Monetary Policies Misunderstood

This article appeared in the May 2016 issue of Globe Asia.
Ever since the US Federal Reserve (Fed) began to consider raising the federal funds rate, which it eventually did in December 2015, a cottage industry has grown up around taper talk. Will the Fed raise rates, or won’t it? Each time a consensus congeals around the answer to that question, all the world’s markets either soar or dive.
This obsession with taper talk – the interest rate story – is simple, but strange. Indeed, it is misguided – wrongheaded. So, why the obsession? It is, in part, the result of a Keynesian hangover. The Keynesians focus on interest rates. The mainstream macro model that is widely in use today is referred to as a ‘New Keynesian’ model. The thrust of monetary policy in this model is entirely captured by changes in current and expected interest rates (the price of money). Money is nowhere to be found, however.
See Banks Tighten As Economic Outlook Grows More Uncertain
The misguided focus on interest rates not only poses a problem for those who are observing the current economic environment and formulating expectations, but also for those who are interpreting important economic and market events of the past. For example, Nobelist and Keynesian Robert Shiller, in his famous book, Irrational Exuberance, comes to the conclusion that the stock market crash in 1929 was caused by the Fed’s excessively restrictive monetary policy. That’s because Shiller focuses on interest rates and thinks that the Fed’s increase in the discount rate in August 1929 signaled monetary tightening. But, as Elmus Wicker carefully documents in Wall Street, the Federal Reserve and Stock Market Speculation: A Retrospective, which was recently published by the Center for Financial Stability in New York, the Fed was accommodative, not restrictive, prior to the 1929 stock market crash.

This post was published at FinancialSense on 05/03/2016.

The Manufacturing Recession That Won’t Go Away: Factory Orders Rebound From 5 Year Lows, Decline For 17 Months

In 60 years, the US economy has never suffered a 17-month continuous YoY drop in Factory orders without being in recession. Which begs the question: are we in one now. Moments ago the Department of Commerce confirmed that in March, US factory orders – despite rising 1.1% sequentially and above the 0.6% expected – declined for 17th consecutive month on an annual basis, dropping 4.2% from a year ago.

This post was published at Zero Hedge on 05/04/2016.

Gold and Silver Market Morning: May-4-2016 — Gold priced by the weak Yuan, silver retreats!

Gold Today -Gold closed in New York at $1,287.10 yesterday down from $1,290.00 on Friday. On Wednesday morning in Asia it pulled back to $1,281.00, as the Yuan weakened against a slightly stronger dollar, before the LBMA price setting in London.
LBMA price setting: $1,280.30 down from Tuesday’s $1,296.50.
Yuan Gold Fix
The Shanghai Gold Fixings today showed only a small change in the Yuan gold price as one would have expected.
Why the fall in dollar terms? You will see the value of the Yuan against the U. S. dollar fell 0.25 of a Yuan. This made all the difference, as it reflected a slightly strengthening dollar or a weakening Yuan, at a time when most other currencies continued strong, overall, against the dollar.
For those following the Technical picture, this is confusing because you are not following just the gold price any more, but the gold price in dollars. The Technical picture of gold in the Yuan is now very different. So is the Technical picture defining the dollar’s moves against gold or gold against the dollar? The same applies to all other currencies where the Technical picture is different.

This post was published at GoldSeek on 4 May 2016.

Here Comes The Turkish Flood: EU Commission Backs Visa-Free Travel For 80 Million Turks

Earlier this week we observed that in what may be Europe’s latest mistake, the European Union is about to grant visa-gree travel to 80 million Turks: a key concession that Erdogan obtained as a result of the ongoing negotiations over Europe’s refugee crisis which has pushed Turkey into the key player spotlight. And then, overnight, the European Commission officially granted its support to a visa-free travel deal with Turkey after Ankara threatened to back out of a landmark migration deal. It proposed to lift visa requirements by the end of June.
The decision was confirmed by European Commissioner for Competition Margrethe Vestager on Twitter.
‘The European Commission is today proposing to… lift the visa requirements for the citizens of Turkey,’ Vestager tweeted.
Let me be very clear: no Turkish citizen will enter the EU visa-free without a biometric passport.
— Frans Timmermans (@TimmermansEU) May 4, 2016

This post was published at Zero Hedge on 05/04/2016.

