48 hours - that's how long it took Citi's chief economist Willem Buiter to issue a report which was just as dire as Daiwa's, but because Citigroup is much more reliant on keeping it traditionally bullish clients as happy as possible, one had to read between the lines to get to the bottom line. This is Citi's punchline: "A global recession starting in 2016, led by China is now our Global Economics team's main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing."
The market has delivered a warning shot in August, but it seems investors aren’t taking it seriously yet. This could turn out to be a costly mistake. If (or rather when) faith in the omnipotence of central banks crumbles, we could see an unusually severe market dislocation.
This level of global inter-connected financial risk is hazardous in Mexico, where it’s peppered by high bank concentration risk. No one wants another major financial crisis. Yet, that’s where we are headed absent major reconstructions of the banking framework and the central bank policies that exude extreme power over global economies and markets, in the US, Mexico, and throughout the world. Mexico’s problems could again ripple through Latin America where eroding confidence, volatility, and US dollar strength are already hurting economies and markets. The difference is that now, in contrast to the 1980s and 1990s debt crises, loan and bond amounts have not just been extended by private banks, but subsidized by the Fed and the ECB. The risk platform is elevated. The fall, for both Mexico and its trading partners like the US, likely much harder.
- Global stocks rally as investors scent fresh stimulus (Reuters)
- Japan's Nikkei 225 Rises 7.7% for Biggest Gain Since October 2008 (BBG)
- China's Stocks Advance for Second Day Amid Stimulus Speculation (BBG)
- Abe Pledges Corporate Tax Cut as Investments Slump (BBG)
- U.S. to shift 50 staff to boost office handling Clinton emails (Reuters)
- Chinese Premier Li Keqiang Says China Doesn't Want a Currency War (BBG)
- One Thing China Got Right (BBG)
While we already knew that China was selling - and following the record selling of FX reserves in August, so does everyone else - an even more interesting question emerged: who is buying? Thanks to the WSJ we now know the answer: "A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street."
Liar loans are back from the dead which means that if you look under the hood, you might just have a shoddy credit or two hiding in the collateral pool of your triple-A mortgage-backed paper. Meanwhile, in a further sign that we've learned nothing since the crisis, non-Agency RMBS is set to stage a comeback.
News That Matters
This is just the beginning. As Central Bankers grow more and more desperate in the coming months, you’ll see more and more calls for extreme measures such as banning physical cash or imposing a “carry tax” on those who remove cash from the system.
Having recently explained (in great detail) why QE4 (and 5, 6 & 7) were inevitable (despite the protestations of all central planners, except for perhaps Kocharlakota - who never met an economy he didn't want to throw free money at), we found it fascinating that no lessor purveyor of the status quo's view of the world - Citigroup's chief economist Willem Buiter - that a global recession is imminent and nothing but a major blast of fiscal spending financed by outright "helicopter" money from the central banks will avert the deepening crisis. Faced with China's 'Quantitative Tightening', the economist who proclaimed "gold is a 6000-year old bubble" and cash should be banned, concludes ominously, "everybody will be adversely affected."
The idea of a change towards a domestic consumption-driven economy is being revealed as a woeful disaster. You can’t magically turn into a consumer-based economy by blowing bubbles first in property and then in stocks, and hope people’s profits in both will make them spend. Because the whole endeavor was based from the get-go on huge increases in debt, the just as predictable outcome is, and will be even much more, that people count their losses and spend much less in the local economy. While those with remaining spending power purchase property in the US, Britain, Australia. And go live there too, where they feel safe(r). I fear for the Chinese citizen. Not so much for Xi and Li. They will get what they deserve.
Over the weeks, months, and years ahead we’ll begin to understand more about the fallout from the death of the petrodollar and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that's fueling speculation about the viability of the dollar peg. As Bloomberg reports, the current situation mirrors a "very scary moment" in Saudi Arabia’s history.
The table below, courtesy of State Street's "Mr Risk", looks at key events occuring in 7 year cycles, finds that every recent multiple of the year 2015 going back in 7 year increments brings with it some major adverse market event, and asks: is it 2015's turn?
The following story is guaranteed to make you sick. Once again, we’re shown that following trillions in taxpayer funded bailouts and backstops, TBTF Wall Street banks immediately went ahead and focused all their attention obtaining loopholes in order to transfer risk and make billions upon billions of dollars in the financial matrix, as opposed to adding any benefit whatsoever to society.
News That Matters...
Gold’s reaction to China’s devaluation was impressive. Sure, it came at a time when gold was oversold and due a bounce, but, even so, a rise from $1,080 an ounce to $1,125 is not to be sniffed at – particularly as it went in the face of what other metals were doing.