Global Asset Allocation Update

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The risk budget this month is unchanged. For the moderate risk investor, the allocation between risk assets and bonds remains at 40/60 versus the benchmark of 60/40. The BofA ML US High Yield Master II OAS did widen on the month but still remains below the 7.5% level I identified last month as a trigger point for a further reduction in risk assets. The sell-off in stocks at the beginning of the year, interestingly, has not been accompanied by a significant change in credit spreads. It appears that stocks are merely playing catch up to spreads that started moving wider months ago. Despite the sell-off, it is noteworthy that stocks are still above their August lows. They are approaching those levels rapidly though and even if they bounce there, I believe we will eventually breach those lows.

  • HY credit spreads are currently at 7.24% versus 7.1% at the last GAA update. There has been further degradation in lower rated credits; CCC bonds have moved another 81 basis points wider but with those spreads already over 16%, further widening probably has little significance.
  • Valuations are still excessive and earnings estimates are still falling although analysts still seem convinced that earnings will surge in the back half of the year. I don’t think there is a lot of conviction about that, probably more a matter of inertia. Trailing P/Es have actually been increasing lately as earnings have fallen and stock prices have not. That is obviously changing even as I write this but trailing numbers really don’t provide much in the way of useful information anyway.
  • Long term momentum has continued to weaken with short and intermediate momentum also now fully negative. Daily momentum readings are getting oversold but are not even yet at the August levels so this correction could carry a bit further before a decent bounce. With long term momentum fully negative and nowhere near oversold, rallies should probably be used to reduce or eliminate any questionable positions.
  • The yield curve continued to flatten although the movement wasn’t significant. The 10/2 spread is now at 1.2% versus 1.26% at the last update. TIPS yields and inflation expectations were essentially unchanged over the last month which is quite interesting considering the action in the stock market since the beginning of the year. It seems the stock market sell-off is not being driven by a change in growth expectations, real or nominal.

Credit Spreads

While spreads did continue to widen over the last month, we have not seen a blowout as one might expect given the recent stock market turmoil. The junk bond market is obviously still stressed and with oil and other commodity prices continuing to fall, I see no reason to believe that we have seen the worst yet. Most of the stress – but not all as I’ve pointed out repeatedly – has been in energy and materials related names and there is no end in sight with oil now under $32. Arch Coal, a large coal producer, filed bankruptcy today seeking to reduce its $4.5 billion debt load. Somebody is going to take a haircut. The default rate is rising and if we get a more general recession it will accelerate. As to the odds of that happening I’d say they are somewhat higher now than they were a month ago if for no other reason than the recent drop in auto sales. If manufacturing was in recession with auto sales over 18 million that surely didn’t improve with them dropping to the low 17s. Continue reading

Greece’s two currencies – Project Syndicate Op-Ed

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

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ATHENS – Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union. Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges. Read more here

Stock Market Suffers Worst Start to the Year Ever – What Does it Mean?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Dismal Beginning

From December 30 to the end of the first week trading week of January, the DJIA has declined by roughly 7.7% (approx. 1,370 points) and the SPX by roughly 7.6% (approx. 160 points). This was nothing compared to the mini-crash suffered by China’s stock market early this year, which continued this morning with the Shanghai Composite (SSEC) declining by another 5.33%. The SSEC has put in an interim peak at approx. 3684 on December 23 and has since then fallen by slightly less than 670 points, or about 18%. Most of the decline occurred in the first week of January.


1-SPX nowS&P 500 Index, daily. The year has begun with a big sell-off in stock markets around the world – click to enlarge.


Although the sell-off in the US stock market was comparatively mild, it still ended up as the worst first trading week of January in history. Had January started out on a positive note, the mainstream financial media would have been full of reminders of how bullish a strong showing in the first week of January was, and what a good omen it represented for the rest of the year. Instead they felt compelled to tell us why a weak start to the year should be ignored.

The contortions went as far as one analyst informing us last week that the sell-off was actually happening “in a parallel universe”. As our friend Michael Pollaro has pointed out to us, central planning worshiper Steve Liesman told CNBC viewers last week that the terrible trade numbers (both imports and exports kept declining) were actually a positive, because they would “subtract less from GDP” – as imports have declined at an even faster pace than exports. Such unvarnished nonsense can only spring from the fevered minds of Keynesians and Mercantilists.


2-US exports and importsAs US imports are falling even faster than exports, the trade balance is held to be “improving” – which bolsters GDP (as we have often pointed out, GDP is a nonsensical number in many respects – this is one of them). However, a rapid decline in both imports and exports is actually not a sign of economic strength, but the exact opposite (leaving aside the fact that the balance of trade is definitely not an important yardstick of a nation’s prosperity).


