Archives for July 2015

Wall Street’s Secret Dividend from the Fed May Go to Fixing Potholes

Courtesy of Pam Martens.

Photo of the Trading Floor at the New York Fed (Obtained by Wall Street On Parade from an Educational Video  Despite Stonewalling by the New York Fed)

Photo of the Trading Floor at the New York Fed (Obtained by Wall Street On Parade from an Educational Video Despite Stonewalling by the New York Fed)

Your humble editor and publisher of Wall Street On Parade might have had a little something to do with a growing mutiny in Congress. Back on November 4, 2012 and again on July 25, 2013, we blew the whistle on an obscene, secret entitlement program between the Fed and the too-big-to-fail banks: a century old program where every year, boom or bust, despite the overall level of interest rates in the markets, the Fed pays out a risk-free, guaranteed 6 percent dividend to its member banks. (All Fed member banks get the dividend but the lion’s share goes to the biggest Wall Street banks because their capital dwarfs all other banks.)

Now, after more than a hundred years, there’s a plan in Congress to shrink that payout to 1.5 percent and fix our crumbling roads with the savings. Only banks with $1 billion or more in assets would be affected.

The Federal Reserve mandates that its member banks subscribe to “stock” in an amount equal to 6 percent of their capital and surplus.  The banks have to post half that amount with the Fed upon becoming a member; the other half is subject to being called upon. The deposited capital translates into a corresponding share of “stock” in one of the 12 regional Fed banks. (The biggest Wall Street banks, of course, prefer holding their shares in their crony New York Fed.) The “stock” then pays out the 6 percent dividend to shareholders, meaning the banks.

If the bank had a hand in crashing the economy twice in the past century, say in 1929 and again in 2008 – like JPMorgan and Citigroup – it gets an extra bonus: its 6 percent dividend is tax-exempt. That’s because the statutes say that if the bank’s shares in the Fed were acquired prior to March 28, 1942 the bank doesn’t have to pay corporate taxes on it. JPMorgan’s roots reach into the eighteenth century while Citibank, part of Citigroup, traces its founding to the City Bank of New York in 1812. CEOs of both banks were shamed before Congress in the 1930s for their role in the crash of ’29 and again following the 2008 Wall Street crash.

But these two banks achieved even greater ignominy in May of this year: both pleaded guilty to a felony charge, admitting that they participated in a banking cartel to rig foreign currency trading. In other words, the Fed, the regulator of these banks, is paying this lavish 6 percent dividend to admitted felons while U.S. college students are going without food and heat and opting for prostitution to pay their more than $1 trillion in student debt – much of it saddled on their backs by these same banks.

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Sentiment Measures vs. Retail Spending: Clueless Clues and Random Noise

Courtesy of Mish.

Economists Shocked

Economists were shocked by the plunge in the Conference Board Consumer Confidence Index this morning, well below the any economist’s guess in Bloomberg’s Econoday Forecast.

The consensus estimate was 99.6. The consensus range was 97.0 to 102.0. And the actual result … 90.9.

Consumer confidence has weakened substantially this month, to 90.9 which is more than 6 points below Econoday’s low estimate. Weakness is centered in the expectations component which is down nearly 13 points to 79.9 and reflects sudden pessimism in the jobs outlook where an unusually large percentage, at 20 percent even, see fewer jobs opening up six months from now.

A striking negative in the report is a drop in buying plans for autos which confirms weakness elsewhere in the report. Inflation expectations are steady at 5.1 percent which is soft for this reading.

Survey Methodology

How many people does the conference board survey each month? The answer is 3,000. Supposedly that’s all it takes to determine car sales, job prospects, economic slowing, home purchases, etc.

Bloomberg reports “While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month.”

I will return to that idea in a bit. But first let’s take a look at what others say.

Risk for the Economy

Please consider Plunge in Consumer Confidence Exposes Risk for U.S. Economy.

A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

Really? US consumers care about the Chinese stock market and Greece? Since when?…

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Putting the Puzzle of Greece Together


Putting the Puzzle of Greece Together

Gordon T. Long (at Macro Analytics) talks with John Rubino (Dollar Collapse) about the current developments in Greece and the seemingly impossible choices facing the Greek people and their government.


To better understand how Greece and the EU found itself in this perplexing problem, John Rubino traces the history of Greece prior to joining the EU. John doesn't hold back in describing the manipulation of economic numbers carried out by Greece, abetted by Goldman Sachs to gain entry into the EU. Greece never met the Maastricht Treaty bar but nevertheless was granted entry. Goldman Sachs and the International Bankers were the big winners. In the short term so were the Greek people.


John further goes on to detail how cheap money suddenly became available to Greece and the other poor peripheral countries. The exploding growth in debt to them was perceived and treated to be debt backed by the EU. John describes it as:

"It was like giving a teenager an unlimited credit card with no supervision. You should have expected nothing less!"

The situtation in the EU with its peripherals was actually not to dis-similar to the bankers' "game plan" regarding US Agency debt (Fannie Mae and Freddie Mac) which were also perceived to be backed by the US government.

When these agencies got into serious financial trouble during the Financial Crisis the US government accepted the liabilities for these agencies and placed them in "conservatorship" thereby burdening US tax payers with the negligent lending practices they had calously incurred. EU tax payers are likewise being handed the bill for what can only be described as a wonderful party of staggering pension benefits and limited taxation for the Greek people and a lending bonanza for the bankers.


The financing of the debt incurred cannot possibly be financed by Greece's economy nor absorbed by the EU, for fear that the other delinquent debtor nations will demand the same easy way out.

Of course what is happening here is the banks have made enourmous profits on loans that should have never been made and are now sliding the responsibility to EU taxpayers.

Many Greeks see no real solution and therefore cash runs on the banks will continue to leave Greek banks insolvent as more money is fruitlessly pumped into them by desperate and naive EU officials.


How to Use the Stochastic Oscillator

A lesson from EWI's Jeffrey Kennedy

The stochastic oscillator is a technical tool that was popularized by George Lane. It is a momentum indicator based on the idea that in an uptrending market, the close tends to be near the high of the price bar, and in a downtrending market the close tends to be near the low of the price bar.

Watch an 11-minute lesson from Jeffrey Kennedy's Trader's Classroom to learn to use this popular indicator in your analysis and trading.


3 Lessons: Learn to Spot Trade Setups on Your Charts

In these three video lessons, Jeffrey Kennedy shows you how to look for trading opportunities in your charts. Kennedy, instructor for Elliott Wave International's popular Trader's Classroom service, reviews the 5 core Elliott wave patterns and then shows you how to combine technical methods to create a compelling forecast.

Get your free lessons now >>

This article was syndicated by Elliott Wave International and was originally published under the headline How to Use the Stochastic Oscillator

Crude Oil: Will the Decline Continue?

In this brief interview, Steve Craig, editor of EWI's Energy Pro Service, explains what he sees next for crude oil ~ and it's not good. 

Free Report: "Peak Oil" — And Other Ways Crude Oil Fooled Almost Everyone

These excerpts from Robert Prechter's Elliott Wave Theorist highlight the flaws in the conventional approach to forecasting oil prices — and show you why oil fooled almost everyone. Create your Club EWI profile and get instant access to this resource >>

This article was syndicated by Elliott Wave International and was originally published under the headline Crude Oil: Will the Decline Continue?

Actually, gold RISES after rate hikes begin

Courtesy of Joshua Brown, The Reformed Broker

If you believe that history is any guide at all when it comes to monetary policy, the dollar and gold, then this may be of interest to you…

Gold has been in a death spiral of late based on the twin fears of rising rates and a dollar at decade highs. According to HSBC’s FX strategist, David Bloom, gold has already priced in the first hike and it may be discounting a continuing dollar rally thesis that is unsupported by history. According to the bank, after the first hike of a cycle the dollar declines in the first 100 days, on average, and gold bounces from where everyone sold in anticipation.

In other words, buy the rumor of rate hikes and sell the event for USD – the reverse order for gold.

re the dollar:

while the USD tends to appreciate going into a Fed hike, history also suggests the USD tends to weaken after the Fed raises rates. Looking at the previous four Fed tightening cycles that have happened over the past 30 years, the USD has fallen for the next 100 days immediately after the first rate rise. On each occasion, the USD fell even though there were additional rate increases made during the period…Fed tightening is already in the price by the time the Fed finally delivers the first hike.

and re gold:

History shows that gold prices also fall leading into a rate hike and generally rise, though sometimes with a lag, after the first rate hike. This is shown in charts 3-6, for the last four Fed tightening cycles. Investors are apt to unload gold in anticipation of tightening monetary policies. This negative pressure is sustained until the Fed announces a rate hike which then eases the negative sentiment towards the yellow-metal. This explains the subsequent rallies in gold that occurred shortly after the Fed announced the first rate hike in the last four tightening cycles.

Here are the charts:

Screen Shot 2015-07-28 at 1.04.14 PM

The takeaway is that no one knows anything.

Most people read a few things here or there and just run their mouths, without worrying so much about the actual data. Not that historical data is necessarily predictive, but it’s probably a better guide than someone’s feelings.

The other takeaway is that anything can happen, even the most unexpected thing – like rate hikes being positive for gold and negative for the dollar. “Should” that happen? I don’t know, let me answer that question with another question – should deflation be the predominant problem in the economy seven years into zero-percent interest rates and the Federal Reserve’s balance sheet ballooning from $1 to $4 trillion? Probably not.

