Not Only Is There No Inflation Anchor, Expectations Increasingly Suggest A Very Bleak Future

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The US economy is supposed to be nothing like its Chinese counterpart, a sentiment that extends in the mainstream well past that into genuine surprise about how it would be possible US financial markets tripping over Chinese stumbles. Though the US might be fighting, too, a manufacturing slump that looks more like recession every day, convention still holds that the US is on the upswing while it is China’s descent alone that troubles anyone. That was the point of Janet Yellen’s December action, to proclaim it at least in symbolic deed.

Yet, for all the supposed differences, we find policymakers on both sides of the Pacific rushing to reassure in almost the same manner as markets on both sides fail to cooperate. China has a renewed stock market problem and currency slide that makes a mockery of all its prior attempts at reassurance.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades…
China’s domestic stock market has become one of the most visible symbols of the government’s struggle to win back investor confidence. After cheerleading by state media helped fuel an unprecedented boom in mainland shares last summer, the market crashed as regulators failed to manage a surge in leveraged bets by individual investors. While a state-sponsored market rescue campaign sparked a 25 percent rally in the Shanghai Composite, those gains were wiped out on Thursday as the index headed for the lowest close since December 2014.

Stock market concerns, as well as “dollar” currency concerns, for that matter, are being fed by increasingly difficult economic estimations. The progression of probabilities is decidedly working against the PBOC, as declared bottom after bottom falls by the wayside and all signs still point downward.

In the US, that progression is a little different but still ends with everything looking increasingly negative and seriously so. We started the year with oil at $50-some and “transitory” and the lingering effects of 5% GDP stoking only hugely positive expectations. The year ended in almost opposite shape, with oil now threatening instead below $30, an all-but-declared manufacturing recession and still more dire threats to broad economic function yet to be unleashed (an inventory problem, primary among them, that by all orthodox count shouldn’t exist under such strong conditions). As such, the Fed raised its interest rate target along with several of its ineffective toys, but rather than markets here rallying around that view they have still moved highly contrary.

ABOOK Jan 2016 US Problems 5yr5yr

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Chinese Sunset

The jet lag from flying back from Hong Kong on Sunday is just about gone, but I’m still deep in thought about what I learned. As I said in last week’s letter, the overall tone on China was bearish for the group of very sophisticated investors I met with. There was particular mention of the quantity of currency flowing out of China and lots discussion about how that was happening. Suffice it to say that the wealthy in China have ways to move money.

I mentioned that fact at lunch today with a close friend of mine (who will allow me to tell the story but not to mention his name in connection with it), and he shared an anecdote that he had run into on a trip to Seattle the day before. It seems that one of his friends bought a rather large, roughly $8 million, new home in a nice part of Seattle and was selling his old home for a mere $4 million. Thirty prospective buyers came through to look at the property, and not one of them spoke English – they were all Chinese.

Think about that for a moment in the context of money leaving China. At the Hong Kong gathering, a Bank of America Merrill Lynch analyst noted that if the top 3% of wealth holders in China moved just 7% of their money out of the country, it would add up to $1.5 trillion. Personally, I think Chinese investors are being smart to diversify their assets and asset bases. That is something we take for granted in the West.

(My friend David Tice, founder and ex-manager of the Prudent Bear Fund, who has a killer apartment in my building – indeed, his apartment was the inspiration for my getting and building mine out – wonders how he can get prospective Chinese buyers to come see his place! The weather is a lot better in Dallas than it is in Seattle. I know from talking to friends in New York City that a lot of Chinese are also buying there, along with Russians and others from that corner of the world.) Continue reading

Switzerland’s Referendum on Fractional Reserve Banking

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Warmed-Up “Chicago Plan”

Many of our readers may be aware by now that a Swiss initiative against fractional reserve banking has gathered the required 100,000 signatures to force a referendum on the matter. Is is called the “Vollgeld Initiative”, whereby “Vollgeld” could be loosely translated as “fully covered money”.

 

logo_vollgeld-initiative_mit_Titel_hoch_2014_05Swiss initiative against fractional reserve banking

Austrian School proponents will at first glance probably think that it sounds like a good idea: After all, it is the creation of uncovered money substitutes ex nihilo that leads to the suppression of market interest rates below the natural rate and consequently to a distortion of relative prices, the falsification of economic calculation and the boom-bust cycle.

However, a second glance reveals that the initiative has a substantial flaw. One may for instance wonder why the Swiss National Bank hasn’t yet let loose with a propaganda blitz against it, as it has done on occasion of the gold referendum. The answer is simple: the “Vollgeld” plan only wants to prohibit the creation of fiduciary media by commercial banks. Continue reading

Hey, Wall Street—This Bud’s For You

The hordes of Washington politicians promising to boost the nation’s economic growth rate and the posse of monetary central planners and their Keynesian economists (excuse the redundancy) lamenting that “escape velocity” appears to have gone MIA have one thing in common. To wit, they have never looked at the chart below, or don’t get it if they have.

Plain and simple, the sum of Washington policy is to induce the business economy to eat it seed corn and bury itself in debt. Capitol Hill does its part with a tax code which provides a giant incentive for debt finance, and the Fed completes the job through massive intrusion in the money and capital markets. The result of systemic financial repression is deeply artificial, subsidized interest rates and free money for carry trade gamblers—–distortions which have turned the C-suites of corporate America into stock trading rooms.

