue CDs worth Rmb14.6tr in 2017</strong>. This represents 60% yoy growth from the issuance plan in 2016. Investor-wise, WMPs, various asset management plans and commercial banks themselves are the major buyers, which combined make up 79% of the total balance (Figure 13).</p> <p><a href=""><img src="" width="500" height="190" /></a></p> <p>However, we view banks that are more reliant on CDs as more vulnerable to rising rates and tighter regulations.</p> <p>Reflecting tighter liquidity, the interbank CD rate has rallied strongly, with the 6-month CD pricing at 4.6% on average. Some CDs issued by smaller rural commercial banks have been priced close to 5% recently. This would have pushed up the funding cost and notably for smaller banks. If banks invest in low-risk assets such as mortgages, discounted bills and treasury bonds, this would lead to a negative spread. Alternatively, banks can lengthen asset duration, increase the risk appetite, add leverage or slow down asset growth. Among these alternatives, we believe a slowdown in asset growth is the most likely.</p> <p><a href=""><img src="" width="500" height="195" /></a></p> <p>Caixin previously reported CDs are likely to be reclassified as interbank liabilities, capped at 33% of total liabilities. This potential regulation could add funding pressure for banks with a heavy reliance on interbank liabilities. <strong>With Rmb4tr interbank CDs to mature during Mar- Jun 2017 (Figure 16) and interbank liabilities exposure approaching the limit (Figure 17), </strong>joint-stock and city/rural banks are subject to notable funding pressure.</p> <p><a href=""><img src="" width="500" height="200" /></a></p> <p>We show the listed banks’ issuances in the chart below. INDB, SPDB and PAB are among the most exposed to interbank CDs.</p> <p><a href=""><img src="" width="500" height="286" /></a></p> <p>* * *</p> <p><span style="text-decoration: underline;"><strong>What are the implications?</strong></span></p> <p><strong>Are we close to a “tipping point”?</strong></p> <p>For now, probably not, especially in a year of leadership transition. In our view, <strong>the risk of an uncontrollable liquidity event is low, </strong>as the PBOC will do whatever it takes to inject liquidity if needed. In the domestic liquidity market, the PBOC exerts strong influence in both the volume and pricing of liquidity. With 90%+ of financial institutions directly or indirectly controlled by the government, PBOC will likely continue to give liquidity support. In 2H15, the central bank established an interest rate corridor to contain interbank rates within a narrow range and pledged to inject unlimited liquidity to support banks with funding needs.</p> <p>However, continuing liquidity injections do not come without a cost. A bigger asset bubble, persistent capital outflow pressure and a lower yield curve over the longer term are side effects that China will have to bear. At the same time, the execution risk of PBOC itself is rising.</p> <p><a href=""><img src="" width="500" height="438" /></a></p> <p><strong>Implications on system credit growth</strong></p> <p>We expect system credit growth to moderate from 16.4% yoy in 2016 (16.1% in Feb’17) to approximately 14-15% yoy in 2017 (Figure 23). <strong>As a result, the credit impulse is likely to trend lower from the current high level (Figure 24). </strong>The slower credit growth is mainly attributable to several factors: 1) a tighter liquidity stance to push up the funding cost of smaller banks and to force them to slow down asset growth; 2) further curbs on shadow banking; 3) a higher&nbsp; bond yield to defer bond issuance; and 4) slower mortgage loan growth.</p> <p><a href=""><img src="" width="500" height="213" /></a></p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>Appendix A – Liquidity flows in China’s interbank market</strong></span></p> <p>New deposits supported 55% of asset growth in China’s banking system in 2016. The remaining 45% of new assets were mainly funded by borrowing from PBOC (19%) and borrowing from each other (19%, including bond issuance). While borrowing from NBFIs remained flat for the entire system, it was the main funding source for medium-sized and small banks. We summarize the liquidity flows in China’s interbank market in Appendix A.</p> <p><a href=""><img src="" width="500" height="373" /></a></p> <p><strong>Liquidity injection from PBOC</strong>. Over the past 12 months, to offset the liquidity drain from falling FX reserves, the PBOC has injected a huge amount of liquidity worth Rmb5.8tr into the banking system, which is equivalent to 400bps of RRR cuts (Figure 29). Of this injection, 30% and 24% have been made to support joint-stock banks and policy banks, respectively (Figure 30). For details, please see our report, PBOC liquidity facilities: Doing whatever it takes, 23 January 2017.</p> <p><a href=""><img src="" width="500" height="198" /></a></p> <p><strong>Borrowing from interbank market</strong>. Policy banks and big-four banks are net interbank lenders, while joint-stock and city/rural commercial banks are net borrowers. Joint-stock and city/rural banks not only borrow from policy/big banks, but also from each other. This could potentially lead to stronger contagion effects if some of them run into liquidity stress.</p> <p><a href=""><img src="" width="500" height="202" /></a></p> <p><strong>Lending/borrowing between banks and NBFIs. </strong>There has been a sharp rise in net claims to NBFIs from banks (Figure 33). We believe this is due to rising shadow banking transactions and also arbitrage activities with funds self-circulating within the financial sector. Clearly as shown in Figure 34, small banks are key lenders to NBFIs</p> <p><a href=""><img src="" width="500" height="192" /></a></p> <p><span style="text-decoration: underline;"><strong>Appendix B - What is driving the financial leverage?