Ground Control to Captain Zhou Xiaochuan

Submitted by James Howard Kunstler  –  www.kunstler.com

Why would anybody suppose that the Peoples Bank of China might want to tell the truth about anything that was within their power to lie about? Especially the soundness of any loan portfolio vested unto the grasp of its tentacles? Of course, most of what China has done in speeding toward the wall of financial crack-up, it learned from watching US bankers slime their way into Too Big To Fail nirvana — most particularly the array of swindles, dodges, and frauds constructed in the half-light of shadow banking to hedge the sudden, catastrophic appearance of reality-based price discovery.

When so many loans end up networked as collateral in some kind of bet against previous bets against other previous bets, you can be sure that cascading contagion will follow. And so that is exactly what’s happening as China’s rocket ride into Modernity falls back to earth. Like most historical fiascos, it seemed like a good idea at the time: take a nation of about a billion people living in the equivalent of the Twelfth Century, introduce the magic of money printing, spend a gazillion of it on CAT and Kubota earth-moving machines, build the biggest cement industry the world has ever seen, purchase whole factory set-ups, and flood the rest of the world with stuff. Then the trouble starts when you try to defeat the business cycles associated with over-production and saturated markets.

Poor China and poor us. Escape velocity has failed. Which raises the question: escape from what, exactly? Answer: the implacable limits of life on earth. The metaphor for all this, of course, is the old journey-into-space idea, which still persists in the salesmanship of Elon Musk, the ragged remnants of NASA, and even the nightmares of Stephen Hawking. Get off this messed-up home planet and light out of the territories, say Mars. Of course, this is a vain and stupid idea, since we already have a planet engineered to perfection for all the life systems associated with the human project. We just can’t respect its limits.

So now, that dynamic duo, Nature and Reality, the actual owners of the planet, have showed up to read the riot act to the renters throwing a wild party. The fourth and perhaps ultimate financial crisis of the last twenty years begins to express itself in terms that only the raptors and vultures can see from on high. George Soros, Kyle Bass, and the other flocking shadow banking scavengers prepare to short the living shit out of the old Middle Kingdom. The immortal words of G.W. Bush ring in their ears: “This sucker is going down,” and they are sure to win big by betting on the obvious. Trouble is, this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.

For instance, when banking systems go down, governments usually follow, and when governments go down, societies often unravel. It doesn’t take a great effort of imagination to see China’s one party politburo leadership machine lose the respect of its governed masses, and then its control of events, followed by a Great Struggle among the regions and factions to restore some kind of order. And when the smoke clears there will a whole lot of nearly worthless concrete and steel, and a vast loss of notional wealth, and China will be lucky to land back in some approximation of the Twelfth Century.

It must be interesting for China to watch the horrifying disintegration of America’s political party structure currently on view, with the mad bull called Trump rampaging across the land and the designated inevitable Mz It’s-My-Turn hijacking her collective for the greater glory of Goldman Sachs. The last time China got the vapors politically — the so-called Cultural Revolution of the 1960s — the country went batshit crazy. Surely some of the ruling party remembers that with requisite terror.

Or maybe this is China and the USA’s Thelma and Louise moment. Pedal to the metal, they drive into the abyss of history holding hands. Remember, audiences loved that!

The Davos Confetti Club

Submitted by Michael Pento – Pento Portfolio Strategies

The Keynesian elite gathered in Davos Switzerland this past week to pontificate on global economic issues and to strategize the engineering of The Fourth Industrial Revolution. This new so called “revolution” includes a discussion on the future of Artificial Intelligence. Judging by the comments coming from most of the list of attendees, it seems obvious the intelligence on display was indeed faux. But the most important take away from thisvenue was that central bankers have made it clear to the markets that the level and duration of quantitative counterfeiting knows no bounds.

European Central Bank (ECB) President, Mario Draghi, used the platform to assure investors he’ll do whatever further is needed to reach his absurd inflation goal: “We’ve plenty of instruments, said Draghi.” “We have the determination, and the willingness and the capacity of the Governing Council, to act and deploy these instruments.”

Central bankers love to use words like instruments and tools to describe the methods and strategies available to them because it makes what they actually do appear less primitive. But truth be told, the only instrument or tool central banks have is the impious power to create money and credit by decree.

Not to be outdone by the Europeans, Japan’s chief money printer, Haruhiko Kuroda, appeared downright giddy from monetary intoxication when discussing what he refers to as his

QQE–Quantitative and Qualitative Monetary Easing program. As if adding that additional “Q” somehow makes it more palatable and effective than the generic form of Quantitative Easing.

When asked by a reporter if the Bank of Japan (BOJ) had more room to ease, Kuroda glibly chuckled that the BOJ has “only” purchased 33% of all existing Government Bonds and conveyed the willingness to monetize every available sovereign debt note issued by the insolvent government of Japan.

