Fix The Error

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

One follow up point to this morning’s missive about why the economy seems to be converging in recession rather than full and blossoming recovery: There must be something said about the manner of redistribution in this “cycle” as different from all others. In other words, the Fed has been attempting greater and greater redistribution efforts via monetary interference ever since Solow and Samuelson predicted their disastrous “exploitable” Phillips Curve. At least in 1961 the Fed was as much a captured article of Treasury’s orbit, but after Greenspan (or Volcker, we don’t really know) moved to interest rate targeting (and eurodollar denial) the intent has been quite evident.

We can measure such things in raw, absolute terms, as the FOMC targeted a low of 3% for federal funds by September 1992. And while ostensibly in recovery, the economy experienced its first “jobless” version (just ask Bush Sr.) during the whole of the low-rate regime. The next cycle, after recognizing just the contours of a grand monetary shift, Greenspan by June 2003 had federal funds targeted at 1%; (not) coincidentally that was another and more prolonged “jobless recovery.” We have now not just ZIRP but much more than that the jobless nature of the economy this time is in a class by itself far removed even from those prior two.

ABOOK Oct 2015 Goods R Labor Empl2

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To Hell in a Handcart

Submitted by William Bonner, Chairman – Bonner & Partners

$5 Trillion up in Smoke

POITOU, France – Pessimism is a sin against God, said money manager Charles Gave. It suggests ingratitude. And a lack of faith. After all, this is God’s world. What, not good enough for you?

That’s why we are always optimistic at the Diary. Things don’t always go the way we would like, but they always go the way they should. Yes, the world may be headed to Hell in a handcart… but it’s for its own damned good!


To Hell in a HandbasketMild surprise down in hell at the timing, but as we all know, what needs to happen always happens – just neverwhen it’s supposed to.

Cartoon by Scott Hilburn


It is cold and snowy this morning. But we are crossing to the sunny side of the street today. Look how easy it is. About $6 trillion has been lost in the world’s stock markets so far this year. Well, boo-hoo! It was only “on paper” anyway.

Meanwhile, the New York Fed’s Empire State Manufacturing Survey – which takes the pulse of New York’s manufacturing industry – just hit its lowest level since the last recession. But what do factories make? Stuff… and do we really need more stuff?

New York City is also reporting retrenchment in its luxury real estate market. Prices are down for the last eight months in a row. To that, we say: It serves those rich SOBs on Wall Street right. They bought their digs with money they got from the Fed on super sweet terms. It’s a pleasure to see them take a loss.

You see what we mean? No matter how dreary the weather, you can always use your portfolio statements to start a cozy fire. Continue reading

Why This Slump Has Legs

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Berenice Abbott Columbus Circle, Manhattan 1936We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth’”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever. Continue reading

Soon Comes The Deluge

The robo-machines are now having a grand old time hazing the August lows at 1870 on the S&P, and may succeed in ginning up another dead-cat bounce or two. But this market is going down for the count owing to a perfect storm.

To wit, the global and US economies are heading into an extended deflationary recession; S&P earnings peaked at $106 per share more than a year ago and are already at $90, heading much lower; and the central banks of the world are out of dry powder after a 20-year binge of balance sheet expansion.

Global Central Bank Balance Sheet Explosion

The latter is surely the most important of the three. It means there will be no printing press driven reflation of the financial markets this time around. And without more monetary juice it’s just a matter of time before a whole generation of punters and front-runners abandon the casino and head for the hills.

Even with today’s ragged bounce, the broad market has now gone sideways for nearly 700 days. The BTFD meme is loosing its mojo because it only worked so long as the Fed-following herd could point to more printing press cash flowing into the market or promises of “accommodation” that were credible.  But that will soon be ancient history.
^SPX Chart

^SPX data by YCharts

Indeed, it is already evident that “escape velocity” has again escaped. Q4 GDP growth is now running at barely 0.5%, and the current quarter could actually be negative for reasons we will analyze in the days ahead. Continue reading

Unsound Credit and Risk Assets – How Serious is the Situation?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Loan Losses and Rumors

We want to briefly comment on recent news about a rise in loan loss provisions at US banks and rumors that have lately made waves in this context.


iceberg, ClevengerThe iceberg – an excellent simile for what we know and what we don’t know… or rather, what we don’t know just yet.

Image credit: Ralph A. Clevenger


First though, here is a look at the Philadelphia Bank Index (BKX) as well as its ratio to the S&P 500:


1-BKXInvestors seem increasingly worried about the banking sector’s prospects – click to enlarge.


Contrary to widespread expectations, market interest rates on treasury debt have actually declined since the Fed’s rate hike, and the yield curve’s trend toward flattening (which has resumed in the summer of 2015) has yet to significantly reverse. In short, investors may inter alia well be fretting about the fact that an expected improvement in interest margins has as of yet failed to occur (in fact, bank stocks peaked concurrently with the yield curve reaching its widest point of the year in 2015).


