en Janet Yellen Can't Pop The Biotech Bubble (But The SF Gate Can) <p><a href=""><em>Submitted by Daniel Drew via</em></a>,</p> <p>Biotech has a special place in the heart of the <span style="text-decoration: line-through;">gambler</span> investor. In the modern market where the average investor doesn&#39;t stand a chance, some of them indulge their hope and turn to lottery tickets. If only they can get the next Gilead or the next Amgen, they will become the next wildly successful &quot;maverick&quot; investor. More lottery tickets seem to be flying around than usual lately, floating alongside the recent biotech bubble. Some have doubted if this is a bubble. <strong>Maybe it&#39;s different this time. The SF Gate pondered this exact same question 15 years ago, and the market promptly replied</strong>.</p> <p>On February 28, 2000, the SF Gate published an <a href="" target="_blank">article</a> called &quot;Boom in Biotech Stocks Brings Back Memories of Bubbles Past, Industry observers say it won&#39;t burst like it did in &#39;92.&quot; The SF Gate quoted &quot;experts&quot; like Steve Burrill, who said, &quot;Prices may come down 10 percent, but not 50 percent.&quot; Earlier this month, Burrill was <a href="" target="_blank">sued</a> for embezzling $17 million. However, back in 2000, he was still an expert biotech investor. <strong>He <a href="" target="_blank">noted</a>, &quot;We are still in the first leg of a biotech rally which we expect will last another decade.&quot; Here&#39;s what happened after the SF Gate published the article</strong>.</p> <p><a href="" target="_blank"><img alt="90s Biotech Bubble" border="1" src="" style="width: 600px; height: 264px;" title="90s Biotech Bubble" /></a></p> <p>Now, 15 years later, we have yet another biotech bubble to contend with, and this time, even the Fed Chairman has been unable to successfully <a href="" target="_blank">top tick</a> this market.</p> <p><a href="" target="_blank"><img alt="Yellen Biotech" border="1" src="" style="width: 600px; height: 347px;" title="Yellen Biotech" /></a></p> <p>In the new normal, it&#39;s important to identify investment opportunities with special technical trading patterns. <strong><span style="text-decoration: underline;">One of my favorite patterns that I use to identify winning stocks is called the Six Flags Magic Mountain setup</span></strong>.</p> <p><a href="" target="_blank"><img alt="ANAC" border="1" src="" style="width: 600px; height: 353px;" title="ANAC" /></a></p> <p><img alt="Superman Roller Coaster" border="1" src="" style="width: 600px; height: 706px;" title="Superman Roller Coaster" /></p> <p><strong><span style="text-decoration: underline;">Until the SF Gate increases its biotech coverage, the coast is clear, and the Six Flags Magic Mountain setup will continue to be a sound investment strategy.</span></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="600" height="600" alt="" src="" /> </div> </div> </div> Janet Yellen New Normal Six Flags Wed, 29 Jul 2015 16:34:35 +0000 Tyler Durden 510661 at China Demonstrates "Sea Combat Ability" With Live Fire Drill Video <p>With China laser focused on propping up its manipulated markets, which over the course of the past month have become the laughing stock of "skeptics" everywhere for exposing just how rigged everything truly is (even as CNBC debates whether it is <a href="">better to manipulate stocks via central bank QE or, as China is doing it, via direct buying of stocks</a>), it is worth recalling that over the past year China has seen another, just a troublesome situation developing in the form of numerous territorial conflicts in the East and South China Seas primarily due to geopolitical bragging rights and natural resource claims. </p> <p>As previously reported, China is currently pursuing a rapid program of artificial island construction in the South China Sea, despite being locked in disputes with several countries over its claims to almost the entire area.</p> <p>And yet, even with Beijing focused on halting the market (and economic) carnage in recent weeks, the politburo found a way to remind its neighbors that China has no intention of allowing its domestic financial volatility derail its territorial expansion. It did so as part of a 10 day maritime training exercise <a href="">which started last week</a>, which culminating overnight when China’s navy carried out a "live firing drill" in the South China Sea to improve its maritime combat ability, state media has reported as tensions flare over the disputed waters.</p> <p>According <a href="">to the Guardian</a>, the exercise on Tuesday involved at least 100 naval vessels, dozens of aircraft, missile launch battalions of the Second Artillery Corps and information warfare troops, Xinhua news agency said, citing navy sources. </p> <p>It added that dozens of missiles and torpedoes, as well as thousands of shells and jamming bombs, were fired during the drill, which tested the navy’s air defense and early warning system. It also “<strong>improved its ability to react quickly”, </strong>Xinhua said.</p> <p>China has rapidly expanded its navy in recent years, commissioning its first aircraft carrier in 2012 and adding to its submarine and surface fleets.</p> <p>This is happening after last week Japan slammed Beijing’s bid to reclaim land there as a “coercive attempt” to make sweeping maritime claims that come as Tokyo is expanding the role of its own military. Ironically for the Abe cabinet, which indirectly asserts that its military expansion mandate is in response to threats from potential local foes (i.e., China), its recent resurgence in military ambitions resulted in Abe's cabinet recording its <a href="">first majority <em>disapproval</em> rating of its tenure</a>.</p> <p><img src="" width="500" height="323" /></p> <p>&nbsp;</p> <p>Unlike largely pacifist Japan, in China increasing militarism merely leads to a boost in "<em>rally around the flag</em>" morale, and greater patriotic support for the government. </p> <p>Which is probably also why China was eager to release at least one clip showcasing its latest naval "live fire" military capabilities, as shown on the recording below.