But that’s the point. As Jeff Gundlach says, “Whenever you hear people in the investment business say the word ‘Never’, that’s when you know it’s about to happen.”


Currency Weekly
HSBC Global Research – July 27th 2015

[Picture via Pixabay.]


Simmering Stew; Italy’s Finance Minister Joins “United States of Europe” Parade; Germany’s “5 Wise Men” Argue for Grexit

Courtesy of Mish.

Italy Seeks Political Union

As expected, Italy has joined the "United States of Europe" parade. And also as expected, some from Germany want no part of it. Let's start with Italy.

Italy's finance minister, Pier Carlo Padoan calls for ‘Political Union’ to Save Euro.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency.

Pier Carlo Padoan’s comments reflect how the tortured and dramatic negotiations that led to this month’s deal on a third bailout of Greece have triggered a round of soul-searching about the future of monetary union across European capitals.

“The exit and therefore the end of irreversibility is now an option on the table. Let’s not fool ourselves,” he said in an interview in his central Rome office.

Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered.

To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said. “And this fiscal policy must respond to a parliament, and this parliament must be elected. Otherwise there is no accountability.”

Germany's "5 Wise Men" Argue for Grexit

In contrast to tighter integration, Germany's "5 Wise Men" say Let Debtor Nations Leave Euro.

Countries should be able to exit the euro as a “last resort” if they are unable to manage their debts, the German government’s independent economic advisers say, in a sign of Berlin’s hardening attitude towards propping up fellow members of the single currency.

The mere suggestion of a country leaving what was supposed to be an irreversible currency union had long been taboo. But Germany’s financeminister, Wolfgang Schäuble, broke it two weeks ago by suggesting apossible five-year eurozone “timeout” for Greece.

“A permanently unco-operative member state should not be able to threaten the existence of the euro,” the economists said in a special report, published on Tuesday, calling for countries to exit the eurozone if it is necessary as an “utterly last resort”.

The five-member independent panel, known as the “wise men”, also argued that creditors should be forced to shoulder losses if states go bankrupt, encouraging them to scrutinize more closely the risks before they invest.

Special Report of the Council

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Another Bridge Loan Likely as Greek Talks Break Down; Shocked Over Parallel Currency Plans? Why?

Courtesy of Mish.

Greece insists it has met all of the conditions for another bailout, but only one vote matters, that of the creditors who say Greece hasn’t.

One of the stickiest issues is hiking taxes on farmers.

But if tax hikes is what the creditors want, that’s what they will get. Greece should realize that by now.

Nonetheless, the bickering lingers and it will continue until Greece finally is forced out of the eurozone.

Greek Talks Break Down

Meanwhile, Denials Fly in War of Nerves Over Greek Debt Talks.

Any hope of a fresh start in fraught relations between Greece’s leftist government, purged of its most radical members, and the institutions representing its creditors, appeared to be dashed by the flurry of assertions and rebuttals.

The two sides couldn’t even agree on when the talks began.

Differences included the pace and conduct of bailout talks, whether or not Greece needs to enact further laws before a deal, the reopening of the Athens stock exchange, and the activities of former finance minister Yanis Varoufakis, who continues to heap abuse on the creditors in his blog.

Greek official said suggestions that Greece needed to pass further reform legislation before a bailout deal were not justified by the euro summit statement or subsequent exchanges.

However, euro zone officials made clear that Athens must enact measures to curb early retirement and close tax loopholes for farmers before any new aid is disbursed. Greece needs more finance by Aug. 20, when it owes a 3.5 billion euro payment to the European Central Bank.

Hanging over the new talks is the legacy of Varoufakis, whom Tsipras sidelined in the final phase of the talks before accepting even more stringent bailout terms this month. He continues to create problems for the premier by denouncing the bailout agreement and accusing the creditors of having treated Greece like a colony.

Uproar Over Varoufakis’ Parallel Currency Plan

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Blame The Fed For The Commodities Slump

Courtesy of Bill Bonner of Bonner & Partners

When we left you at the end of last week the world was falling apart.

As you know, the economy functions on electronic credit… not cold, hard cash. Without the banks pumping more credit into the system – by way of loans – it sags.

The Dow fell 163 points – or about 1% – on Friday.

More significant is the action in the gold market. At this morning’s price of $1,103 an ounce, gold is now trading $100 below what we thought was the “floor” under the price.


It could be that gold is signaling a global recession/depression. People tend to buy gold when they fear inflation. All they see today is a global deflationary slump.

The People’s Daily newspaper – the official organ of the Communist Party – tells us that Chinese electricity consumption is accelerating at the slowest rate in 30 years.

We all know China’s GDP figures are untrustworthy, but electrons don’t lie. They flow with the economy. And they’re now only increasing at a sluggish 1.3% a year – suggesting a big slowdown in the Chinese economy.

According to economists’ estimates compiled by Bloomberg – as opposed to the official spin from Beijing – China’s economy is growing at the slowest pace in 25 years.

A Pileup in Commodities

Meanwhile, on the commodities highway, there’s a huge pileup.

The crash in the oil market – which has taken the price per barrel of U.S. crude down 53% over the last 12 months – has left a massive slick.

A barrel of U.S. crude oil sold for just $48.14 at Friday’s close – just 42 cents above its 52-week low. Overall, commodities are at a 13-year low.

And the coal miners have slid on the cheap oil and gas.

In the March issue of our monthly publication, The Bill Bonner Letter, we explained why energy was so cheap. The Fed dropped the price of capital so low that it cost almost nothing to borrow.

When the cheap money came to an end, so would the cheap oil, we guessed.

But it hasn’t happened – yet…

So far, the Fed’s cheap credit has exaggerated and prolonged the bear market in oil. Producers who should have shut down months ago are still pumping – kept in business by ultra-cheap financing.

Coal, cheap when we wrote about it back in March, is now even cheaper. Today, the price of coal is down 70% from four years ago.

This is pushing coal producers to the edge of solvency…

For example, Alpha Natural Resources, a big producer of metallurgical coal – or “met” coal, which is used for steelmaking –was delisted from the New York Stock Exchange because its share price was “abnormally low.” Bankruptcy is now in the cards.

And this from on the fate of another big met coal producer, Walter Energy:

Walter Energy, an Alabama coal miner, announced on July 15 that it is filing for bankruptcy. Senior lenders will see their debt turned into equity, and if the company cannot turn the ship around, it will more or less sell off all of its assets.

“In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry,” Walter Energy’s CEO Walt Scheller said in a press release.

Dr. Copper’s Diagnosis

Dr. Copper, too, says it’s going to be a rough second half of the year for the global economy.

Copper has earned the “Dr.” title; the old-timers say it is “the only metal with a PhD in economics.”

Copper goes into everything – houses, offices, electronics, autos, you name it. Although it’s not a perfect correlation by any means, when the price of copper falls, it indicates that the world economy is going down too.

From Bloomberg:

Goldman said prices will probably drop another 16% by the end of next year and expects Chinese demand to grow at the slowest pace in almost two decades.

Goldman on Wednesday lowered its copper price outlook by as much as 44% through 2018.

Why the big slowdown? Why is the world falling apart?

Because you can’t fake an economic recovery…

Instead of “stimulating” a recovery, the feds have “simulated” one.

They dropped the price of capital to near zero. Commodity producers took the bait. They borrowed money and increased production.

But global demand couldn’t keep up.

You can’t get real demand from empty credit. Real demand comes from Main Street, not Wall Street.

And for that, you need a real recovery, not a phony one.

[Pictures via Pixabay.]

What Happens When Economists Talk Politics

Courtesy of The Automatic Earth.

Jack Delano Chicago & North Western Railroad locomotive shops 1942

As the “Varoufakis Files” provide everyone interested in the Greek tragi-comedy with an additional million pages of intriguing fodder -we all really needed that added layer of murky conspiracy, re: the Watergate tapes-, a different question has been playing in my head. Again. That is: Why are economists discussing politics?

Why are the now 6 month long Greece vs Troika discussions being conducted by the people who conduct them? All parties involved are apparently free to send to the table whoever they want, and while that seems nice and democratic, it doesn’t necessarily make it the best possible idea. To, in our view, put it mildly.

For perspective, please allow me to go back to something I wrote 3,5 months ago, May 12 2015:

Greece Is Now Just A Political Issue

[..] the EU/troika anno 2010 decided to bail out German and French and Wall Street banks (I know there’s an overlap) – instead of restructuring the debts they incurred with insane bets on Greece and its EU membership- and put the costs squarely on the shoulders of the Greek population.

This, as I said many times before, was not an economic decision; it was always entirely political. It’s also, by the way, therefore a decision the ECB should have fiercely protested, since it’s independent and a-political and it can’t afford to be dragged into such situations. But the ECB didn’t protest. [..]

The troika wants the Syriza government to execute things that run counter to their election promises. No matter how many people point out the failures of austerity measures as they are currently being implemented in various countries, the troika insists on more austerity. Even as they know full well Syriza can’t give them that because of its mandate. Let alone its morals.

