It Starts: Junk Bonds ‘Contained’

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

To an economist, the economy can bear no recession. In times of heavy central bank activity, an economy can never be in recession. Those appear to be the only dynamic factors that drive economic interpretation in the mainstream. And they become circular in the trap of just these kinds of circumstances – the economy looks like it might fall into recession, therefore a central bank acts, meaning the economy will avoid recession; thus there will never be recession. It requires that both the central bank will identify the recession correctly and then invent and apply the requisite “acts.”

It was never really that simple to begin with, but what happens, like now, when central banks remain in the act (monetary policy, we are told, remains “highly accommodative”) but the economy appears more and more like recession? The result is increasingnonsense and absurdity. Such as:

But Deutsche Bank AG Chief International Economist Torsten Slok has some counterintuitive advice for his most pessimistic clients: Buy.
“I frequently hear clients express very negative comments about the U.S. economic outlook, including the statement that that economy is already in a recession,” he wrote. “The irony is that if you have the view that things are really bad at the moment and we are currently in a recession, then it is actually a good idea to buy risky assets today.”

If there is “blood in the streets”, etc. The problem with that saying is that nobody ever tells you how much blood must be in the streets to actualize those sentiments; even if there appears a lot of carnage there might still be room for a lot more. In fact, this happens far more than you think. For economists, they will first tell you that such blood-letting is impossible before being forced to admit it’s there only to suggest there will be no more. Continue reading

Slouching Toward The Dark Side

Last Wednesday we noted there is something rotten in the state of Denmark, meaning that the world’s great potemkin village of Bubble Finance is unraveling. The evidence piles up by the day.

To wit, now comes still another story about the Red Paddy Wagons rolling out in China. This time they are rounding-up the proprietors of a $7.6 billion peer-to-peer (P2P) lending Ponzi called Ezubao Ltd.

Ezubo investors lined up outside a government office in Beijing last month; having shut down the online peer-to-peer investing platform in December, authorities were reported Monday to have declared Ezubo a Ponzi scheme and arrested 21 suspects linked to it and its parent. Ezubo investors lined up outside a government office in Beijing last month; having shut down the online peer-to-peer investing.

The particulars of this story are worth more than a week of bloviating by the Wall Street economists, strategists and other shills who visit bubblevision the whole day long. That’s because it exposes the rotten foundation on which the entire Red Ponzi and the related world central bank regime of Bubble Finance is based.

Needless to say, these dangerous, unstable and incendiary deformations are not even visible to the Keynesian commentariat and policy apparatchiks. They blithely assume that what makes modern economies go is the deft monetary, fiscal and regulatory interventions of the state. By their lights, not much else matters——and most certainly not the condition of household, business and public balance sheets or the level of speculation and leveraged gambling prevalent in financial markets and corporate C-suites.

As that pompous fool and #2 apparatchik at the Fed, Stanley Fischer, is wont to say—–such putative bubbles are just second order foot faults. These prosaic nuisances are not the fault of monetary policy in any event, and can be readily minimized through a risible scheme called “macro-prudential” regulation. Continue reading

Do they really want your money back? op-ed in Bild Zeitung

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

Last February, while visiting the federal finance ministry in my capacity as Greece’s finance minister, an aide to Dr Schäuble asked me playfully, but not without a strong hint of underlying aggression: „When am I getting my money back?

I am sure that many readers of Bild Zeitung would be proud of this official and of his impertinent question.This is not the time, nor the newspaper, for me to enter into an argument regarding the nature and causes of Greece’s public and private debt to German banks and to the German state. Let’s, for now, keep it simple:Greece owes a great deal of money to Germany, and other states, and finds it very hard to meet these repayments given the collapse of Greek national income over the past six years. The interesting question is this:

Does the federal government of Germany genuinely place above other priorities getting its taxpayers’ money back from Greece? Was the finance ministry aide, who asked me that question, genuine in his concern? In other words, can German citizens trust their government to prioritise recouping the money that Germany has lent the Greek state? Or does the German government have other, unstated, priorities?

