Incrementum Advisory Board Meeting Q 4

Submitted by Pater Tenebrarum  –  The Acting Man Blog

The Battle Between Inflationary and Deflationary Forces

At the meeting of the Incrementum Fund’s Advisory Board in early October, there was once again a wide-ranging amd in-depth discussion of the economy and financial markets in light of the increasingly evident tensions between the forces of deflation and the countervailing inflationary measures taken by central bankers all over the world.

1-Incrementum Inflation SignalThe proprietary Incrementum inflation signal vs. inflation-sensitive assets – click to enlarge. Continue reading

Risk Off?

Submitted by Doug Noland – Credit Bubble Bulletin 

The “Granddaddy of All Bubbles” thesis rests upon the view that the world is in the midst of the precarious grand finale of a multi-decade global Credit and financial Bubble. When a Bubble bursts, system reflation requires an even larger fresh new Bubble. This has repeatedly been the case going back at least to the “decade of greed” late-eighties Bubble in the U.S. These days the world confronts the terminal Bubble phase partially because of the unprecedented scope of the China and EM Bubbles. It’s simply difficult to imagine another more far-reaching Bubble.

Also critical to the finale Bubble thesis is that the “global government finance Bubble” – encompassing unprecedented excesses in sovereign debt, central bank Credit and government market manipulation – has engulfed the very foundation of contemporary “money” and Credit. It’s again quite a challenge to envisage a new financial Bubble inflation cycle following a crisis of confidence at the heart of global finance.

As I’ve posited repeatedly, the global Bubble has been pierced. There’s more confirmation again this week.  The collapse in commodities and EM currencies along with the faltering Chinese financial Bubble mark an historic inflection point. Global policymakers have gone to incredible measures to stabilize market, financial and economic backdrops. Yet reflationary measures will continue to only further destabilize.

When policy-induced “risk on” is overpowering global securities markets, fragilities remain well concealed (and my prognosis appears ridiculous). Fragilities, however, swiftly manifest with the reappearance of “risk off.”  Rather quickly securities markets demonstrate their proclivity for illiquidity and so-called “flash crashes.” So after an unsettled week in global markets, the critical issue is whether “risk on” is giving way to “risk off” dynamics.

There is no doubt that a powerful “risk off” has again gripped commodities markets. Crude (WTI) sank 8.5% this week to $40.71, the low since the tumultuous August period. The “GSCI” Commodities Index dropped 4.0% this week, increasing 2015 losses to almost 19% while trading down to near August lows. The Bloomberg Commodities Index sank to an almost 16-year low. Copper prices this week sank 3.6%, trading to a new six-year low. Zinc also traded to a six-year low, with nickel at a five-year low. Unleaded gasoline dropped almost 10%. Wheat fell 5.3% and Corn dropped 4.0%.

With commodities succumbing to another leg in an increasingly brutal bear market, worries quickly returned to EM. The Brazilian real declined 2.1% this week and the Colombian peso sank 6.4%. The Russian ruble fell 3.5% and the South African rand declined 1.6%. Mexican stocks were hit 3.6%.

November 9 – Bloomberg (Taylor Hall): “Debt in developing markets is estimated to have reached $58.6 trillion at the start of 2015, with credit in China, Hong Kong, India, Indonesia, Malaysia, Singapore, South Korea and Thailand exceeding that of Latin America, emerging Europe and the Middle East, according to the Institute of International Finance. Emerging-market debt has grown $28 trillion since 2009, according to the IIF… Global debt has soared $50 trillion during the period to surpass a total of $240 trillion, or 320% of gross domestic product, in early 2015. While credit has increased for almost all countries included in the new monitor over the past decade, debt-to-GDP ratios in developing Asia for non-financial corporate, household and financial corporate sectors have risen the most… Non-financial corporate sector debt in emerging markets has risen $13 trillion since 2009, increasing more than five-fold over the past decade to surpass $23.7 trillion in the first quarter of 2015. The advance has been most concentrated in emerging Asia, where it rose to 125% of GDP.”

And with market attention seemingly returning to the world’s precarious debt overhang, “developing” Asian equities were hit hard this week. Stocks were down 4.2% in Taiwan (TAIEX), 2.8% in Singapore (STI), 2.8% in Thailand (SET), 3.1% in the Philippines (SE IDX), 2.1% in Indonesia (Jakarta Comp) and 1.6% in Malaysia (KLCI). Australian stocks (ASX 200) were hit 3.1% and New Zealand stocks (NZX 20) fell 1.7%. Hong Kong’s Hang Seng Financial index dropped 2.6%, increasing its 2015 decline to 30.4%.

