Submitted by Tyler Durden on 01/15/2015 06:07 -0500
"As if millions of macro hedge funds suddenly cried out in terror and were suddenly silenced"
Over two decades ago, George Soros took on the Bank of England, and won. Just before lunch local time, the Swiss National Bank took on virtually every single macro hedge fund, the vast majority of which were short the Swiss Franc and crushed them, when it announced, first, that it would go further into NIRP, pushing its interest rate on deposit balances even more negative from -0.25% to -0.75%, a move which in itself would have been unprecedented and, second, announcing that the 1.20 EURCHF floor it had instituted in September 2011, the day gold hit its all time nominal high, was no more.
What happened next was truly shock and awe as algo after algo saw their EURCHF 1.1999 stops hit, and moments thereafter the EURCHF pair crashed to less then 0.75, margining out virtually every single long EURCHF position, before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago.
Swiss National Bank discontinues minimum exchange rate and lowers interest rate to –0.75%
Target range moved further into negative territory
The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to ?0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and -0.25%, from the current range of between -0.75% and 0.25%.
The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets. This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.
Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.
The SNB is lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.
The resultant move across all currency pairs has seen the EUR and USD sliding, the USDJPY crashing, and US futures tumbling even as European stocks plunged only to kneejerk higher as markets are in clear turmoil and nobody knows just what is going on right now.
In other asset classes, Treasury yields, understandably plunged across the entire world, and the entire Swiss bond curve left of the 10 Year is now negative, with the On The Run itself threatening to go negative soon as can be seen on the table below:
Crude and other commodities, except gold, are also tumbling, as are most risk assets over concerns what today's epic margin call will mean when the closing bell arrives.
An immediate, and amusing, soundbite came from the CEO of Swatch Nick Hayek who said that "words fail me" at the SNB action: "Today's SNB action is a tsunami for the export industry and for tourism, and finally for the entire country." More from Reuters:
Swatch Group UHR.VX Chief Executive Nick Hayek called the Swiss National Bank's decision to discontinue the minimum exchange rate on the Swiss franc a "tsunami" for the Alpine country and its economy.
"Words fail me! Jordan is not only the name of the SNB president, but also of a river… and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country," Hayek said in an emailed statement on Thursday.
Swiss watchmakers, which are also grappling with weak demand in Asia, are very exposed to moves in the Swiss franc exchange rate because their production costs are largely in Swiss francs, but most of their sales are done abroad.
Shares in Swatch Group fell 15 percent at 1056 GMT, while Richemont CFR.VX was down 14 percent, underperforming a 9 percent drop in the Swiss market index .SSMI following the SNB's announcement.
"Absolutely shocking ... For companies with international operations – translated earnings are going to be lower and if companies make products in Switzerland it is going to hurt margin. It is a terrible day for corporate Switzerland," Kepler Cheuvreux analyst Jon Cox said.
Indeed, in retrospect, it does seem foolhardy that the SNB, whose balance sheet ballooned to record proportions just to defends it currency for over three years would give up so easily. The one silver lining, so to say, is that gold prices in CHF just crashed by some 13%.
Some more soundbites from strategists, none of whom foresaw this stunning move:
ALEXANDRE BARADEZ, CHIEF MARKET ANALYST AT IG FRANCE
"This is extremely violent and totally unexpected, the central bank didn't prepare the market for it. It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going."
LEX VAN DAM, HAMPSTEAD CAPITAL LLP HEDGE FUND MANAGER:
"Major losses in euro-franc trades are causing panic selling and deleveraging across the board."
CHRIS BEAUCHAMP, MARKET ANALYST AT IG
"My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks. However, it's not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there's something bigger afoot. This kind of event is the kind of thing that will trigger volatility. This is not a one day thing now."
DARREN COURTNEY-COOK, HEAD OF TRADING AT CENTRAL MARKETS INVESTMENT MANAGEMENT
"They’ve stopped defending the 1.20 floor. It’s carnage." PATRICK JACQ, RATE STRATEGIST, BNP PARIBAS, PARIS
"The decision of the SNB means it no longer needs to buy euro-denominated paper in order to defend the 1.20 position. This should normally weigh on European debt but the SNB also said they will continue to monitor in order to prevent the exchange rate from rising substantially.
"This means that at the end of the day even if they don't defend the 1.20 level, if they want to prevent a collapse of the euro versus the Swiss franc they will probably have to keep on buying, maybe at a lesser extent, euro denominated paper."
JONATHAN WEBB, HEAD OF FX STRATEGY AT JEFFERIES, LONDON
"It has taken the market by complete surprise. The SNB probably expects the ECB to launch QE next week and along with the Greek elections coming up, it would make it pretty tough on the Swiss to keep bidding the euro.
So they have abandoned the cap and cut rates deeper into negative territory. We expect euro/Swiss to trade around 0.90-1.00 francs after all the stop loss orders have been cleared"
GEOFFREY YU, CURRENCY STRATEGIST AT UBS IN LONDON:
"They think too much money is going to come in, especially with QE coming, and so they think they need a 'Plan B'."
"Let it run, let it settle, and we'll see what happens next."
However, the best soundbites today will surely come from US hedge funds which are just waking up to the biggest FX shocker in years, and of course, any retail investors who may have been long the EURCHF, and who are not only facing epic margin calls, but are unable to cover their positions, as one after another retail FX brokerage has commenced "Rubling" the Swissy and the CHF pair is suddenly not available for trading for retail accounts.
To say that today will be interesting, is an understatement.
