Steve Bull's Blog, page 1361
May 31, 2017
Dear Fed, It’s Not “Really Hard to Spot Bubbles”
Here are some visual aids to help the Fed spot the housing bubble.
Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”
But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.
Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.
“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”
So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.
What’s hard to predict accurately is when they’ll burst.
…click on the above link to read the rest of the article…
May 29, 2017
Not OPEC, China Dictates The Oil Prices
The OPEC deal will lead to an ongoing tightening of the crude oil market, putting a floor beneath crude prices in the $50s per barrel in the second half of 2017, according to Helima Croft of RBC Capital Markets. She said that prices should ultimately “grind higher into the $60s” by the fourth quarter, with an average price for WTI expected at $61. Political and economic pressure surrounding Saudi Aramco’s IPO and Russian elections – both of which are slated for 2018 – will ensure that OPEC and non-OPEC does “whatever it takes” to keep oil prices stable and on the rise.
But there are a lot of factors outside of OPEC’s control. High up on that list is the role of China, a country that has received little attention in the oil world as of late amid all the furor over the OPEC vs. U.S. shale debate. But China could make or break the oil market this year and next, depending on what happens with its economy. “If you wanted to know where the downside risk is, it is not in OPEC’s decision or in U.S. driving demand or in global inventories rebalancing. I think China is the big source of concern,”Prestige Economics President Jason Schenker told CNBC.
Moody’s Investors Service downgraded China’s credit rating on May 24 to A1 from Aa3, explaining that the Chinese government might try to juice the economy with higher spending levels, which will lead to ballooning debt. The decision from Moody’s is ominous as it is the first credit downgrade for China in nearly three decades. Moody’s expects economic growth to continue to slow in China, putting a heavier burden on government stimulus when debt has already started to become a concern.
…click on the above link to read the rest of the article…
Will the Crazy Global Debt Bubble Ever End?
There are multiple sources of friction in the Perpetual Motion Money Machine.
We’ve been playing two games to mask insolvency: one is to pay the costs of rampant debt today by borrowing even more from future earnings, and the second is to create wealth out of thin air via asset bubbles.
The two games are connected: asset bubbles require leverage and credit. Prices for homes, stocks, bonds, bat guano futures, etc. can only be pushed to the stratosphere if buyers have access to credit and can borrow to buy more of the bubbling assets.
If credit dries up, asset bubbles pop: no expansion of debt, no asset bubble.
The problem with these games is the debt-asset bubbles don’t actually expand the collateral (real-world productive value) supporting all the debt. Collateral can be a physical asset like a house, but it can also be the ability to earn money to service debt.
Credit card debt, student loan debt, corporate debt, sovereign debt–all these loans are backed not by physical assets but by the ability to service the debt: earnings or tax revenues.
If a company earns $1 million annually, what’s its stock worth? Whether the market values the company at $1 million or $1 billion, the company’s earnings remain the same.
If a government collects $1 trillion in tax revenues, whether it borrows $1 trillion or $100 trillion, the tax revenues remain the same.
If a government collects $1 trillion in tax revenues, whether it borrows $1 trillion or $100 trillion, the tax revenues remain the same.
If the collateral supporting the debt doesn’t expand with the debt, the borrower’s ability to service debt becomes increasingly fragile. Consider a household that earns $100,000 annually. If it has $100,000 in debt to service, that is a 1-to-1 ratio of earnings and debt. What happens to the risk of default if the household borrows $1 million?
…click on the above link to read the rest of the article…
May 27, 2017
The Federal Reserve Is Destroying America
The Federal Reserve Is Destroying America
And wait until you hear what they’re getting away with now
Perhaps I should start with a disclaimer of sorts. Yes, I realize that the people working at the Federal Reserve, as well as the other central banks around the world, are just people. Like the rest of us, they have egos, fears, worries, hopes, and dreams. I’m sure pretty much all of them go home each night believing they are basically good and caring individuals, doing important work.
But they’re destroying America. They might have good intentions, but they are working with bad models. Ones that lead to truly horrible outcomes.
One of the chief failings of central banks is that they are slaves to an impossible idea; the notion that humans are free to pursue perpetual exponential economic growth on a finite planet. To be more specific: central banks are actually in the business of promoting perpetual exponential growth of debt.
But since growth in credit drives growth in consumption, the two are concepts are so intimately linked as to be indistinguishable from each other. They both rest upon an impossibility. Central banks are in the business of sustaining the unsustainable which is, of course, an impossible job.
I can only guess at the amount of emotional energy required to maintain the integrity of the edifice of self-delusion necessary to go home from a central banking job feeling OK about oneself and one’s role in the world. It must be immense.
I rather imagine it’s not unlike the key positions of leadership at Easter Island around the time the last trees were being felled and the last stone heads were being erected. “This is what we do,” they probably said to each other and their followers. “This is what we’ve always done. Pay no attention to those few crackpot haters who warn that in pursuing our way of life we’re instead destroying it.”