It’s a power game. It’s a political game. It always was. But still it has invariably been presented by both the –international- press and the troika as an economic problem. Which has us wondering why this statement by ECB member and Austrian central bank head Ewald Nowotny yesterday, hasn’t invited more attention and scrutiny:

ECB’s Nowotny: Greece’s Problem Isn’t Economic

The Greek problem is more a political question than an economic one, a member of the European Central Bank said Monday. Discussions with political parties such as Greece’s left-wing Syriza and Spain’s Podemos may be refreshing by bringing in new ideas, “but at the end of the day, they must [end in] results,” ECB member Ewald Nowotny said, adding discussions are “not about playing games.”

The central banker declined to speculate on how to solve Greece’s financial problem saying the issue “is much more a political question than an economic question.” Mr. Nowotny also doesn’t see the ECB’s role as creating a federalized financial government inside the euro zone. “We cannot substitute the political sphere,” he said.

That seems, from where we’re located, to change the discussion quite a bit. Starting with the role of the ECB itself. Because, for one thing, and this doesn’t seem to be clear yet, if the Greek problem is all politics, as the central bank member himself says, there is no role for a central bank in the discussions. If Greece is a political question, the ECB should take its hands off the whole Greek issue, because as a central bank, it’s independent and that means it’s a-political.

The ECB should provide money for Greece when it asks for it, since there is no other central bank to provide the lender of last resort function for the country. Until perhaps Brussels calls a stop to this, but that in itself is problematic because it would be a political decision forced on an independent central bank once again. It would be better if the ‘union’, i.e. the other members, would make available what Greece needs, but they -seem to- think they’re just not that much of a union.

In their view, they’re a union only when times are good. And/or when all major banks have been bailed out; the people can then fight over the leftover scraps.

The IMF has stated they don’t want to be part of a third Greek bailout. Hardly anyone seems to notice anymore, but that makes the IMF a party to political decisions too. Lagarde et al claim they can’t loan to countries that don’t take the ‘right’ measures, but who decides which measures are the right ones? [..] Moreover, if we take Mr. Nowotny on his word, why are there still finance ministers and economists involved in the Greek issue negotiations? Doesn’t that only simply lead to confusion and delay?

It seemed crystal clear to me then, and does even more so today, but nothing has really changed, other than Greece having replaced one economist with another as finance minister. Which never really could help discussions in the eurogroup alone, because, as Ian Parker writes in his long must read “V” (for Vendetta) portrait, the rest of them are still not economists, and therefore have no appetite for discussing matters from that angle:

The Greek Warrior

At the level of the Eurogroup, Varoufakis told me, the conversation was “all about the rules.” It was not a forum in which to discuss debt unsustainability, or the rarity of economic growth under austerity conditions. Varoufakis told me that he was “accused of talking about economics.” Once, Varoufakis was asked what Greece’s target surplus should be, if not 4.5% of GDP. He “had to give a lecture” about the variables that made the question unanswerable in that form. “They’re not economists,” Varoufakis said. “Most of them are lawyers.”

At a certain point, it’s hard to escape the idea that it’s all like if you have a politically volatile discussion about building an airport, or ‘just’ a runway (commonplace issues), and the entire discussion is controlled by architects, or builders, instead of politicians. It makes no sense, and it can only possibly lead to undesirable outcomes. Because you got the wrong people in the wrong venue.

Moreover, unlike architecture, economics has huge credibility issues to begin with. Which is why politicians need to provide very specific instructions to their economists, or the entire exercise risks being watered down in no time to a battle between one economic stream of faith vs another. Keynes vs Mises, that kind of thing.

If we can agree with Nowotny (and I very much do) that this is a political issue, it’s the politicians who should make the decisions, on political grounds, and the economists should fill in the specifics after the fact.

Economists, and eventually lawyers, should fill in the details, but lawyers and economists posing as finance ministers should not be left in charge of the political decisions.

And no, here’s looking at Athens, naming an economist as finance minister does not make him a politician. Nor should it. An economist has his/her own place in the proceedings. But then, that’s where we hit upon the major conundrum: what makes a body a politician?

Turns out, that’s a hard one to answer. Because anyone can pretend to be a politician, and many do pretend just that. But how then, when we can agree that a certain issue is a political rather than an economical one, do we select the proper people to make decisions on the issue?

The simplest bit of deduction teaches us that putting economist Yanis Varoufakis on opposite ends of the same table with eurogroup finance ministers who are lawyers and don’t know diddly-squat about economics, doesn’t work. All a lawyer knows how to do is point to pre-conceived rules and regulations. It’s what lawyers do, it’s what enabled them to get their law degree.

But you might as well put a Chinese farmer and a West Virginia gun dealer together. They don’t speak the same language. Other then perhaps possibly that of compassion, but that’s the one quality lawyers are sure to lack once they get to be finance ministers.

Still, once you acknowledge that something is a political issue, you must make sure that only political arguments drive the talks, not economic ones, not even legal ones. And that’s what seems to be the little big 800-pound thingy, doesn’t it? They all just choose to pretend they speak the same language even if they know they don’t.

So all the eurogroup only possibly can do is to vent as little flexibility as possible. If they veer even an inch off the prescribed path, they would be instantly lost. Lawyers…

But that also, and very much so, means we need to wonder why Syriza insisted on prolonging the eurogroup talks all this time. The eurogroup, whatever it may be, and whatever we may think of it, is not a political forum. It’s evidently not an economic one, either, but that’s another story altogether.

Why did Varoufakis go back into that forum time after time, even after Nowotny said what he did? He must have known from that moment, and long before, that as an economist he had nothing to gain there. He might as well have sent his cleaning lady. And she might have come up with a better result to boot.

Why did Syriza never insist that the people involved be changed, and the venue, to be limited to Merkel and Hollande and Tsipras?

The question that lingers is why these talks are set up the way they are, where failure is all but certain. Is that intentional, as in where the lawyers are sent in because they are supposed to halt all sensible discussion no matter what?

Or, arguably more interesting, is it that when it comes to purely political issues, nobody really knows who to put forward? Who can really discuss exclusively political issues other than actual political leaders?

Well, we know it’s not economists, and we can count out cleaning ladies (though we could get lucky). We also know we shouldn’t let lawyers do the trick. They’re too narrow in their range. So who? I would almost say there’s no-one, but that automatically leads to the only possible option: the highest political ‘functionaries’.

Which in the case of the Troika vs Greece means Merkel, Hollande, perhaps Renzi, and Tsipras. The people who’ve been elected (or quasi) to be their nations’ top-notch political leaders. No Dijsselbloem, or Schäuble, or any of those guys. No Varoufakis either.

The ECB is both a participant in the talks and a creditor, a stakeholder. That pushes it painfully close to being a political participant, something a central bank should never ever be.

But the breaching of red lines and grey areas has become so ubiquitous in the whole ‘discussion’ that nobody seems to notice anymore, or wants to notice, for that matter.

The same goes for the role of the IMF. What do they think they’re doing? The Fund should stay far away from any political discussion, or it loses its credibility.

Both the ECB and the IMF try to keep up the illusion that their decisions are a-political and within their respective mandates, but that idea can only be maintained if and when the Greece issue were an economical one. We’ve already seen it’s not.

We end up concluding that the entire process has been a disaster, unless one’s aim from the get-go was to gut the Greek economy even more, and the outcome is -therefore- a disaster too.

But it’s still economists who keep holding the talks. The “technical experts” from the Troika that re-enter Athens as we speak may be a bit more knowledgeable when it comes to economics that the EU finance ministers, but still, they are loaded with their own issues.

If I were Tsipras I’d refuse to have any of my people talk to any Troika ‘negotiators’ from here on in, and insist on direct talks with Merkel and Hollande only (I’d have done that a long time ago, too). See what the real intentions are amongst those that have real power, and only after that, have staff, like economists and lawyers, discuss specifics and fill in details.

Things have been moving the 180º other way around now, and it could never even possibly have led to a positive result. You can’t start with the details.

Here’s still wondering why they all insist on doing things that way. Isn’t it obvious? Or has the whole thing simply been intentional all along?

Oh, and before I forget, most commentaries on the Greek issue in the media also come from economists. Some of those are palatable, even smart. But at the same time, they haven’t yet gotten the message either: it’s all about politics. If it were just economics, Greece would be solved in 2 seconds flat.

But it’s not. And there’s a reason for that which lies way beyond economics.

Saudi Arabia Expands Price War Downstream


Saudi Arabia Expands Price War Downstream


The undisputed king of oil and gas is making some moves that could change the face of the global refining sector.

In June 2015, Saudi Arabia pumped a record 10.564 million barrels a day, a record level. As if being the world's biggest exporter of oil was not enough, the desert kingdom is now looking to conquer the refining sector as it has quickly become the fourth largest refiner in the world.

"Saudis have moved into the product business in a big way," said Fereidun Fesharaki of FGE Energy. With Saudi Arabia's refined fuel contributing to the global supply glut, what will be its impact on the refining markets especially those in Asia?

How will Saudi Arabia Capture Market Share Downstream?

A refinery's success is measured by its ‘gross refining margins'. The gross refining margin is nothing but the difference between the value of the refined products and price of the crude oil. In case of Saudi Arabia, the price of crude oil would be extremely low. "The crude is so cheap it's pretty much free for them, the margins are going to be massive. It makes trade flows in products very different," said Amrita Sen of Energy Aspects.