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Nikita Khrushchev:"We will bury you"
"Your grandchildren will live under communism."
“You Americans are so gullible.
No, you won’t accept To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. outright, but we’ll keep feeding you small doses of To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll finally wake up and find you already have communism.
To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. ."
We’ll so weaken your To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. like overripe fruit into our hands."
Published: 19:26 EST, 17 January 2015 | Updated: 10:15 EST, 18 January 2015 View comments
Yesterday, in a McDonald’s in Switzerland, I saw people paying nearly £8 for a Big Mac and fries. For anyone unfamiliar with their prices, that’s more than double the cost of the same meal in the UK: £3.88. The ten-minute taxi ride to get from my hotel – £123 for B&B in a chain establishment – to the fast food restaurant was £25.
Like thousands of British holidaymakers here for a skiing break, the crippling prices mean that for every second I’m here, my bank balance is falling as fast as the snow around me.
Switzerland always was pricey. But last week, for complex reasons, the government’s bankers unhinged their Swiss franc from the euro. Instantly, the franc took off like a hot air balloon.
Now it’s the only point of conversation. One young Spanish couple spoke with amazement at paying the equivalent of £68.70 for two posh burgers and beers. British dental surgeon Alyn Morgan was sipping a £15 Margarita cocktail in a ski bar in Verbier in the early hours of yesterday morning. Three days earlier, it would have cost £12.
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Steep: the price of ski rentals and chocolate in Switzerland shot up overnight
‘I was crying on Thursday, the day we came on holiday,’ he said. ‘Our trip was costing at one stage 30 per cent more. When news broke about the franc, I was watching this weekend’s trip getting more expensive by the minute.’
Mr Morgan, 43, and his wife Emma travelled from their home in London for an annual January skiing break with five friends. The group had just spent £700 on a sushi meal at the Nevai Hotel that would have cost £579 before the central bank’s intervention.
TOURISM is now in real peril. Exports will cost more. The decision to stop pegging the franc to the euro will cause economic difficulties in Switzerland. So why on earth did these safety-first, boring Swiss bankers decide to break away and cause such convulsions to the currency markets last week?
The answer is that, however bad it might be for the Swiss, it’s a nightmare for the euro. And it is precisely because of the euro’s perilous weakness that these seismic events are happening.
In many ways the situation here is a mirror image of what happened with Britain’s ERM fiasco in 1992, when we stopped locking the pound to a basket of European currencies.
The Swiss have spent the past three years trying desperately to stop a tide of money pouring into the country, mostly from investors desperate to avoid or ditch the euro: the influx was causing the franc to inflate and make their famous exports – chocolates, watches, pharmaceuticals – too expensive, especially for the Euro market that accounts for half of Switzerland’s trade.
They even began charging negative interest in their world famous banks – effectively upending the basic rule of banking by forcing depositors to pay – but still the cash flowed in.
Finally, last week, rumours swept the money markets that the European Central Bank was about to print more money – so-called quantitative easing – to bail it out of its latest crisis; this time, brought on by concerns Greece will tumble out of the eurozone after an election later this month.
The pressures between the strong franc and weak euro became intolerable, and the Swiss threw in the towel. The cap had to be lifted, and the franc instantly jumped 39 per cent against the floundering euro – the biggest single-day move for a rich nation’s currency in four decades. It ended the day ‘just’ 17 per cent up in a market that considers a two per cent move dramatic.
SNB stuns markets by scrapping cap against euro
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The shocking rises in Switzerland spell disaster from Europe's single currency
This unleashed what the boss of Swatch rightly called a ‘tsunami for the export industry, and for tourism and finally for the entire country’. With the instantly increased price of exports, came fears of job losses.
But while many Swiss shares slumped, the bigger problem is faced by the euro. It has lost a key pillar of support and, as one London analyst said so rightly last week, ‘can’t find a friend for love nor money’. Even now, after such a long time and damaging episode, the eurozone and its pathetic panjandrums have not resolved the internal contradictions of a costly experiment that has caused economic carnage around the Continent.
Now even Germany, the Continent’s economic powerhouse, is struggling to bear the cost of this flawed attempt to align diverse economies without resolving core structural issues.
The timing of the Swiss shock could not have been worse (or perhaps more delicious) – on the eve of this week’s World Economic Forum in Davos, when business leaders and global dignitaries (and Prince Andrew) gather in the glitzy alpine town to debate the state of the world.
The central bank’s announcement was called ‘a bit of a surprise’ by Christine Lagarde, the head of the International Monetary Fund, who had not been given advance warning.
This is diplomatic speak for ‘what the hell?’ or worse – especially since three days earlier the bank’s vice-chairman had insisted the exchange rate cap remained the cornerstone of fiscal policy.
And in the ski resorts yesterday, it was British holidaymakers left utterly dismayed as equipment rental and guiding costs rose 20 per cent overnight. A week’s ski pass for a family of four in Verbier shot up from £863 to £1,030. A beer on their first night cost £4.50 but two nights later was £5.40.
Shopkeepers across Switzerland are desperately trying to calculate the damage.
‘Everyone was very startled by events,’ said Niklaus Wilhelm, manager of a upmarket cigar shop in Zurich. ‘We have to see what happens but it is just too expensive for people to come on holiday to Switzerland now.’
Wilhelm said some 40 per cent of his sales came from European customers. At the start of last week he was selling cigars costing €8 in Germany for the equivalent of €11; now they are €15.
Meanwhile, a German border town was flooded with Swiss people stocking up on cheaper clothes, electronics and food.