And since Mr. Kuroda thinks destroying your nation’s currency is funny, he certainly has a lot more than Mr. Draghi to laugh about. The ECB’s balance sheet stands at roughly 25% of the Eurozone’s Gross Domestic Product; while the BOJ boasts a whopping 78% of Japan’s GDP.

In fact, it wasn’t long after Davos that Kuroda stepped up his assault on the yen by announcing Friday that the deposit rate will move 0.1% into negative territory starting February 16th. Apparently, printing 80 trillion yen a year isn’t wrecking the currency fast enough for the BOJ.

As of Jan 20, 2016 the BOJ’s balance sheet had risen to 389.6 trillion yen. At the start of QQE in April of 2013 its balance sheet was just 174.7 trillion yen. For those keeping track at home that is a 123% increase in the monetary base…and they are just getting started. All this makes you wonder if the additional “Q” really stands for central bank “Quackery”.

Mr. Kuroda averred he has two thirds more JGBs to buy before he runs out of sovereign debt. But once all JGBs are owned by the BOJ the money printing won’t stop. The BOJ President said he will not balk at buying much more of the so called “lesser quality assets” such as equity ETFs and Junk bonds. But buying assets that have a lower quality than a 0.1%, 10-year Japanese bond is a difficult feat to accomplish! Especially in light of the fact that the nation has a debt to GDP ratio of 250% and has an inflation-obsessed central bank.

Turning back to Europe’s Chief Counterfeiter Mario Draghi, he has been buying 60 billion euros a month worth of European sovereign debt and has being do so for quite some time. The total goal had been to add 1.2 trillion euros ($1.4 t) to the ECB’s balance sheet; taking the total up to 3.3 trillion euros. However, that 60 billion euro per month QE program was extended until March 2017 less than 60 days ago. But now, less than two months from expanding the program, he is still not satisfied with rate of euro dilution and told the markets he’s ready to do more!

It is becoming obvious to the worldwide investment community that these central bankers will not quit printing money until inflation becomes an intrinsic and sustainable aspect of the global economy.

But the last seven years has clearly taught us that QE is great for asset prices but is ineffectual at providing viable economic growth. We don’t have to look any further than Japan for this proof. In nominal terms Japan’s GDP is up a measly 5.5% since the currency wrecking regime known as Abenomics took control in December of 2012. Meanwhile, the Nikkei Dow has surged over 100% during that same timeframe.

It is also becoming obvious to the equity markets that there is no escape from this monetary madness. After all, is there anyone who really believes that Kuroda can finally stop printing money when inflation eventually hits his arbitrary 2% target?

The central bank already owns over one third of JGBs and over half of all ETFs. What will happen to the Japanese stock market once the BOJ announces it will begin winding down ETF purchases; and has started down the path to becoming a seller?

And won’t the bond market tank after Kuroda proclaims that its bid for JGBs will be removed? The Ten-year Note must soar from 0.1%, where it is today, to at least where the 2% inflation target now stands. Then throw in a few hundred more basis points for the fact that nation’s tax base cannot service its debt at the higher interest rate.

Therefore, since the obvious result would be a complete collapse in equity and bond prices, which would lead to an unprecedented economic meltdown, the BOJ has unwittingly become trapped into an endless QQE program.

Indeed, the entire global real estate, equity and bond markets have become completely addicted to perpetual and ever increasing quantities of QE and ZIRP. It is no accident that the S&P 500 began its topping process once QE ended in October 2014. The US equity market also has become reliant on ZIRP and QE to move higher.

Asset prices and economies have become wards of central banks and their endless ability to increase the rate of new money creation. Therefore, since the global elites have placed all their faith in the fiat confetti spewed out by central banks, investors would be wise to increase their exposure to the only genuine form of money there ever was…gold.

 

Forget About “Stocks for the Long Run”

Submitted by William Bonner, Chairman – Bonner & Partners

No Shame in Cash

BALTIMORE – After a year of wandering the globe, we are back in the homeland… and ready to turn in our passport. Travel can be fun. It can also be “broadening.” But the most interesting thing about it is not so much what you find out about other places. It’s what you discover about your home.

You return to the land you once knew, as T.S. Eliot put it, and know it for the first time. So, we are ready to rediscover Baltimore – a place where children refer to handguns as “school supplies.”

 

back-to-school sale-1The new school year begins in Baltimore…

 

And what’s this? Judging by yesterday’s mailbag, many of our dear readers are Sarah Palin fans. Several helped us decipher Ms. Palin’s gnomic remarks about Donald Trump, which we covered in Tuesday’s Diary. Several more canceled their subscriptions. They must have thought our admiration for the former Alaska governor was insincere.

But, let’s move on. First, we return to questions put to us in Mumbai two days ago.

“What should an investor do?” asked an old man in a Nehru jacket.

“Should I stay in the stock market? After all, staying in the stock market always seems to pay off over the long term. Or should I move to gold and cash?”

