A Rebound in Stocks Begins
Given that a very sharp downturn in so-called “risk assets” is well underway globally, but not yet fullyconfirmed by US big cap indexes, we are keeping an eye out for confirmation. This is to say, we are looking for events, market moves, positioning data, even newspaper headlines, that will either confirm or refute the notion that a larger scale bear market (as opposed to just a deep correction) has begun.
Haruhiko Kuroda will stimulate us back to Nirvana! Hurrah!
Photo credit: Yuya Shino / Reuters
Readers may recall an article we posted earlier this year, discussing historical examples of the stock market swooning in the seasonally strong month of January (see: “Stock Market Suffers Worst Start to the Year Ever” for details). When the market does something like this, it is more often than not sending a message worth heeding. Chart patterns of course never repeat in precisely the same manner, but such historical patterns are nevertheless often useful as rough guides.
As a reminder, here is a chart of the DJIA from 1961 to 1962. Both the distribution period preceding the sell-off, as well as the timing and pattern of the sell-off itself show many similarities to what has so far occurred in 2015 to 2016:
The DJIA from 1961 to 1962. We may be at the beginning of the period equivalent to the one in the green rectangle – click to enlarge. Continue reading →
Last month when China’s exports “only” declined by 1.7% (revised) the entire orthodox world took it as a definitive signal for the long-awaited monetary stimulus effects. Whether it was the yuan’s “devaluation” or the six rate cuts and the often double shots of reserve requirement reductions that accompanied them, December trade figures were so very encouraging. Economists, in particular, were quick to convince themselves of their faith in monetarism, as exports for January then were expected to “only” slide by 1.9%, similar to December, while imports were predicted to be almost flat – an unbelievable improvement given that imports had been contracting regularly by 15%-20% throughout most of 2015.
As it turns out, these expectations for the turnaround were literally unbelievable since the latest trade figures from China were nowhere near them. Instead, both exports and imports collapsed yet again as if December’s monthly variation was only that. Exports dropped by 11.2% in January, the worst since March 2015 and the third worst of the “cycle.” Imports fell by 18.8%, more in line with last year’s baseline and nothing like a turnaround or even the hint of one.
The slide in exports suggests the yuan’s depreciation since August has yet to result in a sustained boost to the competitiveness of China’s factories. While the decline in shipments to and from most major destinations raises concern of a lingering trade slowdown, the readings may also be influenced by the timing of China’s week-long Lunar New Year holiday and volatility in trade flows with Hong Kong.
“Taken at face value these numbers are a negative sign for the Chinese economy,” said Shane Oliver, head of investment strategy at fund manager AMP Capital Investors Ltd. in Sydney. “But Chinese economic data is traditionally very volatile around January reflecting the floating timing of the Chinese new year and they may also reflect a correction to possible over-invoicing and disguised capital outflows that could have boosted the December data.”
The above quoted passage is exactly why economists keep getting it all wrong, in China and everywhere else. This is nothing like a “slowdown” (how could -20% imports be classified as that?) particularly since Chinese trade has been declining precipitously for over a year. Yet, despite the unusual clarity of direction and intensity, economists still time after time ignore it in favor of central bank activity that they are absolutely sure will create the desired effects even though nothing done so far has. Continue reading →
Dorothea Lange We’ll be in California yet. We’re not going back to Arkansas 1938
Financial bubbles blown on the back of massive amounts of debt, of necessity lead to debt deflation (it’s just entropy, really). Fighting this is futile, and grossly costly to boot. The only sensible thing to do is to guide the process as best you can and try to minimize the damage, especially at the bottom rungs of society, because that’s where the deflation first takes hold, and where it spreads out from.
Attempting to boost inflation, or boost demand, before letting the debt deflation run its course through restructuring and defaults (perhaps even a -partial- jubilee) leads only to -further- distortion, and -further- impoverishes society’s poorer (at some point to a large extent the former middle classes). Whose lower spending, as nary a soul seems to comprehend, is the origin of the deflation to begin with.
