Friday, April 17, 2015

No Credit

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


“There Are Big, Big Problems” – The Shocker Crushing The Economy Revealed

Posted by aurelius77 on April 14, 2015

We are grateful to Alexander Giryavets at Dynamika Capital for pointing us to somethingwhich is far more troubling than even the Atlanta Fed’s collapse in Q1 GDP tracking: namely the latest Credit Managers Index for the month of March which “deteriorated significantly over the last two months and current readings stand at the recessionary levels not seen since 2008.”

To be sure, we have previously shown the collapse in consumer debt as reported by the Fed, which as we noted, just suffered its worst month for revolving credit since December 2010 and explains “why the consumer has literally gone into hibernation – it has nothing to do with the weather, and everything to do with the unwillingness to “charge” purchases, which in turn is a clear glimpse into how the US consumer sees their financial and economic future.”

It turns out it may not have been just a matter of demand: apparently something very dramatic has been happening in February and especially in March. Instead of spoiling the punchline, we will leave it to the National Association of Credit Managers to explain what happened:

From the latest NACM Credit Managers Index:

We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather. There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward. These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage. The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

You mean it wasn’t the weather? “As was the case last month, the majority of the damage was seen in the service sector and this month it is going to be hard to blame it all on the weather or some other seasonal factor.”

Ok, good to know that we were correct in mocking all those “economisseds” who say the recent collapse in seasonally-adjusted (as in adjusted for the seasons… such as winter) data was due to the, well, winter, a winter in which 3 of 4 months were hotter than average!

So what is going on? Well, nothing short of another recession it appears.

The combined score is getting dangerously closer to the contraction zone and has not been this weak in many years (going back to 2010). It is sitting at 51.2 and that is down from the 53.2 noted last month. For most of the last two years, these readings have been in the mid-50s and above—comfortable territory and generally trending up from one month to the next and now there is a very disturbing trend downward. The index of favorable factors slipped substantially, but remains in the mid-range at 55.4. That would be seen as better news if it were not for the fact that these readings had consistently been in the 60s during the last couple of years. It was only August of last year when the reading was a robust 63.8. The most drastic fall took place with the unfavorable factors that indicate the real distress in the credit market. It has tumbled from 50.5 to 48.5 and that is firmly in the contraction zone—a place this index has not been since the days right after the recession formally ended. The signal this sends is that many companies are not nearly as healthy as it has been assumed and that there is considerably less resilience in the business sector than assumed.

Of course, in a world in which the only economic growth comes as a result of new credit entering the economy (as opposed to Fed reserves being stuck in the S&P), the only thing that matters is how easy it is to get credit into the hands of those who need it. As it turns out it has never been more difficult to get credit.

No really!

According to the CMI, the Rejections of Credit Applications index just crashed the most ever, surpassing even the credit crunch at the peak of the Lehman crisis.

And the stunner:

The rejections of credit applications is as miserable as it has been since the depths of the recession—going from 45.9 to 42.0.These are very bad readings and it will take a good long while to climb out of this mess.

No other commentary necessary.

Trouble Ahead

Huge Trouble Is Percolating Just Under The Surface Of The Global Economy

91 The Economic Collapse by Michael Snyder  

World On Fire - Public DomainDid you know that the number of publicly traded companies declaring bankruptcy has reached a five year high?  And did you know that Chinese exports are absolutely collapsing and that Chinese economic growth in 2014 was the weakest in over 20 years?  Even though things may seem to be okay on the surface for the global economy at the moment, that does not mean that big trouble is not percolating just under the surface.  On Wednesday, investors cheered as stocks soared to new highs, but almost all of the economic news coming in from around the planet has been bad.  The credit rating on Greek debt has been slashed again, global economic trade is really slowing down, and many of the exact same financial patterns that we saw just before the crash of 2008 are repeating once again.  All of this reminds me of the months leading up to the implosion of Lehman Brothers.  Most people were feeling really good about things, but huge trouble was brewing just underneath the surface.  Finally, one day we learned that Lehman Brothers had “suddenly” collapsed, and then all hell broke loose.

If the economy is actually “getting better” like we are being told by the establishment media, then why are so many big companies declaring bankruptcy?  According to CNBC, the number of publicly traded companies declaring bankruptcy has hit a five year high…

The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis of data from research firm

Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies.

It is interesting to note that the price of oil is being named as one of the primary reasons why this is happening.

In an article entitled “Anyone That Believes That Collapsing Oil Prices Are Good For The Economy Is Crazy“, I warned about this.  If the price of oil does not bounce back in a huge way, we are going to see a lot more companies go bankrupt, a lot more people are going to lose their jobs, and a lot more corporate debt is going to go bad.

And of course this oil crash has not just hurt the United States.  All over the world, economic activity is being curtailed because of what has happened to the price of oil…

In the heady days of the commodity boom, oil-rich nations accumulated billions of dollars in reserves they invested in U.S. debt and other securities. They also occasionally bought trophy assets, such as Manhattan skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.

Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and other commodity-rich nations are fast drawing down those “petrodollar” reserves. Some nations, such as Angola, are burning through their savings at a record pace, removing a source of liquidity from global markets.

If oil and other commodity prices remain depressed, the trend will cut demand for everything from European government debt to U.S. real estate as producing nations seek to fill holes in their domestic budgets.

But it isn’t just oil.  We appear to be moving into a time when things are slowing down all over the place.

In a recent article, Zero Hedge summarized some of the bad economic news that has come in just this week…

Mortgage Apps tumble, Empire Fed slumps, and now Industrial Production plunges… Against expectations of a 0.3% drop MoM, US Factory Output was twice as bad at -0.6% – the worst since August 2012 (and lamost worst since June 2009). This is the 4th miss in a row.

If we are indeed heading into another economic downturn, that is really bad news, because at the moment we are in far worse shape than we were just prior to the last recession.

To help illustrate this, I want to share with you a couple of charts.

This first chart comes from the Federal Reserve Bank of St. Louis, and it shows that after you adjust for inflation, median income for the middle class is the lowest that it has been in decades

Median Income St. Louis Fed

This next chart shows that median net worth for the middle class is also the lowest that it has been in decades after you adjust for inflation…

Median Net Worth St. Louis Fed

The middle class is being systematically destroyed.  For much more on this, please see this recent article that I published.  And now we are on the verge of another major economic slowdown.  That is not what the middle class needs at all.

We are also getting some very disturbing economic news out of China.

In 2014, economic growth in China was the weakest in more than 20 years, and Chinese export numbers are absolutely collapsing

China’s monthly trade data shows exports fell in March from a year ago by 14.6% in yuan terms, compared to expectations for a rise of more than 8%.

Imports meanwhile fell 12.3% in yuan terms compared to forecasts for a fall of more than 11%.

This is a clear sign that global economic activity is slowing down in a big way.

In addition, Chinese home prices are now falling at a faster pace then U.S. home prices fell during the subprime mortgage meltdown

It appeared as though things went from bad to worse nearly overnight; China’s National Bureau of Statistics said that contrary to hopes that there would be a modest rebound, the average new home price in China fell at the fastest pace on record in February, from the previous year.

Reuters reported that average new home prices in China’s 70 major cities fell 5.7 percent, year to year, in February – marking the sixth consecutive drop after January’s decline of 5.1 percent.

Things continue to get worse in Europe as well.

This week we learned that the credit rating for Greek government debt has been slashed once again

Standard & Poor’s has just cut Greece’s credit rating to “CCC+” from “B-” with a negative outlook.

S&P said it expected Greece’s debt to be “unsustainable.” It cited the potential for dissolving liquidity in the government, banks and economy.

And according to the Financial Times, we could actually be on the verge of witnessing a Greek debt default…

Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government’s thinking.

The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5bn of payments due to the International Monetary Fund in May and June if no agreement is struck, they said.

So I hope that those that are euphoric about the performance of their stock portfolios are taking their profits while they still can.

Huge trouble is percolating just under the surface of the global economy, and it won’t be too long before the financial markets start feeling the pain.

The post Huge Trouble Is Percolating Just Under The Surface Of The Global Economy appeared first on The Economic Collapse.

It’s all in the charts

Well That's Never Happened Before - Exhibit 1

Tyler Durden's picture

Submitted by Tyler Durden on 04/17/2015 15:37 -0400

We have never, ever, seen the US equity market so disconnected from underlying macro fundamentals.

As the chart shows, the rising stock market is shockingly divergent from the US Macro picture (the greatest divergence ever). This has happened before (in 2006/7) but on a lesser scale, and did not end well.

Charts: Bloomberg

Still waiting

Hilsenrath: June rate hike probably off the table • 8:34 AM

Stephen Alpher, SA News Editor

  • "For Fed officials, the turn of events is somewhat of a recurring nightmare," writes Jon Hilsenrath. "Economic growth has continually fallen short of their expectations in an expansion nearly six years old."
  • Putting that in a picture is BAML's U.S. activity surprise index - strongly in positive territory early in 2014, but then steadily dropping throughout the year, and turning sharply negative by Q2 of 2015. BAML says the ratio of disappointing economic reports to positive ones has been greater recently than at any time since the expansion began in June 2009.
  • “We just don’t seem to be getting escape velocity,” says Reserve Bank of India Governor Raghuram Rajan, speaking on the sidelines of an IMF conference in D.C. “That virtuous cycle is just not happening. Every time it seems like it is happening, you have one more quarter of terrible growth.” Veterans of the Japanese experience will be familiar with the term "escape velocity." BOJ officials were talking about it in 1995 ... 20 years later, they're still waiting for it.

