by ilene - November 24th, 2015 3:15 pm
Courtesy of Bill Bonner at Acting Man
The financial news continues to confound and confuse investors. The Fed is telling one story. The world economy is telling another.
What happens next?
The Fed is talking about increasing the federal funds rate – eventually getting rates back to “normal” – because the U.S. economy is so healthy. Meanwhile, the world heads toward deflation.
Says Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management:
“We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment, and population decline are combining to undermine growth…”
But it looks to us as though the global downturn is already here. First, the Baltic Dry Index is at a record low.
The Baltic has been hung out to dry – click to enlarge.
Here’s Bloomberg with the full story:
“The cost of shipping commodities fell to a record, amid signs that Chinese demand growth for iron ore and coal is slowing, hurting the industry’s biggest source of cargoes.
The Baltic Dry Index, a measure of shipping rates for everything from coal to ore to grains, fell to 504 points on Thursday, the lowest data from the London-based Baltic Exchange going back to 1985.”
And falling shipping costs aren’t the only sign of global deflation…
In October, construction and mining equipment maker Caterpillar posted another month of falling sales – making it 35 in a row.
The latest figures reveal something new, too. Sales are now dropping in the U.S. as well as overseas.
U.S. corporate profits have also begun falling.
And earnings per share (EPS) – a key measure of profitability that looks at the portion of companies’ profits allocated to each outstanding share – are falling too.
by ilene - November 24th, 2015 3:05 pm
Courtesy of Mish.
Economists expected manufacturing activity in the Richmond Fed region would bounce into positive territory this month.
The Bloomberg Econoday Consensus Estimate was +1 in a range of 0-4, but the reading of -3 came in below any economist’s estimate.
Early indications for the November factory sector are soft right now after Richmond Fed reports a much lower-than-expected minus 3 headline for its manufacturing index. Order data are very negative with new orders at minus 6, down from zero in October, and backlog orders at minus 16 for a 9-point deterioration. Shipments are also in contraction, at minus 2, with the workweek at minus 3. Employment, at zero, shows no monthly change but the declines for backlog orders and the workweek don’t point to new demand for workers. Price data are subdued but do show some constructive upward pressure.
This report along with Empire State, as well as yesterday’s manufacturing PMI, are pointing to a downbeat month for the factory sector which is being held down by weak foreign demand, as evidenced in the decline for goods exports in this morning’s advance release of international trade data.
Ahead of the release, Bloomberg had this to say: “Regional Fed surveys have been showing improvement in November and the same is expected for the Richmond Fed’s manufacturing index.”
“Details in this report, as in other manufacturing surveys, did show life in October but there were points of weakness including lack of growth for new orders and extended contraction for backlog orders.”
The New York region came in at -10.74 below the lowest Econoday guess of -8.50. The prior (October) release was -11.36, but -10.74 is not an improvement, it’s a decline at a lesser rate.
For more details please see Empire State Manufacturing Negative Fourth Month, Work Week Lowest Since Mid-2011.
There was an improvement in the Philly Fed region, to +1.9 (See Philly Fed Slightly Positive After Two Months of Contraction) but I labeled that “noise” given the new orders and shipment components were negative and the workweek collapsed to -16.2
No Signs of Life
Diving into the Richmond Fed Report, we see shipments, backlog of orders, and the average workweek all negative for the third month consecutive. New orders were down two of the last three months, and flat the third.
by ilene - November 24th, 2015 2:41 pm
Ian Scott at Barclays argues the bright side for equities, especially liking the weak — e.g., materials and commodities, value stocks, the financial sector, and emerging markets.
Commodities and emerging markets may have hit bottom. Fed rate rises mean leadership is switching to "anti-bond" sectors
Barclays has advised clients to jump into world stock markets with both feet, citing the fastest growth in the global money supply in over thirty years and an accelerating recovery in China .
Ian Scott, the bank’s global equity strategist, said the sheer force of liquidity will overwhelm the first interest rate rises by the US Federal Reserve, expected to kick off next month.
Global equities rose by an average 15pc over the six months after the last three US tightening cycles began, on average, and Barclays argues that this time stocks are cheaper.
The cyclically-adjusted price to earnings ratio (CAPE) for the world’s equity markets is currently 18, compared to 25.5 at the beginning of the last rate rise episode in 2004.
Goldman disagrees, suggesting that you may as well sell everything and come back in 2017.
When it comes to 2016, Goldman says that it is "deja vu all over again", and that the S&P 500 index will tread water for a second consecutive year. Specifically Goldman says that its "year-end 2016 target of 2100 represents a 1% price gain from the current index level (2089), which itself is just 1% above the year-end 2014 level of 2059."