Happily, in the rest of Europe, there is good news for us Britons: the euro has slumped against sterling to the most attractive rate since July 2008. And even here in Switzerland, there was one party of holidaying Britons left content amid the crisis last week.
Lawrence Jones, owner of an internet hosting business, was in Verbier with friends when they went to withdraw cash from an ATM. As they did so, they realised the rate had not been changed, so kept pulling out more and more money until the machine was empty.
‘Sometimes the Swiss aren’t quite as organised as some may believe,’ he said happily.
There are always winners alongside losers in these situations. But this was just small change for a nation that has already blown so much money trying to insulate itself from the crushing euro catastrophe.
In the wake of Switzerland’s removing the cap on the Swiss franc’s value against the euro, debt owed by non-Swiss agents has become an emerging issue. That debt, denominated in either Swiss francs or in euros, is secured by collateral outside of Switzerland. Is this an unfolding foreign-currency-related debt problem? The answer appears to be yes.
Russian businesses secured loans denominated in low-interest foreign currencies, including the Swiss franc. The franc was then pegged to the euro. The collateral for the loans depended on an assumption of $100 oil and a Russian ruble that has since plummeted. It appears that some of these agents now cannot pay.
Real estate speculators in Warsaw pledged their real estate to secure loans in Swiss francs. Why? The interest rate was very low – much lower than if they had borrowed in zlotys. Or they borrowed euros with the assumption that the Swiss peg against the euro would remain in place.
These borrowers around Europe and elsewhere in the world pledged collateral, took on foreign-currency risk, and based the risk-taking on the commitment of the Swiss National Bank (SNB) to maintain its currency peg at 1.2 francs to a euro. Many of these borrowers are now sweating bullets.
Markets around the world are reacting in fear of contagion that could result from these debts. Is the reaction rational? We shall find out in due time.
We do not know how much debt there is, who the borrowers are, or what banks and intermediaries are involved in the loans. We do not know what supervision and regulation have been applied, since this is activity that is mostly outside the US and thus not supervised under the post-Dodd-Frank regulatory regime.
Markets can handle good news, and they can handle bad news. Markets have trouble, however, with uncertainty. The pressure on stock markets and the volatility that has spiked due to the SNB’s move are the results of rising uncertainty about the foreign-currency-denominated debt and abrupt changes in central bank policy.
The Swiss have punched new holes in their cheese. They have boiled their chocolate so that it smells bad. They committed to a course, reversed themselves, and have now lost their credibility.
This is the second governor of the Swiss central bank who has suffered a loss of credibility. The first one had to resign because a member of his household was allegedly trading a foreign currency position against the euro peg. The second governor has derailed billions in loans and pressured his citizens through his unexpected policy change.
When one central bank loses its credibility, all central banks suffer. The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified.
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Nikita Khrushchev:"We will bury you"
"Your grandchildren will live under communism."
“You Americans are so gullible.
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We’ll so weaken your To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. like overripe fruit into our hands."
There are lots of theories as to why the central bank chose to act, but there is one that was clearly underappreciated — the role of Swiss local government in lobbying for dividend payments.
The SNB is unlike other central banks because it is not owned by the Swiss government but is a listed company with shareholders that include Swiss administrative regions, know as cantons, as well other public bodies and private individuals. As Cullen Roche points us to:
At the end of 2013, 52.5% of these shares were held by cantons, cantonal banks and other public authorities and institutions. The remaining shares were in the possession of private individuals and legal entities in Switzerland and abroad.
Who owns the central bank is not terribly important. What is important is that the SNB has a fiduciary duty to its shareholders — that is, a responsibility to act in their best interest. And here we may start to understand the pressures the bank was under.
Firstly, the SNB pays a dividend to its shareholders capped at a maximum of 6% of net profit as well as a flat fee to local governments. As such, shares in the bank tend to act very much in line with a Swiss government bond with a 6% coupon.
This arrangement provides a cool 1 billion francs ($1.15 billion) annually split between Switzerland’s 26 cantons in proportion to their populations and, most importantly, was considered a safe and reliable stream of income. In fact, according to the Swiss central bank, the dividend had been paid every year for over 100 years. Until 2013. The reason? A collapse in the price of gold hurt the bank's gold asset holdings.
The 30% drop in gold prices over 2014 caused a loss of 9 billion francs, meaning the central bank was unable to pay out under Article 31 of the Swiss National Bank Act.
The failure to pay a dividend proved a shock to local government finances — a fact the central bank was clearly aware of. In the explanation for cancelling the 2013 dividend, Jean Studer, president of the Bank Council, noted that the consistency of dividend payments reflected "special factors in the last two decades meant that payments were very handsome." However, he reminded the cantons that "the SNB has regularly emphasised that there is no guarantee for the distributions."
And yet after the cancellation, the cantons started to complain to the central bank. Bloomberg reports that "cantonal budget chiefs earlier this month urged the SNB to give them more money for 2014 to offset shortfalls in revenue from other sources." As majority shareholders in the business, the bank had a duty to listen to but not necessarily to act on their concerns.
At the start of this month, the SNB said it expected to book a net profit of 38 billion francs for 2014, allowing it to restart its dividend payments. In its statement it made clear that as a result "ordinary profit distributions of CHF 1 billion to the Confederation and the cantons can be resumed."