</p> <p><iframe src="" width="500" height="281" frameborder="0"></iframe></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="762" height="601" alt="" src="" /> </div> </div> </div> China Japan Volatility Wed, 29 Jul 2015 16:15:12 +0000 Tyler Durden 510659 at MeiN CoiF! <p><a href="" title="HILLARY'S ORDINARY HAIRCUT"><img src="" alt="HILLARY'S ORDINARY HAIRCUT" width="816" height="1024" style="display: block; margin-left: auto; margin-right: auto;" /></a></p> <script src="//"></script> Wed, 29 Jul 2015 16:14:34 +0000 williambanzai7 510658 at Was Kyle Bass Wrong About Japan? <p style="line-height: 20.7999992370605px;"><em style="line-height: 20.7999992370605px;"><span style="color: #800000;">By Chris at&nbsp;<a href=""></a></span></em></p> <p style="line-height: 20.7999992370605px;">Have you ever read John Steinbeck's Of Mice and Men? It's part of the high school curriculum in many western countries. The story is of two lonely and alienated farm labourers in the depression. One, George, who is sharp and quick, and the other, Lennie, who is physically huge and strong but possesses the mind of a child.</p> <p style="line-height: 20.7999992370605px;">Early on in the book the reader gets this sense of impending doom, yet Steinbeck draws the reader in. You find yourself wanting to find out what terrible fate awaits. It's an uncomfortable feeling as you begin to see this chain of events forming and you find yourself wanting to scream out warnings to the characters. As the story unfolds this sense of doom and the despair that goes with it is heightened as the inevitability and consequences of actions taken plays itself out. You realise early on that poor Lennie, the simpleton, is going to get into trouble, possibly horrible trouble, and as a reader there is not a damn thing you can do about it.</p> <p style="line-height: 20.7999992370605px;">When I think about the Bank of Japan, I think about Lennie. Possibly well intentioned but totally out of depth with little idea of the immense problems ahead which will ultimately cause untold hardship.</p> <p style="line-height: 20.7999992370605px;">Japan, as we know, have unimaginably huge debt. All ¥ 1,259,476,310,706,736 of it. In fact, this figure is already outdated since the debt is rising every second so let's simply agree it's large. So large that if it was human it would make Pavarotti look positively anorexic.</p> <p style="line-height: 20.7999992370605px;"><img src="" alt="Japan Debt" width="450" height="245" style="display: block; margin-left: auto; margin-right: auto;" /></p> <p style="line-height: 20.7999992370605px;">Desperate times call for desperate measures. Enter Shinzo Abe. This guy was the first politician I know of that actually campaigned and won on a mandate to destroy a country's currency. This is like Novak Djokovic entering a grand slam tournament, promising to play wearing a straight jacket and blindfolded, and still receiving the highest odds at the bookies. It's completely nuts but it happened.</p> <p style="line-height: 20.7999992370605px;">The standard line is that devaluing the yen is going to halt deflation, spur exports and bring about economic growth. This is the story told. It's a ridiculous concept parroted by Paul Krugman and the likes whose wet dream involves us all fighting imaginary aliens in order to become wealthier. No really, I'm not joking.</p> <p style="line-height: 20.7999992370605px;">Unpayable debts won't be paid. This seems obvious and Japan has unpayable debts... sort off - a point I'll come to in a minute.</p> <p style="line-height: 20.7999992370605px;">Kyle Bass, one of the most successful and intelligent investors on this ball of dirt today, has made no secret of his firm's bet against Japanese government bonds. The reasons for this are mathematical and easy to understand. Tax revenues, which are falling due to demographics, cannot keep up with existing, ever rising debts. With a government spending 1.4x what it takes in via taxes the budget deficit can only be made up with more debt. Hardly sustainable and a solid case for shorting JGBs.</p> <p style="line-height: 20.7999992370605px;">Until recently I, too, would have wished to do what Kyle has been doing, which is buying credit default swaps. To participate in this requires a balance sheet well north of my own and as such these options are not available to me. As I review and rethink markets and opportunities - a never ending process for me - I've come to thinking that the short JGB premise may well be wrong.</p> <p style="line-height: 20.7999992370605px;">Consider what we do know:</p> <ol style="line-height: 20.7999992370605px;"> <li>We know that Japan's&nbsp;debts are unsustainable and we also know that they are demographically - how to say this kindly - screwed.</li> <li>We also know that Japanese pension funds have been the pillar that has held up the JGB market as they are the largest holders of Japanese government debt.</li> <li>We further know that these same pension funds have turned from net buyers to net sellers, not coincidentally due to the aforementioned demographic structure.</li> <li>We know that their debts are denominated in yen, the currency which the BOJ has the ability to print. This is an important point as I mentioned last week when discussing<a href="" target="_blank">how Greece is different</a>.