…click on the above link to read the rest of the article…
Merkel Furious With Trump After “Unprecedented” G-7 Failure To Reach Consensus On Climate Change
In the end it was not mean to be. As discussed on Friday, during Trump’s first G-7 summit, world leaders including German Chancellor Angela Merkel and new French President Emmanuel Macron, had hoped to persuade the the US president to endorse the Paris Agreement climate pledge to fight global warming. By the end of the summit – held at a luxury hotel in Taormina, Sicily that was once a Dominican monastery and base for the Nazi air force during World War Two – they realized they had failed, as Trump “underscored his determination to break the global mold” by refusing to follow the Group of Seven line not only on global warming but also by resisting measures on trade.
Furthermore, in what was described as an “unprecedented step“, the final G-7 communique gave the U.S. its own section to say that it is “undergoing a review process” and is unable to join in the discussion, an official cited by Bloomberg said. As a result while the US will remain excluded from the final affirmation, the other six, call it the G-6, will recommit to the Paris Agreement on climate change, which Trump tweeted Saturday he’d come to a decision on next week.
Needless to say, Merkel who had hoped to leave the Saturday summit with the G-7 agenda endorsed by everyone, including Trump, was furious at the US president.
“The whole discussion about climate has been difficult, or rather very unsatisfactory” German Chancellor Angela Merkel told reporters Saturday. “Here we have the situation that six members, or even seven if you want to add the EU, stand against one. That means there are no signals until now whether the U.S. will remain in the Paris Agreement or not.
…click on the above link to read the rest of the article…
US Deploys Third Aircraft Carrier Toward North Korea
One month ago, when we first discussed that in addition to the CVN-70 Carl Vinson aircraft carrier group, the US was deploying two more carriers toward the Korean peninsula, some took the Yonhap-sourced report skeptically: after all, what’s the incremental symbolic impact of having three, or even two aircraft carriers next to North Korea when just one would more than suffice. Then, two weeks ago, the report was proven half right when US officials announced that in addition to the first US carrier already on location, the US Navy is moving the USS Ronald Reagan aircraft carrier to the Korean Peninsula, where it would conduct dual-carrier training exercises with the USS Carl Vinson.
Aircraft carrier CVN-76 Ronald Reagan
After completing its maintenance period in Yokosuka, Japan, the USS Ronald Reagan departed for the Korean Peninsula on Tuesday, according to the Navy. “Coming out of a long in-port maintenance period we have to ensure that Ronald Reagan and the remainder of the strike group are integrated properly as we move forward,” Rear Adm. Charles Williams said in a press release. Once it arrives in the region, the carrier will conduct a variety of training exercises but primarily focus on certifying its ability to safely launch and recover aircraft, the service said. In other words, training for combat missions involved the North Korean capital.
We concluded our report from mid-May by saying that the US Navy may soon “further deploy the CVN-68 Nimitz, which was the third carrier reported to be eventually making its way toward Korea.”
We didn’t have long to wait, because on Friday the Kitsap Sun confirmed what we reported initially over a month ago, namely that the USS Nimitz will depart Naval Base Kitsap-Bremerton on Thursday on its first deployment since 2013.
…click on the above link to read the rest of the article…
May 26, 2017
All Heck Breaks Loose in Toronto’s House Price Bubble
“It’s fear.”
During the first two weeks in May, according to preliminary data from Toronto Real Estate Board, home listings surged 47% from the same period last year even as sales plunged 16%. The average selling price dropped 3.3% from April – and this, after a 33% year-over-year spike in home prices in March and a 25% surge in April. Something is happening to Toronto’s blistering house price bubble.
Canada’s largest alternative mortgage lender, Home Capital Group, which focuses on new immigrants and subprime borrowers turned down by the banks, is melting down after a run on its deposits that crushed its funding sources. The industry is worried about contagion.
At the same time, the provincial government of Ontario announced a slew of drastic measures, including a 15% tax on purchases by non-resident foreign investors to tamp down on the housing market insanity that left many locals unable to buy even a modest home.
It comes after Bank of Canada Governor Stephen Poloz warned in April that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that “It’s time we remind folks that prices of houses can go down as well as up. People need to ask themselves very carefully, ‘Why am I buying this house?”’
A few days ago, Moody’s Investors Service downgraded Canada’s six largest banks on concerns over their exposure to the housing bubble and household indebtedness that ranks among the highest in the world.
Now even the relentlessly optimistic industry begins to fret:
…click on the above link to read the rest of the article…
Mark Yusko: I’m Telling You Right Now, the US Is Going to Have a Massive Crash
“I’m telling you right now, the US is going to have a crash and it will be massive,” asserted Mark Yusko at Mauldin Economics’ Strategic Investment Conference.
In his keynote speech, Mark Yusko, CIO of Morgan Creek Capital Management, outlined where he sees the biggest opportunities and risks for investors are today.