</strong></span></p> <p>From the accounting perspective, we believe the rising credit-to-deposit ratio is mainly due to bank credit circulating back into the banking system as non-deposit liabilities. In normal cases, when a bank makes a $100 corporate loan or purchases a $100 corporate bond, the bank books the credit to a corporate on the asset side while it also books a deposit on the liability side. We show a normal case in Figure 35. However, if a bank’s money circulates back into the banking system, just like in the two cases we illustrate in the diagram below, the $100 deposit is removed but interbank borrowing or borrowing from NBFIs would increase by $100. While there are likely to be many variants of bank credit circulation, we elaborate on two cases in detail.</p> <p><a href=""><img src="" width="500" height="290" /></a></p> <p><strong>Case #1: Bank credit circling via NBFIs </strong></p> <p>It is well known that NBFIs have been serving as SPVs to channel shadow banking credit from banks to corporates in past years. What is&nbsp; insufficiently addressed though is that NBFIs also have been acting as channels for bank credit circling. Let us show a simple example below:</p> <ul> <li>First, Bank A invests in an asset management plan packaged by an NBFI. This is booked as a receivable investment on Bank A’s balance sheet.</li> <li>Second, the NBFI invests further in a CD issued by Bank B. Bank B books the CD under interbank borrowing. The money circulates back into the banking system and no deposit is generated.</li> <li>In some cases, if the yield of the CD does not cover the cost of issuing the asset management plan, the NBFI will leverage up in the bond market by pledging the CD through repo transactions. The leverage could be built up by two transactions: 1) entrusted bond investment (“Daichi” in Chinese); or 2) entrusted investment (“Weiwai” in Chinese), which we discuss in detail in our 2017 outlook report.</li> <li>In this case we use the investment in a bank’s CD as an example. In reality it applies to investment in interbank CDs, interbank negotiated deposits and financial bonds issued by banks, which are all circulating money back into the banking system.</li> </ul> <p>The bank credit circling through NBFIs is growing rapidly. This is evidenced by strong growth in banks’ receivable investments, which reached Rmb21tr as of end-2016 to account for 10% of commercial banking assets, as shown in Figure 36. This represents 80% CAGR in balance since 2013. The majority of these investments was made by medium-sized and small banks. Note that not all receivable investments are credit circling, but we believe it should make up a notable portion. We summarize the structure of banks’ receivable investments in Figure 38.</p> <p>The NBFI here could be any trust company, broker, fund subsidiary or insurance company. We believe brokers and fund subsidiaries should be the key players, as their bond trading leverage in the interbank bond market is much higher than other participants (Figure 37).</p> <p><a href=""><img src="" width="500" height="198" /></a></p> <p><a href=""><img src="" width="500" height="248" /></a></p> <p>&nbsp;</p> <p><strong>Case #2: Bank credit circling via corporates</strong></p> <p>Corporate loans may circle back into the banking system as well. This is because many corporates use borrowed but idle cash to buy bank WMPs. Below is a simple example:</p> <ul> <li>Firstly, Bank A makes a loan to a corporate.</li> <li>Secondly, the corporate uses the loan proceeds to buy a wealth management product issued by Bank A.</li> <li>Thirdly, Bank A invests the WMP fund in a financial bond issued by Bank B. This corporate deposit would circle back to the banking system as a non-core liability.</li> <li>To make this process economic, in many cases it would require leverage. The corporate borrowing cost may be at 4%, but the financial bond issued by Bank B may only yield 3.5%. To compensate the yield shortage, Bank A has to entrust the WMP fund to a third party and to leverage up by pledging the bonds through repo transactions. This process is called entrusted investment (“Weiwai” in Chinese, or entrusting to an external party).</li> </ul> <p>This type of transaction is not an individual case. As shown in Figure 39, corporates purchased Rmb7.7tr WMPs in 1H16. This accounted for 7% of total corporate debt in China, or 29% of total WMP AUM in the system. SOEs, large private corporate and listed companies enjoy ample bank lending resources with low interest cost. However, the lack of attractive investment projects in their own business prompts them to invest in the financial market (i.e. bank WMPs).</p> <p><a href=""><img src="" width="500" height="273" /></a></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="1064" height="710" alt="" src="" /> </div> </div> </div> B+ Bank Banking Bear Market Bond Business Capital Markets CDS China Deutsche Bank Economy Fail Finance Financial markets Kyle Bass Kyle Bass Loan-To-Deposit Ratio Market liquidity Monetary Policy Money Money market Pejoratives People's Bank of China Reality Shadow Banking Shadow banking system Systemic risk United States housing bubble Volatility Yield Curve Mon, 27 Mar 2017 02:26:43 +0000 Tyler Durden 591786 at Visualizing The World's Deepest Oil Well <p>In the<strong>&nbsp;<a href="">world&rsquo;s deepest gold mine</a>, workers will venture 2.5 miles (4 km) below the Earth&rsquo;s surface </strong>to extract from a 30-inch (0.8m) wide vein of gold-rich ore.</p> <p>While these depths are impressive, <a href="">Visual Capitalist&#39;s Jeff Desjardins notes</a> that <strong>mining is limited by the frailty of the human body.</strong> Going much deeper would be incredibly dangerous, as limitations such as heat, humidity, logistics, and potential seismic activity all become more intense.</p> <p><strong>Luckily, the oil industry does not have such human obstacles, </strong>and drilling deep into the Earth&rsquo;s crust is instead limited by a different set of circumstances &ndash; how deep can the machinery and technology go before the unfathomable heat and pressure renders it inoperable?</p> <h2><u>THE WORLD&rsquo;S DEEPEST OIL WELL</u></h2> <p>Today&rsquo;s infographic comes to us from&nbsp;<a href="">Fuel Fighter</a>, and it helps to <strong>visualize the mind-boggling depths of the world&rsquo;s deepest oil well,</strong> which is located in a remote corner of eastern Russia.