Something’s got to give in the oil market

Crude oil time-spreads have completely dislocated from inventories. Historically, such dislocations have proved to be short lived. We expect that either spot prices will sell-off again or the back end of the curve will move sharply higher. As per our proprietary gold pricing model, the latter would be very supportive for gold prices.
View the entire Research Piece as a PDF here…
Oil prices have rallied sharply from their January lows. At the time of writing, ICE Brent and NYMEX WTI front month prices are up 64% and 71%, respectively. While the media and commodity analysts have focused mainly on the recent rally in the spot price, in our view the more interesting development was in the curve structure. The entire move up happened in the front end of the curve. Longer-dated oil prices have remain almost unchanged. This has led to a sharp rally in crude oil time-spreads; 1-60 month ICE Brent time-spreads moved from -USD20.64/bbl in January to -USD8.82/bbl at the time of writing. In commodity markets, the shape of the forward curve is primarily a function of inventories. In our view, the inventory time-spread mechanism is the strongest and most robust relationship in commodities. Any divergence presents a physical storage arbitrage opportunity which will inevitably be exploited quickly by the market. Hence any deviation between spreads and inventories is typically very short lived. And this is where the oil market is now completely out of balance in our view. The rally in front month prices combined with the lack of any price action in the back has pushed time-spreads roughly 20-30% above the levels they should normally be. This is the largest discrepancy between time-spreads and inventories we have witnessed over the entire time-horizon in which 5-year forward prices are available. In our view, either near-dated crude oil prices will sell off again or longer dated prices appreciate.
The two possible outcomes described above point to an interesting opportunity in gold. Gold prices are driven by longer-dated energy prices while changes in oil spot prices have little to no effect. Hence a renewed sell-off in the front end of the curve would in our view have little impact on the gold price. A move higher in the back end however would be positive for gold prices. We estimate that in order for time-spreads to move back in line with inventories, either front end prices have to sell off by USD10-15/bbl or the back end has to appreciate USD15-20/bbl. Given the parameters of our gold pricing model, the latter would imply roughly a USD100-150/oz rise in the gold price.
Oil prices have rallied sharply from their January lows. At the time of writing, ICE Brent and NYMEX WTI front month prices are up 64% and 71%, respectively. Interestingly, the whole price rally took place even as petroleum inventories continued to rise. Total global commercial petroleum stocks are now at an all-time high, up 285 million barrels year-over year and 550 million barrels above the 5-year average (see Figure 1).

This post was published at GoldMoney on MAY 03, 2016.

Silver Bullion Market Has Key New Player – China Replaces JP Morgan

The silver bullion market has a key new player – Enter the Dragon. The Shanghai Futures Exchange in China is replacing JP Morgan bank and its clients as the most significant new source of demand according to a very interesting blog with some great charts and tables published by SRSrocco Report yesterday.
According to the report:
The days of JP Morgan controlling the silver market may be numbered as a new player in the silver market has arrived. For the past several years, JP Morgan held the most silver on a public exchange in the world. While the LBMA may hold (or did hold) more silver, their stockpiles are not made public.

This post was published at Gold Core on May 4, 2016.

Zandi’s “Job Creation Machine” Stalls As ADP Employment Growth Worst In 3 Years

Against expectations of a 195k gain, ADP reported just 156k job growth in April with manufacturing losing jobs once again and services job growth clowing quickly to catch down to such negative indicators as ISM Services Employment. This is the worst headline print since April 2013. From last week’s job-creation-machine firinmg on all cylinders, Mark Zandi is now more cautious – ‘The job market appears to have stumbled in April. Job growth noticeably slowed, with some weakness across most sectors. One month does not make a trend, but this bears close watching as the financial market turmoil earlier in the year may have done some damage to business hiring.’
Overall this is the worst print since April 2013…

This post was published at Zero Hedge on 05/04/2016.