Disappointing Chinese economic data (imports, exports, producer inflation, etc.) already had investors on edge. A (rapidly?) deteriorating corporate Credit backdrop was beginning to cause angst. And then Thursday’s Chinese Credit data was stunningly disappointing. October saw total Credit growth (“Total Social Financing”) cut by more than half. After September’s jump to $204bn, Credit growth slowed sharply to $75bn, the weakest month of Credit expansion since July 2014. New bank loans, at $81bn, were less than half of September’s $165bn. This is insufficient Credit to hold bust at bay.

In short order, confidence that Chinese policymakers have everything under control has begun to wane. The view that Beijing can simply dictate Credit growth through mandates to the big state-directed lenders is being shaken by anecdotes of increasingly nervous bankers and cautious borrowers. Suddenly there’s talk of the Chinese “pushing on a string.”

When global markets are in a bullish mood, commodities and EM currencies appear to have bottomed. Yields on energy, commodities and deep cyclical company debt around the globe seem enticing. “Developing” country debt is attractively priced. Chinese officials seem capable of ensuring 6.5% growth as far as the eye can see. China enjoys the capacity to stabilize its currency, inflation level and debt load. And stable Chinese growth will backstop commodities markets, EM markets and economies and the global economy (and markets!) more generally.

But this optimistic view of things turns flimsy in a hurry. When crude and commodities begin to tank, large quantities of debt (company, country and financial) look increasingly suspect. King dollar takes off, putting added pressure on faltering commodities and EM (currencies, debt and stocks) Bubbles. And with the Chinese currency pegged to king dollar, the markets’ view of the China Credit situation can abruptly shift from “manageable” to “potentially very troubling.”

And returning to the “Granddaddy Bubble Finale” thesis, the Chinese and EM Bubbles fundamentally changed the “producer” and “consumer” inflationary backdrops. Ultra-loose global finance has ensured massive overcapacity in too many things. It has created an unprecedented divergence between bubbling financial markets and weakening fundamental prospects. There’s way too much debt almost everywhere, a debt burden that central bankers would like to inflate away to more manageable levels. The Chinese are desperate for inflation to grow out of historic amounts of debt. They’ve been able to inflate out of debt troubles previously, and they’ve watched U.S. reflationary measures work their magic repeatedly.

The bursting global Bubble is especially problematic for China. EM currencies have been devalued, while the U.S. and Chinese currencies have skyrocketed. The old reflationary measures no longer work. Loose “money” only exacerbates overcapacity, inequalities and financial Bubbles. The strong dollar further pressures global pricing, while adding to heightened Credit stress globally (certainly including EM dollar-denominated debt). Meanwhile, China’s currency peg to the dollar ensures the already vulnerable Chinese manufacturing complex becomes further uncompetitive. It ensures major problems related to the country’s enormous lending and investing boom in global resources. The resulting Credit stress only exacerbates disinflationary pricing pressures.

In 2014 and again in August, it appeared China was to commence meaningful currency devaluation. In both instances acute financial stress forced Chinese officials to immediately backtrack. Trying to recover from the August fiasco, the Chinese have focused on currency stability. And when markets are in that optimistic state of mind, Chinese policy appears sensible and sustainable. But when “risk off” begins to take hold, China’s mountains of overcapacity and debt appear completely at odds with a strong currency – with a peg to king dollar – in a disinflationary global environment.

It wasn’t only commodities and EM that succumbed to “risk off” this week. European stocks were down about 3%. U.S. stocks had a really rough week. The S&P500 declined 3.6%, with the broader market down even more. Selling was broad-based. Credit spreads also widened, most notably in high-yield. Junk bond funds saw flows reverse to sizable outflows. There were anecdotes of waning demand for leveraged loans, high-yield municipal debt and risky Credits more generally. Puerto Rico… Hedge fund performance… This is all consistent with heightened risk aversion and self-reinforcing pressure to de-leverage.

Confidence was so high that the bulls had essentially already taken a big year-end rally to the bank. “Risk off” into December would catch the bullish consensus completely flatfooted. “Risk off” would also catch most market operators un-hedged and over-exposed on the long side. “Risk off” would also complicate life for the Fed. Just when they had finally gathered the nerve to move, global markets turn sour. And perhaps the Fed has been whipsawed by the markets one too many times. But I still think global markets are being dictated much more by China than the Fed. And at this point, Chinese officials have the much more difficult decisions. Do they bite the bullet and start devaluing? Or do they stick with the peg and hope?