Banks Struggle

Lean times for Main Street banks • 3:02 PM

Stephen Alpher, SA News Editor

  • "[Interest spreads] are unimaginably low for those of us who have followed this area for a long time,” says Nancy Bush of NAB Research.
  • While low rates have provided occasional income boosts at lenders thanks to bursts of refinancing and the related fees, that well may have run dry. Now banks must rely on the gap between what they pay for deposits and what they charge for loans, and at Wells Fargo the spread dropped below 3% for the first time in decades, and at JPMorgan, it's just 2.07% after falling another seven basis points in Q1.
  • On the expense side, the low-hanging fruit of big cuts following the financial collapse is gone, with at least some of it replaced by legal costs which won't quit and regulatory costs which look here to stay.
  • Mergers? One look at the 3-years-and-running battle to close Hudson CIty and M&T Bank is enough to make any management shy about pursuing large acquisitions.
  • Source: Ben McLannahan and Tom Braithwaite in the FT.

Draghi Drags Intelligence Down


Is Mario Draghi Stupid, Crooked Or What?

by David Stockman • April 17, 2015

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Europe is surely at the top of today’s heap of raging  financial market lunacy. It seems that Ireland has now broken into the negative interest rate club, investment grade multinationals are flocking to issue 1% debt on the euro-bond markets and, if yield is your thing, you can get all of 3.72% on the Merrill Lynch euro junk bond index.

That’s right. You can stick your head in a financial meat grinder and what you get for the hazard is essentially pocket change after inflation and taxes.

Remember, the average maturity here is in the range of 7-8 years. During the last ten years Europe’s CPI averaged 2.0% and even during the last three deflationary years the CPI ex-energy averaged 1.2%. So unless you think oil prices are going down forever or that the money printers of the world have abolished inflation once and for all, the real after-tax return on euro junk has now been reduced to something less than a whole number. Has the reckless stretch for “yield” come down to this?

Well, no it hasn’t. Yield is apparently for suckers and retired school marms.

This is all about capital gains and playing momo games in the bond markets. It’s why euro junk debt—-along with every other kind of sovereign and investment grade debt—-is soaring. In a word, bond prices are going up because bond prices are going up. It’s an utterly irrational speculative mania that would do the Dutch tulip bulb punters proud.

In the days shortly before Draghi issued his “whatever it takes” ukase, the Merrill high yield index was trading at 9.0%. So speculators who bought the index then have made a cool 140% gain if they were old-fashioned enough to actually buy the bonds with cash. And they are laughing all the way to their estates in the South of France if their friendly prime broker had arranged to hock them in the repo market even before payment was due. In that case, they’re in the 500% club and just plain giddy.

Does Mario Draghi have a clue that he is destroying price discovery completely? Do the purported adults who run the ECB not see that the entire $20 trillion European bond market is flying blind without any heed to honest price signals and risk considerations at all?

Worse still, do they have an inkling that the soaring price of debt securities has absolutely nothing to do with their macroeconomic mumbo jumbo about “deflation” and “low-flation”?  Or that they are in the midst of a financial mania, not a ” weak rate environment” due to the allegedly “slack” demand for credit in the business and household sectors?

In fact, European financial markets are being stampeded by a herd of front runners who listened to Draghi again yesterday reassure them that come hell or high water, the ECB will buy every qualifying bond in sight at a rate of $65 billion per month until September 2016. Full stop.

Never before has an agency of the state so baldy promised speculators literally trillions in windfall gains by the simple act of buying today what Draghi promises he will be buying tomorrow. And that will be some tomorrow. As more and more sovereign debt sinks into the netherworld of negative yield and falls below the ECB’s floor (-0.2%), there will be less supply eligible for purchase from among the outstanding debt of each nation in the ECB’s capital key.

This is price fixing with a vengeance. It is no wonder that repo rates have plunged into negative territory.

But here’s the thing. The geniuses at the ECB are not cornering the market; they are being cornered by the speculators who are recklessly front-running the central bank with their trigger finger on the sell button. Everything in the European fixed income market is now so wildly over-priced and disconnected from reality that the clueless fools in Frankfurt dare not stop. They dare not even evince a nuance of a doubt.

So this is a house of cards like no other. Greece is a hair from the ejection seat, yet everything is priced as if there is no “redenomination” risk. Likewise, with the European economies still dead in the water, and notwithstanding some short-term data squiggles in the sub-basement of historic trends, the debt of Europe’s mostly bankrupt states is priced as if there is no credit risk anywhere on the continent outside of Greece.

Well then,  just consider three fundamentals that scream out danger ahead. Namely, public debt ratios continue to rise, GDP continues to flat-line, and the Eurozone superstate in Brussels continues to kick the can and bury its member states in bailout commitments that would instantly result in political insurrection in Germany, France and every other major European polity were they ever to be called.

In short, Europe is a financial and political powder keg. The ECB is bluffing a $20 trillion debt market and the Brussels apparatchiks are bluffing 300 million voters.

The only problem is that the true facts of life are so blindly obvious that its only a matter of time before these bluffs are called. And then the furies will break loose.