US Worker Productivity Slumps At Worst Rate In 23 Years

Despite a very modest beat of expectations US worker productivity fell for the 2nd quarter in a row (down 1.0% vs 1.3% QoQ), the two-quarter-average output per hour isdown 1.4% – the worst slump since 1993. Unit labor costs rose by a better than expected 4.1% (helped by a downwardly revised 2.7% rise in Q4), the highest since Q4 2014.
America’s productivity slump is the biggest in nearly a quarter century…
As Bloomberg notes, the confluence of falling productivity, higher labor costs and an economic slowdown are putting a dent in companies’ bottom lines, with earnings among S&P 500 Index members projected to slip for the fourth straight quarter.
As we detailed previously, there are numerous reasons for this plunge in worker-productivity, from perverted inventives not to work to unintended consequences of monetary policy enabling zombies, but perhaps the most critical driver is exposed in the following dismal chart…
51% of total time spent on the Internet is on mobile devices – in 2015, first time ever mobile is #1 – to make a total of 5.6 hours per day snapchatting, face-booking, and selfying…

This post was published at Zero Hedge on 05/04/2016.

Fratboys at the Punchbowl

Source: The Federal Reserve, like chaperones at a fraternity house party, has appeared overly concerned about the prospect of upsetting the party-goers and has backed off from earlier indications that it would raise rates four times this year, says Joe McAlinden of McAlinden Research Partners.
William McChesney Martin, the longest sitting Federal Reserve Chairperson in history, once famously quipped that it was the Fed’s job to “order the punch bowl removed just when the party” really starts to get going. His point was that the Fed should raise interest rates and restrict liquidity to preempt an overheating economy before the economy actually overheats and it is too late. The metaphor is a bit dusty as it’s been over a decade since the Fed was in a tightening mode, but the “punchbowl” reference is increasingly relevant again.
Following the first interest rate hike last December, the Fed, like chaperones at a fraternity house party, has appeared overly concerned about the prospect of upsetting the party-goers and has backed off from earlier indications that it would raise rates four times this year. In mid-March, the Fed not only passed on hiking rates but also issued its updated FOMC median projection for the year-end Fed Funds rate. The median forecast was lowered by 50 basis points, effectively signaling there will now be only two rate hikes over the course of 2016. At the April FOMC meeting the Fed remained cautious about raising rates. As things stand, rates will remain below 1% for the rest of the year.
The news was greeted by some (including me) as a total capitulation by the central bank to the more dovish views held by traders in the financial markets. It added fuel to the notion that central banks have lost control and are letting markets dictate monetary policy. Fed Chair Janet Yellen’s comments about a very gradual path were reinforced at a recent speech before The Economic Club of New York where she used the word “gradual” nine times. But those assurances may be part of what’s driving expectations in the Fed Funds futures market where traders are not even pricing in those two hikes. At this point, traders don’t believe the Federal Funds Rate will hit a full 1% by the end of 2018! As that famous monetary economist Crocodile Dundee might have said, “Now that’s gradual!”

This post was published at GoldSeek on 4 May 2016.

US Trade Deficit Tumbles As Overall Imports Plunge, Even As Oil Imports Continue To Rise

In a surprising development, the U. S. monthly international trade deficit decreased substantially in March 2016 from $47.0 billion in February (revised) to $40.4 billion in March, below the $41.2 billion expected, as exports declined by a modest $1.5 billion, a 0.9% drop to $176.62BN from $178.16BN in Feb. At the same time imports outright plunged by $8.1 billion, down 3.6% in March to $217.06BN from $225.13BN in Feb. Curiously this happened just as Canada announced a trade deficit of C$3.4 billion, the widest on record. In March, the US trade deficit excluding petroleum was $37.48 billion.
The previously published February US deficit was $47.1 billion. The goods deficit decreased $6.0 billion from February to $58.5 billion in March. The services surplus increased $0.5 billion from February to $18.1 billion in March.
The breakdown:
Exports of goods and services decreased $1.5 billion, or 0.9 percent, in March to $176.6 billion. Exports of goods decreased $1.8 billion and exports of services increased $0.3 billion. The decrease in exports of goods mainly reflected decreases in consumer goods ($1.6 billion) and in industrial supplies and materials ($0.8 billion). An increase in capital goods ($1.0 billion) was partly offsetting. The increase in exports of services mainly reflected increases in travel (for all purposes including education) ($0.2 billion) and in transport ($0.1 billion), which includes freight and port services and passenger fares.