</li> </ol> <p style="line-height: 20.7999992370605px;">Now, when your largest net buyer turns into your largest net seller the market reaction would logically be a rise in risk premiums, measured here in interest rates. This, given the debt load, would crush the bond market. Not something that the government of Japan would like. Humans will always act in their own self interest and the political class in Japan is no different. In order to keep their jobs they need to hold the bond market together. </p> <p style="line-height: 20.7999992370605px;">What if the story about killing deflation, creating a stronger export market, thus increasing corporate profits, is just that,&nbsp;a story, and the real reason is less altruistic? What if, backed into a corner with no way out, the Abe government realised how desperately precarious their bond market is, and not wishing to preside over a collapse further realised that the ONLY way forward is to print yen in order to buy the bonds that are needed to be continuously issued, not to mention those bonds now being sold by the pension funds who've turned from net buyers to net sellers? </p> <p style="line-height: 20.7999992370605px;">Remember, unlike Greece, Japan can do that. As I mentioned a minute ago, Japan has unpayable debts. Sort off. I say sort of because the the debts are denominated in yen, a currency they can print as much as they like of, and as such Japans debts can be paid at par.&nbsp;The value of the currency under those conditions is what matters here but they can actually pay the bonds at par. </p> <p style="line-height: 20.7999992370605px;">This is the real reason the BOJ is weakening the yen. Not in order to "help" Japanese companies but in order to save their own jobs. They HAVE TO print yen to buy Japanese government bonds. It's that simple. That in itself weakens the yen but it's a result, not a cause. Abenomics is merely a smokescreen to sell the concept to the world.</p> <p style="line-height: 20.7999992370605px;"><span style="font-size: 16pt;"><strong>What to Do?</strong></span></p> <p style="line-height: 20.7999992370605px;">Shorting the bond market amounts to standing in front of the mighty BOJ who can print as much yen as is necessary. Last&nbsp;<a href="">week I discussed how the Asian crisis took hold</a>. In particular, the key takeaway is that countries with foreign denominated debt are in a very different and more precarious position to those who issue the currency their debts are denominated in. </p> <p style="line-height: 20.7999992370605px;">Shorting the yen therefore seems a cinch. Japan can never pay their debts and it's pretty much a given that as they keep issuing and buying bonds the yen will continue to decline until it goes away. </p> <p style="line-height: 20.7999992370605px;">But Chris, the yen won't disappear, you might say. </p> <p style="line-height: 20.7999992370605px;">Why not? They'll print it until they have to go and issue a new currency and at this point their debts have been wiped out. It would take a miraculous recovery of Japan's economy to pay their debts. As soon as the market finally realises this the depreciation we've seen so far which is mild will turn into a collapse. There is still time therefore to position ahead of the inevitable. </p> <p style="line-height: 20.7999992370605px;">The only argument I can come up with against this scenario is if Abe decides to cut spending, let interest rates rise and stand in front of the tsunami of debt they've built up. He'd be the first politician in Japan's history to commit political seppuku. </p> <p style="line-height: 20.7999992370605px;">Maybe I'm missing something and am always open to that "something". I haven't found it yet and until then I'm betting "Lennie" is going to kill&nbsp;something. I'm betting the BOJ kills&nbsp;the yen. </p> <p style="line-height: 20.7999992370605px;">- Chris</p> <p style="line-height: 20.7999992370605px;">&nbsp;</p> <p style="line-height: 20.7999992370605px;"><em>"Trouble with mice is you always kill em."</em>&nbsp;- John Steinbeck, Of Mice and Men</p> Abenomics Bank of Japan Bond Budget Deficit Credit Default Swaps default Demographics Greece Japan Krugman Kyle Bass Kyle Bass Paul Krugman recovery Yen Wed, 29 Jul 2015 16:12:10 +0000 Capitalist Exploits 510657 at Banks Squirm As Congress Moves To Cut The 6% Dividend Paid To Them By The Fed <p><a href=""><em>Submitted by Mike Krieger via Liberty Blitzkrieg blog</em></a>,</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong><em>On December 23 of this year, the Federal Reserve will be 99 years old.&nbsp; And throughout that 99 years, regardless of boom, bust, recession or Great Depression, the biggest Wall Street banks have been enjoying a 6 percent, risk-free return on the capital they hold at the Fed in the form of dividends.</em></strong></p> <p>&nbsp;</p> <p><strong><em>Have you looked at your checking or money market bank statement lately from JPMorgan Chase or Citibank? How about the statement showing the interest you&rsquo;re earning on your mortgage escrow account with the big banks? While the country suffers through the lingering effects of the Great Recession caused by the biggest Wall Street banks, the public typically receives less than 1 percent on their deposits at the big banks, while the government&nbsp;has legislated a permanent, risk-free 6 percent guarantee&nbsp;to the Wall Street banks for their capital on deposit at the Fed.&nbsp; Now that&rsquo;s an entitlement program that needs to die!</em></strong></p> <p>&nbsp;</p> <p><strong><em>This corporate welfare program gets even better: if the shares of stock were acquired prior to March 28, 1942,&nbsp;the 6 percent risk-free dividend is tax exempt&nbsp;and the bank doesn&rsquo;t have to pay corporate taxes on it.</em></strong></p> <p>&nbsp;</p> <p>&ndash; From the excellent 2012 <em>Wall Street on Parade</em> article:&nbsp;<a href="" rel="bookmark" title="Permalink to Kill This Entitlement Program: The 6% Risk-Free Dividend the Fed Has Been Paying Wall Street Banks For Almost a Century">Kill This Entitlement Program: The 6% Risk-Free Dividend the Fed Has Been Paying Wall Street Banks For Almost a Century</a></p> </blockquote> <p>Did you know that the Federal Reserve pays an annual 6% dividend to its shareholders, i.e., the member banks of the cartel? Must be nice, considering savers who had nothing to do with cratering the world economy, and failed to receive a taxpayer funded bailout, can barely earn 0.5% on their money. It&rsquo;s also quite bizarre. How many other &ldquo;public institutions&rdquo; have private shareholders to whom&nbsp;they pay 6% risk free dividends?