Liesman apparently also argued that the weakness in assorted economic data releases should be ignored because employment is so strong. Apart from the fact that it isn’t really – it is easy to report improvements in the unemployment rate when labor force participation collapses to levels last seen 40 years ago and people hold multiple jobs that end up being double-counted – employment is a lagging indicator. If anything, this is the data point that should be “ignored”.

It was also widely recommended that one shouldn’t worry about China’s troubles, although everybody has insisted for years that China represents the “world’s economic locomotive”. Mr. Liesman also asserted that the 0.3% decline in wholesale inventories argued for “further economic strength” – evidently not considering that sales fell by an unexpectedly large 1% at the same time, widening the inventory-to-sales ratio further, which argues for the opposite.

Naturally, viewers were told that manufacturing should be ignored as well, since the services sector remains strong. However, as we have often stressed, this is a mistake, given the large share of gross economic output represented by manufacturing. The recent weakness in manufacturing data is by itself not yet a “recession guarantee”, but it is definitely not something that should simply be ignored.

Let us get back to that dismal first trading week though – how meaningful is it? Continue reading

Billary Buddy Marc Lasry’s Last Rodeo——The Jig Is Up On 25 Years Of Bottom Fisher Bailouts

As the Fed’s third and last bubble of this century heads for its splatter spot, the stench of desperate crony capitalism fills the air. You can count hedge fund mogul and Billary Buddy, Marc Lasry, among the upchucking financiers.

A few months back I heard him say on bubble vision that energy debt was a “once in a lifetime opportunity”. My thought was good luck with that, but even better luck to your investors—–who will need to get out of Dodge fast.

The truth is, Lasry had it upsidedown. Energy prices over the last 15 years were carried skyward by a once in a lifetime central bank driven credit explosion. The latter fueled a surge of phony demand and a tidal wave of malinvestment——not only in oil and gas, but practically everything else in the material and manufacturing economy of the world.

The reason that 2016 will prove to be a great historical inflection point is that the central banks of the world have finally run out of dry powder. After a 20 year spree in which their balance sheets exploded by nearly 11X—–from $2 trillion to $21 trillion—-they are being forced to shutdown their printing presses.

China has to stop because it has been slammed with a $1 trillion capital flight in the last year, and it’s accelerating. The BOJ and the ECB have already shot their wad and it’s done no good at all. The Fed spent 84 months dithering on the zero bound and now it has no dry powder left as the US economy slides into recession.

Accordingly, the great global credit bubble has finally run out of new central bank fuel. It has now surely reached its apogee at about $225 trillion compared to only $40 trillion back in 1994 when oil prices were still well under $20 per barrel. And soon the world’s mountain of debt will be falling in upon itself—–starting with the cratering Red Ponzi of China.

Needless to say, the latter amounts to a sword of Damocles hanging over the world’s massively deformed and dangerously unbalanced energy markets. To wit, almost all of the increase in global oil demand since the 2008 crisis has been in China and its caravan of EM suppliers and fellow travelers.

Total global demand in 2015, in fact, averaged about 92.6 mb/d per day (liquids basis)—–up nearly 7.0 mb/d since 2008. But 4.0 mb/d of that growth was attributable to China and another 6.0 mb/d to Brazil, Korea, the petro-states and the balance of the EM economies. By contrast, oil demand in the US, Western Europe and Japan is actually down by about 3.0 mb/d since the 2008 peak, as shown below:

Continue reading


Submitted by James Howard Kunstler  –

It looks like 2016 will be the year that humanfolk learn that the stuff they value was not worth as much as they thought it was. It will be a harrowing process because a great many humans are abandoning ownership of things that are rapidly losing value — e.g. stocks on the Shanghai exchange — and stuffing whatever “money” they can recover into the US dollar, the assets and usufructs of which are also going through a very painful reality value adjustment.

Of course this calls into question foremost exactly what money is, and the answer is: basically a narrative construct. In other words, a story explaining why we behave the way we do around certain things. Some parts of the story have a closer relationship with reality than other parts. The part about the US dollar has a rather weak connection.

When various authorities — the BLS, the Federal Reserve, The New York Times — state that the US economy is “strong,” we can translate that to mean giant companies listed on the stock exchanges are able to put up a Potemkin façade of soundness. For instance, The company continues to seem like a good idea. And it reinforces that idea in the collective imagination by sending a lot of low-priced goods to your door, (all bought on credit cards), which rings your (nearly) instant gratification bell. This has prompted investors to gobble up Amazon stock.