Yet less than a week later the central bank abandoned its currency peg, sending the franc soaring and providing the much publicised mark-to-market currency losses estimated to have been around 13% of GDP (CHF75 billion) on Thursday. Letting the franc appreciate against the euro means the value of euro assets that the central bank built up on its balance sheets (the euros it bought to defend the cap) fall in CHF terms.
So why act in a way that almost guaranteed losses for the central bank's balance sheet?
One simple (though incomplete) answer, is mis-timing. Given that SNB President Thomas Jordan believed the franc was "greatly overvalued" at its pegged level, it is perfectly possible (though it looked unlikely) that he thought it might fall somewhat against the euro after the peg was abandoned. At the very least he may have expected the rally to leave some of the SNB's full-year profit intact — especially given that interest rates on deposits held at the bank were dropped even further into negative rates to dissuade people from shifting cash into the country — allowing the central bank to pay its dividend.
Even with the prospect of quantitative easing by the European Central Bank (ECB) weakening the euro, the SNB board may have felt that having just dealt with the dividend payment for 2014 and with the rest of 2015 to try to reverse any possible losses it might incur after April, the central bank could seize the moment to abandon a peg that it had clearly become uncomfortable with. It has a whole year to find the money for the 2015 dividend, after all, even if it's hurting right now as its foreign currency holdings sinking in price.
Of course, even if the franc had fallen against the euro initially, such logic is effectively a gamble on the eurozone crisis. The ECB is widely expected to undertake quantitative easing (bond buying) on Thursday, the major impact of which may well be to weaken the euro further from its current level (and therefore potentially drive the franc up in the short-term). If it has a positive effect on the region's prospects, then it is possible that eurozone growth will pick up, and with it the currency.
If it fails, however, the Swiss could find themselves taking in more capital flows from Europe seeking a "safe haven" place to park capital. You can see the SNB's decision to drop its interest rate on deposits again to a staggering minus 0.75% — the bank takes a slice of your money rather than paying interest — as an effort to limit this effect. Investors it seems still see the franc as a safe harbour from losses, even at a price of 0.75%.
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Nikita Khrushchev:"We will bury you"
"Your grandchildren will live under communism."
“You Americans are so gullible.
No, you won’t accept To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. outright, but we’ll keep feeding you small doses of To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll finally wake up and find you already have communism.
To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. ."
We’ll so weaken your To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. like overripe fruit into our hands."
By Craig Stephen
Shutterstock/Bildagentur Zoonar GmbH HONG KONG (MarketWatch) — The surprise move by Switzerland to scrap its currency ceiling against the euro EURCHF, -0.54% last week is a reminder there can be unexpected collateral damage from central banks waging currency wars. As markets digest last week’s turmoil, expect focus to turn to other fault lines on the global currency map.
Here China stands out, as like the Swiss, it runs an implicit currency peg that is becoming increasingly painful to maintain.
Due to its longstanding crawling peg to the U.S. dollar, the yuan USDCNY, +0.04%USDCNH, +0.00% has increasingly found itself pulled higher against just about every major currency. The world’s largest exporter has already had to endure two years of aggressive yen USDJPY, -0.31% devaluation since the introduction of Abenomics and its accompanying quantitative easing.
Now comes a new front, as the European Central Bank (ECB) looks ready to green-light its own QE next week. The move by Switzerland also means the Swiss National Bank (SNB) ceases its purchases of euros needed to maintain its peg, again meaning the euro will all but certainly head lower.
Further currency strength is likely to be distinctly unwelcome for the Chinese economy. Later this week, gross domestic product figures for 2014 are widely expected to show growth at its slowest pace in 24 years if, as some predict, the government’s 7.5% annual growth target is missed. This comes at the same time that the economy is flirting with outright deflation and amid a new trend of foreign capital exiting China.
Last week’s currency ructions present a new headwind to growth as exports will be harder to sell across Europe, China’s second biggest market after the U.S.
The other danger looming for China is that a strong currency exacerbates deflationary forces. Producer prices have been falling for almost three years, and the plunge in crude-oil prices adds a further disinflationary bent. The property market looks as if it could also push prices decisively lower. Prices of new homes in big cities fell 4.3% in December from a year earlier, according to new government data released over the weekend.
The difficulty for Beijing is that these external movements in currencies are outside its control. If moves to depreciate the euro EURUSD, +0.24% trigger another round of competitive deprecations, just how much more yuan appreciation can China withstand?
While the policy actions of both the Swiss and European central banks last week appear quite different, they share a common feature: Both acted with reluctance only when the pain became too much to bear.
The reason deflation is public enemy No. 1 for central banks is that debt becomes much harder to service and can stall growth and employment as consumers put off purchases and business put off investment.
China certainly has debt levels that would make deflation worrisome. Total debt levels are now estimated to be in excess of 250% of GDP. Lower-than-expected bank loan growth in December also suggests demand in the economy is already weak.
The other area to be concerned about is capital flows, as investors remove bets on further yuan appreciation. In recent quarters, we have seen signs of hot-money flows exiting China and foreign-reserve accumulation reversing.
Fourth quarter 2014 figures showed that Chinese forex reserves declined by $48 billion to $3.84 trillion. This could reflect both a forex-valuation effect and capital outflows with the euro and yen depreciating by 4.2% and 9.3%, respectively, against the dollar during the period, according to Bank of America data in a recent note.
Outflows widened to $120 billion in the fourth quarter from $68 billion in the third quarter, Bank of America said.
Meanwhile there are already signs liquidity is tightening. Latest figures show China’s money supply contracted in December, with M2 growth slowing to 12.2% from 12.3% a month earlier. Bank of America notes that M0 — the most narrow measure of liquidity — has been growing very slowly due to slumping foreign-exchange purchases by the People’s Bank of China (PBOC).