</p> <div style="clear:both"><em><a href=""><img src="" style="border-width: 0px; border-style: solid; height: 3430px; width: 600px;" /></a></em></div> <div><em>Courtesy of: <a href="">Visual Capitalist</a></em></div> <p>&nbsp;</p> <p><strong>The world&rsquo;s deepest oil well, known as Z-44 Chayvo, goes over 40,000 ft (12 km) into the ground &ndash; equal to 15 Burj Khalifas (the&nbsp;<a href="">tallest skyscraper</a>) stacked on top of each other. That&rsquo;s also equal to 2x the record height for air balloon flight.</strong></p> <p>Perhaps more importantly to the operator, Exxon Neftegas Ltd., the wells on this shelf are expected to produce a total of 2.3 billion barrels of oil.</p> <h2><u>THAT&rsquo;S SOME SERIOUS DEPTH</u></h2> <p>Before the Z-44 Chayvo Well and other holes like it were drilled on the eastern side of Russia, the famous Kola Superdeep Borehole held the record for drill depth.</p> <p>Located in western Russia, this time just 10 km from the border with Norway, the Kola Superdeep Borehole was rumored to have been discontinued in 1992 because it actually reached &ldquo;hell&rdquo; itself. At its most extreme depth, the drill had pierced a super-hot cavity, and scientists thought they heard the screams of &ldquo;damned souls&rdquo;.</p> <p><strong>All folklore aside, the Kola Superdeep Borehole is super interesting in its own right. It revealed&nbsp;<a href="">many important things</a>&nbsp;about our planet, and it still holds the record today for depth below the surface.</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="820" height="402" alt="" src="" /> </div> </div> </div> Borehole eastern Russia Exxon Exxon Neftegas Kola Measured depth Mining Norway Oil well Sakhalin-I Science and technology Structure of the Earth Technology western Russia Mon, 27 Mar 2017 02:15:00 +0000 Tyler Durden 591744 at "Much Worse Than Watergate", Former CIA Officer Admits Trump 'Wiretapping' Likely True <p><strong>The &quot;political appointees&quot; in the intelligence community knew exactly what they were surveilling for,</strong> former CIA officer Col. Tony Shaffer <a href="">told Fox News,</a> adding that the case is <strong><em>&quot;much worse than Watergate by an order of magnitude.&quot;</em></strong></p> <p><script type="text/javascript" src=""></script></p> <p>While Trump was not physically wiretapped, with a wire into his phone, Shaffer said <strong>the &quot;basic fundamental idea and claim is true.&quot;</strong></p> <p><em><strong>&quot;Clearly they were after gossip because it was political,&quot;</strong></em> Shaffer said, maintaining that the alleged wiretap had nothing to do with Russia.</p> <p>Due to the simplicity required to &quot;mask&quot; an American&#39;s name during an incidental wiretap, Shaffer said that <strong>the leak of Gen. Michael Flynn&#39;s name was &quot;accidental on purpose.&quot;</strong></p> <p>Even if the surveillance was done legally, Shaffer exclaimed that <strong><em>whoever is responsible for the &quot;unmasking&quot; of Americans&#39; names and the leaking of the information are felons</em></strong>.</p> <p>With Comey and Rogers facing &quot;closed sessions&quot;, and Trump looking for a win, we can&#39;t help but think something substantial looms for the leakers just ahead. Of course, the biggest dilemma for exposing the leakers is the confirmation of what we already know to an even wider audience of deniers - that Snowden, Binney, et al. are 100% correct and the surveillance state&#39;s all-seeing eye is everywhere and far beyond government control. (just remember it&#39;s for your own good).</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="309" height="211" alt="" src="" /> </div> </div> </div> Anthony Shaffer Central Intelligence Agency Dismissal of United States Attorneys controversy Fox News James Comey Law enforcement Learning Prevention Surveillance Mon, 27 Mar 2017 01:50:00 +0000 Tyler Durden 591763 at "They're Baaack! And Why You Should Be Worried – Very Worried" <p><a href=""><em>Authored by Mark St.Cyr,</em></a></p> <p><strong>Bubbles are easy to spot &ndash; pinpointing when they&rsquo;ll pop &ndash; is quite another.</strong></p> <p>I coined that phrase a while back which is nothing more than adding my own spin combining two very old catch phrases used by seasoned traders and investors. I use the word &ldquo;seasoned&rdquo; for a reason. Why?</p> <p>Because they&rsquo;re the ones that have been around (and been burned themselves) yet lived to trade, or invest, another day. Those who remained wedded (usually the novice or one who&rsquo;s never experienced true volatility) to the more prominent and specious claims of &ldquo;you can&rsquo;t tell when you&rsquo;re in a bubble&rdquo; followed with &ldquo;you can always get out in time&rdquo; for the most part are long gone. i.e.,The bubble popped into the ether &ndash; along with their money.</p> <p>Nowhere was this phenom more apparent than the real-estate boom of the early 2000&rsquo;s, which followed the prior phenom only 10 years prior (e.g., the dot-com crash) that should have seared into people&rsquo;s memory for millennia just how &ldquo;bubbles&rdquo; take shape &ndash; and the resulting financial devastation that happens rapidly once they&rsquo;ve popped.</p> <p>Guess what? (actually you already know) nobody seems too care. Yet, here&rsquo;s something you may not know, but should: <em><strong>It&rsquo;s all happening again, and in the same time frame.</strong></em></p> <p><strong>We are once again (you&rsquo;re going to see that phrase a lot) hovering in and around the all-time highs in the &ldquo;markets.&rdquo;</strong> And, once again, all the warning signs are coming into place that should be <em>the</em> tell-tale signs for prudence and caution. Here are three, but they&rsquo;re a very big 3 when combined. Ready?</p> <ol> <li>Tony Robbins has <a href="">authored another financial book</a>.</li> <li>Suze Orman has once again reemerged to deliver her brand of financial advice.