Hardly the double-digit annual growth everyone has gotten used to over the past 7 years, that was so easy anyone could do it.
by ilene - November 24th, 2015 2:41 pm
Courtesy of Pater Tenebrarum at Acting-Man
Breaking Below the Shelf
In our recent missive on junk bonds, we discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.
“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”
Photo credit: Bari Goodman
In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.
Annual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.
This is the final piece of the puzzle if it keeps up (and why wouldn’t it keep up?). Stock market internals have become ever more atrocious in the course of this year, which we have regarded as a sign that not enough new money was being printed to keep all the pieces of the bubble in the air at once. Now there is even less support.
Lest we forget, this is the Greenspan-Bernanke legacy in terms of money supply inflation in toto:
by ilene - November 24th, 2015 1:42 pm
Courtesy of Mish.
Theater of Absurd
The tangled web of friend-foe relationships in the Mideast has reached a new high point of circular absurdity.
- The US and Turkey are fighting ISIS (allegedly), as is Russia and Iran.
- Turkey just shot down a Russian plane on the Syrian-Turkey border.
- Turkey freely buys oil from ISIS which gives ISIS the money needed buy weapons.
- The US and France are working with Russia to fight ISIS.
- Syrian rebels, armed with US Anti-Tank missiles just shot down a Russian helicopter.
- The US backs alleged “moderate” Al Qaeda rebels seeking to overthrow Syrian president Assad.
- ISIS also seeks to overthrow Assad.
Turkey Shoots Down Russian Plane
The Financial Times reports Turkey Shoots Down Russian Fighter Jet on Syrian Border.
Vladimir Putin has accused the Turkish government of providing financial and military support to Isis, in a furious response to the downing of a Russian fighter jet near the Syria-Turkey border.
Turkey said it shot down the Russian Sukhoi Su-24 on Tuesday morning after it violated Turkish airspace, escalating tensions between international powers with competing aims in war-torn Syria.
Mr Putin warned that the “tragic incident” will bring “serious consequences” for relations between the two countries, and alleged that Turkey had helped bankroll Isis through oil sales.
Turkey has disputed Moscow’s version of events. A government official said the crew was given “repeated warnings”, beginning from when the jet came within 15km of the Turkish border.
A special meeting of Nato’s North Atlantic Council was called for later on Tuesday at Turkey’s request, prompting further anger in Moscow.
“Instead of immediately getting in contact with us, the Turkish side immediately turned to their partners with Nato to discuss this incident, as if it was us who downed a Turkish jet and not vice versa,” said Mr Putin.
“Do they want to put Nato at Isis’s service?”
by ilene - November 24th, 2015 12:04 pm
Despite Ackman's triple-down, Valeant has given up all the after-hours' gains and is rapidly losing last week's "buying spree" dead-cat-bounce rally as Pershing's newly synthetic position in the troubled stock moves deeper in the red…
As we noted previously, Pershing's position 'proxies' 34.12 million shares at an average cost of $113.76…
Although his exposure is dramatically non-linear should things not work out (and note he remains even more drastically underwater still even on this newly acquired position).
by ilene - November 24th, 2015 11:10 am
Some have suggested Vladmir Putin's first retaliation for the Turkish shooting down of a Russian fighter jet would be to cut off gas supplies (which represent 57% of Turkey's [gas] supply). With Russia Defense Minister stating that the "downing of the Russian warplane is a 'hostile act'," adding that the defense ministry is "devising a set of measures to respond to the incident," it seems taking the 'nuclear option' of cutting off 20% of Erdogan's entire energy supply would be a strong first non-lethal non-World-War-3-starting step.
- *RUSSIAN DEFENSE MINISTRY: DOWNING OF WARPLANE HOSTILE ACT: IFX
- *RUSSIA TO CONTINUE FIGHTING TERRORISTS IN SYRIA: IFX
- RUSSIAN DEFENSE MINISTRY DEVISING SET OF MEASURES TO RESPOND TO INCIDENTS SIMILAR TO TURKISH AIR FORCE'S ATTACK ON RUSSIAN SU-24
So, despite earlier saying that "there will be no disruption," given the statements above, (and all of Erdogan's bluster on finding alternate sources) Russia may well decide to take the 'nuclear option' and cut off Turkey's gas supplies as a first non-military reaction.
Turkey gets 57% of its gas from Russia (and Turkey is Russia second biggest non-domestic market for gas). Turkey's alternative supply routes include Iran, which of course just signed a $5 bn trade deal with Russia and is unlikely to come to Turkey's aid. As we ominously predicted recently, although Moscow and Ankara have thus far kept it civil in order to preserve and expand trade, it now looks as though each country may be willing to Plaxico themselves all because they disagree over what the fate of Bashar al-Assad should be… It appears we have moved on from 'civil'.