2-ten-minus-two-year yield10 minus 2 year treasury yield: while the curve widened from February to July 2015, bank stocks rallied and exhibited relative strength. They peaked right around the time when the yield curve reached its widest point of the year – click to enlarge. Continue reading

The True And Hidden Menace of Liquidations

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Today’s radical reversal in stocks notwithstanding, the continuing hits of liquidations are not achieving their settled ends. In purely financial terms, the entire process of liquidation is to renew a settled state. Local imbalances force restriction of financial resources (what used to be money but now is something recognizable as such but truly not money) which triggers a cascade of repositioning that either relieves the immediacy of the imbalance or takes another step further in repositioning. This is the snowball effect predicated a great deal on the scale and, perhaps more importantly, the composition of the leverage in support of it all.

Local liquidations are a troubling nuisance, but when they cannot solve the imbalance from within a localized financial space the risk of a more general liquidation rises. An analogy of our current circumstances would be junk bonds. Since junk bond positions are tied to other asset classes through the vehicles which have “invested” in them, should junk bonds as either collateral or information signals (about the soundness of the vehicle holding them) produce too much of a counter-effect, the tendency to liquidate just junk bonds is surpassed and spills over into other assets. Obviously, that has already happened.

This is why Ben Bernanke’s assertion to Congress on March 28, 2007, was dead wrong before it was ever uttered:

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely.

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Invest In Gold Now As Stock Market To Crash – Faber

Submitted by Mark O’Byrne  –  GoldCore

Marc Faber, editor of the “Gloom, Doom & Boom Report,” has advised investors that now is a good time to invest in gold  because stocks will crash over 40% and the world is on the verge of a new liquidity and debt crisis.


Faber says investors would be prudent to diversify into safe haven in gold bullion which has risen 3% this year and is currently at $1,096 an ounce.

He recently told MarketWatch that the stock-market downturn could result in stocks hitting lows not seen in five years.

Faber warns that the S&P 500, which fell to 1,881 yesterday, could drop to its 2011 low below 1,200.

“According to FactSet data, that would be 1,099.23, set that October. Faber referred to that outcome, a more-than-40% plunge in the broad stock-market benchmark, as his ‘medium bearish’ scenario. His most bearish prognostication envisages the S&P 500 falling back to its 2009 nadir, which FactSet data put at 676.53,” MarketWatch reported.

“The main factor is diminishing global liquidity because of the decline in oil prices.”  A rapid appreciation of the U.S. dollar may send Brent oil as low as $20 a barrel, according to Morgan Stanley and other analysts.

Crude oil (WTI) fell sharply to below $28 a barrel today on deepening concerns about oversupply, fragile demand from China and the slowing global economy.

Faber has correctly warned that the price of crude oil indicates a shrinking global economy. “When oil prices increase, it basically is a consequence of expanding [global] liquidity,” Faber said, so inversely, this unrelenting fall suggests contraction.

Faber cautioned that the situation could change because of global central bank tactics. “It is impossible to make predictions because we don’t know the extent of the madness of central bankers,” he said. He has been a harsh critic of the quantitative easing measures of the Federal Reserve and other global central banks.

He has warned that their zero percent interest policies have resulted in the world becoming vastly more indebted and therefore more vulnerable to a new and worse global debt crisis.

Faber favours allocated and segregated coin and bar storage in Singapore.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Oil Falls 3% On Surplus Worries, As US Drops Toward $27 (Reuters)
• Shell Q4 Profit Plunges as Oil’s Slump Deepens (BBG)
• Chinese Stocks in Hong Kong Fall to Global Financial Crisis Lows (BBG)
• Nikkei, Hang Seng Lead Slump In Asian Markets (CNBC)
• Recent S&P 500 Correction Appears Small in Context of History (BBG)
• World Faces Wave Of Epic Debt Defaults: Central Bank Veteran (AEP)
• Hedge Fund That Called Subprime Crisis Urges China To Devalue Yuan by 50% (BBG)
• China Is Getting Less and Less Bang for Its Credit Buck (BBG)
• China Needs a Great Economic Shift Away From Debt Fueled ‘Growth’ (Wolf)
• China Data Indicate Heavy Deflationary Pressure (Nikkei)
• What Is China’s Actual GDP? (CNBC)
• Mining Giant BHP Billiton Lowers Forecast, Investors Fear Dividend Cut (WSJ)
• Fed’s $216 Billion Treasuries Rollover Recalls Crisis Era Buying (BBG)
• ECB Plans To Order Banks To Tackle Bad Loans (Reuters)
• Varoufakis Speaks About 2015 Greece Parallel Currency Plan (Kath.)
• Greek Immigration Minister Slams Turkish Failure To Curb Refugee Flow (Kath.)
• EU To Scrap ‘First Country’ Asylum Claim Rule (FT)
• Children On Syrian Refugee Route Could Freeze To Death: UN (Reuters)
• Doctors Without Borders Says EU Worsens Refugee Crisis, Aids Smugglers (AP)
• Rate Of Refugee Arrivals In Greece Dwarfs 2015 Pace (AFP)
• More Plastic Than Fish In The Sea By 2050 (Guardian)