It’s well-established by now that the “brick-and-mortar” retail operations are majorly sucking wind. Meaning, fewer people are driving to the Target store and venues like it to buy stuff. Supposedly, they are buying stuff at Amazon instead. What interests me in that story is the idea that every single object purchased these days has a UPS journey attached to it. Of course, people also drive to the Target store, though I doubt they leave the place with just one thing. Continue reading

The EU Bail-In Directive: Dark Clouds are Gathering

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Portugal’s Rickety Banking System

After the unseemly bankruptcy of the Espirito Santo Group and the associated bank, then Portugal’s second biggest (likely a result of not praying enough, see: “Big Portuguese Bank Gets Into Trouble” and “Fears Over Banco Espirito Santo Escalate” for the gory details), Portugal’s state-run deposit insurance fund basically ran out of money.

It turns out that Europe’s new Bank Recovery and Resolution Directive (BRRD for short) came just in time for Portugal. At the end of 2015, another Portuguese bank bit the dust, the country’s seventh largest lender by assets, Banif. Portugal’s government once again decided to bail the bank out, but with strings attached. Subordinated bondholders and shareholders were essentially wiped out, which is as it should be.


Banif, weeklyBanif SA, weekly. Although this is hard to see on this linear chart, the stock rose by 40% today, to €0.002. Shareholders are allegedly planning to throw a wild party in Lisbon over the weekend (we were unable to confirm this rumor) – click to enlarge.


Senior bondholders and depositors were spared however, with Portugal’s overburdened taxpayers once again footing the bill. According to the FT:


Portugal has agreed a €2.2bn state rescue for Banco International do Funchal (Banif), splitting the Madeira-based lender into “good” and “bad” banks and selling its healthy assets to Spain’s Santander for €150m in the country’s second bank bailout in less than 18 months.

António Costa, Portugal’s new socialist prime minister, said the bailout would involve “a high cost for taxpayers” but had the advantage of being “a definitive solution”. Branches would open normally on Monday, he said. The rescue, which “bails in” shareholders and subordinated creditors, follows the €4.9bn bailout in August last year of Banco Espírito Santo, once Portugal’s largest listed bank, whose healthy assets, split off into Novo Banco, remain unsold.

In a statement late on Sunday night, the Bank of Portugal said the rescue of Banif would involve “total public support” estimated at €2.25bn to cover “future contingencies”, of which €1.76bn would come directly from the state and €489m from a bank resolution fund, to which all banks contribute.The bailout protects depositors and senior creditors and ensures that Banif’s operations, transferred to Santander Totta, the Spanish group’s Portuguese subsidiary, will continue to “function normally”, the central bank said.

Shareholders and subordinated creditors would be left in Banif, retaining “a very restricted group of assets” that are to be liquidated, the Bank of Portugal said. “Problematic assets” would be transferred to a special asset management vehicle. The rescue partly mirrors the 2014 bailout of BES, which was split into “good” and “bad” banks after its profits were hit by exposure to the heavily indebted Espírito Santo family business empire.

Banif is Portugal’s seventh largest lender with total assets valued at €12.8bn in June, equivalent to about 7 per cent of Portugal’s gross domestic product, and deposits totalling €6.3bn. The bank is the dominant lender in the Portuguese islands of Madeira and the Azores, where it accounts for more than 30 per cent of total deposits.”


(emphasis added)

Since no deposits were wiped out as a result of the bail-out, Portugal’s money supply won’t be affected. However, Banif’s downfall is a reminder that Portugal’s banking system remains quite rickety. We dimly remember someone saying that the bail-out of BES would be the last such problem. Evidently it wasn’t. Continue reading

PBOC Wastes No Time Proving Desperation

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The PBOC wasted no time this week showing that it was serious about its desperationlast week. The central bank fixed the CNY reference contrarily upward to 6.583 this morning from Friday’s 6.600. As we have been documenting during this unabated “dollar” problem, whenever the PBOC attempts a contrary maneuver with the fix it typically sets off enormous fireworks. Sure enough:

ABOOK Jan 2016 Funding Short HIBOR

Offshore, HIBOR rates surpassed all prior indications of stress, hitting new highs almost across the curve. The overnight rate jumped from 4% Friday to 13.396%, while the one-week rate shot past 11%. The more important (and usually more stable) 3-month HIBOR rate fixed just shy of 7.25%, itself a record.