Let’s approach this question dispassionately. Greece’s economy is badly damaged. Whatever the reasons, Greeks have lost exactly one third of our national income (since 2010), Greek banks are unable to lend even to profitable firms, and investment from abroad has dried up. These are facts independently of your theory, dear reader, or mine, as to their causes.

Given these facts, suppose that we were to sit down, together, to decide what must be done to ensure that Greece’s broken economy can generate the taxes from which the German taxpayers’ money will be returned. Would we agree on the measures that are currently being passed through the Greek Parliament as a result of inordinate pressure from the troika and with the blessings of the federal finance ministry? Continue reading

Still Searching For Those Dollars

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

There is a great danger to negative interest rates, one that is denied by economists and central bankers because they deny the essence of wholesale finance. Stuck in the 1950’s, their solutions were arguable even then but hold little if nothing of value now. Markets are being reacquainted once more with the possibility (finally). As discussed last week, the Bank of Japan did not unleash more “stimulus” but rather confirmed the ineffectiveness and general impotence of all that came before (which was considerable).

Confusion over terminology is very much understandable in this area on the grounds of complexity alone. However, even in basic concepts there is in enough instances serious ambiguity as to render little but further confusion. In this case, surrounding NIRP, we have the simultaneous distinctions of the “dollar” short and a dollar shortage. While seemingly indistinguishable by virtue of the words’ common root, those terms are very different at least insofar as they can describe opposite perspectives. And it gets even more confusing when attaining those different perspectives requires an indirect angle.

On the one hand, the “dollar” short suggests nothing on its own of a dollar shortage. Indeed, the entire banking system from the first appearance of fractional lending shows that a systemic short position can be entirely stable for long periods of time. Any fractional reserve bank is synthetically “short” money; thus the difference between the short and the shortage was the willingness of the public to maintain equal value in claims. The short is the system, the shortage when it doesn’t work. This is “sound” banking or even “sound” money; the strong dollar.

The short turns to shortage when that confidence is eroded just enough to surpass some critical threshold. Once demands placed upon banks to deliver money become too voluminous, the money short becomes the self-reinforcing shortage – the bank run that leads to a systemic run. The point of the central bank under currency elasticity was to interject currency at that critical moment, so that the shortage might be undercut to allow the short its return to stability (artificial as it may be).

While that is much easier to follow, the wholesale “short” is a degree of magnitude further removed and in several important respects. The angle of perspective is no longer purely banks to the public; in the wholesale framework, especially the eurodollar, banks are “short” each other as well as the public. It is the interbank tangle that so perplexed “elasticity” in 2007 and 2008 as the public largely sat out the affair being stung almost exclusively in asset prices rather than money and convertibility. Outside of a few small outliers (Northern Rock), there were no long lines at ATM’s expressing the public’s growing unease with their perceptions of the currency regime. It was entirely an interbank affair. Continue reading

Gold and Gold Stocks – A Meaningful Reversal?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Negated Breakdown

There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.

 

goldmine-700x360Photo via genius.com

We suspect that in it was initially still widely expected that stock market weakness was just a fluke and that the downtrend in the gold price would therefore soon resume. Moreover, base metal mining stocks were pounded mercilessly and as we have previously discussed, there is a completely illogical short term correlation between this sector and gold mining stocks, likely due to various tracking products and the mindless automatic buying and selling associated with them. From a technical perspective the action has created quite an interesting situation though:

 

1-XAU-HUI breakdown and reversalXAU and HUI daily. After initially beginning to recover from November, resp. December lows, both indexes sold off sharply after the first trading week in January, and in the process broke below a previous support level that has been tested many times and has up to that point always held. It looked like yet another breakdown in the long-lasting bear market was underway – but the indexes quickly reversed back above the broken support line – click to enlarge.

 

As the chart annotation indicates, the recent reversal is definitely positive. Both false breakouts and false breakdowns often turn out to be reliable trend change signals. An additional bonus in this case was that the initial breakdown has induced widespread capitulation (judging from anecdotal evidence). Continue reading

The West Is Traveling The Road To Economic Ruin

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Michael Hudson is the best economist in the world. Indeed, I could almost say that he is the only economist in the world. Almost all of the rest are neoliberals, who are not economists but shills for financial interests.