This combination of money outflows and tighter liquidity shows the challenge facing the PBOC. If capital outflows were to accelerate, it will need to use up more of its foreign-exchange reserves to maintain its currency peg.
This will reduce liquidity, unless the PBOC finds new loosening measures, among which, lower bank reserve requirements are expected this year.
But the danger lies in a possible a loss of confidence in the yuan, in which case new liquidity may just facilitate more capital outflows. Such a scenario would make it more likely that China would have to “go Swiss” and also let its currency loose.
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Nikita Khrushchev:"We will bury you"
"Your grandchildren will live under communism."
“You Americans are so gullible.
No, you won’t accept To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. outright, but we’ll keep feeding you small doses of To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll finally wake up and find you already have communism.
To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. ."
We’ll so weaken your To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. like overripe fruit into our hands."
Well, he finally launched “whatever it takes” and that marks an inflection point. Mario Draghi has just proved that the servile apparatchiks who run the world’s major central banks will stop at nothing to appease the truculent gamblers they have unleashed in the casino. And that means there will eventually be a monumental crash landing because the bubble beneficiaries are now commanding the bubble makers.
There is not one rational reason why the ECB should be purchasing $1.24 trillion of existing sovereign bonds and other debt securities during the next 18 months. Forget all the ritual incantation emanating from the central bankers about fighting deflation and stimulating growth. The ECB has launched into a massive bond buying campaign for the sole purpose of redeeming Mario Draghi’s utterly foolish promise to make speculators stupendously rich by the simple act of buying now (and on huge repo leverage, too) what he guaranteed the ECB would be buying latter.
So today’s program amounts to a giant bailout in the form of a big fat central bank “bid” designed to prop up prices in the immense parking lot of French, Italian, Spanish, Portuguese etc. debt that has been accumulated by hedge funds, prop traders and other rank speculators since mid-2012. Never before have so few—-perhaps several thousand banks and funds—-been pleasured with so many hundreds of billions of ill-gotten gain. Robin Hood is spinning madly in his grave.
The claim that euro zone economies are sputtering owing to “low-flation” is just plain ridiculous. For the first time in decades, consumers have been blessed with approximate price stability on a year/year basis, and this fortunate outbreak of honest money is mainly due to the global collapse of oil prices—not some insidious domestic disease called “deflation”. Besides, there is not an iota of proof that real production and wealth increases faster at a 2% CPI inflation rate compared to 1% or 0%.
Nevertheless, Draghi had no problem gumming the following absolute gibberish in announcing that his big monetary bazooka would be soon firing at will on the hapless citizens of the E-19.
Today’s monetary policy decision on additional asset purchases was taken…..(because) the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation.
This assertion is blatantly contradicted by the facts. Outside of the commodities and industrial materials complex, where prices are being weakened by the rapid cooling of China’s construction madness, it is still”creeping inflation as usual” in the EU-19 economies. There is flat out no emergency that could possibly justify an ECB action which will result in the creation out of thin air of what amounts to fraudulent credit equal to nearly 10% of euro zone GDP in less than two years.
And folks, it is fraudulent credit——really dangerous, toxic stuff. The $1.2 trillion of debt securities to be purchased by the ECB (and its constituent national central banks) in the secondary market originally financed that amount of labor, material and capital consumption. Can you actually pay such massive sums to vendors of real goods and services with central bank manufactured digital credits and still pretend that the economy is functioning on the level? If so, why not manufacture $5 trillion or even $15 trillion of ECB credit and buy up the entire euro bond market?
In short, Draghi is presiding over a gargantuan fraud and can’t be so stupid as not to recognize it. Indeed, the dictionary definition of a “charlatan” could not more aptly describe his current gambit:
“….a person falsely claiming to have a special knowledge or skill; a fraud”.
A few weeks ago, I called out the lame case on which Draghi’s “low-flation” humbuggery is based. Nothing has changed since then—so it is self-evident that the ECB’s new bond buying binge is designed to relieve financial speculators of hot merchandize, not long suffering euro zone citizens of the stone cold economies that their overlords in Brussels and the national capitals have confected.
Well, of course the CPI has momentarily weakened. Crude oil has experienced a monumental plunge of more than 50% since mid-2014. That has temporarily dragged down the euro zone’s reported CPI and the math isn’t all that complex. During the last 12 months, euro zone energy prices have fallen by 6.3%, and everything else is still 0.6% higher than a year ago.
So what’s the emergency? This is the very same CPI blip that occurred when oil collapsed in the second half of 2008. As is evident below, that episode did not generate some cascading plunge into economic darkness. In fact, the Eurozone CPI was back running above 2.5% in no time.
The truth of the matter is that the EU-19 is in clover because it’s consumers get a big break; and, on the other side of the economic equation, it produces almost no oil. Europe’s production is mainly in the UK and Norway and they have their own currencies. Accordingly, the ECB should be putting its printing presses on an extended sabbatical and declaring victory on the achievement of its “price stability” objective.
Indeed, the notion that the hairline puncture of the zero inflation line shown above is a precursor of a deflationary calamity amounts to economic voodoo. There has been no structural change whatsoever in the Eurozone economy since 2008 when the last oil-driven CPI drop occurred, and therefore no empirical basis for the notion that wages and prices are about to descend into an accelerating downward spiral. If anything Brussels’s dirigisme regime has made prices and wages even more “rigid” and “sticky” owing to it’s avalanche of new regulations, subsidies and other economic interventions.