</p> <p>None, which once again highlights the point that the Federal Reserve is NOT a public institution working on behalf of the citizenry, but is rather <a href="">a banking cartel designed to enriched and protect its member banks</a> (as we saw on clear display in 2008).</p> <p>It appears that some members of Congress are now targeting the estimated $17 billion per year paid out by the Fed to its member banks via the highway-funding&nbsp;bill. The <a href=""><em>Hill</em> reports</a> that:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>The banking industry is scrambling to kill a provision in the Senate highway-funding bill that would reap billions of dollars in revenue by cutting a century-old system that has reaped annual awards for banks.</em></p> <p>&nbsp;</p> <p><em>Industry lobbyists say they were blindsided by the inclusion of the provision, which would help policymakers cover the bill&rsquo;s cost by cutting the regular dividend the Federal Reserve pays to its member banks.</em></p> <p>&nbsp;</p> <p><em>One lobbyist went so far as to reread the Federal Reserve Act of 1913 after getting wind of the proposal to determine what was at stake.</em></p> <p>&nbsp;</p> <p><em>In a Congress where lawmakers are always hunting for politically palatable ways to raise revenue or cut costs to cover the expenses of additional legislation, the Fed provision was a novel, and rich, one. <strong>The proposal is estimated to raise $17 billion over the next decade, and is by far the richest &ldquo;pay for&rdquo; included in the bill.</strong></em></p> <p>&nbsp;</p> <p><em>Lobbyists said they were not aware of any previous time when lawmakers had attached the language to a piece of legislation, which would scrap a perk banks have come to expect for over a century.</em></p> <p>&nbsp;</p> <p><strong><em>When banks join the Federal Reserve system, they are required to buy stock in the central bank equal to 6 percent of their assets. However, that stock does not gain value and cannot be traded or sold, so to entice banks to participate, the Fed pays out a 6 percent dividend payment.</em></strong></p> <p>&nbsp;</p> <p><em><strong>The Senate proposal says it would slash that &ldquo;overly generous&rdquo; payout to 1.5 percent for all banks with more than $1 billion in assets.</strong> While the summary language outlining the proposal said that change would only impact &ldquo;large banks,&rdquo; industry advocates argued that banks most would identify as small community shops could easily have assets in excess of that amount.</em></p> </blockquote> <p>While I&rsquo;m not convinced that this proposal will actually go through, I applaud the members of Congress who included it nonetheless. At a minimum, it will expose more people to how the banking system actually works, and get this 6% dividend in the public consciousness.</p> <p>After all, #banklivesmatter</p> <p>&nbsp;</p> <p><iframe allowfullscreen="" frameborder="0" height="315" src="" width="560"></iframe></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="433" height="511" alt="" src="" /> </div> </div> </div> Citibank Federal Reserve Great Depression JPMorgan Chase None Recession Wed, 29 Jul 2015 15:52:16 +0000 Tyler Durden 510656 at Hillary Does It Again: What "Everyday American" Would Pay $600 For This Haircut? <p>There are plenty of &#39;everyday Americans&#39; out there with perfectly good haircuts, styled by perfectly good hairdressers, in perfectly good Main Street salons... so why is self-proclaimed populist person-of-the-everyday-American <strong>Hillary Clinton getting a $600 haircut at Bergdorf Goodman&#39;s Fifth Avenue store in NYC</strong>?</p> <p>&nbsp;</p> <p><a href=""><em>As PageSix reports</em></a>,</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>Hillary Clinton put part of Bergdorf Goodman on lockdown on Friday to get a $600 haircut at the swanky John Barrett Salon.</strong></p> <p>&nbsp;</p> <p>Clinton, with a <strong>huge entourage in tow, </strong>was spotted being ushered through a side entrance of the Fifth Avenue store on Friday.</p> <p>&nbsp;</p> <p>A source said, <strong><em>&ldquo;Staff closed off one side of Bergdorf&rsquo;s so Hillary could come in privately to get her hair done. An elevator bank was shut down so she could ride up alone, and then she was styled in a private area of the salon. Other customers didn&rsquo;t get a glimpse. Hillary was later seen with a new feathered hairdo.&rdquo;</em></strong></p> <p>&nbsp;</p> <p>Clinton regularly sees salon owner John Barrett, who charges regular mortals $600 for a cut and blow-dry. Hair color can cost an extra $600.</p> <p>&nbsp;</p> <p>And <strong>let&rsquo;s not forget that her husband, Bill Clinton, was famously caught up in a 1993 controversy known as &ldquo;Hairgate&rdquo; when he got a $200 haircut on Air Force One as it was idling for an hour at LAX, shutting down two runways and diverting numerous flights.</strong></p> <p>&nbsp;</p> <p><a href=""><u><strong><em>Read more here...</em></strong></u></a></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>Maybe she should ask for her money back?</p> <p><a href=""><img height="390" src="" width="480" /></a></p> <p>&nbsp;</p> <p>The &quot;Something About Mary&quot; look?</p> <p><a href=""><img height="388" src="" width="480" /></a></p> <p>&nbsp;</p> <p>Still could be worse...</p> <p><a href=""><img alt="" src="" style="width: 480px; height: 516px;" /></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="240" height="195" alt="" src="" /> </div> </div> </div> Main Street Wed, 29 Jul 2015 15:26:26 +0000 Tyler Durden 510655 at This Is The Biggest Paradox Facing The Fed Ahead Of Its Rate Hike Decision <p>Ahead of today's FOMC announcement, which comes without a press conference and has thus been dismissed as a possible start to a Fed hiking cycle, the Fed has a big problem. It's not jobs, which are running at a pace that many suggest is strong enough to sustain at least a 25 bps hike to nearly a decade of ZIRP, assuming of course one completely ignores the "quality" component as virtually all recent job growth has been in the low-paying job category especially waiters and bartenders...