While The IMF recognizes the gaping chasm between collapsing global growth expectations and market exuberance, they remain confident that US growth will save the world. This, Marc Faber explains to a wise Bloomberg TV panel, is why stocks around the world (and now in the US) are starting to weaken, "the recognition that global growth is not accelerating," as the narrative would like us all to believe, "but is slowing." Central Bank money-printing has enabled deficit-heavy fiscal policy and, Faber simplifies, "the larger the government, the less growth there will be from a less dynamic economy." Policy-makers have only one tool - money-printing, and QE99 is coming.
We have been discussing the widespread belief in "the narrative of central bank omnipotence" for a number of months (here and here most recently) as we noted "there are no more skeptics. To update Milton Friedman’s famous quote, we are all Bernankians now." So when Saxobank's CIO and Chief Economist Steen Jakobsen warns that "the mood has changed," and feedback from conference calls and speaking engagements tells him, there is a growing belief that the 'narrative of the central banks' is failing, we sit up and listen.
Yesterday, in a periodic repeat of what he says every 6 or so months, Jamie Dimon - devoid of other things to worry about - warned once again about the dangers hidden within the shadow banking system (the last time he warned about the exact same thing was in April of this year). The throat cancer patient and JPM CEO was speaking at the Institute of International Finance membership meeting in Washington, D.C., and delivered a mostly upbeat message: in fact when he said that the industry was "very close to resolving too big to fail" we couldn't help but wonder if JPM would spin off Chase or Bear Stearns first. However, when he was asked what keeps him up at night, he said non-bank lending poses a danger "because no one is paying attention to it." He said the system is "huge" and "growing." Dimon is right that the problem is huge and growing: according to the IMF which just two days earlier released an exhaustive report on the topic, shadow banking (which does not include the $600 trillion in notional mostly interest rate swap derivatives) amounts to over $70 trillion globally.
Did the sharp sell-off in crude oil trigger the meltdown in stocks? While there are plenty of potential reasons for the stock market to drop - stretched valuations, the slowdown in Germany, Japan and China, etc. - it is more than possible that the recent sell-off in crude oil might have served as a trigger. Crucially, as we explained in detail here and here, if the manipulation of prices of crude oil lower by the Saudis is indeed a US-friendly anti-Russian move, how much equity market pain (and thus created wealth) is America willing to take for the use of "The Oil Weapon"?
Just months after unofficially entering the currency wars, China has torn another page from the 'causes of the great depression' playbook. As Reuters reports, for the first time in almost a decade, China - the world's top coal importer - will levy import tariffs on the commodity crushing Australian (the biggest shipper of coal to China) dreams of a commodity-based renaissance. "China is clearly moving to protect its local miners," explained one analyst, which is key since so much of the credit market is predicated on these mal-invested entities - as the China National Coal Association, urged Beijing to act swiftly to support the besieged sector, where 70% of the miners were making losses and more than half owed wages. Crucially, Indonesia - the second-biggest shipper of the fuel to China - will be exempt from the tariffs, which one trader exclaimed, means "It is game over for Australian coal."
At the moment, the Ebola virus is ravaging three countries - Liberia, Guinea and Sierra Leone - where it is doubling every few weeks, but singular cases and clusters of them are cropping up in dense population centers across the world. Ebola's mortality rate can be as high as 70%, but seems closer to 50% for the current major outbreak. This is significantly worse than the Bubonic plague, which killed off a third of Europe's population. Previous Ebola outbreaks occurred in rural, isolated locales, where they quickly burned themselves out by infecting everyone within a certain radius, then running out of new victims. But the current outbreak has spread to large population centers with highly mobile populations, and the chances of such a spontaneous end to this outbreak seem to be pretty much nil. The scenario in which Ebola engulfs the globe is not yet guaranteed, but neither can it be dismissed as some sort of apocalyptic fantasy: the chances of it happening are by no means zero.