</li> <li>They&rsquo;re both delivering their insights at a venue titled (wait for it) <a href="">Real Estate Wealth Expo&trade;</a>, where you too can learn how to become a millionaire via real estate.</li> </ol> <p><a href=""><img height="128" src="" width="600" /></a></p> <p><strong>So, let me make this statement right-off-the-bat: This isn&rsquo;t a hit piece about either Tony, Suze, or The Expo. </strong>What I&rsquo;m strictly relating my argument too is the phenom and psychology that reemerges with a vengeance during what is known as &ldquo;the topping process.&rdquo; aka &ldquo;The late stages of a bubble mentality.&rdquo;</p> <p><em><u><strong>This is the moment in time where generic, over simplified advice, that sounds so good (and too good) shouted too an adoring crowd &nbsp;&ndash; should be taken as the siren, and clarion call to those who are diligent in preserving their wealth to buckle up, buckle down, and prepare in earnest.</strong></u></em> For once this show is over? &ldquo;Over&rdquo; is going to be something many of those attending these types of seminars are going to pray for &ndash; as in &ldquo;Please make it stop!&rdquo;</p> <p>To re-aquaint you with a little ancient history, let&rsquo;s remember Tony&rsquo;s first book (Money: Master the Game) and when it emerged: November 2014. Do you remember what else took place&nbsp;at that point? Hint: QE (quantitative easing) ended in earnest.</p> <p>Remember what followed for the next 2 full years? Again, hint: The &ldquo;markets&rdquo; ping pong&rsquo;d between &ldquo;all time highs&rdquo; and &ldquo;Holy S&ndash;t! This thing is all about to collapse &ndash; again!&rdquo; Which is precisely why we now have something called the &ldquo;Bullard Bottom.&rdquo;</p> <p>What were the markets doing prior to this?: A straight up,&nbsp;one-way, rocket-ship ride since the origination of the &ldquo;Bernanke Put&rdquo; then reiterated in 2010 by its namesake chairman in his now famous (or infamous) 2010 Jackson Hole speech, where he basically announced QE &ldquo;forever&rdquo; would remain under his tutelage until he retired in late 2014.</p> <p>Since then what&rsquo;s remained and is still prevalent today (maybe even more so) is that other phenom now known as &ldquo;Buy The F&rsquo;n Dip&rdquo; (BTFD.)</p> <p>When Tony&rsquo;s book first emerged I made my opinion of it quite clear in the article, <a href="">&ldquo;Why Tony Robbins Is Asking The Wrong Questions&rdquo;</a>&nbsp;One of the main points I tried to express was the following. To wit:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;The real issue at hand from my point of view is this: Looking for answers to both financial safety as well as financial freedom in the same light or viewpoint where it seems one only needs to &ldquo;think like a billionaire&rdquo; or &ldquo;tweak&rdquo; or &ldquo;slightly modify&rdquo; perceptions on how one approaches these financial markets today &ndash; will hurt more than it will help.</p> <p>&nbsp;</p> <p>The markets for all intents and purposes are no longer for the &ldquo;average&rdquo; person looking to make gains in any form today. What is needed now more than ever is a direct understanding that safety &ndash; safety above all else &ndash; is paramount. And exactly how one can achieve it. Or get as close to the proverbial &ldquo;cash in the mattress&rdquo; understanding of it as humanly possible.</p> <p>&nbsp;</p> <p>The idea of &ldquo;diversification&rdquo; is a great sounding idea in principle and theory. However, it is one of the greatest myths when it comes to protecting one&rsquo;s assets in today&rsquo;s financial market place aka Wall Street.&rdquo;</p> </blockquote> <p>Not only do I still feel the same today as I did then. My opinion has become far more steadfast.</p> <p>I had even expressed this a year later in Nov. of 2015 when (once again) Tony was appearing on many of main stream financial/business media outlets as the &ldquo;markets&rdquo; kept up the appearance of &ldquo;gains&rdquo; as they ping pong&rsquo;d between &ldquo;near death&rdquo; experiences and &rdquo; new all time highs.&rdquo; Even if those &ldquo;highs&rdquo; many times were only by a mere point or such, yet, the headline was the only thing that seemed to matter.</p> <p>In the article <a href="">&ldquo;Why Tony Robbins Is Still Asking The Wrong Questions&rdquo;</a> I laid out my argument using charts, and current data, as to try to drive this singular point across. Again, to wit:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;First: The answers to the questions Tony realized are far from groundbreaking. They&rsquo;ve been around for some time. Yet, it&rsquo;s the second part that has the most troubling aspect in my view, and that problem is this: Although fees are a very important aspect of financial planning at any level. Where prudence in reducing them should always be sought with vigor. In markets such as these, just one year since Tony&rsquo;s book &ldquo;Money Master The Game: 7 Simple Steps to Financial Freedom,&rdquo; (2014 Simon &amp; Schuster) The most probing questions that should remain front-of-mind, everyday, with no respite should be focused squarely to: The surety for the return of one&rsquo;s money. Then the proverbial &ldquo;on.&rdquo; Period. Confusing that sequence today is a recipe for financial disaster waiting to happen in my view.</p> <p>&nbsp;</p> <p>Safety today is paramount. I am ever-the-more resolute of the opinion: Everything else is playing around the edges. And as I watched or listened &ndash; I heard nothing addressing the preponderance of possible systemic failures or upheavals. Let alone how one might safeguard themselves from one.</p> <p>Oh wait, yes there was one: &ldquo;diversification.&rdquo; All I&rsquo;ll point to on that note, is what I pointed to last time &ndash; 2008. For diversification in the markets was, for all intents and purposes; a meaningless exercise during the panic. Why? Lest I remind you during the panic how everything was going down the drain simultaneously?