There is little doubt then as to why the Saudis are shifting their focus to domestic refining. Along with acquiring a controlling stake in Korea's S- Oil, the desert kingdom is commissioning a new refinery in Jizan which would have a capacity of around 400,000 barrels per day when it begins operations in 2017. Jizan will come on top of Saudi Arabia's two other 400,000 bpd- refineries at Yasref and Yanbu, and will turn the country into a major global player in the downstream sector, expanding its campaign for market share beyond just crude oil.

Saudi Arabia Oil Price

Is Saudi Arabia likely to win a potential price war against Asian producers of diesel?

By offering almost 2.8 million barrels of low-sulphur diesel to Asian and European markets, the Saudis are directly competing with Asian refiners, potentially sparking a price war. In fact, at $5.60 the Asian refining margins have fallen by almost 50 percent from June this year and are expected to drop by a further 30 percent.

"We see refining margins weakening on worsening diesel fundamentals, particularly east of Suez, though gasoline should be supportive. A lot of diesel will be trapped in the Far East and this will lead to run cuts in places like Japan and South Korea as the arbitrage to the west will be closed by growing Middle Eastern supplies" said Robert Campbell of Energy Aspects.

On the other hand, it won't be easy for Saudi Arabia – Chinese refiners are also producing more gasoline, for which demand is still strong. Moreover, Indian refiners are now moving away from Saudi Arabia which was previously India's largest crude oil supplier. Indian refiners are now buying more crude oil from Nigeria, Iraq, Venezuela and Mexico. As a result, Saudi Arabia was forced to offer discounts on its heavy and sour grade of crude oil to its Asian customers.

Still, Saudi Arabia can likely wait out the competition. Just as they have kept their crude oil production levels intact, it is possible that the Saudis will maintain their current refining output in spite of falling refining margins and eventually end up winning the price war against Asian producers.

However, one cannot easily neglect the Indian and Chinese refiners. Let us consider the case of Indian private refiners Essar and Reliance, which are among the most complex refineries in the world (refineries which are capable of processing heavier and cheaper crude). These two refineries have seen great success recently, following the recent dip in oil prices after a deal was reached between the P5+1 and Iran, and are likely to build upon their already impressive refining margins (Gross refining margin for Essar refinery was $9.04 per barrel while that of Reliance was $8.70 per barrel in first quarter of 2015).

So, who will reap the benefits of the low prices?

Given current market conditions, the Asian demand for diesel has reduced mainly due to the weakening Chinese market, while demand for gasoline is increasing in India, Pakistan, Thailand, the Philippines and Vietnam. The price for diesel is expected to fall, and gasoline prices will also continue to fall if there are no run cuts in the Asian refineries.

This all translates into lower prices of refined fuels will eventually benefit Asian customers who will pay less for transportation, basic commodities and essential services.

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[Picture via Pixabay.]


China’s Stock Market Crash Looming Large Over Oil Prices


China’s Stock Market Crash Looming Large Over Oil Prices

Courtesy of Evan Kelly at

Oil prices continue to defy even some of the most pessimistic expectations, with WTI falling substantially below $50 per barrel, dropping near $47 on July 27. WTI is now within $3 of its March low, essentially erasing all the gains made in the intervening months. The reasons for renewed descent to such lowly depths are multiple, many of which we have covered extensively in recent weeks – the Iran nuclear deal, ongoing surpluses in supply, and the turmoil in China’s stock markets.

The latter point, in fact, appears to be the main culprit for the dive in recent days. China had appeared to get a handle on the mini-meltdown it suffered last month after the government came to the rescue. However, on July 27, the Shanghai Composite dropped a jaw-dropping 8.5 percent, the largest decline since 2007. China’s financial system suddenly looks frighteningly unstable, although the unfolding crash should not exactly come as a surprise.

China has achieved incredibly impressive levels of economic expansion over the years, but the stock market started to detach from reality last year, rising faster than the underlying economy appeared to justify. The Shanghai Composite, for example, surged more than 140 percent between last summer and the June 2015 peak. The run up in the financial system was intoxicating, and more and more average Chinese investors of modest means began pouring their savings into the stock market.

But at the same time that the stock market was skyrocketing, the real Chinese economy was slowing, hitting its lowest growth rate in decades. The divergence couldn’t continue forever, so it was only a matter of time before there was a (rather large) correction in the stock market. That’s the optimistic case – that we are merely witnessing an overdue correction. A greater risk lies in the possibility that the stock market keeps falling and falling, infecting other financial systems around the world. While still limited, the turmoil is spreading to a certain degree: on July 27, the FTSE 100 dropped by more than 1 percent, the stock markets in Frankfurt and Paris were down 2.5 percent, NASDAQ was off by nearly 1 percent. Emerging markets are even more vulnerable – India, Russia, and Saudi Arabia saw their markets down by more than 2 percent.

The silver lining is that China’s stock market does not represent as large a share of its economy as financial markets do elsewhere – 40 percent of GDP in China, as compared to more than 100 percent in many developed countries. That means that even if the market continues to contract, there is less of a chance of financial contagion as would be the case if the U.S. markets were melting down.

Still, the financial turmoil is causing some of the worst oil market pessimism in months. Hedge funds and other institutional investors are shorting oil and retreating from bullish positions. Net-long positions on crude are at their lowest levels in five years, suggesting that, on balance, traders think oil prices are going to continue to fall.

Moving on from China’s stock market and oil prices…

BP (NYSE: BP) and ExxonMobil (NYSE: XOM) are submitting petitions to Alaskan regulators to allow more natural gas to be produced from the North Slope. Back in 1977 Alaska limited gas production from the Prudhoe Bay field to 2.7 billion cubic feet per day (Bcf/d). But Alaska is now planning on allowing LNG exports, and BP and ExxonMobil want to increase production to 4.1 Bcf/d to supply the project. However, it isn’t as simple as just allowing more gas to be produced. Already, the companies produce around 8 Bcf/d, but reinject much of that back into the field to maintain reservoir pressure for oil production. The state is required to pursue maximum hydrocarbon production by law, so if diverting more gas for export results in a loss of reservoir pressure, that may be an unacceptable trade off. A public hearing is set for August 27.

Saudi Arabia is petrified of an oil boom here and with good reason





Similar geology to the U.S., vast shale deposits, an ever-improving investment climate and guaranteed higher oil prices than North America. Find out why OPEC is so afraid of this coming oil boom. Click here for the full story




Speaking of BP, the British oil giant reported second quarter earnings, and included in the figures are what appears to be the firm’s last significant charge from the Deepwater Horizon disaster. The company reported a $9.8 billion charge for the latest legal settlement. In total, BP coughed up $54.6 billion for the legal and environmental fallout.

BP also took a $600 million impairment charge for its assets in Libya in the second quarter (three months ago French oil major Total (NYSE: TOT) wrote off $755 million from its Libyan assets). Violence there has halted BP’s oil exploration program. Adjusted for one-time charges, BP’s quarterly profit dropped to $1.3 billion, the worst performance in 10 years. For the year, BP said that it expects to drop capital spending to under $20 billion, a deeper cut than previously expected.

Statoil (NYSE: STO) also reported a decline in quarterly earnings, falling to $1.2 billion for the second quarter from $1.5 billion for the same period a year ago. On the other hand, Statoil also reported higher production figures, with output rising to 1.873 million barrels of oil equivalent per day, a 4 percent jump from 2014 numbers.

Gazprom’s production portfolio is heading in the opposite direction. The Russian gas company will likely see its natural gas production hit an all-time low this year, falling to just 414 billion cubic meters on the back of weak demand and a lack of investment, according to Russia’s Economy Ministry. Pricing disputes with Ukraine have slashed Russia’s gas exports to Europe, and Gazprom’s upstream investments fell by 60 percent from January to April of this year.

Finally, modular construction of nuclear power plants, held up as the solution to an age-old problem of cost overruns at nuclear power plants, is not working out quite as planned, according to a Wall Street Journal report. Two nuclear power plants under construction in the United States are facing the same construction delays that plagued the previous generation of nuclear technology. Modular construction, in which equipment and parts are manufactured in a factory and then shipped to site, have not sped up construction times. Georgia Power (NYSE: GPE-A), a 46 percent owner of the Vogtle Power Plant, projects it will spend $7.5 billion on building two reactors, $1.4 billion higher than expected. The new generation of nuclear technology may be better, but for now, it is not exactly proving to be much cheaper.

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When China Sneezes, the U.S. Stock Market Could Catch a Bad Cold

Courtesy of Pam Martens.

DragonAccording to the Office of the U.S. Trade Representative, “China was the United States’ 3rd largest goods export market in 2013.” That’s the latest year that data is available. The total of U.S. exports to China in 2013 reached $122.1 billion, a 10.4 percent increase over 2012.

The top categories of goods that we export to China are: agricultural products, $25.9 billion; aircraft, $12.6 billion; machinery, $12.2 billion; electrical machinery, $11.4 billion; and vehicles, $10.3 billion.

According to a March report from FactSet, “companies in the S&P 500 in aggregate generate about 10 percent of sales from the Asia Pacific region, most of which comes from China and Japan.”

On Monday, China’s Shanghai Composite Index fell 8.48 percent (it was off another 1.7 percent at the close on Tuesday, closing at 3,663). From a June 12 high of 5,166, the Shanghai Composite is now off 29 percent in less than two months and the roller coaster ride which had seen as much as $4 trillion in investor losses earlier this month is spilling over into U.S. markets. Many S&P 500 stocks have far greater sales exposure to China than 10 percent.