This post was published at Zero Hedge on 05/04/2016.

US Services Data Rebounds But Jobs, Backlogs “Highlight Fragility” Of US Economy

Despite a modest rise in April’s headline Services PMI print to 52.8 (from 52.1) the details under the surface paint a different picture (remaining weaker than its post-crisis average of 55.6). The rate of employment growth was the weakest seen since December 2015 asbacklogs of work declined for the ninth consecutive month, which is the longest continuous period of depletion since the survey began in late-2009. ISM Services data also beat expectations, rising to 55.7 despite a drop in business activity and backlogs. As Markit warns, “the fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low.”
April data highlighted a sustained recovery in overall business conditions across the U. S. service sector, led by faster growth of activity and incoming new work. However, the rate of job creation slipped down to its weakest so far in 2016 amid a lack of pressure on operating capacity and subdued confidence regarding the business outlook. At the same time, squeezed pricing power remained evident in April, with average tariffs broadly unchanged despite input cost inflation accelerating to its fastest since August 2015.

This post was published at Zero Hedge on 05/04/2016.

Global Stocks Slide As Dollar Continues Rising: Has The “Pricing In” Of Trump Begun

While there was no unexpected overnight central bank announcement unlike yesterday’s surprise by the RBA which unleashed volatility havoc in the FX market, which promptly spilled over into all asset classes, overnight stocks around the world saw another leg lower without a tangible catalyst, while EM currencies fell to a one-month low after two Fed presidents raised concern investors had become too complacent in their belief that U. S. interest rate raises will stay on hold. Or perhaps all that is happening is that after ignoring Trump, the market is starting to finally price in the possible reality of the Donald in the White House (although as Jeff Gundlach pointed out, Trump would be a far better president for the economy and the market than Hillary or Bernie).
“Equity market sentiment seems to be rolling over globally as the wind begins to come out of the oil price rally,’ said Angus Nicholson, market analyst at IG in Melbourne. ‘Given the move in commodity prices, the materials and energy sectors are set for a difficult session.”
The dollar has climbed against all its 16 major peers since Monday’s close as Atlanta Fed President Dennis Lockhart called a June rate increase “a real option,’ while San Francisco’s John Williams said he would support such a move at the next meeting provided the U. S. economy stayed on track. While both are non-voting members of the Federal Open Market Committee, the outlook for Fed policy is under scrutiny with data on nonfarm payrolls due at the end of the week.
“While the probability of a hike next month is very low, I do think the market is underpricing the chances of a hike after that,’ Michael Wang, a strategist at hedge fund Amiya Capital told Bloomberg. ‘And to that extent emerging markets may be vulnerable.’

This post was published at Zero Hedge on 05/04/2016.

Economic Switcheroo: from Unbridled Optimism to Deep Pessimism

‘In the global economy, there are not many bright spots around the world.’
– Jim Yong Kim, President, World Bank
‘It is worse than in 2008… Freight rates are lower… The external conditions are much worse.’
– Nils Andersen, CEO of shipping giant AP Mller-Maersk
I pay scant attention to the International Monetary Fund (IMF) and the World Bank when they gush about how great the global economy is doing… which is almost always. However, I do pay careful attention to them whenever their near-perpetual optimism turns negative.
The IMF lowered its 2016 global growth forecast for both 2016 and 2017 by 0.2% and 0.1%, respectively. Specifically, it is worried about the drop in oil prices, a sharp economic slowdown in China, rumblings about trade wars and tariffs, disease epidemics, refugees crises, and military conflict.

This post was published at Mauldin Economics on MAY 3, 2016.

Three In A Row…

Two days ago, when looking at the latest “Senior Loan Officer Opinion Survey on Bank Lending Practices”, we showed that Fed lending standards had tightened for the third quarter in a row, and pointed out that in recent history this has never happened without either a default cycle, or a recession, following immediately after.
Today, as part of its brand new daily report “Credit Bites” titled “3 in a row…” Deutsche Bank takes on the same subject, and notes that the April survey showed that on balance, banks tightened lending standards on commercial and industrial loans during Q1, even if lending standards on loans to households were said to have eased. It then updates a couple of charts DB uses to show the correlation between the C&I Loan Standards and US HY defaults (12 months on) and also that the yield curve is a good lead indicator of the direction of lending standards around 18 months in advance.