&rdquo;</p> </blockquote> <p>As illustrative of what the &ldquo;markets&rdquo; were doing back then. What I would like to remind you of is this:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>During this period (e.g., 2015-16 and still present today) there&rsquo;s a very little discussed fact: Many of the experts couldn&rsquo;t do the one thing the least informed &ldquo;investors&rdquo; been doing in spades and &ldquo;winning!&rdquo; e.g., BTFD horns-over-hooves, forget fundamentals, forget diversification, forget the experts, forget everything. Just buy an ETF or Index (just make sure if has a central bank&rsquo;s bullseye on it) and spend the rest of that time once used for &ldquo;research&rdquo; in researching and picking out your desired options in your new Rolls!&rdquo; Bam!</p> </blockquote> <p>For those who are questioning my assertions, may I remind you that even <a href="">Paul Tudor Jones during 2016 was battling losses</a> (yes &ndash; losing great amounts of money resulting in $2.1 Billion in redemptions alone.) The reason? (in my opinion)</p> <p><strong>Hedge funds (you know, where that term &ldquo;diversification&rdquo; is the root of its meaning) can&rsquo;t hedge in a &ldquo;market&rdquo; without amassing losses for those hedges. Combine that with fees and more? And the best of the best can&rsquo;t compete with a chimp throwing darts at a board full of ticker symbols supported via central bank intervention. Making the whole idea that one can simply &ldquo;diversify&rdquo; to safety pure poppycock. Period.</strong></p> <p>To repeat &ndash; if hedging is now pretty much a losing battle (see preceding paragraph) and hedge ultimately means diversify, as to hedge against losses &ndash; where even the professional money manager can no longer &ldquo;hedge&rdquo; without incurring losses (even those once considered &ldquo;the best&rdquo;) what does &ldquo;diversify&rdquo; currently mean to the unskilled or average investor? Where even going to &ldquo;cash&rdquo; which was once thought the ultimate &ldquo;safety&rdquo; as in a &ldquo;Money Market&rdquo; account no longer applies to that once thought &ldquo;safety&rdquo; zone.</p> <p>Why some might ask? Easy&hellip;</p> <p><strong>Your &ldquo;Money Market&rdquo; fund today is basically nothing more than a stock with a different name. In other words: it can be gated without notice other than telling you &ndash; it&rsquo;s been gated. (e.g.,you won&rsquo;t be able to get at it. And who knows for how long, if ever.) Since the rule change.</strong></p> <p>Also: it can &ldquo;break the buck&rdquo; e.g., It&rsquo;s no longer guaranteed to be worth what you&rsquo;ve deposited. e.g., $1.00 can now fluctuate to be worth what ever the &ldquo;market&rdquo; states it to be. Just like a stock. Hint: Think Snapchat&trade; for clues.</p> <p>As alarming as the above might sound. (And I&rsquo;ll bet dollars-to-donuts you wont hear that coming from the stage) You know who else was perplexed and calling for any help no matter how stupefying it sounded? You guessed it &ndash; today&rsquo;s (once again) &ldquo;financial expert&rdquo; Suze Orman.</p> <p><strong>For those who may not remember how precarious and outright terrifying the &ldquo;markets&rdquo; were gyrating back during 2015 (you know, back in the ancient history) it was none other than Ms. Orman that took the Twitter-verse to call for the one. and only, great hope the &ldquo;markets&rdquo; seemed to have left, when she called to the heavens for none other than CNBC&trade; host James Cramer to plead with Janet Yellen as to not raise interest rates.</strong></p> <p>From the article, <a href="">&ldquo;The Week That Laid The Experts Bare&rdquo;</a> To wit:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>&ldquo;Then there was Suze Orman&rsquo;s taking to Twitter&trade; pleading to none other than the Fed. and Jim Cramer.</strong></p> <p>&nbsp;</p> <p>Of Fed. Chair Yellen she pleads &ldquo;help us out. Commit to no rate increases.&rdquo; And to Mr. Cramer, &ldquo;Jim do something&rdquo; and more. This is coming from someone who self describes themselves as &ldquo;America&rsquo;s Most Trusted Personal Finance Expert.&rdquo; I&rsquo;ll let this stand on its own, and let you be the judge. I&rsquo;m at a loss for lost for words, and for anyone who knows me &ndash; that&rsquo;s saying something. For one can only surmise by her pleads, those that were taking her advice of late were caught and blindsided by the events of the day much like she appears to have been.&rdquo;</p> </blockquote> <p><strong>I guess time heals all wounds, and BTFD investing advice heals all 401K balances.</strong> That is &ndash; until it doesn&rsquo;t &ndash; but no one cares. Why? Let me express it this way for this is what now seems to be the current meme for creating wealth. Ready?</p> <p><u><strong><em>&ldquo;Just BTFD, or flip that house! It&rsquo;s so darn easy, and the music is playing so loud I can hardly hear myself think, but that&rsquo;s the point &ndash; I don&rsquo;t have too! It&rsquo;s a win-win!! And Yes -you too! can become a millionaire easy-peasy. The only hard part? Are you willing to take the risk &ndash; and decide today?&rdquo;</em></strong></u></p> <p>That&rsquo;s about it as far as I can tell. However, since I&rsquo;m also in the business/motivation business let me offer you up this little tidbit of caution if you&rsquo;re planning on attending one of these so-called &ldquo;wealth&rdquo; seminars. And it&rsquo;s this&hellip;</p> <p>As you jump, cheer, and shout as Tony or any other speaker there screams from the stage for you to shout in unison, or to the person directly adjacent to you, &ldquo;I own you!&rdquo; as some mantra for you to remember as to help solidify your reasoning, and wherewithal as to commit to your decision making process. Let me add this one note of caution&hellip;</p> <p>That is precisely what the banks, mortgage holders, credit card companies, city, and county real estate tax authorities, IRS, bankruptcy courts, lawyers, and more will be shouting at you if there&rsquo;s even a hiccup in this current BTFD &ldquo;market&rdquo; stampede.