We have been telling people there is “no shame in staying in cash” until the market finds a bottom. If we’re wrong and prices shoot upward, we will miss the upside. But the risk of missing substantial gains seems slight. Earnings are going down. Almost all the signals from industry and commerce seem to be pointing down, too.

Meanwhile, U.S. stocks are still expensive. The CAPE ratio looks at the inflation-adjusted average of the previous 10 years of earnings relative to stock prices. On that basis, the S&P 500 has been a worse deal only three times in the last 100 years. Those were just before the 1929 Crash… the dot-com bust in 2000… and right before the 2008 meltdown – hardly auspicious precedents.

 

1-PE10-percentilesWhere we are: the current PE/10 is in the 92nd percentile of market valuations since 1871 – exceeded only by 1919, 2007 and 2000. Continue reading

The Bank of Japan – Ringing in the Endgame?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Let’s Do More of What Doesn’t Work

It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.

 

Bank of Japan (BOJ) Governor Haruhiko Kuroda speaks at a news conference at the BOJ headquarters in Tokyo June 11, 2013. REUTERS/Yuya ShinoBoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?

Photo credit: Yuya Shino / Reuters

At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:

 

1-NikkeiThe Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust – click to enlarge.

 

This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.

For decades Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough! Continue reading

Gold and Silver Bullion Up 5.3% and 3.4% In January as Stocks Fall Sharply

Submitted by Mark O’Byrne  –  GoldCore

Gold and silver rallied (5.3% and 3.4% respectively) in January, as stocks fell sharply.

Turmoil and sharp falls in Chinese and global stock markets, plunging oil prices, rising stress in credit markets and further signs of weak US and global growth led to a renewed bout of risk aversion in January.

Gold_silver
Finviz.com

This once again led to increased demand for traditional safe-haven assets – gold and silver.

Gold’s best monthly gain in dollar terms in a year, contrasted sharply with the sharp drop in US equities. For the month, the S&P 500 shed 5.1% – the sharpest fall in the S&P 500 index since the Greek debt crisis broke in May 2010. It was the S&Ps worst monthly start to a year since 2009 and other international stock indices had there worst monthly start to the year since 2008.

The DJIA lost 5.5%, for the biggest monthly losses since August and the biggest January declines since 2009. The Nasdaq plunged 7.9%, its worst month since May 2010.

U.S. stocks as measured by the Russell 3000 index fell 5.74% in the month. Tech darlings Apple and Amazon were the largest contributors to the decline. Apple fell 7.52% in the month, while Amazon fell 13.15%.

Europe’s benchmark Stoxx 600 saw January losses of 6.4pc and the DAX was 8.9% lower with vulnerable Deutsche Bank collapsing over 25%.

Emerging markets equities as measured by the MSCI Emerging Markets index fell 9.06%. The Chinese stock market, the Shanghai Composite Index, collapsed 23 percent, the biggest monthly drop since October 2008 and the worst performance among 93 equity indices tracked by Bloomberg internationally.

Brokers and Wall Street strategists had predicted another 10 percent gain for equities in 2016. Wall Street and others bullish predictions are now being revised downwards as measures of investor anxiety reach levels not seen in a few years.

The risk-off trade  saw flows into gold and silver and also into U.S. bonds. While the dollar fell versus gold, other currencies fared worse than the dollar. The New Zealand dollar fell more than 5% in the month vs. the U.S. dollar and sterling fell 3.66%.

Ultra loose monetary policies globally, the BOJ negative interest rates and increasing speculation that the Federal Reserve will have to delay further interest-rate increases is burnishing gold’s appeal and bodes well for gold in 2016.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• China Manufacturing Shrinks At Fastest Rate For Over 3 Years (Reuters)
• Mid-Tier Chinese Banks Piling Up Trillions Of Dollars In Shadow Loans (Reuters)
• US Hedge Funds Mount New Attacks on China’s Yuan (WSJ)
• China’s Steel Sector Hit By Growing Losses (FT)
• Athens And Rome Expose Europe’s Greatest Faultlines (Münchau)
• Euro-Area Factories Cut Prices as Deflation Risks Loom Large (BBG)
• Nigeria Asks For $3.5 Billion In Global Emergency Loans (FT)
• Why Miners Have it Worse Than Oil Producers (BBG)
• Saudis Told To Embrace Austerity As Debt Defaults Loom (Tel.)
• 1 Million Investors Lose $7.6 Billion In China Online Ponzi Scheme (Reuters)
• The West Is Reduced To Looting Itself (Paul Craig Roberts)
• US, UK-Backed Saudi War & Blockade Cause Mass Starvation In Yemen (Salon)
• Europe Chokes Flow of Refugees to Buy Time for a Solution (WSJ)
• German Police ‘Should Shoot At Migrants’, Populist Politician Says (BBC)
• UK Labour MP Compares Cologne Attacks To Birmingham Night Out (Tel.)
• The EU Must Reassert Humane Control Over Chaos Around The Mediterranean (UN)