The plain fact is that the euro zone like the rest of the DM has an inflationary bias that is embedded in six decades of history during which the euro and its predecessor currencies lost purchasing power month-in-and-month-out. So households are finally getting what will undoubtedly be a short respite from the inflation tax, but that is the extent of it. There is not one rational reason to believe that the relentless upward march of the price level shown below will not presently resume its well-worn path.
The euro zone deflation story is pure cock and bull, and that proposition doesn’t take much investigation to document. First and foremost, there is no sign of a wage collapse, yet how do you get a deflationary spiral if wages continue to rise?
As shown below, owing to heavy unionization and protectionist labor laws, euro zone wage rates have been on a long-running one-way escalator, and show no sign of “deflation”. Total compensation per worker is up 1.3% during the last twelve months—-an identical rate to the 1.3% recorded during the year before that, and not much below the 1.7% annual rate of gain that has been recorded since mid-2010.
If you take purely euro zone produced items the story is the same. In the case of total services, the December LTM price change is 1.25%—-a figure that has been visited twice before this century without untoward effects.
In the specific case of housing services and rentals, the LTM inflation rate is not much under 2%—-a level which has prevailed for the past several years.
Likewise, the inflation rate for euro zone produced recreation and personal services shows no signs of plunging into the abyss. It’s LTM rate of increase is about 1.5%, and is in the general zone that has prevailed for most of this century.
The same is true of transport services. The index is still rising at a 1.5% rate, and while below the 2.5% trend of the last decade or so, the larger point is self-evident. Isn’t it a good thing for productivity and growth that the euro zone’s inflation rate for transport of people and goods is abating slightly? Where’s the fire?
In short, the euro zone’s momentary spat of year-over-year price stability is almost entirely owing to the global decline of commodities since the China bubble driven peaks of 2012; and also the lagged effect of the Euro’s strength prior to mid-2014.
In the case of non-food commodities including energy, for example, the producer price index is down about 25% from it 2011/12 peak. Since the euro zone imports a heavy share of its energy and industrial commodities, isn’t this decline a welcome development?
And there’s more. Commodity prices are still double their pre-2005 level. In other words, the giant global commodity bubble generated by the runaway credit boom in China, the BRICs and their EM satellites has finally started to cool, and this relief is now washing through the euro zone price indices. Rather than an existential crisis, the cooling of euro zone inflation is mainly a welcome surcease from the utterly aberrational credit bubble that was foisted on the global economy by central banks over the past decade.
Even in the case of food commodities, the sharp decline since 2012 is a menace only to the French farmers, at worst. How can it be said that a 20% reduction in food costs is harming the living standard of 350 million euro zone consumers or is a causing the macro-economy’s chronic underperformance?
Finally, where prices are falling outside of imports, commodities and the processed industrial goods which embody them, this result has nothing to do with short-term monetary policy. The price index for euro zone communications services, for example, is negative 2.5% on an LTM basis—–but that is nothing new. Owing to the communications technology revolution and a modest degree of deregulation, prices in this sector have been falling for the better part of two decades, and its been a boon for economic growth and consumer welfare, too.
In short, the euro zone deflation scare has nothing to do with empirical reality or common sense economics. Instead, it is pure propaganda emanating from the policy apparatchiks in Frankfurt and Brussels, and aped and amplified by the casino’s stock peddlers who claim to be “economists” and “strategists”.
It goes without saying, of course, that the evidence for Draghi’s QE that you can’t find in the inflation curves is screamingly apparent in the bond price curves. They have gone damn near parabolic in the 30 months since Draghi’s “whatever it takes” ukase. The windfall profits which have accrued to riders on the Draghi curve are flat out obscene.
This morning all euro zone sovereign debt is trading at absurdly low yields. Even as Draghi foams at the mouth about the ECB’s determination to get inflation back close to its arbitrary 2% target, the Italian 10-year bond is trading at 1.56%, the Spanish 10-year at 1.42% and the French bond at the nearly insane level of 0.70%. Or as one wag recently noted, European debt yields has not traded this low since the black plague leveled the people and their sovereigns, alike.
Now self-evidently, the speculators who have ridden the Italian bond down from 7% don’t see any contradiction between Draghi’s pledge of 2% inflation come hell or high water and today’s nominal yield of 1.56%. They don’t care, they don’t discount, and they most certainly do not engage in “price discovery”. Instead, they hover with their finger on the “sell” button ready to unload at any moment their vastly over-priced stash on the stupid apparatchiks who run the ECB.
Exactly, the same can be said for the Spanish and French curves below. The fast money traders, of course, do not recognize that Spain’s public debt ratios continue to soar despite the phony “austerity” claimed by the crooks who run its government, and the insurgent anti-austerity political party and Catalonian succession movement that are likely to make it ungovernable in the near future. They just don’t care because there is a patsy in Frankfort ready to relieve their downside risk.
But the most absurd case of price discovery destruction fostered by Draghi’s foolish promise, and now action, is the French 10-year bond yield. French socialism and dirigisme have finally strangled its private economy and sent capital and its best enterprenurial talent scrambling for foreign shores, thereby leaving its bloated public sector—- now at 57% of GDP—-high and dry.
Yes, the above juxtaposition makes all the sense in the world. It is entirely reasonable that a state drifting toward insolvency and/or ruinous taxation should be able to borrow 10-year money at 0.70%. That is, when the fix is in, the central bank printing press is open to buy, the apparatchiks are terrified and one of history’s greatest monetary charlatans is in charge——the speculators have nothing to do but harvest their haul.