In the first place, the EU-19 is marching toward the fiscal wall and even Germany’s surpluses cannot hide the obvious. During the last six years, the collective debt-to-GDP ratio among the Eurozone nations has gone from 66% to 91% of GDP, and the sheer drift of current policy momentum will take the ratio over the 100% mark long before the end of the decade.

Historical Data Chart

Secondly, notwithstanding the ebb and flow of short-term indicators, there is no evidence whatsoever that Europe is escaping its no growth rut.  Indeed, euro area industrial output has continued to flat-line, and remains below the level achieved way back in 2002.

You can’t grow your way out of debt on the basis of a profile like that in the graph below. Even then, the underlying truth is more daunting because the picture is flattered by Germany’s exports to China and the EM that are fast coming to a halt.

Eurozone Industrial Production

quick view chart

Thirdly, the state sector in Europe has gotten so big that politics are paralyzed. Accordingly, it is virtually impossible that the true barrier to growth—crushing taxes and interventionist dirigisme—-can be eliminated. Check out recent pro-market policy actions in Italy, France or Spain. There have been none.

Historical Data Chart

So with no growth and rising debt, how long can the Brussels bureaucrats continue to bluff? Yet here is what the EU nations owe on Greece alone.

Source: @FGoria

Is it possible that France could absorb its $70 billion share and see its 10-year bond remain at today’s 35 bps? Is it likely that Italy’s paralyzed government would last even a day if its $60 billion Greek guarantee were called or that its 10-year bond would trade for even a nanosecond longer at todays 1.25%?

Would not the bombastic crooks who run the Spanish government send a few legions of crusaders into Greece before they made good on the $42 billion they are on the hook for?  Would the bond speculators basking in the Riviera not hit the sell button at the sound of the Spanish hoofs?

So, yes, the euro and the Eurozone do not have a prayer of surviving. It is only a question of when the bluff of a handful of bureaucrats in Brussels and Frankfurt is called.

Maybe Varoufakis will do it next week, or his successor will be forced to after the next Greek election. But whatever the precise scenario, Greece is finished, the bailout commitments will be called, and all hell will break loose in a $20 trillion bond market that is in thrall to a raging central bank induced mania.

In this fraught context, it is tempting to think that Mario Draghi is being paid off by someone. But a project this monumentally stupid may be just that. To wit, the work of a monumentally stupid man.

How a “third of a third” starts

32 Days Is a Long Time Without a Record for U.S. Stock Investors

byCallie Bost

12:00 AM EDT
April 17, 2015

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Federal Reserve Announces Interest Rate Decision

Traders work on the floor of the New York Stock Exchange.

Photographer: Spencer Platt/Getty Images


Europe Stocks Fall Most in Three Weeks Amid Greece as Banks Drop

Greece Enters Twilight Zone as Visions of Euro Exit Take Shape

The Expensive Antics of China’s Gaudiest Billionaire

The 1341hp Electric Car (Beats a Bugatti)

A couple of paychecks, maybe a haircut and a trip to the movies -- not much typically happens in a month. But for investors waiting for the next all-time high in U.S. stocks, it’s actually been a long time.

While equity indexes from Asia to Europe have climbed to multiyear highs in recent days, the Standard & Poor’s 500 Index and Dow Jones Industrial Average last hit theirs on March 2, the same day the Nasdaq Composite Index topped 5,000 for the first time in 15 years. The 32-day stretch without celebrating a fresh high is the S&P 500’s longest since July 2013.

“We think the investor has gotten a little bit spoiled,” said Jim Russell, a Cincinnati-based portfolio manager at Bahl & Gaynor Inc., which has about $8 billion under management. “The market has reached a valuation level where more things have to go right, in that earnings have to come in strongly and interest rates have to remain low. Without the Fed in QE, fundamentals matter more this year.”

In most respects, American equities occupy the same space they did in 2013 and 2014, preserved from protracted losses and never more than 3.7 percent away from the high hit on March 2. It’s been three years since the S&P 500 experienced a 10 percent drop and measures of options-based volatility are below historical averages.

Still, day-to-day swings have been more pronounced. The S&P 500 slid in five of seven sessions from March 2 through March 11, including two declines of 1.4 percent or more, amid concern a stronger dollar and lower oil prices would hurt earnings as the Federal Reserve considers raising rates.

Unanswered Questions

The S&P 500 dropped 1 percent to 2,084.65 at 9:47 a.m. in New York as companies from Advanced Micro Devices Inc. to American Express Co. slid on earnings reports and Chinese regulators updated rules on margin trading.

Over the last year, the S&P 500 has averaged just eight days between highs. The measure has reached an all-time high on five occasions in 2015, all occurring in an 11-day span ending March 2.

While the Fed ended its monthly bond-buying program last year and considers boosting borrowing costs, accommodative central banks from Asia to Europe have fueled a global equities rally. The Stoxx Europe 600 has surged 20 percent in 2015, taking out a 15-year-old record this month, while the Shanghai Composite Index has nearly doubled in the past year to close Thursday at the highest since 2008.