</p> <p><img src="" width="600" height="491" style="border: 0px; max-width: 100%; height: auto; color: #000000; font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.3333330154419px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 17.3333320617676px; orphans: auto; text-align: start; text-indent: 0px; text-transform: none; white-space: normal; widows: 1; word-spacing: 0px; background-color: #ffffff;" /></p> <p>&nbsp;</p> <p>... but inflation, and specifically the bifurcation between core inflation and headline inflation. </p> <p>Here is the paradox as succinctly summarized by Deutsche Bank, which notes that <strong>the current -29% year-over-year drop in the CRB index implies YoY headline CPI inflation falling from 0.1% to -0.9% </strong>over the next couple of months, or just in time for the September or December FOMC meetings both proposed as the "lift off" date. <strong>This would be the largest year-over-year drop since September 2009 (-1.3%) and one of the lowest prints in modern history.</strong> </p> <p>However <strong>core YoY CPI inflation is likely to edge above 2% in the months ahead </strong>which complicates matters. </p> <p>In other words, Fed will have to pound the table on the commodity crunch being a transitory event, just like every other "<em>transitory event"</em> that forced the Fed to postpone hiking rates since 2011. The problem, however, is that unlike "snow in the winter", plunging oil and commodity prices are proving to be anything but "transitory", and are mostly a function of China's economy whose ongoing decline is also anything but a one-time event. In fact, if anything, <em>China's contraction is accelerating</em>, with the recent bursting of its stock market bubble only likely to add to its headaches and to commodity price downside as Chinese <a href="">Commodity Financing Deals </a>are unwound. </p> <p>Which brings us to the WSJ's Fed mouthpiece, Jon Hilsenrath, who largely summarized the above in his preview of what the Fed will today as follows:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The Federal Reserve has framed its decision about raising interest rates around the progress it sees in achieving its dual mandate goals of maximum employment and 2% inflation. Officials could emerge from their policy meeting today with a split decision – <strong>progress on the employment side of their mandate and continued uncertainty on the inflation side</strong>.</p> <p>&nbsp;</p> <p>Fed Chairwoman Janet Yellen said in testimony to Congress earlier this month that the economy is “demonstrably closer” to reaching the Fed’s full employment goal. Since the Fed last met in June, the jobless rate has notched down further from 5.5% to 5.3%, its lowest level since April 2008, hiring appears to have returned to a path of steady gains in excess of 200,000 per month after stumbling in March and wages show tentative signs of moving higher. Fed officials will need to acknowledge these advances in their post-meeting policy statement, a sign that a rate increase is approaching.</p> <p>&nbsp;</p> <p><strong>Still it is hard to see how officials derive great confidence that inflation is surely returning to their 2% goal. Oil prices and commodities more broadly have resumed their march down and the dollar its movement higher, factors that have weighed on inflation all year</strong>. The Fed has described these developments as transitory before, but slow growth in China could give them some pause about that conclusion. <strong>Broad measures of inflation show little sign of breaking out of the sub-2% trend which has been in place for more than three years</strong>. Meantime, inflation compensation in bond markets has notched lower after stabilizing earlier this year. And though wages show signs of picking up, a breakout isn’t yet obvious and the links between wages and broader inflation are tentative.</p> </blockquote> <p>Hilsenrath's conclusion: "It potentially sets up the Fed and markets for a cliffhanger policy meeting in September. The jobs part of their mandate – so important to Ms. Yellen – is signaling a rate increase is due. But the inflation part of the mandate signals continued patience. Officials won’t want to lock themselves in until they see more data on the economy’s performance."</p> <p>Which is probably another way of saying what Lloyd Blankfein just stated in a Bloomberg TV interview, namely that the "<strong>first rate hike will be jarring</strong>."</p> <p>And while the above covers the Fed's thinking on input drivers, but what about the market's "reaction function" manifesting in the strength of the USD? Here are some thoughts from UBS on the topic:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The dollar's strong foreign exchange value remains a challenge for forecasters and investors. Over the year ended in June, the Federal Reserve's broad trade-weighted dollar index rose 12.5%. (The major currencies component was up 17.3% and the other important trading partners component rose 9.0%.) How much difference does a strong dollar make for Federal Reserve monetary policy and the US economy? Our answer is that a strong dollar means growth and inflation are lower than&nbsp; they would be otherwise but probably not by enough to preclude the Fed funds rate tightening that we still see beginning before year-end. </p> <p>&nbsp;</p> <p>One way to assess what a strong dollar means for Fed policy and the economy is to consider some recent analyses provided by Fed economists for Fed policymakers. One such analysis comes from Federal Reserve Bank of New York economists