</p> <p><u><strong>And if you think there&rsquo;s no true &ldquo;market&rdquo; indigestion forth coming? </strong></u>Here&rsquo;s just two as of late to consider.</p> <p><strong>First: Canada (you know, where the latest &ldquo;Wealth Expo&rdquo; just concluded March 18th in Toronto) is showing the beginning effects when &ldquo;hot money&rdquo; flows are seen (as in confused) as &ldquo;proof&rdquo; of investment prowess. </strong>Yes &ndash; Toronto is booming. But there&rsquo;s a reason, and it&rsquo;s not a good one. That reason? <a href="">Because Vancouver values are collapsing</a>. Now down some 40% and growing as Chinese &ldquo;hot money&rdquo; needed to find another spot to park, and quick!</p> <p><em>How do you think all those newly minted &ldquo;investors&rdquo; in Vancouver currently feel?</em></p> <p><strong>Second: The Federal Reserve has now openly stated not only are they going to raise rates &ndash; they are going to raise far faster than anyone just 4 months ago thought plausible, while also openly discussing the need (and want) for balance sheet reduction to go hand in hand, all while the economic reports such as Atlanta Fed. estimates Q1 GDP have crashed to now below the previously revised down 1.2%, to now just .9%.</strong></p> <p>And if that wasn&rsquo;t enough to make one think twice? Add to that the now professed answer by Minneapolis Fed. president Neel Kashkari when <a href="">questioned about Fed. responses to any potential sell-off</a>. To wit:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;Don&rsquo;t care about stock market fall itself. Care abt potential financial instability. Stock market drop unlikely to trigger crisis.&rdquo;</p> </blockquote> <p>Remember: He was the only dissenter in the latest March hike. And appears to be not worried in the least.</p> <p><strong>Which is precisely why you should, for&nbsp;&ldquo;History doesn&rsquo;t repeat, but it often rhymes&rdquo; no longer appears purely anecdotal with the above for context, does it?</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="906" height="193" alt="" src="" /> </div> </div> </div> Atlanta Fed Economy Federal Reserve Federal Reserve Finance Financial markets Hedge Hot money Internal Revenue Service Janet Yellen Jim Cramer Jim Cramer Mergers and acquisitions Minneapolis Fed Money Neel Kashkari None Paul Tudor Jones Quantitative Easing Real estate Stock market Twitter Twitter US Federal Reserve Volatility Mon, 27 Mar 2017 01:40:00 +0000 Tyler Durden 591779 at Bond Bears Panic, Cover Shorts At Fastest Pace Since Brexit; But Rate-Hike Bets Top $3 Trillion <p>Last week saw the <strong>largest drop in aggregate Treasury short positions since Brexit</strong>. Ironicaly, while bond bears felt the squeeze, <strong>traders piled into Eurodollar shorts</strong> (increased rate-hike bets) sending the short-end&#39;s positioning to <strong>record highs</strong>.</p> <p><strong>Across the entire Treasury bond futures complex, shorts covered over 200,000 10-year-equivalent contracts </strong>(around $20 billion notional), but as is clear below, the net short - while the <strong>smallest since December 2nd</strong> - remains extreme relative to norms over the last 6 years.</p> <p><a href=""><img height="308" src="" width="600" /></a></p> <p>At the same time, <strong>Eurodollar traders added to their rate-hike bets </strong>- extending the net short to a record 3.009 million contracts... (over $3 trillion notional)</p> <p><img height="318" src="" width="600" /></p> <p><strong>The lofty fiscal expectations surrounding President Donald Trump have begun to subside.</strong></p> <p>The short-dated skew between payers and receivers on 10-year yields is flat, with the risks now more symmetric for rates, allowing investors to position for outcomes following the U.S. fiscal debate. <strong>Steeper skews would indicate payers richening relative to receivers, signaling expectations for higher rates.</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 287px;" /></a></p> <p>Additionally, as Bloomberg&#39;s Tanvir Sandhu notes, another factor that bears need to contend with is <strong>overseas demand for Treasuries.</strong> The cost of currency-hedging for dollar assets has cheapened for Japanese investors, with the three-month basis now at the two-year average. <strong>Japanese life insurers typically buy domestic bonds in March and foreign bonds in the first half of the fiscal year that starts in April.</strong> This may help keep U.S. 10-year yields below 3 percent.</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="961" height="494" alt="" src="" /> </div> </div> </div> Bond Bond Business Donald Trump Economy EuroDollar Eurodollar Finance Futures contract International finance Money Yield Mon, 27 Mar 2017 01:05:00 +0000 Tyler Durden 591778 at Is Bankruptcy For Illinois The Answer? <p><a href=""><em>Authored by Mark Glennon via,</em></a></p> <p><u><strong>Could a formal bankruptcy proceeding for the State of Illinois be the answer to it&rsquo;s fiscal crisis? If you think that&rsquo;s out of the question, as many do, you&rsquo;re wrong.</strong></u> On the contrary, though Congress isn&rsquo;t working on it now, the option is quite viable, though subject to obstacles and open issues. The question is certain to gain growing national attention as a number of states sink further into insolvency, so it&rsquo;s time to get up to speed. I have yet to see a single Illinois politician or reporter raise the question, but plenty of others outside the state are talking about it for Illinois. More on that later.</p> <p><strong><em>This article summarizes the basic issues.</em></strong></p> <p><strong>First, why?