In June, we noted that Russia had signed an MOU [Memorandum of Understanding] with Shell, E.On and OMV to double the capacity of the Nord Stream pipeline, the shortest route from Russian gas fields to Europe.
Here is a helpful visual:
What you’ll note from the above is that the Nord Stream allows Gazprom to dodge Ukraine, which is desirable for obvious reasons.
by Market Shadows - November 24th, 2015 10:51 am
Financial Markets and Economy
U.S. stock-index futures declined after Turkey said it shot down a Russian warplane, while investors await data for further indications of the strength of the world’s biggest economy.
Airline shares are plummeting as easyJet suspends more flights to Egypt (Business Insider)
Shares in British listed airlines are tanking this morning after easyJet said it's cancelling all flights between the UK and Sharm el-Sheikh on Egypt's Mediterranean coast until at least January 6.
In their first top-level trade talks since President Obama hosted China’s leader in September, the United States and China said on Monday that they had made progress on sticking points, including preventing the theft of trade secrets and opening the Chinese market more broadly to American multinationals.
Still, the lack of larger breakthroughs on bigger issues — like negotiations for a broad trade deal — contrasted with America’s improving economic ties with the rest of Asia.
The lira dropped the most in emerging markets, and stocks fell with bonds, after the Turkish military shot down a Russian jet, threatening to escalate tension between the two nations as Turkey prepares to name a new cabinet.
Asian shares stall, dollar firm near eight-month peak (Business Insider)
Asian shares dragged their feet on Tuesday after a healthcare mega-merger failed to impress investors while the dollar held firm near an eight-month high as investors grew more convinced of a U.S. rate hike next month.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was almost flat while Japan's
by ilene - November 24th, 2015 10:20 am
Courtesy of Pam Martens.
After lamenting in a recent book how Presidents George W. Bush and Obama didn’t answer his letters (Return to Sender: Unanswered Letters to the President, 2001-2015), Ralph Nader has finally been requited by a powerful person in Washington.
Nader had the temerity to write Fed Chair Janet Yellen a letter on October 30, pointing out how the Fed’s zero bound interest rate policy is crimping the spending ability of savers who rely on such things as savings accounts and money market interest for added income to survive. Yesterday, Yellen boldly answered Nader’s letter with a smackdown.
The letter has caused an outbreak of sexism charges against Nader by various writers for his suggestion in the letter that Yellen would be wise to “sit down with your Nobel Prize winning husband, economist George Akerlof, who is known to be consumer-sensitive.” Annie Lowrey at New York Magazine said it suggested Yellen needed things mansplained to her “small lady brain” lest there be “cryfests” and “emotional overeating” at the nation’s central bank.
A number of writers have dismissed Nader’s letter as nonsense. In fact, there is a large segment of seniors who can’t afford to risk their meager life savings in the stock market, who have historically relied on the interest from insured money market accounts, insured certificates of deposit, and U.S. Treasury notes and bills to supplement their pension or Social Security benefits. Those individuals have seen that income cut by half or more since the 2008 crash and the Fed’s slashing of interest rates.
But what about economist George Akerlof? Might he actually have something important to share with Janet Yellen and the rest of us for that matter? In fact, Akerlof has co-authored a recent book with a theory that, taken to its logical conclusion, casts a dangerous light on the very institution his wife heads, the Federal Reserve.
by ilene - November 24th, 2015 5:25 am
Courtesy of Mish.
Alternative Bank Schweiz (ABS), a small bank in Switzerland broke the negative interest rate on deposits barrier, CHARGING customers to take their money. (emphasis in caps from the article).
The Alternative Bank Schweiz wrote to customers telling them they would face a -0.125 per cent rate on their money from 2016 – and a -0.75 per cent rate on deposits above 100,000 Swiss francs.
The move echoes the Swiss central bank’s -0.75 per cent negative deposit rate imposed on financial institutions placing money with it.
Sweden’s central bank also introduced negative rates, which currently stand at -0.35 per cent, while the European Central Bank introduced them in part with its -0.2 per cent overnight deposit rate.
The Bank of England’s chief economist Andy Haldane delivered a speech in September discussing how Britain could have to consider negative interest rates as an extreme measure in a future crisis.
The big Swiss banks passed on some of the pain from the Swiss central bank’s -0.75 per cent rate to their institutional clients, but Alternative Bank Schweiz is believed to be the first retail bank to hit savers with a charge.
The bank describes itself as an ethical organisation focused on backing firms investing in social and environmental projects.
With its balance sheet totalling nearly 1.6 billion Swiss francs last year, most of its activities are concentrated in cooperative housing projects, providing affordable housing and sustainable energy solutions, as well as organic farming.
Less Than Zero
Bloomberg offers a "quick take" on Less Than Zero.
Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.