This post was published at Zero Hedge on 05/04/2016.

Eight “New Normal” Charts That Are Insanely Abnormal–and Dangerous

Is there anyone on the planet who’s actually stupid enough to believe these New Normal charts are healthy and sustainable? Anyone questioning the sustainability and rightness of The New Normal is immediately attacked by the mainstream-media defenders of the crumbling status quo. Not only is everything that broke in 2008 fixed, everything’s going great globally, and anyone who dares question this narrative in a tin-foil hat conspiracy nut or simply an annoyingly doom-and-gloomer who recalcitrantly refuses to accept the positive glories of official statistics: low unemployment, rising valuations of stock market Unicorns, etc. But the New Normal is anything but normal; all the readings of artificial life-support and manipulation are off the charts. If the New Normal were indeed a return to normalcy, we’d see a rapid and sustained decline in official life-support of the economy. Instead, we see official life-support efforts rising to new and dangerous levels. The only reason stocks are at nose-bleed valuations globally is massive, sustained intervention on multiple levels. We also see increasing dependence on debt to sustain increasingly weak growth. The New Normal is all about diminishing returns on additional debt.

This post was published at Charles Hugh Smith on TUESDAY, MAY 03, 2016.

This is Why No One Should Bail Out the ‘Smart Money’ Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears

The toxic Safeway-Albertsons combo is waiting in the wings. Late yesterday, Fairway Group Holdings, parent of Fairway Market – an ‘iconic New York food retailer,’ as it calls itself, that had started out as a ‘veggie stand’ in 1933 and now lists 18 stores on its website – crumpled under a pile of debt and filed for a prepackaged Chapter 11 bankruptcy. Almost exactly three years after its IPO!
Bankruptcy rumors have been swirling for a while. The company announced in February that it would need to raise capital in order to keep its doors open. April 15, Bloomberg reported that the company was negotiating a debt restructuring with its creditors, and that a deal was near for a prepackaged Chapter 11 filing.
When the company did file yesterday, it stated that it wanted to ‘eliminate’ $140 million senior secured debt. In return, these creditors would get common equity and $84 million of new debt of the reorganized company.
All of the currently outstanding shares will be cancelled. Screw those who’d bought them. They should have known better. That was the message.

This post was published at Wolf Street on May 3, 2016.

Fear Not Gold Bugs, Gold Ratios Well Intact

What has been going on since mid-February is a burst of the ‘inflation trade’ as evidenced by silver’s leadership in the precious metals sector. This opened the barn door for all kinds of inflated animals to flee into the light of day, and for commodity and inflation boosters to do their thing. As often happens with silver, things were pushed to and even through their limits. Silver went up, oil went up, base metals went up and stocks went up.
But what we should do is retire back to some of the things that actually indicated bullish for the gold sector well before the mini hysteria (and market relief) cropped up. A pullback/correction in gold stocks would be an opportunity.
Gold vs. Silver took a real hit and now is bouncing, unsurprisingly as USD makes a final support bounce attempt of its own.

This post was published at GoldSeek on 4 May 2016.

Aeropostale Files Chapter 11: Latest Retail Bankruptcy After American Apparel, Cache, Wet Seal And Quiksilver

Teen retailer Aeropostale, a company once seen as a competitor to Abercrombie & Fitch, filed for Chapter 11 bankruptcy, listing assets of $354 million and liabilities of $390 million. The company experienced an atrocious fiscal 2015, reporting a net loss of $136.9 million in a year in which sales declined 18%.
Soon after reporting full year results, the company had its stock delisted from the NYSE, and overnight filed for bankruptcy in order to “optimize its store footprint, access additional tools to shed or renegotiate burdensome contracts, resolve its ongoing disputes with Sycamore partners, and achieve long-term financial stability.”
The retailer has secured a $160 million commitment from Crystal Financial, LLC to provide DIP financing, and has an initial plan to close 154 out of roughly 800 stores.

This post was published at Zero Hedge on 05/04/2016.