Demographics Are Destiny
Mark began with the big story of the SIC 2017—demographics.
He believes that efforts to generate growth through fiscal stimulus and tax cuts will prove futile because the working-age population in the US is declining. As such, consumption—which makes up 70% of the US—will continue to fall.
Mark thinks instead of taking off, the US economy is on the cusp of a recession.
Headed for Recession
Mark points to key indicators such as credit growth and tax revenues, which are declining, as proof a recession is around the corner.
Source: St. Louis Fed
“Every time a President leaves the White House after two terms, there is a recession within the first year of the new administration. I believe this time will be no different.”
So, what does this mean for investors?
Sell US Stocks
Since 2012, the earnings of S&P 500 companies have gone nowhere, yet the market is up 70%. This rise has all been multiple expansions. As such, US equities are one of the most expensive class of assets in the world today.
With the S&P 500 trading at record highs, top investment management firm GMO projects returns will be negative over the next seven years.
Source: GMO
With US markets fully priced, Mark says his firm is deploying their capital elsewhere.
European Banks Are a Buy
Despite all the hype around US financials due to “Trumponomics,” Mark points out that European financials have vastly outperformed their US counterparts since the beginning of the year.
…click on the above link to read the rest of the article…
Another shoe drops in the FX fraud manipulation conspiracy
FX is quite literally, a rigged game. Not like the stock market, well not exactly. FX has been, a game of ‘how many numbers am I holding behind my back?’ and the guess is always wrong! As we explain in Splitting Pennies Understanding Forex – FX is rigged. But that doesn’t mean there isn’t opportunity! One just needs to understand it.
French bank BNP Paribas was fined $350 million by the New York State Department of
Financial Services for lax oversight in its foreign-exchange business that
allowed “nearly unfettered misconduct” by more than a dozen employees involved
in exchange rate manipulation, officials announced Wednesday.
From 2007 through 2013, a trader on the bank’s New York desk, identified in the
consent order as Jason Katz, ran a number of schemes with more than a dozen
BNPP traders and salespeople on key foreign exchange trading desks to
manipulate prices and spreads in several currencies, including the South
African rand, Hungarian forint and Turkish lira, officials said.
He called his group of traders a “cartel” and they communicated in a
chat room called “ZAR Domination,” a reference to the rand’s trading
symbol, according to the consent order. The group would push up the price of
the illiquid rand during New York business hours when the South African market
was closed, moving the currency in whichever way they chose, and thus
depressing competition, officials said.
Katz also enlisted colleagues at other banks to widen spreads for orders in
rands, increasing bank profits and limiting competition at the customer’
expense, the order says. Some of the traders engaged in illegal coordination
and shared confidential customer information, officials said. As part of a
cooperation agreement with prosecutors, Katz pled guilty in Manhattan federal court in
January to one count of conspiracy to restrain trade in violation of the
Sherman Act.
…click on the above link to read the rest of the article…
May 25, 2017
RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention
A “prudent” Fed (and China’s “National Team”) have spurred a risk-on rally, as RBC’s head of cross-asset strategy Charlie McElligott notes the market’s ‘Pavolovian’ response to Fed’s ‘dovish hints’ contained within the Minutes – despite simultaneously staying ‘on message’ with hiking / tapering commentary – prompts a “QE of old” response: stocks and Treasuries bid, while the USD faded.
China further perpetuates the ‘risk rally’ via apparent market interventions:
1. Intervention in FX markets to strengthen the Yuan overnight, with speculation of a number of Chinese banks selling Dollars in the onshore market overnight which drove the Yuan higher.2. Chinese “National Team” stock market inventions as well, with sharp-turns higher off of an initially weaker equities opening and again-weaker industrial metals. Major reversals off lows saw nearly all domestic markets close at highs (Shanghai Prop +2.8%), while Hong Kong’s Hang Seng closed at highs since July 2015, with Chinese real estate developers leading.
Initial (and expected) ‘sell the news’ on the snoozer OPEC outcome, as they extend the output cut 9 months per expectations—which disappointed the ‘bullish surprise’ camp which anticipated more OPEC-‘gaming’ of the market, thinking it was possible for a deeper-cut in conjunction with the consensus extension.
This move lower in crude is notable if it were to escalate the current rollover in ‘inflation expectations’ (10Y BE’s below 200dma) which continue to show as the largest price drivers of risk-assets and major rates markets currently per the QI factor PCA model—although should be noted that both SPX and HYG (US HY proxy) are both deeply OUT OF REGIME with low r-squareds / low explanatory power.
Due to my much-discussed “Chinese deleveraging / Fed tightening / ECB pivoting ‘less dovish’” trifecta, we are seeing good buying in cash USTs and receiving in swaps (strong 5Y auction as well) keeping rates pinned despite the ongoing risk-asset rally.
…click on the above link to read the rest of the article…