If you have not heard of Michael Hudson it merely shows the power of the Matrix. Hudson should have won several Nobel prizes in economics, but he will never get one.

Hudson did not intend to be an economist. At the University of Chicago, which had a leading economics faculty, Hudson studied music and cultural history. He went to New York City to work in publishing. He thought he could set out on his own when he was assigned rights to the writings and archives of George Lukacs and Leon Trotsky, but publishing houses were not interested in the work of two Jewish Marxists who had a significant impact on the 20th century.

Friendships connected Hudson to a former economist for General Electric who taught him the flow of funds through the economic system and explained how crises develop when debt outgrows the economy. Hooked, Hudson enrolled in the economics graduate program at NYU and took a job in the financial sector calculating how savings were recycled into new mortgage loans.

Hudson learned more economics from his work experience than from his Ph.D. courses. On Wall Street he learned how bank lending inflates land prices and, thereby, interest payments to the financial sector. The more banks lend, the higher real estate prices rise, thus encouraging more bank lending. As mortgage debt service rises, more of household income and more of the rental value of real estate are paid to the financial sector. When the imbalance becomes too large, the bubble bursts. Despite its importance, the analysis of land rent and property valuation was not part of his Ph.D. studies in economics. Continue reading

Intraday Precious Metal Returns – Latest Research

Submitted by Mark O’Byrne  –  GoldCore

Some interesting research looking at intraday precious metal returns has just been published by Brian Lucey, Jonathan Batten, Maurice Peat, Frank McGroarty and Andrew Urquhart in a paper entitled “Stylized Facts Of Intraday Precious Metal Returns”.

 

intraday_precious metals

 

The authors note in the paper that has just been published on the Social Science Research Network (SSRN) website, that

“Precious metals are some of the most traded assets worldwide and they also play an important role for investor as well as comprising an important asset for central banks. Given the increased attention precious metals have received in the literature, the intraday dynamics are of great interest.”

They conclude that

“Initially, we show that the volume of trades of precious metals has increased substantially over the last 15 years’ while the bid-ask spread has decreased indicating the increase in efficiency and liquidity of precious metal markets. We also show strong evidence of intraday periodicity of precious metals volume of trades and volatility.

The intraday volume has increased over time, while the intraday bid-ask spread has decreased over time.

We also study interaction between volatility and returns of each precious metal and our correlation analysis shows that returns are negatively correlated with the contemporaneous volatility and the previous 5-minute volatility.

Furthermore, we find bi-directional Granger causality between volatility and returns suggesting that past volatility (returns) offers significant explanatory power in explaining current returns (volatility).”

The paper can be found here

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• The Citi Market-Crash Clock Says It’s 5 Minutes To Midnight (BI)
• Time Running Out For China On Capital Flight, Warns Bank Chief (AEP)
• China Announces 400,000 Steelworker Job Cuts, 3 Million More Expected (WSWS)
• Hong Kong Property Sales Slump To 25 Year Low (BBG)
• Hong Kong Short Sellers Could Find The Weak Link In Real Estate (MW)
• Oil-Price Poker: Why the Saudis Won’t Fold ‘Em (WSJ)
• BP Reports 91% Decline In Fourth-Quarter Earnings (BBG)
• BP Posts Biggest Loss In 20 Years, Axes 7000 Jobs, Shares Lose 5% (Guardian)
• Flood Of Oil Asset Writedowns Across Asia (BBG)
• Iceland Central Bank Preparing New Weapons To Fight Capital Rush (Reuters)
• World Index Of Economic Freedom Tells Us That EU Should Be Broken Up (AEP)
• Ground Control to Captain Zhou Xiaochuan (Jim Kunstler)
• Progress On Migration Could ‘Facilitate’ Greece’s Bailout Review (Kath.)
• Europe’s Refugee Story Has Hardly Begun (Paul Mason)
• Where Are Our Principles? (Boukalas)