So now begins the greatest heist since Bernanke bailed out Wall Street in September 2008.
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"Your grandchildren will live under communism."
“You Americans are so gullible.
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The eurozone is embarking on full-scale money-printing, with the European Central Bank launching a €60bn-a-month quantitative easing programme in a bid to save it from deflation and a low-growth crisis.
ECB president Mario Draghi showed his hand today after a leak last night revealed the bank was poised to step up the fight against deflation with a scheme similar to that already employed by the US and UK.
He announced at lunchtime that QE will finally arrive for the eurozone. There will be a larger than expected programme that will see €60bn-a-month of bonds purchased until September 2016, with the aim of lifting inflation back towards the ECB's 2 per cent target.
By buying up the eurozone nations' government bonds, the ECB will inject extra money into the financial system. It was not revealed how much of the monthly total will go towards buying government debt.
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Deflation roulette: Will Mario Draghi's 'big bazooka' prove to be a powerful enough weapon for the euro
Markets had already cheered the prospect, with shares rising late yesterday and again this morning.
Investors have been watching nervously, however, to see whether what has been dubbed the eurozone’s ‘big bazooka’ will end up being considered a powerful enough weapon.
In the end, Draghi said purchases would be €60bn-a-month rather than the €50bn tipped last night.
He revealed that the ECB would buy euro-denominated investment grade bonds, including the government bonds of the currency union's 19 member states.
Draghi said that there was a large enough majority agreement on the need to trigger QE now that it did not need to take a vote. However he added that the decision was not unanimous.
Stock markets' reactions to the news was mixed, initially rising and then falling back. The euro dropped against the dollar and the pound.
Nancy Curtin, chief investment officer of Close Brothers Asset Management said: 'European QE is set to start with a bang rather a whimper, a fact that will be well received by investors.
‘The eurozone was in need of shock and awe tactics from the ECB to combat the prospect of a prolonged period of deflation, and Draghi has finally delivered on his promise to do “whatever it takes”.
‘In reality, Draghi had little choice but to act, and this QE will help provide greater liquidity, and lower the value of the euro to support manufacturing and exports.
‘However, the eurozone is far from out of the woods. Structural economic issues remain, and all eyes now turn to the Greek election, with concerns that the result may eventually lead to a default and exit from the monetary union - a move which could send shockwaves through investors in the eurozone.’
Why is this happening?
QE keeps government bond yields low, eases the cost of servicing national debt, pushes extra funds into the financial system to be invested and lent out, and keeps a currency low - lowering the price of exports for overseas buyers.
Launching eurozone QE, similar to the asset-purchasing schemes previously adopted by the UK and US alongside ultra-low interest rates, has been discussed for many years.
The ECB has so far held fire on money-printing, something that has been a source of major dispute within the currency union.
Advocates of the move say QE is needed to pump more money into the struggling eurozone economy, keep borrowing costs low for troubled nations, encourage business and consumer lending and keep the euro low against other currencies.
Critics say that money-printing will let irresponsible economies that borrowed too much in the boom years off the hook - and allow them to avoid necessary austerity measures to get their finances in order.
The eurozone’s powerhouse Germany has been the main critic of QE and its objections created the biggest stumbling block to its arrival.
Initially, German fears surrounded the risk of triggering a bout of eventual substantial inflation through printing money. Now with the eurozone seemingly locked into a cycle of stagnant growth and deflation, the concern has shifted. The main fear is problem economies that need to reform will see QE as get-out-of-jail free card.
The crunch point is considered to have arrived, however.
Figures showed the eurozone economy slipping into deflation in December, with an inflation figure of -0.2 per cent.
Meanwhile, the currency union’s biggest problem child Greece goes into a snap election this weekend, with fears that left-wing party Syriza could be elected and lead the nation to default on its debt.
Even in the larger and more stable nations such as Italy and Spain, some people question the merits of the euro, as the union has prevented them from allowing their currency to slide in value to improve competitiveness, as they have done in the past.
How does this work?
Quantitative easing does not actually involve printing money, although it is popularly described in this way.
Instead, a central bank buys bonds with the extra funds it has created, which essentially puts more money into the financial system.
In the UK, this was done through the Bank of England buying up government bonds from investors with money it generated.
The exact details of the eurozone plans are still emerging, but they will involve buying up both private and public sector debt. A substantial amount is expected to be government sovereign bonds.
Complicating matters, the ECB already has a process in place that was dubbed QE-lite through which it is buying asset-backed securities and covered bonds. This is included in the €60bn programme revealed today.
Mr Draghi said it was likely that the money paid to buy bonds under QE would find its way into the financial system and be invested or lent out. The ECB’s negative interest rate of -0.2 per cent on its deposit facility would mean that investors would have to pay to stash the funds they receive there.
Draghi said the ECB intended to carry out the purchases of €60bn-a-month until September 2016, which would deliver €1.2trillion of bond-buying.
However, he also left the option of open-ended purchases hanging, as he said that they would be conducted until there was a meaningful change in the path of inflation towards the 2 per cent target.
Will eurozone QE help boost the markets?
Will this work?
Some argue that QE does not work and simply pushes up asset prices without providing any proper benefit to economies.
Even QE supporters have no real direct evidence of its benefits, yet many economists argue that versions of money-printing in the UK, US and recently in Japan helped stave off more problems.