</strong> Why would Illinois or any other state consider bankruptcy? Just as for insolvent corporations and municipalities that reorganize, a successful state bankruptcy would provide a fresh start by putting a state on a sustainable path that frees up funding for needed services &mdash; funding that&rsquo;s getting crowded out by legacy debts. It would do that in three primary ways:</p> <ul> <li>Debt that cannot be repaid gets cancelled. In the case of governments, that includes unfunded pension liabilities insofar as there&rsquo;s no realistic hope of paying them. For Illinois, that means part of its $130 billion pension debt could be erased notwithstanding the state constitutional pension protection clause. Unsecured bonds and other debts could also be cut. Illinois will never have a truly balanced budget or be restored to competitiveness unless those cuts are made, as we&rsquo;ve written so often before.</li> <li>Unfavorable contracts and leases can be cancelled in bankruptcy, which include employment contracts and collective bargaining agreements.</li> <li>Bankruptcy provides an orderly, rational process to sort out who gets what. Without it, a free-for-all eventually sets in for any entity that can&rsquo;t meet its obligations. Creditors start suing and racing to courts to get the first judgement liens. Bankruptcy halts that tsunami of litigation and foreclosures.</li> </ul> <p><strong>There are constitutional objections to expanding bankruptcy to states. </strong>Bankruptcy for governments is a matter of Federal legislation &mdash; Chapter 9 the United States Bankruptcy Code. Today, it covers only cities, towns and other municipalities, but not states.</p> <p>Expert legal opinions differ on whether Chapter 9 could simply be expanded by Congress to states, but my sense is that the weight of opinion is that Congress could, and eventually will, do so.</p> <p><strong>Congress unquestionably has the power to make bankruptcy laws &mdash; it&rsquo;s expressly granted in the Constitution.</strong> Further, its power to apply bankruptcy to municipalities was upheld by courts over seventy years ago. Skeptics think putting state finances under control of a Federal bankruptcy court would upset the notion that states, unlike municipalities, are &ldquo;sovereigns.&rdquo;&nbsp; They cite the 10th&nbsp;Amendment, which reserves to states powers not granted to the Federal government, and the 11th Amendment, which prohibits lawsuits in Federal courts against a state by citizens of another state. For those interested in the details, see the article <a href="" target="_blank">linked here</a> by Michael McConnell, a Stanford Law School professor.</p> <p>A leading expert on the other side is David Skeel, a law professor at the University of Pennsylvania. He <a href="" target="_blank">wrote</a> outright that, <strong><em>&ldquo;The constitutionality of bankruptcy-for-states is beyond serious dispute.&rdquo;</em></strong> The key, as he sees it, is that bankruptcy would be entirely voluntary, which should eliminate any concerns about Federal intrusion on state sovereignty.</p> <p>A professorial legal analysis, however, probably wouldn&rsquo;t matter in the end. Courts often bend the rules or make new ones when major emergencies or humanitarian issues arise. Even Professor McConnell, who doesn&rsquo;t like the idea of state bankruptcy, <a href="" target="_blank">agrees</a> with that:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em><strong>If we were facing a genuine fiscal meltdown, which could be solved only through bankruptcy or some equivalent process, and if the use of that process enjoyed the support of Congress, the President, and the affected states, it is not hard to imagine the Court swallowing its theoretical objections.</strong></em></p> </blockquote> <p>Beyond the legal issues, some fear that merely authorizing the option of bankruptcy would drive up state borrowing cost because potential bond buyers would face the added risk of having debt cancelled. That&rsquo;s probably true for states in or near insolvency, but wouldn&rsquo;t it also instill the needed borrowing discipline never to get to that point?&nbsp; Bankruptcy would only be available upon insolvency &mdash; that&rsquo;s already required under the Code &mdash; which means inability to pay what&rsquo;s owed. If you can&rsquo;t pay you won&rsquo;t pay, bankruptcy or no bankruptcy, so it might not make a difference in the long run. In any event, higher borrowing costs would only result during the period from when it was authorized to when a state filed.</p> <p><strong>Remember that most objections to bankruptcy come from the municipal bond industry, so take them with a huge grain of salt. </strong>That industry primarily just wants to protect against losses on bonds already issued. The state shouldn&rsquo;t be concerned about those; only future borrowing costs should matter. Future borrowing costs are lowered, not raised, if a successful bankruptcy reduces legacy debt.</p> <p>And remember that <strong>the muni bond industry is already well aware that Congress could extend bankruptcy to the states.</strong> Rest assured they know all that&rsquo;s being written here, and much more. They are way ahead of the curve. To some extent, they&rsquo;ve already built bankruptcy risk into what they will pay for state bonds. And their efforts to shore up their position to assure they come ahead of taxpayers and other creditor are underway, discussed in our <a href="" target="_blank">earlier article</a>.</p> <p><strong>Public employee unions and their supporters also don&rsquo;t like bankruptcy because of the threat it poses to pension obligations. </strong>That&rsquo;s perhaps rational, <em>if</em> you assume states will in fact eventually find some way to pay scheduled obligations. Not Illinois, in my opinion. All sides need to get on the same page about the plain math. And a bankruptcy court should not be expected to cut pensions if it&rsquo;s indeed feasible to pay them in full. Unions would be wise to recognize that bankruptcy courts so far have typically favored public pensioners over unsecured bondholders. However, time is not on the pensioners&rsquo; side: The muni bond industry is hard at work doing all it can to get first liens and other mechanisms to attain priority over pensions.</p> <p>Unions also worry that collective bargaining agreements could be cancelled. Well, maybe. This highlights the most important general question about how state bankruptcy would work. And the issue applies to municipal bankruptcies as well: <em>Who controls the bankruptcy proceeding?