According to Sue Chang, a MarketWatch reporter using data from FactSet, 52 percent of Yum Brands sales come from China; Qualcomm derives 48 percent;  Micron Technology 40 percent; and Texas Instruments 32 percent.

Along with the troubles in China, the U.S. economy is facing a rash of equally serious headwinds. Canada has now entered a technical recession with two back to back quarters of contraction this year. Canada is the number one export market for U.S. goods, buying $312 billion from the U.S. in 2014 or 19.2 percent of all U.S. exports.

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Information overload is making us dumber investors

"Information overload" may be especially problematic when we don't have a plan or don't stick with our plan. For example, we may have a long term goal for a stock, but then short term information gets presented, and we act on it, abandoning our original thesis. This can lead to over-trading, chasing the news, and ultimately, regrets. 

Information overload is making us dumber investors



We live in an age of seemingly infinite information, and that’s great in many ways. But that doesn’t make investors any smarter.

Stock research was a problem in years past, with earnings data and other key information slow to trickle out. Now, 10-Qs are posted on investor relations websites in short order, and thanks to screening software, a savvy investor can size up a company or an entire industry sector in a few hours.

But the glut of information presents a challenge of its own, as many investors become overwhelmed by headlines and analysis. There are many valuable tools and reports out there, but there is also a lot of noise — and that makes acting on the facts that really matter increasingly difficult.


These Superhumans Are Real and Their DNA Could Be Worth Billions

The decreasing cost of gene sequencing (as low as $1,000 a patient today) is allowing companies to to sequence many people's DNA, create large data bases, and find relationships between genes and symptoms. The result: potentially new and improved drugs to treat genetic and other conditions such as high cholesterol and chronic pain. 

These Superhumans Are Real and Their DNA Could Be Worth Billions

Drug companies are exploiting rare mutations that make one person nearly immune to pain, another to broken bones



Dreyer and Pete are “a gift from nature,” says Andreas Grauer, global development lead for the osteoporosis drug Amgen is creating. “It is our obligation to turn it into something useful.”

What’s good for patients is also good for business. The painkiller market alone is worth $18 billion a year. The industry is pressing ahead with research into genetic irregularities. The U.S. Food and Drug Administration is expected to approve a cholesterol-lowering treatment on July 24 from Sanofi and Regeneron Pharmaceuticals based on the rare gene mutation of an aerobics instructor with astoundingly low cholesterol levels. Amgen has a similar cholesterol drug, based on the same discovery, and expects U.S. approval in August. The drugs can lower cholesterol when statins alone don’t work. They are expected to cost up to $12,000 per patient per year and bring in more than $1 billion annually.

Drugmakers are also investing in acquisitions and partnerships to get their hands on genetic information that could lead to more drugs. Amgen bought an Icelandic biotechnology company, DeCode Genetics, for $415 million in 2012, to acquire its massive database on more than half of Iceland’s adult population. Genentech is collaborating with Silicon Valley startup 23andMe, which has sold its $99 DNA spit kits to 1 million consumers who want to find out more about their health and family history—more than 80 percent have agreed to have their data used for research. The Genentech partnership will study the genetic underpinnings of Parkinson’s disease. And Regeneron has signed a deal with Pennsylvania’s Geisinger Health System to sequence the genes of more than 100,000 volunteers.


What is the Message of the Market?


What is the Message of the Market?

Courtesy of Jeff Miller, Dash of Insight's Weighing the Week Ahead

As I have noted for the last two weeks, this earnings season carries a special significance. It provides an alternative to the official data on the economy. After a bad week for stocks, the punditry will be asking:

What is the message of the market?

Prior Theme Recap

In my last WTWA [Weighing the Week Ahead], I predicted that attention to earnings reports would once again dominate the news. This was an accurate call. Earnings stories, both good and bad, were daily highlights. Our featured chart on dollar weakness as more important than geopolitics was especially accurate. More on earnings in the account of the week below.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can try it at home.

This Week’s Theme

Earnings season has developed a bipolar theme: Strength in some popular momentum names and weakness in stocks sensitive to the dollar. The market has provided a daily verdict on earnings reports. For many there is also an important economic message. Observers are asking:

What is the message of the market?

…and for some… Will the Fed be listening?

The Viewpoints

The earnings message draws several different viewpoints, including some noted last week.

  • A weak economy has finally taken a toll on corporate profits, especially in some sectors.
  • Stock market leadership has narrowed dramatically. Frank Zorilla illustrates with the chart below. He is open-minded about how this divergence could resolve, including a possible broad rally.


Stockbee has a very similar take on this important theme, including the potential for a rally.


  • The strong dollar has hurt exports and profit margins of many large companies. It is showing up dramatically in energy stocks.
  • Commodity price declines have accompanied the earnings reports, providing a negative feedback loop.
  • Commodity prices remain strong on a long-term basis. The current economic risk is exaggerated. Scott Grannis has one of his helpful chart packs, including this “favorite indicator.”


As always, I have my own ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was some good economic news.

  • The Greek agreement held – at least for now.
  • Earnings have been solid, measured by the “beat rate.” Bespoke has the story, noting the need to consider revenue and outlook as well.



  • Leading indicators showed strong gains, 0.6% versus expectations of 0.2%. Steven Hansen at GEI has charts, comparisons to other measures and a full discussion.
  • Existing home sales beat expectations. Bill McBride is not impressed, noting problems with the mix of sales and inventory. There is also less impact on the economy than new home sales. Good news, but perhaps not too significant.
  • Initial jobless claims set an all-time low on a population-adjusted basis. NDD at the Bonddad Blog has the full story.
  • Commercial real estate is strong. Scott Grannis analyzes the strength in prices, including this chart:



The Bad

There was also some negative data last week.

  • LA port traffic was weak in June. (Calculated Risk).
  • New home sales disappointed. Calculated Risk describes the miss in the annualized rate, but also notes year-over-year strength of 18.1%. Key question: Did mortgage rates affect the sales rate? It is too soon to tell.


  • Revenues for Q2 have disappointed. Ed Yardeni notes the 4% decline including energy and the 1.5% increase without that sector.

yardeni revenues 

  • China Flash PMI declined to 48.2, a fifteen-month low. Combined with the decline in commodity prices, this further spooked related stocks. ( This diffusion survey has a rather short life span and little demonstrated correlation to important outcomes, but it is getting a lot of attention. The world is hungry for data about the Chinese economy.

China PMI

The Ugly

Louisiana shootings. These incidents are so disturbing and repetitive that I almost yearn for Congress to do something dumb to take its traditional position in this section.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger.

This week’s winner, Jimmy Atkinson at Dividend Reference, provides A Visual Guide to Useless (but Entertaining) Stock Market Indicators.Enjoy a good laugh, but there is an important conclusion. If you use data mining techniques to look at thousands of candidates, you will find some relationships. Poor methodology leads to indicators with no predictive value.

There are plenty of interesting charts, but those of us from the Chicago area will appreciate this one:


Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.


Recent Expert Commentary on Recession Odds and Market Trends

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market.

Georg Vrba: An array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. He gets a similar result from the Business Cycle Indicator. Georg continues to develop new tools for market analysis and timing, including a combination of models to do gradual shifting to and from the S&P 500.

Doug Short: Provides an array of important economic updates including the best charts around. One of these is monitoring the ECRI’s business cycle analysis. Recently the ECRI finally admitted to the error in their forecast, but still claims the best overall record. This is simply not true. I rejected their approach in real time during 2011 and also highlighted competing methods that were stronger. Until we know what is inside the black box (I suspect excessive reliance on commodity prices and insistence on unrevised data) we will be unable to evaluate their approach. Doug is more sympathetic in his last update. While I disagree, it will require a longer post to elaborate.

ECRI now thinks that a near-term recession is unlikely, and Doug has the story.

Doug has regular updates of the “Big Four” economic indicators making up the NBER’s recession timing method. This week’s update includes revisions to industrial production, making the picture a bit worse.


dshort industrial production

The Week Ahead

It is a big week for economic data.

The “A List” includes the following:

  • FOMC rate decision (W). No one expects a policy change, but the statement will get a lot of attention.
  • Initial jobless claims (Th). The best concurrent news on employment trends, with emphasis on job losses.
  • Michigan sentiment (F). Important concurrent indicator on spending and employment – some leading elements.
  • Consumer confidence (T). Similar to Michigan sentiment. Showing recent strength.

The “B List” includes the following:

  • Q2 Advance GDP estimate (Th). This may seem like “old news” and it will get revised.
  • Durable goods (M). June data and volatile, but still important.
  • Pending home sales (W). Less significant for construction and economic growth than new home sales.
  • Crude oil inventories (W). Current interest in energy keeps this on the list of items to watch.
  • Chicago PMI (F). Ranked highly in the analysis of indicators, and always significant when a weekend intervenes before the ISM index.

It is the quiet period for Fed speeches.

The earnings stories will command attention.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has continued in bullish mode after more than a month in a neutral stance and the negative results last week. The confidence in this three-week forecast remains very low with the continuing extremely high percentage of sectors in the penalty box. Felix has shifted back to fully invested, including some foreign exposure. For more information, I have posted a further description — Meet Felix and Oscar. You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com. Felix appears almost every day at Scutify (follow himhere).