ABOOK Jan 2016 Funding Short 3M HIBOR

Commodities are being heavily sold including and especially crude oil in WTI, which has the direct effect of getting the attention of “nervous” stock traders many of whom are still fixed on the undoubted economic boom scheduled for any day now. The above charts are supposed to be China and only China, yet the symmetry with oil and so many other financial indications globally demand disprove the suggestion; that includes the curious fixations of “dollar” money markets that are no stranger to any of this as I explained here(subscription required).

ABOOK Jan 2016 Funding CNY WTIABOOK Jan 2016 Funding Copper

Even with copper trading solidly below $2, the scale of the disaster in oil is hard to fathom though importantly it should be more appreciated because of this connection between global “dollar” finance and the global economy including our increasingly distressed domestic component (manufacturing first).

ABOOK Jan 2016 Funding WTI FuturesABOOK Jan 2016 Funding WTI Futures Collapse 2nd Half

The crude curve has just collapsed, especially since the rebound after China’s Golden Week reprieve ended around October 15. Now the entire futures curve is under $50, an upsetting commentary on everything from US “demand” to long-term implications and especially those that are derived from economists’ somehow continued insistence that this is all just “transitory.” There is no such thing in the oil curve, which is exactly where it should be. Continue reading

Sales Surge After U.S. Mint Quadruples Silver Eagles Allocatio

Submitted by Mark O’Byrne  –  GoldCore

American Eagle silver coin sales jumped on Monday after the U.S. Mint said it set the first weekly allocation of 2016 at 4 million ounces, roughly four times the amount rationed in the last five months of 2015, after a surge in demand.


More than half of the week’s allocation sold on Monday, the first day of 2016 sales, the mint said, a sign that demand remains strong as spot silver prices hovered above a 6-1/2-year low of $13.60 per ounce hit in December.

The mint said nearly 2.76 million ounces of American Eagle silver bullion coins sold, about half of the 5.53 million ounces that sold in all of January 2015.

First-day sales of American Eagle gold bullion coins were also strong at 60,000 ounces, compared with the 81,000 ounces that sold in the entire month of January 2015, mint data showed.

On Monday, spot gold prices traded just below $1,100 an ounce, which is up about 5 percent from the near six-year-low of $1,045.85 reached in early December.

The mint ran out of American Eagle silver coins in July because of a “significant” increase in demand as spot silver prices fell to a six-year low.

The bullion coins are bought by authorized dealers who then sell to the general public at a premium, which changes according to supply and demand. The coins are viewed as a more affordable form of investment in physical bullion than the much larger bars.

Inventory was replenished in August and sales resumed. But the coins were on weekly allocations of roughly 1 million ounces for the rest of the year because of low supplies.

The U.S. Mint was not alone in limiting silver coin sales. The unexpected surge in demand put the global silver-coin market in an unprecedented supply squeeze, forcing other mints around the world to ration sales, while U.S. buyers had to look abroad for supplies.

The Daily Debt Ratte

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• RBS Cries ‘Sell Everything’ As Deflationary Crisis Nears (AEP)
• An ‘Extremely Normal And Realistic’ 26% S&P 500 Drop Is Taking Shape (MW)
• Oil Down 20% Since Start Of Year, $10 Target Looms (Reuters)
• Plunging Prices Could Force A Third Of US Oil Firms Into Bankruptcy (WSJ)
• China Resorts To ‘Nuclear Strength’ Weapons To Defend The Yuan (Guardian)
• Chinese Official: Bets Against Yuan Are ‘Ridiculous and Impossible’ (WSJ)
• China Banks Feel The Heat Of Meltdown (FT)
• China FX Reserve Sell-Off To Soon Move Beyond US Treasuries (Reuters)
• Why China’s Market Illness Has Gotten More Contagious (WSJ)
• China Rout Threatens to Spawn India Crisis (BBG)
• EU Set To Weigh China’s Eligibility For Lower Import Tariffs (BBG)
• South Africa’s Flash Crash Exposes Cracks in Currency Liquidity (BBG)
• Saudi Arabia Plays Down Riyal Peg Fears (FT)
• Banks’ Worst Fears Eased as Basel Soft-Pedals Capital Overhaul (BBG)
• Canadian Stocks Fall in Longest Slump Since 2002 (BBG)
• Discovery (Jim Kunstler)
• It’s Time For Europe To Turn The Tables On Bullying Britain (Luyendijk)
• Migrant Flows ‘Still Way Too High,’ EU Tells Turkey (AFP)
• Mass Migration Into Europe Is Unstoppable (FT)