All the attempts by central bankers to boost inflation that we’ve seen so far squarely ignore this, and operate on the false assumption that if only prices for financial assets and real estate can be raised even higher -artificially-, deflation can be warded off.
Thing is, deflation starts not at the top, it starts at the bottom. It’s not the banks or the bankers or the well-off who are maxed out and stop spending, but the people in the street.
They are responsible for most of the spending in an economy, and therefore for the velocity with which money moves in a society. And if the velocity of money falls below a critical point, no increase in the other side of the inflation/deflation equation -the money/credit supply- can make up for the difference. There is a point where all of the King’s horses and all of the King’s central bankers can’t put Humpty Dumpty together again. Continue reading →
Submitted by Mark O’Byrne – GoldCore
European Banks holding European sovereign debt may have to take haircuts and be part of bail in plans should that same debt default, according to a plan being pursued by German government advisers. In another attempt to shelter German tax payers from the largess and excess of fellow European neighbouring countries’ national banks, the move could trigger a run on billions of euro of sovereign debt of said banks. In an article penned by the Telegraph’s Ambrose-Evans Pritchard, one of the council’s dissenting members describes the plan as the “fastest way to break up the Eurozone”.
The plan, by The German Council Of Economic Experts, calls for banks to be bailed in should losses occur from a sovereign default before the European Stability Mechanism steps in to stabilise the situation.
Italian and Spanish banks hold vast amounts of their national government debt; in Italy’s case they are supporting the Italian treasury. Should that debt default, which is a very real possibility, then Italian banks would have to take significant losses first, only then would the ESM be allowed to step in.
Professor Bofinger, who sits on the council, has dissented. He believes that such a move could force Italy and Spain to actively depart from the euro in order to prevent their countries from facing bankruptcy. The mere prospect of such a move could ignite a bond run and cause the collapse of European sovereign debt, forcing up yields and crashing bond prices. This would mean that European nations would face far higher refinancing rates.
So will it happen?
So far the plan has attracted a number of high profile supporters, including the influential German Finance Minister Wolfgang Schauble and the German Bundesbank. When questioned about the plan, ECB president Mario Draghi stated, tellingly, on Monday that “…it is an issue that we do have to deal with. But we have to take a very considered and phased-in approach”. Portuguese 10-year bonds are already trading at yields not seen since 2014. Continue reading →
WRITTEN BY Tim Fernholz
The last socialist to freak out the establishment with a radical plan, former Greek finance minister Yanis Varoufakis, said Vermont senator and presidential candidate Bernie Sanders is earning votes for his common sense, not his political theory, in a recent Quora post:
Last year, the Greeks elected people like me not because they suddenly became leftwing! Similarly with Bernie Sanders. The New Hampshire voters did not suddenly discover they were democratic… socialists! They just had enough of phoney politics and decided to back someone who has been saying the same common sense stuff for decades. They would not vote for a ‘transition to socialism’ (like my voters would not have voted me in last year if I was proposing such a ‘transition’ to them).
But they understand that Bernie and us—his comrades on the Atlantic’s other side—are modest in our aims. We understand that socialism is far, far away—and that it will probably only become pertinent when technology develops further … For now, all we propose is the return to basic liberal democratic principles that the establishment has confined to the dustbin of history—at the cost of everyone (except some, very few, entrepreneurial spivs).
Varoufakis captivated the media with his long-shot efforts to push his country out of a punishing debt repayment plan, but they ended in his own resignation and national capitulation to the EU’s unrealistic demands. Last week, the IMF official in charge of monitoring Greecewrote that that the country’s inadequate pension reforms and the EU’s refusal to consider debt relief mean a Greek exit from the euro zone will soon be back on the table.
In contrast, Sanders’ plans for the US, including single-payer healthcare and publicly funded education, are well within the political mainstream of Europe—even in tight-fisted Germany, Varoufakis’ sworn enemy.
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