The last note briefly addressed the benefits associated with the reverse repurchase facility (RRF). Indeed liabilities have increasingly moved from bank balance sheets to the Fed, freeing lending capacity. One must recall reserves are not fungible outside of the banking system (but can act as collateral for margin). With flow decreasing, the opportunity for small relative volume bids spread over a large quantity of transactions (most instances per unit time) decreased with market prices in many asset markets. Is more downside coming?
One would think that after last week's market rout, the worst in years, that Goldman clients would have just one question: why just a month after you, chief Goldman strategist David Kostin said to "Buy Stocks Because Hedge Funds Suck; Also Chase Momentum And Beta", are stocks crashing? No really: this is literally what Kostin said in the first days of September: "investors should buy stocks which should benefit from a combination of beta, momentum, and popularity as funds attempt to remedy their weak YTD performance heading into late 2014." Turns out frontrunning the world's most overpaid money losers wasn't such a great strategy after all. In any event, that is not what Goldman's clients are asking. Instead as David Kostin informs us in his weekly letter to Jim Hanson's beloved creations, "every client inquiry focused on the same four topics: global growth, FX, oil, and small-caps."
Physical gold is being accumulated and used in exchanges but very discretely as of now. The geopolitical and economic environment in the last few months was in my view the calm before the storm. Both the economic and political environments are uncertain and will surprise the complacent markets.
“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” - Lewis Carroll, Alice's Adventures in Wonderland
It was heinous. It was underhanded. It was beyond the bounds of international morality. It was an attack on the American way of life. It was what you might expect from unscrupulous Arabs. It was “the oil weapon” -- and back in 1973, it was directed at the United States. Skip ahead four decades and it’s smart, it’s effective, and it’s the American way. The Obama administration has appropriated it as a major tool of foreign policy, a new way to go to war with nations it considers hostile without relying on planes, missiles, and troops. It is, of course, that very same oil weapon.
While Ebola is getting all the headlines, China is dealing with "the worst outbreak in decades" of Dengue Fever. As ITAR-TASS reports, the outbreak of the mosquito-borne disease in China has killed six people and infected more than 27,200 according to Chinese health officials. Just today, the epidemic has infected 1,826 more people in the Guangdong Province alone. But it's not just China, last month Malaysia reported that dengue fever deaths had more than tripled in 2014, while Japan recently saw its first outbreak in 70 years with many contracting the illness at Tokyo's popular Yoyogi Park.
Despite claims of containment, Reuters reports seven more people turned themselves in late on Thursday to an Ebola isolation unit in Madrid; but following a visit by PM Rajoy, Spanish citizens can relax as the government is setting up a special Ebola committee. Following yesterday's scare in Paris, The Independent reports authorities are investigating a 'probable' case of a French national who may have contracted the disease in Africa. The World Health organization has warned that East Asia is at risk of becoming a "hot spot" for diseases - but is well prepared after SARS and avian flu but it is the appearance of a confirmed case in Brazil that is most concerning. A 47-year-old man, originally from Guinea, is LatAm's first case and suggests SOUTHCOM's "nightmare scenario" is closer than many would care to believe. Finally, the CDC has issued special guidance to 911 operators on dealing with suspected Ebola cases across America.
Whether this trend will hold or reverse is unknown, but it does suggest that there are advantages to being the cleanest shirt in the dirty laundry.
- It wasn't Obama this time: Pakistani teen, Indian activist win Nobel Peace Prize (Reuters)
- Surging VIX Shakes Bulls as S&P 500 Charts Go Haywire (BBG)
- Global shares hit six-month low as growth worries mount (Reuters)
- Police, protesters clash in St. Louis ahead of weekend of rallies (Reuters)
- We're Sitting on 10 Billion Barrels of Oil! OK, Two (BBG)
- Spain seeks answers as seven more enter Ebola isolation (Reuters)
- Iran will sell its oil to Asia in November at the biggest discount (BBG)
- Redefining honeypot: U.S. DEA 'most interested' in U.S. investors in Canadian marijuana firms (Reuters)
- UKIP Wins First Commons District With Conservative Defector (BBG)
- Fake Ebola Patients Help Hospitals Prepare for Next Case (BBG)