Mary Amiti and Tyler Bodine-Smith in a July 17 Liberty Street Economics article titled "The Effect of the Strong Dollar on US Growth". They concluded that sustained 10% dollar appreciation after a year reduces US real net exports enough to subtract 50 basis points from US real GDP growth, with another 20 basis points coming after the second year. (See Figure 1.) These effects are more related to lower exports, which are more sensitive to dollar movements than imports. </p> <p>&nbsp;</p> <p>If the strong dollar makes near-term real GDP growth 50 basis points lower than it would be otherwise, would that be enough to preclude a Fed funds rate hike before year-end? That might be the case if the Fed only considered actual versus its expected real GDP growth. For instance, in the FOMC's mid-year projections of Q4/Q4 real GDP growth, the members' central tendency forecast was 1.8% to 2.0% for 2015 and 2.4% to 2.7% for 2016. Heading into 2015, Q4/Q4 real GDP growth at the end of 2014 was 2.4%. A 50-basis-point reduction in growth due to a strong dollar would still leave growth at the 1.9% mid-point of the 2015 central tendency forecast if growth momentum outside of the trade sector is maintained in 2015. Clearly, given the uncertainties about how much a strong dollar reduces growth, it is a close call whether the strong dollar over the past year will enable the Fed to achieve its growth targets. </p> <p>&nbsp;</p> <p><strong>However, the Fed is more likely to be influenced by the unemployment rate and core inflation than real GDP growth. </strong>Frequent and uncertain revisions to real GDP growth are a practical reason for the Fed not to hitch its Fed funds rate and balance sheet policies to published real GDP growth. While the unemployment rate and core inflation inevitably are imperfect measures, at least they are not subject to the types of sometimes large revisions associated with real GDP growth data.</p> </blockquote> <p>So maybe the resumed strength in the dollar won't be enough to push the Fed away from the hike button, but it surely will be enough to crush corporate sales and EPS, as has been the case for the past two quarters and will be for the coming quarters. Recall that the biggest <a href="">complaint <em><strong>by far </strong></em>during Q2 the earnings season by CFOs </a>has been the strength in tthe USD. How long until the CEOs of US multinationals decide to all dial the Fed and make it clear that the ongoing surge in the DXY will simply not do? </p> <p>What does the Fed likely do? Nothing today, almost certainly nothing in September, and a small rate hike in December just to show it can is possible. The question then is will this send the dollar surging even more, and lead to an even more acute crash in corporate profitability, one which not even buybacks and non-GAAP addbacks can mask the underlying corporate recession, and more importantly, just how much more credibility can the Fed afford to lose as a result of the recent dramatic flattening in the yield curve, before we finally get the clearest recession signal of all, a curve inversion, at which point the next step after the rate hike becomes inevitable: even more QE?</p> <p><a href=""><img src="" width="600" height="298" /></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="962" height="477" alt="" src="" /> </div> </div> </div> Bank of New York Bond China CPI CRB CRB Index Deutsche Bank Federal Reserve Federal Reserve Bank Federal Reserve Bank of New York Janet Yellen Lloyd Blankfein Monetary Policy Recession Testimony Unemployment Yield Curve Wed, 29 Jul 2015 15:00:32 +0000 Tyler Durden 510654 at VIX Vanquished To 12 Handle Ahead Of FOMC <p>Climbing the <a href="">wall of complacency...</a></p> <p>As we noted yesterday...</p> <blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">VIX 12 handle now looking almost certain</p> <p>&mdash; zerohedge (@zerohedge) <a href="">July 28, 2015</a></p></blockquote> <script src="//"></script><p>&nbsp;</p> <p>And sure enough, <em><span style="text-decoration: underline;"><strong>VIX roundtrips The Matterhorn Pattern</strong></span></em></p> <p><a href=""><img height="402" src="" width="600" /></a></p> <p>&nbsp;</p> <p>As Grexit fears have disappeared...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 327px;" /></a></p> <p><em><span style="text-decoration: underline;"><strong>&nbsp;</strong></span></em></p> <p>&nbsp;</p> <p><em>Charts: Bloomberg</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="1494" height="1000" alt="" src="" /> </div> </div> </div> Wed, 29 Jul 2015 14:41:57 +0000 Tyler Durden 510653 at Crude Surges After Surprise Inventory Draw, Biggest Production Decline Since 2013 <p>Total US crude <strong>production slumped over 1.5% last week - the biggest decline since October 2013</strong>.</p> <p><a href=""><img height="298" src="" width="600" /></a></p> <p>&nbsp;</p> <p>Add to that a <strong>considerable inventory draw of over 4.2mm barrels </strong>(against expectations of a build)...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 313px;" /></a></p> <p>&nbsp;</p> <p>and crude prices are surging.</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 403px;" /></a></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Charts: Bloomberg</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="1494" height="1003" alt="" src="" /> </div> </div> </div> Crude Wed, 29 Jul 2015 14:37:50 +0000 Tyler Durden 510652 at Russell Napier: What Happens When Markets Realize China Is A Forced Seller Of Treasuries <p>One week ago, our post "<a href="">China's Record Dumping Of US Treasuries Leaves Goldman Speechless</a>" which revealed an unexpected plunge in China's foreign exchange reserves or, said otherwise, a historic sale of US Treasurys held by official and unofficial Chinese accounts, was met with unprecedented public interest, having been read over 400,000 times (a record for coverage of a nuanced, technical subject) and even forced Goldman to follow up admitting its "estimation" of Chinese reserve outflows may have been <em>too high.