Tradeciety has another great post, aimed this time at “amateur” traders. There are four common questions and good answers. I especially like the discussion of stop losses and whether the market is rigged.

Brett Steenbarger has great advice for traders on avoiding promiscuity! Read it all, and learn to focus on the right type of trade. (This is pretty good advice for investors as well).

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.

We also have a page summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking.

In Part Two of my series on risk I used the Chinese market as an example of headline risk. My main objective is to explain how to navigate the ever-threatening headlines. Along the way I share a few ideas of how you might profit from stocks with Chinese exposure.

Other Advice

Here is our collection of great investor advice for this week.

If I had to pick a single most important article, it would be this story of how a Harvard econ prof and retirement expert blundered on her own retirement account and what she did to recover.

Hints: Beware of tapping retirement funds for current spending. A few years of extra work can make all of the difference.

Investment Ideas

REITs. There are some interesting REIT ideas this week. We all know that there is risk from rising interest rates. Some sectors are growing rapidly enough that this risk might be offset. CNBC’s Diana Olick looks at some names in cloud computing, including what to look for. (I am using these and health care REITs as a bond alternative for some clients).

Offices are another idea, offering reward in some areas, but fraught with peril (ghost space) in others. Beware.

Real Estate. There are several ways of investing in real estate, ranging from direct purchase, to loans, to construction stocks. Bernice Napach at ThinkAdvisor covers the waterfront. Has the easy money been made already?

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in this special edition. As always, there are several great links, like this one about why it is great to be a young investor. I especially liked this great post (yet another) from Ben Carlson. I am not a fan of buy-and-hold, preferring attention to risk in adjusting size, but the article provides a good understanding of the fundamental approach.

If you sold your stocks the Friday before Lehman went bankrupt, went to cash & stayed there you would have missed out on a gain of 93%

He also quotes Jason Zweig as follows:

In 2009, when no one, I repeat NO ONE, was predicting that stocks would end up at the levels they’re at today, Jason Zweig talked about the paradox of buy and hold at a time when many had completely given up on it.

You can check out the quote, but it is not completely accurate. I am not getting much recognition for my 2010 Dow 20K call.

Junk Bonds

Watch out! That is the warning from Jeff Gundlach and Carl Icahn. Josh Brown reports the story and agrees.


Kid Dynamite warns about using charts to determine value in the yellow metal. He writes as follows:

the same people who are telling you that gold miners are cheap have been touting that story for at least the past four years, as the miners have gotten absolutely obliterated.


Energy Stocks

Morgan Stanley has a four-point checklist (via Bloomberg) suggesting the oil prices will stabilize and move higher. The biggest wild card is expanded supply from a reduction in Iran sanctions and improved conditions in Libya. It is an interesting, data-driven approach suggesting important points to follow.

Final Thought

As I have often observed in “the final thought”, the right answer may well be different for traders and for investors.

Felix’s trading approach reflects a market that is at the lower part of a long-term trading range and has several attractive sectors. Traders (including Felix) are very skeptical of economic data and use a lot of charts, trends, and theoretical points of support and resistance.

Investors have a different problem. Investors cannot make major position shifts in short time periods. Most who try to be agile wind up losing money through the market timing attempts.

Investors do better to focus on fundamentals – the economic cycle and corporate earnings. If there is no recession in prospect, the risk of a major decline (40-50%) is low. The risk of a 15-20% market correction is always present and essentially unpredictable.

The result is that investors are often on the other side of the market from traders. This week that means two things:

  1. Selling (or reducing size) in momentum stocks with exaggerated multiples.
  2. Buying (or increasing size) in downward momentum stocks that are oversold based upon the economy.

Put another way, the economic data are far more positive than the apparent message of the market. A strong approach to investing is to make your investment choices on fundamental grounds and take advantage of errors by “Mr. Market.”

A common investor error is to change course whenever the market seems to be going against you.

None of our indicators show major economic risk. Commodity prices have notoriously given false signals before, especially in 2011.Cullen Roche analyzes the question and draws a solid conclusion, consistent with the work we regularly cite:

More importantly, is the big outlier risk at this point still further upside in the economy as opposed to the next big crisis that everyone seems to be in search of on a daily basis?  In other words, is our boom still in front of us before the next big bust?  It’s looking like that just might be the case.  Therefore, while we’re very likely entering the middle to later stages of this recovery the current 72 months relative to historical averages does not necessarily mean we’re at the end of the cycle.

PTJ on being on the right side of the trend

Courtesy of Joshua Brown, The Reformed Broker

There’s more than one way to skin a cat. The stuff that Paul Tudor Jones has made his billions based on does not appear in any traditional investing text book. Ben Graham would read his stuff and roll over in his grave.

For example, the idea of being on the right side of a predominant trend – bring a concept like this into the Church of Value Investing and you might see the holy water begin to boil. And yet, it can work if applied correctly.

Here’s PTJ on his own chosen trend indicator, the 200-day moving average, via Tren Griffin at 25iq:

One principle for sure would be: get out of anything that falls below the 200-day moving average.”

I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school. Here, you’re getting a $100k class, and I’m going to give it to you in two thoughts, okay? You don’t need to go to business school; you’ve only got to remember two things.

The first is, you always want to be with whatever the predominant trend is. My metric for everything I look at is the 200-day moving average of closing prices.  I’ve seen too many things go to zero, stocks and commodities.  The whole trick in investing is: “How do I keep from losing everything?”  If you use the 200-day moving average rule, then you get out.  You play defense, and you get out.

Josh here – We run a tactical model in-house that is designed to respect trend and omits the kind of touchy-feely pseudo-intellectualism that often accompanies market or economic prognostication.

Part of this is because there is no Why. Or, more reasonably, if there is a Why, it is only very clear to the majority of people after the fact. Trends are confirmed or violated as a result of the process by which markets attempt to figure out the Why, in real-time. When the the crowd feels confident that it’s got the What and Why figured out, a trend solidifies. When this confidence is shaken – in either direction – a trend becomes invalidated and a new trend is born. Even if that new trend is trendlessness – what we’re going through so far in 2015, for example.

The kind of trading that Tudor does would be wholly inappropriate for wealth management clients, but its remarkable how universal this idea of respecting trend can be – and how versatile when applied to lower-turnover strategies.

Incidentally, after 8 months of consolidation, the US stock market’s primary trend is now flat. This can be a confusing time for people without a plan, people who are looking to headlines for guidance or who may be hoping to make it up as they go along. Doing so with one’s own money is one thing, but with other people’s money?


A Dozen Things I’ve Learned from Paul Tudor Jones About Investing and Trading (25iq)

See also, Joshua's previous article:

Quote of the Day: There is No Why

Some of the most brilliant people I’ve met are terrible investors because they’re constantly seeking out ways to explain why things happen the way they do in the markets. Even when you’re right about the way something transpires in the macro picture, you may come to the wrong conclusion about how the markets will react to that event.

When you’re constantly looking for a catalyst to explain every single move in the markets you start to see signals and correlations that just don’t exist. Most of the time we won’t know exactly why the markets moved a certain way until much later. Sometimes even with the benefit of perfect hindsight, investors still can’t agree on the specifics of the cause and effect. But to some the ‘why’ in the markets will always seem easy after the fact, so they keep searching for the answers.

Letting go of the Why (A Wealth Of Common Sense)

Even if you know the Why, you still don’t know what will happen. And if you manage to somehow know the What, well you definitely can’t know the When. The good news is, knowing these things aren’t crucial for good investing. Conversely, searching for them in vain, with money on the line, can be highly detrimental.

[Picture via Geralt at Pixabay.]

Europe: Running on Borrowed Time


Thoughts from the Frontline: Europe: Running on Borrowed Time

By John Mauldin

“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”

– Romano Prodi, EU Commission president, December 2001

Prodi and the other leaders who forged the euro knew what they were doing. They knew a crisis would develop, as Milton Friedman and many others had predicted. It is not conceivable that these very astute men didn’t realize that creating a monetary union without a fiscal union would bring about an existential crisis. They accepted that eventuality as the price of European unity. But now the payment is coming due, and it is far larger than they probably anticipated.

Time, as the old saying goes, is money. There are lots of ways that equation can work out. We had an interesting example last week. Europe and the eurozone pulled back from the brink by once again figuring out how to postpone the inevitable moment when all and sundry will have to recognize that Greece cannot pay the debt that it owes. In essence they have borrowed time by allowing Greece to borrow more money. Money, I should add, that, like all the other Greek debt, will not be repaid.

I’ve probably got some 40 articles and 100 pages of commentary on Greece and the eurozone from all sides of the political spectrum in my research stack, and it would be very easy to make this a long letter. But it’s a pleasant summer weekend, and I’m in the mood to write a shorter letter, for which many of my readers may be grateful. Rather than wander deep into the weeds looking at financial indications, however, we are going to explore what I think is a very significant nonfinancial factor that will impact the future of Europe. If it was just money, then Prodi would be right – they could just create new economic policy instruments, whatever the heck those might be. But what we’ve been seeing these last few months is symptomatic of a far deeper problem than can be addressed with just a few trillion euros, give or take.

The More Things Change

Almost four years ago, in an article on Bloomberg with the headline “Germany Said to Ready Plan to Help Banks If Greece Defaults,” we read this paragraph:

“Greece is ‘on a knife’s edge,’” German Finance Minister Wolfgang Schäuble told lawmakers at a closed-door meeting in Berlin on Sept. 7 [2011], a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.