My Friday writing has been interrupted by the news of terrible terrorist attacks in Paris. It’s a reminder of the increasingly hostile world in which we live. And it’s consistent with a darkening of the social mood in Europe, as well as here in the U.S. and around the world more generally. It’s also part of the troubling backdrop conducive to a problematic “risk off” when faith in global central bankers and Chinese officials wanes.

Continue reading

Job Openings and JOLTS Crossed Signals

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The updated JOLTS numbers for September just confirmed more nonsense on the part of the BLS. Job openings continue to be all their own while the rest of the data series, even as the whole is indexed to the CES, at best stagnates. On every other count, including hires and quits, there is something drastically different in the US labor market. The view from Job Openings, however, instead is quite imitating of the Beveridge Curve which is, in my view, a significant clue as to what might explain the growing discrepancy.

After declining last month by nearly 300k, “job openings” rose149k in September to nearly match July’s record. As you can see below, this data series took an unusually sharp turn starting with 2014’s Polar Vortex.

ABOOK Nov 2015 JOLTS JO

There was a similar increase at that time in “hires”, though of not nearly the same magnitude. In short order, the surge in job openings far, far outpaced hires not just in terms of the recent cycle but out of all proportion with the entire prior series. That discrepancy has only become much worse in 2015 as the estimated rate of new hires has languished quite conspicuously and below the prior 2005-07 cycle peak. Continue reading

Stephen Lendman Asks Legitimate Questions About French Attacks

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

It’s too soon to know for sure. Given French complicity with ongoing US state terror throughout the Middle East, North Africa and elsewhere, odds strongly favor the latter.

Multiple likely well-planned Friday night attacks in Paris had a disturbing aroma to them – including France’s knee-jerk police state reaction. More on this below. Here’s what happened.

At least seven apparently well-coordinated attacks occurred, gunmen with automatic weapons and suicide belts killing over 150 victims. Many others were injured. Stade de France stadium was struck during a football (soccer) match between France and Germany.

So was the Bataclan theater during a concert, restaurants full of patrons, a cinema, and pedestrians on Bichat Street, the Avenue de la Republique and Boulevard Beaumarchais.

Reports indicated other Paris locations were attacked, including the Forum des Halles shopping area attracting an estimated 150,000 daily visitors.

The predictable aftermath so far includes French President Francois Hollande declaring a state of emergency – effectively suspending constitutional rights under martial law.

“Two decisions will be taken,” Hollande announced. “The state of emergency will be decreed, which means several places will be closed off, and traffic will be limited in certain areas.”

“The state of emergency will apply across the country. The second decision I have taken is to close the borders, so that the people who have committed these crimes can be apprehended.”  Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Calm Broken as US Stocks Post Worst Week Since August Selloff (Bloomberg)
• Nomi Prins Warns: “It’s All Coming To An End” (KWN)
• Albert Edwards: The Global Economy Will Be Thrown Into Chaos (ZH)
• Ten Ex-Deutsche Bank, Barclays Traders Charged in Euribor Probe (Bloomberg)
• 3 Accused Euribor Rate Manipulators Members of ECB Crisis Focus Group (ZH)
• Central Bankers Are Heroes: OECD’s Gurria (CNBC)
• China’s Yuan Takes Leap Toward Joining IMF Currency Basket (Reuters)
• VW Said to Seek as Much as €20 Billion in Bridge Funds (Bloomberg)
• How GM’s Bailout Became China’s Bonanza (Bloomberg)
• Portuguese Revolution Falls Far Short (Paul Craig Roberts)
• EU Commissioner’s Dire Warning: “The Only Alternative To Europe Is War” (ZH)
• Greece Says Turkey Turning Blind Eye To Refugee Smugglers (AFP)
• Greece Warns EU To Hold Turkey To Account On Refugee Crisis (Kath.)
• World’s Largest Ocean Cleanup Operation One Step Closer To Launch (Guardian)
• Monstrous Wave Of Paris Attacks Underlines France’s Year Of Terror (RT)
• Let Mercy For Refugees Be The Response To The Paris Attacks (Margaret Corvid)
• The Annihilation Of Nature (Woods Inst.)