default

If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.

Will we never learn?

At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread, as Bloomberg notes, what Fabozzi's bible of swap-pricing calls a "perversion" is now the rule all the way from 30Y to 2Y maturities. As one analyst notes, historical interpretations of this have been destroyed and if the flip to negative spreads persists, it would signal that its roots are in a combination of regulators’ efforts to head off another financial crisis, massive corporate issuance (which we are seeing), China selling pressure (and its impact on repo markets) and "broken" wholesale money-markets.

This weekend we saw an important action in the downgrade of Saudi Arabia, highlighting just how far the EM crisis has carried. As Ice Farm Capital's Michael Green notes, in response, Saudi CDS continues to climb, reaching its highest since 2009 (amid both default risk and devaluation concerns). The rising risks in Saudi Arabia are a reminder that growth weakness has its own feedback mechanism – if oil prices stay at these levels for an extended period of time, it appears unlikely that Saudi Arabia will remain the reliable source that the world is currently counting on.

• There have been 606 global rate cuts since LEH
• $12.4 trillion of central bank asset purchases (QE) since Bear Stearns
• The Fed is operating a zero rate policy for the longest period ever (even exceeding the WW2 Aug’37-Sep’42 zero rate period)
• $6.3 trillion global government bonds currently yielding <0%
• $20.0 trillion global government bonds currently yielding <1%

The most anticipated economic release over the weekend was the early glimpse into China's manufacturing and non-manufacturing sectors via the two key PMI surveys released by China's National Bureau of Statistics, to get a sense if the slowdown across China is stabilizing or, as some have suggested, rebounding. It did not: overnight the NBS reported that the manufacturing PMI remained unchanged in October at 49.8 missing consensus estimates of a modest rebound to 50.0, its third consecutive month in contraction territory.

The only way that the Fed and the politicians can claim that the economy is “fine” and QE “worked” is to make sure that the one piece of obvious evidence which would say otherwise is kept highly restrained. The manipulation of the gold and silver market is a nothing but a product of complete systemic corruption.

The Chinese are known for being strategic thinkers. This goes back thousands of years to the days of Sun Tzu. Leaders don’t act haphazardly, they make long-term plans and execute in a disciplined manner. But it’s becoming pretty obvious now that the Chinese government is in reaction mode. Their system is based on a bunch of unelected policymakers sitting in a room and making decisions to control one of the largest economies in the world. But now it’s all extremely reactive. The grand plans and strategy have gone out the window, and instead they’re taking it day-by-day, making it up as they go along. To us, this is a sign of how bad things really are.

To believe this isn’t a bubble is to believe that all of the hot momo money from insti’s, high/biotech, flipper, flappers, fraudsters, and foreigners buying houses is fundamental and here to stay, which is exactly what everybody thought in 2006. Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices.

10-year Puerto Rico general obligation bond yields spiked to 12.3% - the highest on record - as the island’s Government Development Bank's $354 million of principal and interest due on December 1st looms. Puerto Rico is now 450bps 'riskier' than Greece, which means Treasury Secretary Jack Lew was wrong again in not taking the German FinMin's offer in July to swap Puerto Rico for Greece...

• World stocks on course for best month in four years (Reuters)
• Global Stocks Up Amid Stimulus Hopes (WSJ)
• BOJ Refrains From Adding Stimulus Even as Inflation, Growth Wane (BBG)
• U.S. Avoids Debt Default as Congress Passes Fiscal Plan (BBG)
• China naval chief says minor incident could spark war in South China Sea (Reuters)
• Exclusive Club: No High-Frequency Traders Allowed at Luminex (WSJ)

Back in September we explained why, contrary to both conventional wisdom and the BOJ's endless protests to the contrary, neither the BOJ nor the ECB have any interest in boosting QE at this - or any other point - simply because with every incremental bond they buy, the time when the two central banks run out of monetizable debt comes closer. Since then the ECB has jawboned that it may boost QE (but it has not done so), and overnight as reported previously, the BOJ likewise did not expand QE despite many, including Goldman Sachs, expecting it would do just that.

Where is the “hyperinflation”?

In late 2014 something happened: for whatever reason the most unregulated aspect of China's financial system, its shadow banks, not only stopped lending money but actually went into reverse, thus putting a lid on China's Total Social Financing expansion, which had been the world's "under the radar" growth dynamo for so many years. At that moment not only did China's ghost cities officially die, but it meant an imminent collapse for China's steel industry. That collapse has arrived.

Once more in this new normal in which we 'live', the necessary creative destruction of capitalism is eschewed in favor of saving a zombie company that the CEO admitted was "overwhelmed." The good news for American taxpayers is that it is Canadian taxpayers - via a generous $1.3 billion 'investment' by the Quebec government - that are bailing out private-jet-maker Bombardier. Following aircraft projects plagued by overruns, missed deadlines, and scant interest from airlines, Bombardier posted a $4.9billion loss in Q3. Well never mind that, Quebec taxpayers now own 49.5% of the challenged CSeries program.