</em></p> <p>The key here is that, on the face of Chapter 9, the bankrupt government &mdash; basically, the incumbent politicians &mdash; have <em>exclusive</em> power to submit the plan of reorganization. <em><u><strong>But it&rsquo;s essential, if a bankruptcy is to be successful, that the same politicians and special interests responsible for bankrupting a government not control the bankruptcy, too. Otherwise, that government is doomed forever and a day.</strong></u></em></p> <p>That problem can be overcome in a number of ways that could be written spacifically into legislation expanding Chapter 9 to states. That is, Chapter 9 would not be extended &lsquo;as is&rsquo; to states; appropriate changes for states certainly would be made.</p> <p><strong>Puerto Rico offers a particularly interesting way to address the problem. </strong>For Puerto Rico, Congress last year passed legislation similar to bankruptcy, known as PROMESA, that included appointment of a qualified ,seven-member oversight board. That board effectively has control over most major financial issues and will have to sign off on any reorganization plan that cuts debts. Opponents of bankruptcy for states are terrified that PROMESA may have set some sort of precedent. A national television ad campaign opposed PROMESA while Congress was considering it for just that reason. We&rsquo;ll be writing separately about PROMESA and whether parts of it could work for Illinois.</p> <p>The problem of who controls the bankruptcy can also be overcome at the state level. Detroit handled the problem in its bankruptcy by having the state appoint an emergency manager empowered to negotiate its reorganization plan. The same concept could work for appointment of a financially competent control board similar to New York City&rsquo;s during its crisis in the 1970s.</p> <p><strong>Various &ldquo;bankruptcy-light&rdquo; proposals have also been floated. </strong>They would have Congress use its bankruptcy power to allow states cut pension debt through a proceeding short of a full bankruptcy. One, proposed by the Manhattan Institute, was the subject of a <em>Chicago Tribune</em> <a href="" target="_blank">guest article </a>last year.</p> <p>But that&rsquo;s about all you&rsquo;ll find from the Illinois press about bankruptcy for states. Outside, however, the discussion has proceeded for some time. In 2011 the <em>New York Times</em> <a href="" target="_blank">reported</a> that policymakers were working behind the scenes to come up with a way to let states declare bankruptcy. They did their work &ldquo;on tiptoe,&rdquo; according to the <em>Times</em>, to avoid alarming the municipal bond community. Supporters included Jeb Bush and Newt Gingrich.</p> <p><strong>Legislation never materialized but the discussion continues. <em>Bloomberg-Business Week</em> <a href="" target="_blank">wrote</a> last year under the headline, &ldquo;The Case for Allowing U.S. States to Declare Bankruptcy.&rdquo; Significantly, William Isaac also <a href="" target="_blank">wrote last year</a> that both Illinois and Chicago <em>should already be in bankruptcy</em>. He&rsquo;s the former Chairman of the FDIC and a nationally recognized insolvency expert.</strong></p> <p><img class="alignright size-medium wp-image-35371" height="206" src="" width="300" /></p> <p><strong>I&rsquo;m not quite to the point of saying bankruptcy for Illinois is unavoidable, but it&rsquo;s getting mighty close.</strong></p> <p>*&nbsp; *&nbsp; *</p> <p><em><strong>For those who dismiss the possible need for bankruptcy, I&rsquo;ll let two points suffice here:</strong></em></p> <ul> <li>The only legal ways to cut the state&rsquo;s $130 billion unfunded pension debt, thanks to the Illinois Supreme Court&rsquo;s interpretation of the Illinois Constitution, are 1) amendment of the state&rsquo;s constitution, or 2) bankruptcy. However, the constitutional amendment might not work because serious objections would remain under the United States Constitution. Further, amending the state constitution then cutting pensions would would raise the question, &ldquo;Why only pensions?&rdquo; Shouldn&rsquo;t other debts, especially unsecured bonds, be cut equally?&nbsp; That would be an entirely fair objection, and the only way to fairly cut those other debts along with pensions is bankruptcy. <em>Nobody</em> has ever proposed a solution for Illinois that truly balances the budget and pays its debt. Pensions already consume about 25% of the state&rsquo;s budget even though they remain badly underfunded, which keeps the pension debt growing rapidly.</li> </ul> <ul> <li>The reason why Illinois can&rsquo;t get a budget solution in place is there&rsquo;s not any real one to be had. The true budget deficit is <em>two to three times the official</em> one that lawmakers can&rsquo;t balance. See the numbers <a href="" target="_blank">linked here.</a> Spending has already been slashed, and tax increases attempting to stabilize the state would be suicide &mdash; they would backfire by accelerating the flight of our tax base, ultimately lowering revenue. Illinois will continue to sink rapidly into further debt unless existing obligations, especially pension debt, get cut.</li> </ul> <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="309" height="166" alt="" src="" /> </div> </div> </div> Bankruptcy Bankruptcy Code Bankruptcy in the United States Bond Borrowing Costs Budget Deficit Business Chapter 9, Title 11, United States Code Congress Creditors Detroit Detroit bankruptcy Economy FDIC federal government Finance Foreclosures Fresh Start Great Recession in the United States Illinois Illinois Supreme Court Insolvency Labor Law Manhattan Institute Meltdown Money New York City New York Times Puerto Rico Social Issues Sovereigns Stanford Law School the University of Pennsylvania Title 11 of the United States Code Tribune UN Court United States bankruptcy court Mon, 27 Mar 2017 00:30:00 +0000 Tyler Durden 591777 at