U.S. stocks also entered a stretch of the year when companies customarily suspend share repurchases, a force of buying activity that has buoyed the bull market, before reporting quarterly results.

The S&P 500 has yet to completely recover from two declines of more than 2.5 percent since its last record. Investors have been juggling reports indicating economic growth is tempering, mixed signals from the Fed on its stance regarding interest-rate increases, and what is forecast to be the S&P 500’s worst earnings season in five years.

Zigzagging Market

“There are a lot of balls in the air with regard to the timing of a Fed rate increase and the strength of the economy,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “These questions need to be answered before we see this market break out of resistance.”

The S&P 500 declined 3.6 percent from the record by March 11, before recovering to within 0.5 percent of the high in the next seven sessions. Stocks then tumbled 2.5 percent in four days as a selloff in biotechnology and chip companies dragged the rest of the market with it.

The S&P 500 has gained back most of that ground this month, closing Thursday 0.5 percent short of the record, amid a rebound in oil prices that has turned energy producers from first-quarter laggards into leaders.

Low Volume

Investors have shed portfolio hedges as stocks have oscillated in a 52-point range in the past four weeks. The Chicago Board Options Exchange Volatility Index fell 1.9 percent to 12.6 Thursday, hovering around a four-month low.

The VIX, a gauge of S&P 500 options costs, soared 10 percent to 13.9 today in trading.

Volume has suffered as traders have remained reluctant to make decisions in a range-bound market with so many unknowns lingering, according to Jordan Irving at Irving Magee Investment Management. About 6.2 billion shares have changed hands on U.S. exchanges each day in April, putting it on pace for the slowest month of trading this year.

“When the Fed has been as stimulative as they’ve been over the last couple years, that was the obvious trade,” Irving, co-founder of Conshohocken, Pennsylvania-based Irving Magee, said by phone. “I don’t think there’s an obvious trade to jump in on any more. Folks are taking a wait-and-see approach, just sitting on their hands for now.”

Thursday, April 16, 2015

Greek Default

Greek default seems to be imminent. At least markets think so. Greece’s 5yr default probability jumps to almost 90%.

Submitted by IWB, on April 16th, 2015

When they leave the euro in May we will see a huge shock to the system


much like the Lehman collapse.

Greek default imminent as S&P downgrades them to junk

Ratings agency S&P has downgraded Greece’s credit rating


again, saying it expects its debt and other financial commitments will be “unsustainable”.

It has dropped long and short-term sovereign credit ratings


to CCC+/C from B-/B and says its outlook is negative.

Markets use sovereign ratings to work


out the interest rate at which investors should lend to a country.

Official figures on Wednesday also showed Greece’s deficit last year was higher than government forecasts.

The budget deficit


– the difference between its revenue and spending – was 3.5% of GDP, compared with the prediction of 0.8%. The worsening finances of the government could see Greece’s creditors pushing for further austerity, experts said.


Wednesday, April 15, 2015

Is the Fed clueless?


It’s Not The Weather: Industrial Production Is Rolling Over, Yet The Fed Is Clueless About Its Own Index

by David Stockman • April 15, 2015

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Another day of “incoming data” and still more evidence that this isn’t your father’s business cycle. This time it comes from the Eccles Building itself, but don’t expect the Keynesian money printers domiciled there to recognize that the industrial production report they issued today constitutes yet another rebuke to their entire macro model.

The March index slipped badly (0.6%) and thereby predictably elicited a “do not be troubled” assurance from the talking heads. It was just aberrant weather again. Well, that’s actually right. March was so much warmer  than February that the utility component of the index plunged by 5.9%.

Indeed, as another branch of the Fed revealed a few days ago, March was actually warmer than normal for the month. Presumably this means the punk economic data for March can’t be explained by winterish weather—-since it is the very opposite condition which explains last month’s steep drop in utility production.

So the better part of wisdom would be to keep the weather and its unpredictable impact on monthly power plant demand out of it. And, as it happens, the trends in the other two components of the index—–mining and manufacturing—-do offer some very pertinent clues about the dismal state of the US economy.

In a word, both of these indices are rolling over on a short-term basis and reflect trend lines which implicate the destructive doings of bubble finance, not the Fed’s pretension that it is rejuvenating the main street economy.

In the case of mining, the March index was down 4% from its December level, yet the decline in actual shale patch output has not yet even started. The recent rollover in the index is mainly attributable to the plunge in coal production, which is now down 20% from it peak three years ago.

In sum, the 30% gain in mining production since the pre-crisis peak is all in the rearview mirror. Mining accounts for about one-seventh of the industrial production index, and, as George W. Bush once said in another context, this sucker is going down.

In fact, buried in the mining index is the true handiwork of the global convoy of money printing central banks—-that is, the U.S. crude oil production subcomponent. The People’s Printing Press of China stimulated the greatest construction and industrial boom in recorded history, thereby ballooning the demand for crude oil. At the same time, the Fed drove interest rates to the zero bound, thereby touching off a massive scramble for yield among institutional investors and mutual fund chasing homegamers alike.

