Will the Fed’s Higher Rates Destroy “ZIRP Age” Investments?

Submitted by William Bonner, Chairman – Bonner & Partners

Faded, Tired, and Shredded

POITOU – It doesn’t look as though investors will get much Christmas cheer in their stockings this year. Last Wednesday, the Fed raised interest rates – as expected – by a token amount…

At first, there was a little rally in stocks. But in the two trading days thereafter, the Dow lost 621 points. Trading will be thin this week, as the big day approaches and more and more people turn from Mr. Scrooge investors into Mr. Fezziwig revelers.

But on Monday morning, the Japanese stock market sold off – a bad start to what could be a bad day… a bad week… and a bad year.

Investors looking at what happened on Thursday and Friday might think they see a trend. They might decide to spend the holidays “safe and sound” – on the sidelines. Falling prices might create a panic… who knows?

We would run our “Crash Alert” flag up the pole. But the old flag is in tatters. We felt sorry for it and put it into retirement. Each time we thought a panic might occur, we hauled it out and sent it up.

 

hudbEach time, it hung there… fluttering in the breeze… warning investors. And each time, there was no crash to give meaning to its life.

Faded… tired… shredded on the edges, the poor flag is out of service – and maybe just when we need it most!

Image by fmh

 

1-NikkeiThe Nikkei’s EKG is beginning to look like cardiac arrest is imminent – click to enlarge.

 

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HOW AMERICA LOST ITS SOVEREIGNTY

Submitted by J.C. Collins  –  philosophyofmetrics

American PigJust after World War Two the United States had a massive debt-to-GDP ratio of over 140%.  Today’s debt-to-GDP ratio of 104% seems paltry in comparison. But along with a huge debt-to-GDP ratio after the war, the US also had one of the largest trade surpluses in the world.  Much like China does now.

The difference, China’s debt-to-GDP ratio today, for government debt, is around 42%, with a balance of payments surplus of over $60 trillion. This puts China in a very strong position within the multilateral monetary transition which is taking place.

At present time, the US has a large trade deficit, with China being the biggest creditor, and a high debt-to-GDP ratio.  The ability of the US to push its debt-to-GDP ratio down after the war had a lot to do with its strong balance of payments position at the time.

Also, the status of the dollar as the international reserve currency gave America the ability to print large amounts of money to fund production and increase exports to a world which was rebuilding.  The Triffin Paradox defined the problematic and systemic issues which would arise from such an arrangement.  The use of the domestic currency of one specific country, here being the USD, would cause deflationary pressure back home and force the central bank to continue printing money to meet the international demands brought about by the reserve currency status.

The chart below defines how the US debt-to-GDP ratio decreased after the war on the back of robust American production and huge exports.  But around the early 1970’s, when the original Bretton Woods agreement was ended by Nixon, the American debt-to-GDP ratio began to increase once again.

US Histrocial Debt to GDP

There are several reasons for this, but it mainly had to do with the US beginning to build a trade deficit as more and more dollars accumulated in the foreign exchange reserve accounts of central banks.  The trade agreements which developed from this US debt accumulation forced western companies to move production to the creditor nations.  In this particular circumstance, China was becoming the largest American creditor, and as such, many American factories were moved to China to offset the dollar inflation which was being exported. Continue reading

Increasingly Durable Correlations

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

There are a few correlations that I find particularly compelling. The first is Chinese RMB (or CNY) next to WTI crude oil, as both are proxies in their own way of multi-dimensional crosscurrents between global “dollar” finance and real economy function. Since March, that correlation has come into renewed and tight focus. In the past few days, the CNY has traded and fixed narrower, perhaps indicating an end to the latest run that has demonstrated huge “dollar” tightness. WTI, however, is still on the way down “catching up” to CNY and thus signaling instead only a short-term pause in the financial downgrade and downdraft.

ABOOK Dec 2015 Correlations WTI CNY

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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Macquarie Forecasts 13% Fall In Chinese Steel Export Prices (BBG)
U.S. Calls for 256% Tariff on Imports of Steel From China (BBG)
US Existing Home Sales Down 10.5% In November (Reuters)
Man Who Called China’s Boom and Bust Now Warns of Crisis Risks (BBG)
Canadian Oil Industry To Lose 100,000 Jobs By The End Of 2015 (FP)
Finland Should Never Have Joined Euro, Foreign Minister Says (BBG)
Finns’ Support For Euro Falls Ahead Of Referendum Debate (Reuters)
Singapore Stock Losses Set to Rival Greece in 2015 (BBG)
Hope And Fear In The Endless Greek Crisis (FT)
The Decline Of Europe Is A Global Concern (FT)
Mr. Schäuble’s Ultimate Weapon: Restructuring European Public Debts (Bastasin)
Greece Recalls Its Ambassador In Prague After Czech Grexit Comments (Kath.)
Christmas 2015: Will Syria & Iraq Become Washington’s Stalingrad? (Holland)
Military to Military (Seymour Hersh)
UN Blames Saudi-Led Coalition For Attacks On Yemeni Civilians (Reuters)
ExxonMobil and Sierra Club Agreed on Climate Policy – and Kept It Secret (BBG)
Britain Can No Longer Sit Out Refugee Crisis As EU Prepares For More (Guardian)
Turkey Moves to Clamp Down on Border, Long a Revolving Door (NY Times)
Some Catholics Heed Pope’s Call To Succor Refugees, Others Look Away (Reuters)
13 Refugees, 7 Children, Die as Boat Sinks Off Greek Island (Kath.)