Over the last few weeks he took a similar hard line, offering the possibility that Greece could take a “timeout,” whatever in creation that is, and only the gods know how it could work for five years.

Reports of the final meeting before the agreement with Greece was reached demonstrated that there is little solidarity in the European Union. The Financial Times offered an unusually frank report of the meeting:

After almost nine hours of fruitless discussions on Saturday, a majority of eurozone finance ministers had reached a stark conclusion: Grexit – the exit of Greece from the eurozone – may be the least worst option left.

Michel Sapin, the French finance minister, suggested they just “get it all out and tell one another the truth” to blow off steam. Many in the room seized the opportunity with relish.

Alexander Stubb, the Finnish finance minister, lashed out at the Greeks for being unable to reform for half a century, according to two participants. As recriminations flew, Euclid Tsakalotos, the Greek finance minister, was oddly subdued.

The wrangling culminated when Wolfgang Schäuble, the German finance minister who has advocated a temporary Grexit, told off Mario Draghi, European Central Bank chairman. At one point, Mr Schäuble, feeling he was being patronised, fumed at the ECB head that he was “not an idiot”. The comment was one too many for eurogroup chairman Jeroen Dijsselbloem, who adjourned the meeting until the following morning.

Failing to reach a full accord on Saturday, the eurogroup handed the baton on Sunday to the bloc’s heads of state to begin their own an all-night session.”

That meeting ended with Angela Merkel and Alexis Tsipras arguing for 14 hours and giving up. Donald Tusk, the president of the European Council (and former Polish Prime Minister), forced them to sit back down, saying, “Sorry, but there is no way you are leaving this room.”

Essentially, they were arguing over what form of humiliation Greece would be forced to swallow.

For all intents and purposes, Greece had to surrender its sovereignty and is now a European protectorate. But in the end, a majority of the Greek parliament agreed that was better than holding hands and stepping off the cliff into the abyss. In the wake of all my reading this past week on the topic, and after a lengthy conversation with George Friedman of Stratfor, let me offer some thoughts.

Europe as a free trade zone essentially works. It is not perfect, as no free trade zone is, but it is far better than the alternative. However, the eurozone has been an utter disaster for most of its members. It has been a triumph for Germany.

Germany now exports almost 50% of its GDP, with half of that to its fellow European Union members. Germany has prospered with a far weaker currency, the euro than it would have with its deutschmark. The southern members of the eurozone (including France) have suffered with a far stronger currency than they deserve.

George Friedman argues (quite aggressively) that the Germans were bluffing. The idea that Greece might lead the eurozone panics German leaders, since they know that if other members were also to leave, their export market share would begin to erode.

I agree with George that there is a two-speed Europe that is trying to make a single monetary policy work for dramatically different economies. If you were to split the eurozone into several different currency zones, the zone that contained Germany would soon see its currency appreciate, perhaps dramatically, against the currency of its southern peers.

The vision of a European Union as something more than a trade zone is one for Euro-romanticists. It’s a political vision, not an economic one. And during the meetings in mid-July, the political reality crushed economic reality. No one really thinks that Greece can repay the debt it has incurred. Greece was once again forced to agree to a deal that will let it to borrow more money that it can’t pay in return for hobbling its economy even further.

Why would Greece do this? Especially after the people voted overwhelmingly not to take a deal that was somewhat better? Because if they simply walked away from the debt and returned to the drachma, then every Greek pension would have to be paid in drachmas. Grexit would almost immediately cut the lifestyle of every person on a pension in half. And whatever we may think about the situation in Greece, Greek pensions are not all that generous.

Greece has to import nearly all of its pharmaceuticals and medical supplies, all of its energy, and most of the bits and pieces needed to run its machinery and businesses. By contrast with Germany’s, Greece’s exports are less than 15% of its economy. Greece is already at the critical point in the medical arena, with most drug and medical companies already dealing with Greek hospitals on a pay-as-you-go basis. Hospitals are short of the basics such as sutures and bandages, not to mention life-saving drugs.

If Greece left the euro, Greek banks would immediately be completely destroyed. Business would grind to a halt, as there would be no way to roll out a new drachma overnight. There is no mechanism in place to do so. Things would eventually sort themselves out, but for the several months that the transition would would require there would be a real humanitarian crisis in a developed country, a phenomenon unprecedented in post-World War II Europe.

Tsipras, with the political naïveté that only a new politician could muster, came into office thinking the Germans would blink because the threat of the eurozone breaking up would terrify them. He overplayed his hand. Now he is a dead politician walking. Relatively soon there will be a new Greek election. There is no way the Greek economy gets any better over the next few months, and voters will be looking for another option.

Though I have little sympathy for radical socialists like Tsipras, I will admit to feeling sorry for him. He was in a no-win situation. Greek voters do not want to leave the euro, but they don’t want to have to deal with the realities of austerity that is European- (read German-) imposed.

If Tsipras and Syriza actually took Greece out of the euro, there would be a massive voter backlash, because the economic reality on the ground for the year after exit would be quite ugly. No politician who wants to get reelected wants to inflict that kind of pain.

Merkel and team knew Tsipras would have to cave at the end of the day. It is not that Angela Merkel is mean-spirited or wants to make the Greeks suffer. She has her own political realities to contend with. The odd thing is, the majority of German voters think they are the victims. They were innocents who goodheartedly lent Greece money, and now Greece doesn’t want to pay them back.

There was a fascinating op-ed in the New York Times last week by Jacob Soll, a professor of history and accounting at the University of Southern California and the author of The Reckoning: Financial Accountability and the Rise and Fall of Nations. He talks about speaking at a conference in Germany where they were debating the Greek situation. I’m going to quote a little bit more than I usually do from someone else’s essay, because he conveys a serious point really well. He has spent much of the day listening to German economists before he rises to speak and debate on a panel.

…but to hear it from these economists, Germany played no real part in the Greek tragedy. They handed over their money and watched as the Greeks destroyed themselves over the past four years. Now the Greeks deserved what was coming to them.

When I pointed out that the Germans had played a major role in this situation, helping at the very least by insisting on austerity and unsustainable debt over the last three years, doing little to improve accounting standards, and now effectively imposing devastating capital controls, Mr. Enderlein and Mr. Fuest scoffed. When I mentioned that many saw austerity as a new version of the 1919 Versailles Treaty that would bring in a future “chaotic and unreliable” government in Greece – the very kind that Mr. Enderlein warned about in an essay in The Guardian – they countered that they were furious about being compared to Nazis and terrorists.

When I noted that no matter how badly the Greeks had handled their economy, German demands and the possible chaos of a Grexit risked political populism, unrest and social misery, they were unmoved. Debtors who default, they explained, would simply have to suffer, no matter how rough and even unfair the terms of the loans. There were those who handled their economies well, and took their suffering silently, like Finland and Latvia, they said. In contrast, a country like Greece, where many people don’t pay their taxes, did not seem to merit empathy. It reminded me that in German, debt, “schuld,” also means moral fault or blame.

When the panel split up, German attendees circled me to explain how the Greeks were robbing the Germans. They did not want to be victims anymore. While I certainly accepted their economic points and, indeed, the point that European Union member countries owe Germany so much money that more defaults could sink Germany, it was hard, in Munich at least, to see the Germans as true victims.

Here lies a major cultural disconnect, and also a risk for the Germans. For it seems that their sense of victimization has made them lose their cool, both in negotiations and in their economic assessments. If the Germans are going to lead Europe, they can’t do it as victims.

Admittedly, conferences tend to attract a focused group of attendees and are generally not representative of a population at large; however, the reaction he got is in line with the opinion polls I see coming out of Germany and other northern-tier European countries.

Merkel will not remain popular if she is seen to be caving in to the Greeks. And so she dug in her heels. But at the end of the day she finally had to agree to lend the Greeks more money in order to maintain the appearance of a united Europe.

But the agreement with Greece undermined, if not destroyed, the concept of European unity. Germany clearly dictated what were essentially unconditional surrender terms to Greece. One can be sympathetic to the German position that the Greeks have been profligate, don’t pay their taxes, need significant reforms, and on and on. But that doesn’t take away from the fact that the Germans who lent the money have benefitted from the system. The reality is that the Greeks owe something approaching one-half trillion euros to the rest of Europe. The Germans are going have to pick up about €200 billion of that, give or take.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

Pictures via Pixabay.

Stench from Chicago so Bad, Fitch Finally Smells It

Courtesy of Mish.

At long last, the stench from Chicago is so strong that Fitch can finally smell it. Fitch just now downgraded Chicago Board of Education General Obligation bonds to junk status.

Fitch and the S&P were holdouts because there's money to be made by purposely pretending a manure factory is a rose garden.

MarketWatch reports Fitch Downgrades Chicago Board of Ed (IL) ULTGOs to 'BB+'.

Fitch Ratings has downgraded the Chicago Board of Education, IL's (the board) approximately $6.1 billion of unlimited tax general obligation (ULTGO) bonds to 'BB+' from 'BBB-'. The rating has been placed on Negative Watch.

Rating Drivers

  • Continued financial stress
  • Dependency on borrowing
  • Cash flow drain
  • Pension liability weakness
  • Poor labor history
  • Unfavorable debt position
  • Structural imbalances
  • Mounting fixed costs
  • Limited options to address large budgetary gaps
  • Growing gap for fiscal year 2016
  • Liquidity concerns
  • Negative cash balances
  • Swap termination triggers

Fitch can finally smell enough stench from the above rating drivers to label the bonds as junk.