So taken together——booming global demand reflected in $115 per barrel oil prices and dirt cheap and plentiful junk bonds and related forms of subordinated capital—-the central banks generated a perfect storm of malinvestment. In less than a decade, the oil rig count went from 200 to 1600 and US oil product surged from 5 to 9 million barrels per day.

Accordingly, the Fed’s index of crude oil production soared. At its current level, which is the highest since 1973, it is up 82% from the pre-crisis peak, and a stunning 133% from the bottom in September 2008.

Needless to say, the shale production surge is not a miracle of capitalism; its an aberration of central bank financial repression. Indeed, cheap and plentiful capital is to shale output what green grass is to a goose. That is, it goes from one end to the other in a remarkably short period of time!

In fact, after two years from completion, production from the typical shale well declines by 80%. So given the record plunge in oil drilling rigs since last October’s 1600 peak, the oil production index is destined for some considerable retracing to the downside in the years just ahead.


In the case of manufacturing output, the index has been slipping for five months now, but the real story is that it had no place to slip from in the first place. At the March value of 103.1, the index is just 2.2% higher than it was seven years ago in November 2007.

So virtually the entire rise in the manufacturing index that has been celebrated month-after-month by the talking heads has been “born again” production. What they have forgotten to mention was that the build-up of excess inventories and unsustainable production during the Greenspan/Bernanke housing bubble was so extreme that production dropped all the way back 1998 levels at the Great Recession’s bottom.

That is a dramatic contrast with past cycles, and underscores how the Fed’s conventional reflation policy has so completely failed. Compared to the 2.2% growth of manufacturing output during the past seven years, the index rose by 12.5% in the comparable period after the 2000 peak; and, more importantly, it rose by 25% during the seven years after the 1981 peak and 33% during the 1990-1997 cycle.

In other words, the current so-called recovery is not even in the same league. The fact that production is now rolling over—–and the internals reviewed below make that abundantly clear—is powerful evidence that the Fed is pushing on a string when it comes to the main street economy.

Consequently, as it foolishly continues to keep interest rates pinned to the zero bound it is only inflating an even more fantastic financial bubble, the inevitably bursting of which will send manufacturing  index plunging once again.

Even this picture is too strong. The minor gains from the 2007 top are entirely attributable to autos, defense and metal fabrications—–much of which went into the booming energy patch and related pipelines and support industries. All of these gains are fueled by cheap debt including the subprime lending boom behind autos.

By contrast, the index for non-durable manufactures is still 5.5% below its pre-crisis peak, and has not yet even regained the level it posted in December 1997. Stated differently, a component which accounts for fully one-fifth of the industrial production index has been going nowhere for 18 years.

The same is true of consumer goods production outside of energy, autos and high tech. The index for March was still 11% below the pre-crisis peak, and also below the level first attained in September 1996.

Even technology oriented sectors are nothing to write home about. The information processing index, which includes computers and related products, is down 3% from December and is essentially flat with its level in late 2007. In fact, after the enormous boom in which output rose by 5X between 1990 and 2007, the index has essentially flat-lined ever since.

By contrast to the numerous floundering components of the industrial production index reviewed above, there are enormous vulnerabilities among even those sectors which have experienced meaningful gains in recent years. Front and center on that score is the index for defense and space equipment.

As shown below, the Bush/Obama wars resulted in a 75% gain between 2000 and July 2014.  But even the defense bonanza has plateaued out—-a victim of war fatigue in the nation and the sequester caps on defense spending that have finally brought the Pentagon’s procurement spree to a halt.

Finally, since the June 2009 bottom and GM’s quick rinse discharge from the White House bankruptcy/bailout court, motor vehicle production has been a booster rocket. Output has more than doubled from the 2009 bottom.

But even here there is much less than meets the eye. The 50% plunge of the auto production index during the Great Recession was an artifact of Washington’s machinations before and during the financial crisis.

In the first instance, it reflected a massive inventory liquidation on the dealer lots during 2008-2009. Several million excess vehicles needed to be sold-down in order to make room for new production—–a distortion which, in turn, had been fueled by the Wall Street subprime lending boom enabled by the Fed.

On top of that, the complete disruption of production at Chrysler and General Motors owing to the bailouts and bankruptcies during 2009 further depressed production. During most of late 2008 and early 2009, the entire executive leadership of the auto industry was running to Washington rather than running their plants and operations.

So much of the “born again” recovery in auto production shown in the graph below was simply a rebound from the prior Washington orchestrated disruption. Now that inventories have been rebuilt and then some, however, the pace of expansion has sharply slowed.

At the same time, the resurgent sub-prime auto credit boom of the past two years is getting long-in-the-tooth. Delinquency rates on newly issued credits are now rising rapidly, and the issuance rate has flattened out in recent months.