</em></p> <p>By then the cat was out of the bag, and now what is surely the biggest Chinese wildcard, not what happens to itts manipulated stock market, just how much more capital outflows will Beijing suffer before it is forced to finally end the Renminbi's peg with the dollar, is finally being appreciated by the general public.</p> <p>Which leads us to today's most recent article by ERI-C's Russell Napier titled "<a href="">The Great Reset - Act II</a>", in which the former CLSA strategist, asks a simple question: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"<strong>how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. </strong>Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. <strong>Would even Treasury bulls stand in the way of such a large and predictable liquidation</strong>? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM."</p> </blockquote> <p><em>For his answer, read on. Courtesy of The <a href="">Electronic Research Interchange</a></em></p> <p><em>* * * <br /></em></p> <p><strong>The Great Reset - Act II </strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Do you love me, or are you just extending goodwill?<br />Do you need me half as bad as you say, or are you just feeling guilt?<br />I’ve been burned before and I know the score<br />So you won’t hear me complain<br />Will I be able to count on you<br />Or is your love in vain?</p> </blockquote> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - Bob Dylan – Is Your Love in Vain? (1978)</p> <p>In May 2011 this analyst changed his mind about the impact of the monetary love being spread around the world by developed world central bankers. He stopped forecasting higher inflation and instead foresaw the return of deflation.</p> <p>Fresh from the battering in the deflationary storm of 2007-2009 investors did not want to hear that such monetary love would be in vain. They counted on central bankers then, just as they are counting on them now, to restore a level of nominal GDP growth that can prevent the severe burning of another painful deleveraging through default.</p> <p>Central bankers, the argument goes, need to boost financial asset prices to achieve higher nominal growth and that higher growth, when finally achieved, will be good for asset prices anyway. So while their love may be for higher nominal GDP growth, the goodwill this spreads to asset prices should be priced in if it succeeds in creating inflation. However, a list of some prices that have been falling from last year --- gold, steel, iron ore, copper, crude, coffee, cocoa, live cattle, hogs, orange juice, wheat, sugar, cotton, natural gas, silver, platinum, palladium, aluminium and tin --- must raise questions as to whether there is reflation or whether this monetary love is in vain.</p> <p>This analyst is told that such major decline in prices across a broad spectrum of commodities and products represents a supply shock and not the failure of central banks to spur demand! Such supply side synchronicity is highly unlikely. This is nothing less than a failure to reflate and it is due to the growing crisis in Emerging Markets (EM).</p> <p>It was in a report called The Great Reset, in May 2011, that this analyst suggested the world was more likely to move towards deflation rather than higher inflation. There were many reasons for this change of mind, but key to it was a realisation that EM external surpluses had peaked.</p> <p>That sounds like a rather esoteric reason to change from an inflationist to deflationist stance, and it was not one that was of any concern to investors. However, the end of a long period (1998-2011) when external surpluses, combined with exchange-rate intervention policies, forced EM to create more domestic high-powered money, while simultaneously depressing the yields on US Treasuries, seemed both important and deflationary. Crucially, The Great Reset predicted this decline in EM external surpluses would produce tighter monetary policy in both EM and the developed world despite the efforts of central bankers to prevent it.</p> <p>This was not a dynamic that would inflate away the world’s record high debt-to-GDP ratio! This was a monetary mechanism, in the shape of EM exchange-rate targets, that would counteract the expansionary monetary policy of the developed world’s central bankers and thus would be bad news for global growth assets. This focus on the peaking in EM external surpluses and the impact on growth assets proved to be both a good and a bad forecast and remains essential to understanding the failure of monetary love to boost global nominal GDP growth.</p> <p>As it happened, most EM foreign exchange reserves peaked in 2011, as did EM equities, EM currencies, commodities and the price of gold. Inflation rates in the developed world also peaked in 2011, with the US , the UK and the Euro area all since reporting deflation. So far so good for the May 2011 forecast with even European equities experiencing a slump in 2011 and not surpassing their early 2011 level until the end of 2014.</p> <p>Crucially though, The Great Reset was very wrong about the US. <strong>US equities simply ignored the travails of Europe, EM and commodity markets and sailed ever higher</strong>. Ask any fund manager why developed-world equities ignored the deflationary trends since 2011 and they will point to the monetary love spread by The Federal Reserve, The Bank of Japan, The Bank of England and The European Central Bank. <strong>But fixating on the expansion of these central bank balance sheets has only distracted investors from the monetary tightening that started in 2011 and is now accelerating in EM as forecast in The Great Reset.</strong></p> <p>Most investors still believe that we live in a fiat currency world. They believe central bankers can create as much money as they believe to be necessary. Such truths are on the front page of every newspaper, but they may contain just as much truth as the headlines of their tabloid cousins. A belief in this ability to create money is the biggest mistake in analysis ever identified by this analyst.