The "J" Word

The downgrade from BBB- to BB+ is a downgrade to a "non-investment" rating, commonly labeled "junk". Curiously, MarketWatch just could not bear the say the "J-Word".

MarketWatch reports "Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance."

I think we can count on that.

Deep Into Junk

[Picture of Chicago via Pixabay.]

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Final Second Quarter “GDPNow” Forecast 2.4% vs. Bloomberg Consensus 2.9%

Courtesy of Mish.

The Atlanta Fed second quarter GDPNow final estimate came it at 2.4%.

The second quarter GDP official "advance" estimate from the BEA is due out Thursday, July 30 along with the annual revision of the National Income and Product Accounts (NIPA).

The Bloomberg Consensus Estimate for second quarter GDP is 2.9%, a half percentage-point higher than the Atlanta Fed model.

I will take the under.

First quarter GDP releases by the BEA have been all over the map. The initial reading was +0.2%, revised to -0.7%, then revised again to -0.2%.

Whatever number comes out Thursday, expect revisions, possibly in both directions. I expect the final first quarter and/or second quarter GDP to be revised lower.

Mike "Mish" Shedlock

Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too

Courtesy of Mish.

Nearly 1,800 stocks, over 60% of issues traded on the Shanghai and Shenzhen stock exchanges fell by the daily limit of 10% and were halted according to a Financial Times report.

When contacted by the Financial Times, the China Securities Regulatory Commission refused to answer any questions.

The amusing comment of the day comes from Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance: “If [the government] does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market.”

In reality, previous efforts were wasted the moment they were tried. Price discovery is now lacking, and that is a huge problem in and of itself.

Absurd Cries for More Intervention and Liquidity

On Monday, Zhu Baoliang, director of the economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was "essential for the authorities to cut interest rates and loosen monetary policy further."

Bear in mind that it was excessive liquidity that created China's property bubble followed by the stock market bubble.

Thus, Zhu Baoliang is another charlatan promoting the inane notion that the cure is the same as the disease. In effect, Baoliang wants to give alcohol to alcoholics.

Witch Hunt is On

The witch Hunt is on. That means the ridiculous notion of blaming the shorts is in full swing.

Chinese regulators even launched a website encouraging people to name the shorts, further stating those found guilty will be "dealt with severely".

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[Pictures via Pixabay.]

China: Major Devaluation Coming

Courtesy of John Rubino.

The whole “market economy” thing is turning out to be a little trickier than China’s dictators expected. To set up the story: After the 2008 crash the country borrowed about $15 trillion (an amount that dwarfs the US Fed’s quantitative easing programs) and spent the proceeds on history’s biggest infrastructure program.

China bank assets

This pushed up the prices of iron ore, oil, copper, etc., igniting a global commodities boom. Then China liberalized its stock trading rules, setting off a stampede into local equities that doubled prices in less than a year. The result is a classically unbalanced economy, with massive physical malinvestment, overpriced financial assets and way too much debt. The inevitable crash began in June.

Beijing responded by tossing about 10% of GDP into equities to stop the bleeding. This worked, as such interventions tend to do, for a while. But last night it failed:

Chinese shares tumble 8.5 percent in biggest one-day drop since 2007

(Reuters) – Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing’s efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.

“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide.

The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index .SSEC lost 8.5 percent to 3,725.56 points.

China’s market gyrations have stoked fears among global investors about the broader health of the world’s second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low.

Devaluation time?
While the prices of commodities and equities have been bouncing around, China’s currency, the yuan, has been eerily stable in US dollars, because the government pegs the former to the latter.

China yuan July 2015

But because the dollar is way up against virtually every other currency, so is the yuan, which is a major cause of today’s crisis. Economics 101 says that a stronger currency makes exports more expensive and slows growth, and in 2015 China’s trade has responded exactly as predicted:

China exports

So here’s the dilemma: A too-strong currency is making it impossible for China to service excessive debts, which is contributing to a bear market in equities, which further slows the economy and makes it even harder to service debts, and so on.

This probably seems like uncharted territory to the central planners, but is actually a pretty standard problem — for which the traditional solution is to devalue and stiff your creditors by repaying debts with cheaper currency. The US did it in the 1970s, Europe is in the process of doing it now with the euro’s recent steep decline, and much of Latin America is in various, mostly disorderly, stages of the process.

Put another way, the world is following the standard currency war script, in which countries take turns devaluing, reap modest temporary benefits, and then give up those gains when their trading partners respond in kind. China’s devaluation, however, will be a much bigger deal than most.

Visit John’s Dollar Collapse blog here

What Loss Of Control Looks Like: Chinese Regulator Urges Traders To Rat Out “Malicious Sellers”

Maybe the Chinese should just close their stock market until valuations catch up to prices. Lock in those gains!  I mean really lock in. 

What Loss Of Control Looks Like: Chinese Regulator Urges Traders To Rat Out "Malicious Sellers"

Courtesy of ZeroHedge

After pledging a whopping 10% of China's GDP, or just about $1 trillion, to its various (at last check over 40) discrete measures to prop up its collapsing market, among which such threats as arresting shorters of stock and "malicious sellers", actions which have merely slowed down the bursting of the world's biggest stock bubble in recent years, China has finally reverted to what the communist regime does best to preserve "order" – implement witch hunts in which the population rats out any criminals who dare to go against the protocols of the communist party. In this case, the targets are "malicious sellers" with the regulator adding that those found guilty of shorting will be "dealt with severely."

This is what appeared moments ago on the website of the Chinese stock market regulator, the CSRC – an interactive online box allowing "traders" to rat out anyone who sellsmaliciously (as opposed to non-maliciously).

Google translated:

Online Reporting Notes

Note: This website is in trial operation stage, the event can not normally access, please understand!

According to "securities and futures law violations Report Interim Regulations", the Center received reports meets the following conditions:

  1. to report the matter belongs to China Securities Regulatory Commission and the various supervisory duties range;
  2. provided by an informer's name (name), identity and other information;
  3. to provide violate securities and futures laws and administrative regulations of specific facts, clues or evidence.

The same illegal behavior securities and futures are reporting has been accepted or processed, no new facts or clues of informants to report when no longer be accepted.

Second, note

  1. to encourage real name, real name informants should provide my real name (name) when making a report, document number and valid identity information telephone number.
  2. Respond limited real name reporting centers and Zhengjianju accepted.
  3. please fill out the form to report each item. Fill out the "summary report the matter," a time, to write clearly illegal acts involving personnel, time of occurrence, and the main evidence and other circumstances, limited to 500 words or less.
  4. marked with "*" are required items.
  5. informants should be realistic, not fabricate facts, falsification of evidence, cheat reward or false accusation against others. Report defraud reward for the use or bringing false charges against others, shall bear The corresponding legal responsibility.
  6. China Securities Regulatory Commission and each will be in strict accordance with the relevant provisions of confidential informants and report content.

The new policy is already "working":

And that, dear readers, is what total loss of control looks like.

* * *

Instead of repeatting what we have said countless times about what happens when a government finally loses control of not one but numerous credit-driven bubbles of which China now has at least three (the downside is clear: social unrest, rioting, perhaps even civil war should stocks resume their crash to a fair value which BofA said last night is 50% lower from here) here is the running commentary from SCMP's George Chen, whose views on the matter are identical to ours.

Here one wonders why what the Fed and its peer central planning banks have done, by throwing trillions in fresh funds at an identical problem – of both asset values and collapsing confidence in capital markets – across the globe, is any different.

As for China, our visual summary from three weeks ago is more accurate now than ever:

Chinese Stocks Crash Overnight; Will We See Another “Glitch” in New York

Courtesy of Pam Martens.

Shanghai's Bull Statue on Its Bund Waterfront (left); Bull Statue in Lower Manhattan (right)

Shanghai’s Bull Statue on Its Bund Waterfront (left); Bull Statue in Lower Manhattan (right)

Despite unprecedented efforts by the Chinese government to stem the rout in the Chinese stock market that had shaved as much as $4 trillion from share prices before the government’s interventions this month and last, the Shanghai Composite closed down 8.48 percent today at 3,725.558.

The overnight rout has raised speculation in some quarters as to whether we are going to see another “glitch” on the New York Stock Exchange today similar to that of July 8 in the midst of another Chinese stock market tumble. As we reported at the time:

“Yesterday, beginning at 11:32 a.m. and for the next three hours and forty minutes, the iconic New York Stock Exchange shuttered trading in all of its listed securities. The Exchange said it had experienced an internal glitch.

“Unknown to most Americans, some of those shuttered stocks on the New York Stock Exchange were Chinese stocks and among the largest capitalized companies in the world. More than 100 Chinese companies trade on U.S. stock exchanges as American Depository Receipts (ADRs) and almost 200 Chinese company ADRs trade over-the-counter in the U.S. (Individual shares are referred to as ADS, American Depository Shares.) Last year, Thomson Reuters estimated the market value of Chinese companies listed on just the New York Stock Exchange and Nasdaq Stock Market at more than $1.4 trillion.

“With the Chinese stock market rupturing over the past week and trading in more than a thousand stocks suspended in China, the spillover has hit the U.S. market hard.

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