In any event, after soaring by 130% between June 2009 and June 2014, auto production has essentially flat-lined since then. Indeed, with sales at the 17 million mark and the subprime market tapped-out, it is hard to see where any further gains will occur in motor vehicle production.

The more likely direction is down. Indeed, that is a guaranteed outcome when the Wall Street bubble finally bursts. Like last time, it will shatter confidence among the gamblers who essentially fund the purchase of low end vehicles in the subprime market, thereby drying up demand in what amounts to the rent-a-car market. By the same token, the top 10% of households, which own the stock and buy the luxury end of the auto market, will be sidelined trying to reach their brokers.

At the end of the day, the meaning of today’s incoming industrial production data is that the Fed has not fueled an industrial recovery in any meaningful sense of the word. Outside of energy and defense, which are reversing, and motor vehicles, which have tapped out the household sector’s remaining credit veins, there have been virtually no industrial production gains at all.

So once again the Fed is pushing on a string and inflating a gargantuan financial bubble. That much is plainly evident in the Fed’s own data releases.

Unfortunately, there is no prospect that Janet Yellen and her merry band of money printers will shed their Keynesian blinders at any time soon. So they will dither until the bubble bursts under its own weight and sends the industrial production index into another round of cliff-diving.

Tuesday, April 14, 2015

Volatility Warning

Chart Of The Day: Volatility Ratio Warning

Submitted by IWB, on April 14th, 2015

by Lance Roberts

The one thing that I love about writing a daily blog and a weekly newsletter is the thoughtful commentary AND criticism that I receive along the way. I have always solicited thoughtful discussions and, besides the few inevitable “trolls” that show up now and then, I have learned much from the “community” along the way. For that, and your readership, I am very thankful.

The reason that I bring this up is that I received a very interesting email


this past weekend from Earl A. To wit:

“There are a few indicators upon which I have come to rely heavily during this Fed induced bull market to avoid becoming too bearish. One is the slope of the VIX forward futures curve which can be readily approximated by VXZ/VXX. Another is the BOAML US High Yield


Option Adjusted Spread. These two, in particular, seem to be good barometers of investor risk tolerance. Since I expect that the next bear will likely have its genesis in the high yield space, the later should be a good warning signal as well.

I’m a long time ValueForum member and look forward to your presentation next Saturday in Scottsdale. I’ll be doing a presentation on Tactical Asset Allocation


earlier the same morning. I hope we’ll get a chance to say hello.”

  • (As Earl notes, I will be doing a presentation at the ValueForum this weekend in Scottsdale and will post my presentation slides for you very shortly.)

His comments on market warning signals are very interesting, and I have not previously looked at the Mid- to Short-Term VIX ratio as shown in the chart below.



I have also noted the start and ending points of the Fed’s quantitative easing cycles as well as the ratio of high-yield to 10-year Treasury bond prices


. There are several points to discuss.

First, when the volatility ratio is rising it has been coincident with the Fed’s intervention programs and coincident rises in asset


prices. Rises in both asset prices and the volatility ratio ended when the Fed ended their monetary programs. I have also noted that sharp spikes in the volatility ratio also coincided with short to intermediate term market peaks. (vertical blue dashed lines)

Secondly, the bottom chart shows the ratio between high-yield bond prices and 10-year Treasury bond


prices. Notice that during actual QE programs the chase for “yield”accelerated. However, during lack of monetary stimulus or during “reinvestment”programs like “Operation Twist (OT)” the demand for excess risk taking quickly subsided.

Importantly, note the decline in “risk taking” started most recently in January of 2014 which coincided precisely when the Fed began to “taper” QE-3. Since its conclusion last October, the ratio between high-yield bond


prices and treasury bonds has once again begun to flatline as the Fed continues to “reinvest” balance sheet income in an un-official “operation twist” campaign.

Lastly, since January of this year, the mid-to-short-term volatility index ratio has spiked sharply as the markets have struggled higher. Not unlike 2010, 2011 and 2012, these spikes in the volatility index ratio as markets were consolidating led to either short to intermediate-term corrections.

Also, the spike in the volatility index ratio combined with the “risk off” attitude of bond investors suggests that a risk of correction from current levels is elevated.

Currently, the “bullish trend” of the market remains firmly entrenched which suggests that portfolios should remain more heavily tilted towards equity exposure


. However, that does not mean that this will always be the case.  Earl’s commentary is correct, and the current measures of investor “risk tolerance” is clearly waning. At what point, or with what catalyst, that sends investors running for cover is unknown.

However, as Noah Smith noted in his recent Bloomberg column: “What causes recessions? Unexplained shocks to investment.”

While there are a litany of articles written about markets climbing a “wall of worry,”what is crucial to remember is that this is always the case, until it isn’t. It is only in hindsight that the obvious causes of the next market reversion and subsequent recession will be clearly seen. Unfortunately, for most, that revelation will be of little real value.


Bearish Signals

Get Ready for QE4: Two Lousy Quarters, A Trifecta Of Bearish Signals

Submitted by IWB, on April 14th, 2015



Screen Shot 2015-04-13 at 3.02.52 PM

The US economy has hit the skids.