As a case in point, the $46 billion of bonds sold by the owners of Budweiser last night where priced at a ten-year yield of 3.67%, which means that after taxes and inflation, the company’s borrowing cost was hardly 1%. Yet, as explained more fully below, the only point of this massive offering was to fund with nearly free long-term capital the huge payday for speculators in SABMiller stock that will result from the $120 billion Anheuser-Busch InBev (BUD) takeover transaction. Continue reading

China Trade Following China Finance

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Chinese exports in December were better than feared, declining by just 1.4% against some expectations for an 8% decline. However, there were significant questions in the data, starting with year-end contract projections, unverified accounts that don’t match other countries’ trade figures and the return of Hong Kong as a potential falsification point. As ZeroHedge points out, without the huge jump in Hong Kong activity the export figures would have been more in line with recent months.

While economists were taking comfort with -1.4%, for the quarter exports declined 5.1% which was practically the same as the -5.9% from Q3. The trend is still undeniably weak, with the past five quarters projecting nothing but continued disappointment; +8.5% Q4 2014; +4.6% Q1 2015; -2.2% Q2 2015, including the last positive number for exports; -5.9% Q3 and -5.1% Q4.

SABOOK Jan 2016 China Exports

The true nature of the unfolding disaster is revealed by wider context, where the argument over whether -1.4% is really an improvement is put to rest. As noted month after month, China’s industrial capacity was built upon the premise of not positive growth but growth that averaged 20-40% year in and year out. The export numbers in 2015 confirm that either the global economy suddenly stopped buying so much of its goods from China, or the global economy suddenly stopped. Those are the only two possibilities; the only way to explain why China was exporting at 30% before 2008 and then again, briefly, just after, but now can’t even maintain a steady level. Continue reading

“Buy Gold” As Equities “Rolling Over” Warns UBS

Submitted by Mark O’Byrne  –  GoldCore

UBS has warned that the seven-year cycle in equities is rolling over, we could see a sharp 30% correction in stocks and that as per the headline of their ‘Technical Outlook 2016′, it is time to “buy gold”.

UBS_Gold_Charts_2016

In their just released research note entitled ‘The 7-Year Cycle in Equities Is Rolling Over … Buy Gold!’, analysts Michael Riesner and Marc Müller believe the bear market that has dominated the price of gold since 2011 is nearing a bottom, with the “basis for the next multi-year bull market” now taking hold:

“Gold we expect to move into a major 8-year cycle bottom in 2016, as the basis for a new multi-year bull market.”

“Gold has been trading in a cyclical bear market since 2011. In 2016, we expect gold and gold mines moving into an 8-year cycle bottom as the basis for the next multi-year bull market. Initially, we see gold profiting as a safe haven and as of 2017, gold could profit from the US dollar moving in a major top and starting a bear market.” 

“In contrast to the underlying secular trend in commodities (which has turned bearish) we see gold (which is in our view a currency and not a commodity) still trading in a secular bull market.

Pattern wise we continue to see the 2011/2016 cyclical bear market in the same context as the 1975/1976 bear cycle in gold. Keep in mind, in the mid-70s gold lost 43% of its value from its January 1975 top before another gold bull market started into the January 1980 bubble peak. It is amazing to see that with a loss of 45% from its August 2011 top into the early December 2015 low, the decline in gold has more or less exactly the same proportion as in the mid-70s.

Furthermore, there are still a lot of market commentators who say that the August 2011 top in gold was the top of a bubble. According to the average gains we have seen in historical financial bubbles, the gold bull run from 2001 into 2011 (760%) was far away from any bubble territory.

In the first gold bubble, gold gained 2400%. In the 1903 to 1929 Dow bubble, the Dow Jones Industrial gained 1200%. The 1979-1989 Nikkei bubble came in at around 2000% and the 1980 – 2000 Nasdaq bubble topped out a +3900%.

So if gold moves into a bubble, we would need to see a gold price of minimum $3,300, and in this case we would still talk about a low bubble phenomena such as the 1903 – 1929 Dow Jones bubble!!”

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• WTI, Brent Oil Sink Under $30 (FT)
• China Stocks Enter Bear Market as State-Fueled Rally Evaporates (BBG)
• Asia Shares Hit 3-1/2-Year Lows As Oil Resumes Fall (Reuters)
• A Towering Chinese Debt Mountain Looms Over Markets (BBG)
• China’s Capital Flight (BBG)
• China Wants a Reserve Currency and Control, But Can’t Have Both (BBG)
• Layoffs and Unrest Loom in China as Growth Slows (BBG)
• The Simple Truth About China’s Market (BBG)
• China Credit Growth Surged In December Amid Fresh Stimulus (BBG)
• Glimmers Of Hope For Oil As Russia Poised To Slash Output – But.. (AEP)
• The ‘Real’ Price Of Oil Is Below $17 (ZH)
• Saudi Life With $30 Oil (BBG)
• Saudi Arabia Plans New Sovereign Wealth Fund (Reuters)
• Iron Ore Risks Tumbling Into $20s on Demand Fall: Citi (BBG)
• How Australian Households Became The Most Indebted In The World (Guardian)
• Greece: A European Tragedy (Mody)
• Dutch Populist Wilders Says EU Finished, Netherlands Must Leave (BBG)
• Europe Doesn’t Need Stronger Borders (Legrain)
• Switzerland Joins Denmark In Seizing Assets From Refugees (Guardian)
• Nine Bodies Of Refugees, Migrants Found Off Turkish Coast (Reuters)
• Three Children Drown Off The Coast Of Greece’s Agathonisi Island (Kath.)