</p> <p>The first reality it ignores is that money, the stuff that buys things and assets, is created by an expansion of commercial bank, and not central bank, balance sheets. The massively expanded central bank balance sheets have not lifted the growth in broad money in the developed world above tepid levels. <strong>Until that happens, developed world monetary policy must be regarded as tight and not easy.</strong></p> <p>The second reality that a belief in a fiat currency world refuses to recognise is the fact that the growth-engine of the world, the EMs, do not operate independent monetary policies. EMs have chosen to target the value of their exchange rates , primarily to the USD and the EUR, and thus abandon their ability to create money when they chose to. <strong>The scale of their money creation is dictated to them by the size of their external surplus</strong>. This is important to grasp when even a cursory look at changes in foreign-exchange reserves reveals that most EMs are constantly meddling to affect exchange rate targets and thus, abandoning any control they held over their own domestic money supply.</p> <p>This is why The Solid Ground considered the end of the rise in EM foreign exchange reserves to be so key in shifting the outlook towards deflation and not inflation. The lack of reserve accumulation would either force deflation upon EMs or force them to devalue. <strong>The impact of either adjustment, whether through lower growth or lowered USD selling prices, would be deflationary and not inflationary.</strong></p> <p>Given the huge role China has played since its 1994 devaluation in spurring global growth, the adjustment process in China could be particularly detrimental to the stability of global prices. <strong>Events of the past few weeks are finally focusing investors’ attention on the lack of monetary control in China and thus on the lack of control generally</strong>. Local owners of RMB denominated capital have been voting with their feet since 2012 and <strong>capital has been pouring out of the country. </strong>Now even foreigners are realizing that an external deficit, and a fixed exchange rate, do not lead to more money, reflation or any form of control over asset prices by the authorities.</p> <p>The Chinese authorities have attempted to shore up their external accounts by getting their commercial banks to borrow USD to fund RMB activities, ramping the domestic stock market, suggesting the opening of the domestic debt market to foreigners, lobbying for RMB inclusion in the SDR and hoping for inclusion in the MSCI equity indices<strong>. At this stage they are failing and the continued contraction in China’s foreign exchange reserves is witness to a continued external deficit.</strong></p> <p>The Great Reset , which began with China’s first reported foreign reserve decline in 2012, is now accelerating. The ultimate destination for China is either to continue to support the exchange rate and accept ever lower growth, probably accompanied by deflation, or to devalue. Either option will further exacerbate global deflationary pressures and place huge pressure on other EMs that compete with China and are linked to the USD.</p> <p><strong>So could the liquidation of US Treasuries by EMs, in an effort to defend their exchange rates, also push up Treasury yields?</strong> This was the forecast in the May 2011 paper and it was very wrong. It was wrong because the Fed was an aggressive buyer of Treasuries, but the Fed is not currently in the marketplace.</p> <p>Today the yield on Treasuries is set by the actions of foreign central bank activity and the global private sector. The Solid Ground has long wondered <strong>how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate</strong>. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM.</p> <p>PBOC liquidation of Treasuries to support the RMB exchange rate would not be prolonged. <strong>Both the US and China would recognize the dreadful dynamics inherent in such a policy if it did indeed push Treasury yields higher</strong>. Very soon China would be given the permission to <strong>devalue its exchange rate and the nature of the pain to be endured by the global system would be of a somewhat lesser and somewhat different nature. It would, however, still be a deflationary adjustment</strong>.</p> <p>One day we will tell those much younger than ourselves that once upon a time there was a large economy that ran a surplus on both its current account and on its capital account for more than twenty consecutive years. <strong>We will tell them, when they’re sitting comfortably, that because it went on for twenty years everyone assumed it would go on forever, despite the fact that such a thing had never ever been seen before</strong>. Then one day it ended. And the world thought that this would pass or, if it didn’t pass, they thought that it was not of great import.</p> <p>Only years later did the world realise that the end of unsustainable double surpluses in China triggered what became known as The Great Reset. It all began with the sudden realisation that developed-world central bankers had no magic wand with which to reflate the world if China was forced to deflate or devalue. The first sign that the monetary love of developed world central bankers would ultimately be in vain was the collapse of commodity prices in 2015. What came next did not involve the words ‘happily’ ‘ ever’ and ‘after’.</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="96" height="96" alt="" src="" /> </div> </div> </div> Bank of England Bank of Japan Central Banks China Copper Crude default European Central Bank Federal Reserve fixed headlines Japan Monetary Policy Money Supply Natural Gas Newspaper Nominal GDP Reality Wed, 29 Jul 2015 14:30:57 +0000 Tyler Durden 510643 at