And as I’ll show you today… if it weren’t for ultra-low rates of inflation, you’d be reading about a new recession over your morning coffee.

Absent a major turnaround in the coming quarters, you can forget about the Fed raising interest rates


. More than likely, the Fed will instead be forced to launch QE4 before the end of the year.

*** Two lousy quarters

The slowdown began during the last three months of 2014.

Adjusted for inflation, the US economy


grew by an annual rate of 2.2% in the fourth quarter. That’s about 30% below the inflation-adjusted – or “real” – GDP growth rate of 3.2% since 1952.

As bad as that is, according to Bill’s friend, economist Richard Duncan, this belies a far weaker economy.

As Duncan recently told subscribers of his Macro Watch advisory, something called the “GDP price deflator” was exceptionally low in Q4 2014. (Don’t be put off by the complicated-sounding name. It’s what government bean counters use to gauge the effects of inflation on GDP.)

The price deflator – which has an inverse relationship to real GDP – was just 0.2% for the fourth quarter. It has only been lower in two quarters since 1952 – which both occurred in the dark days of the 2008 meltdown.

So even with a historically low price deflator hugely flattering the headline real GDP figure, growth was still well below the long-run average.

And if the annual inflation rate had been at the Fed’s target of 2%, real GDP growth for the fourth quarter would have come in at just 0.2%.

Meanwhile, things aren’t looking pretty for the first three months of this year either. The Atlanta Fed says it expects first-quarter real GDP to come in at an annual rate of 0.1%.

Absent ultra-low inflation rates, the US economy would now be shrinking in real terms.

For those who want to subscribe to Macro Watch, Richard Duncan is offering a50% discount to B&P Briefing readers.

*** A trifecta of bearish signals

This comes amid a trifecta of other bearish signals:

1. US corporate profits are shrinking – Profits fell in 2014 and are expected to fall again during the first and second quarters of 2015. Ultimately, it’s profits that drive stock prices



2. US stock valuations are stretched – You can recap on colleague Vern Gowdie’s “tried and tested” valuation metrics here. But by most measures that have a decent track record of predicting future returns, US stock valuations are way above their long-run averages.

3. The Fed’s QE is on pause – During 2013, the Fed expanded its balance sheet by $1 trillion… and the S&P 500 rose 30%. In 2014, the Fed expanded its balance sheet by $450 billion… and the S&P 500 rose 11%. So far in 2015, QE is on pause… so the S&P 500 no longer enjoys that tailwind.

*** Old age is killing this economy

According to Lakshman Achuthan, head of the Economic Cycle Research Institute


(ECRI), the slumpy US economy shouldn’t come as a surprise.

Achuthan is one of the best forecasters on Wall Street – and has a track recordto prove it.

As you can see below from the ECRI, there is a clear trend toward weaker US GDP growth during post-recession expansions.


Achuthan says aging populations… combined with weaker productivity growth


… are to blame:

For a long time, nearly four decades, growth has been getting progressively weaker during each recovery from recession…

There are two key drivers behind this declining trend: demographics and lower productivity growth. Yes, it’s true that we’ve seen pretty good US jobs growth recently, but that comes with productivity growth slamming down to zero.

Japan, with its “lost decades,” is at the leading edge of this long-term trend.

This won’t surprise paid-up Bill Bonner Letter readers. As Bill told them in theFebruary issue, titled “Saving the World from Old People”:

“Old countries” – their assets and their institutions, at least the ones that depend on population, income and credit growth – are “fastened to a dying animal” and are not likely to survive in their present form.

*** Richard Duncan: Here Comes QE4

Duncan reckons – and Bill agrees with him – that the big slowdown in the US economy means the Fed will be forced to launch QE4 later this year… and put its slated rate hikes on hold.

I exchanged emails


with Richard about this deeply contrarian call yesterday. Here’s what he told me when I pressed him further about what could be in the cards as a result of the recent slump in economic activity in the US:

The Fed will do whatever it takes to keep stock prices moving higher over the next couple of years.

There is a possibility that the Fed will act before the stock market


corrects to make sure that it does not correct. But more likely, Fed action will be in response to a stock market correction. Like back in October when St. Louis Fed president James Bullard said on Bloomberg that QE3 might have to be extended….

The Fed won’t launch QE4 until there is a significant correction in the stock market


of more than 10% to 15%.

That would be a terrible blow to the economy, causing a negative wealth effect and reduced consumption. I don’t think the Fed would tolerate that for long. So, I think it would launch QE4 to push stocks back up.

I then asked Richard what the effects of another round of QE would be. Here’s what he told me:

We may have a sell-off before QE4 and then a very big rally after QE4. As soon as Janet Yellen approaches the microphone and begins to pronounce the letter “Q,” US stocks will fly. And bond yields will fall further.

To find out how you can protect your profits before the next selloff, read on here.