What we do know from the US and UK versions of QE - and the latterly launched Japanese programme - is that asset prices tend to rise. Government and corporate bond prices have soared, shares have been big winners in the US and Japan, and the property market has leapt in the UK.
Its difficult to trace any of that directly back to QE, but the cheap money flooding the system would certainly seem to be lifting those assets.
Ultimately that rise in asset prices may cause further problems down the line, but in the short term it can lift confidence and start to get things moving again.
- QE is like spraying oil onto a broken engine to keep it running -
To draw an analogy, QE is like spraying vast quantities of oil onto a broken engine to keep it running. You aren't fixing the underlying problem - but you are buying yourself time to get somewhere and start doing so.
The worry over eurozone QE is that it is too little too late - and that it tempts problem economies into backsliding on much-needed reforms.
Interestingly, it also doesn't quite support the eurozone principle of everyone being in it together.
The ECB is only going to take the risk on 20 per cent of the debt being bought, the rest will be shouldered by national banks.
This concession means that the Germans won't end up on the hook if bonds hoovered up from countries like Greece, Spain and Italy end up being defaulted on. This has always been a major stumbling block.
Draghi indicated that he thought this was a moot point, as he doesn't expect anyone to default.
As the purchases involve only investment grade bonds, Greece is also only eligible through the exception granted to those in a bailout programme.
Michael Hewson, at CMC Markets, said this 'appears to be a message to Greece, and its election at the weekend. So long as you remain in the euro then we will buy you bonds under certain conditions. If you leave, you’re on your own.'
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Build a rocket boys: The pound jumped against the euro as the ECB revealed QE
+3
Sinking feeling: The euro dropped against the dollar on the back of ECB money-printing
Some experts' thoughts on QE
On economic reform:
Douglas Flint, chairman of HSBC, said: ‘If quantitative easing is successful and creates confidence then that is a good thing. The risk is that the political progress on reform gets put on the back burner. Then we get a lack of confidence.’
Axel Weber – chairman of financial services firm UBS and former head of Germany’s central bank, the Bundesbank – said at the World Economic Forum, in Davos: ‘If the ECB continues to buy time and the time is not used then you have to ask whether doing more of the same is the right policy.
'Europe needs to continue to work at integration. If that does not happen, the single currency area becomes an increasingly difficult project to run.’
Ben Southwood, head of research at thinktank the Adam Smith Institute, said: 'Quantitative easing cannot solve many problems, but there is precisely one it can tackle—deflation brought about by central bank incompetence, like that we are now seeing across the eurozone. That was what caused the Great Depression in the 1930s and easier money can reverse it.
'What's more, the structural problems economists have identified in Europe are very real. Even before the crisis, countries like Italy and France were hamstrung by tight labour market regulations that kept unemployment close to 10 per cent. Changing these can enhance growth in the short and long run, and QE should be combined with rigorous reform so that long-term growth can be achieved.'
On currency:
Victor Golovtchenko, FX market analyst, Forex Magnates: 'The ECB has once again managed to over-deliver on market expectations. The EUR/USD should continue its traction lower as the central bank’s program is open ended and will consist of at least of €1.2trillion.
'The large majority among the governing council of the ECB is likely to drive the single currency lower towards parity until the end of 2015, unless the US Federal Reserve backpedals on raising interest rates.'
For investors
Shaun Port, chief investment officer of online wealth manager Nutmeg, said: 'We see the ECB decision as a big plus. It brings much needed confidence to the global financial markets. We have a good-sized exposure to European equities for this very reason.
'Together with QE from the Bank of Japan – and the US and UK unlikely to raise interest rates this year – this means that global equity markets are well supported in 2015. We think sterling will continue to appreciate against the euro, bond prices will stay high, and we maintain a preference for FTSE 250 stocks over the FTSE 100 because of weak commodity prices'
Anthony Doyle, director & head of fixed income at M&G Investments said: 'We believe that in the short-term QE could force European government bond yields lower, meaning that investors will increasingly look for higher yielding investment opportunities.
'As a result, investment grade and high yield bonds could benefit from today’s announcement. In addition, the euro will likely come under increased pressure as European investors seek to invest globally in their hunt for a positive yield.'
Ben Brettell, senior economist at Hargreaves Lansdown, said: 'QE in both the UK and US has almost certainly boosted stock markets. When the central bank buys government bonds, the sellers receive cash.
'Unless they wish to increase the amount of cash they hold, they will use the money to buy other assets like shares, driving up prices. QE in Europe should therefore be good news for equity investors, at least for the duration of the programme.'
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Nikita Khrushchev:"We will bury you"
"Your grandchildren will live under communism."
“You Americans are so gullible.
No, you won’t accept To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. outright, but we’ll keep feeding you small doses of To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll finally wake up and find you already have communism.
To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. ."
We’ll so weaken your To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. until you’ll To view links or images in signatures your post count must be 15 or greater. You currently have 0 posts. like overripe fruit into our hands."
Official data on 1st-quarter growth will be released April 29
April 2, 2015
The U.S. economy isn't off to a great start in 2015.
It's looking so rotten that the Federal Reserve Bank of Atlanta just cut its growth projection to zero for the first three months of the year.
That's a big drop from the 1.9% growth forecast they started with in early February.
Of course, this is only an estimate. The official data on first-quarter growth will be released April 29. But it's yet another sign of the cracks appearing in the economy in a year when America was supposed to be the global growth leader.
What went wrong? Blame the weather and the strong U.S. dollar. ()
American consumers and businesses haven't been spending much in recent months. There was hope that extremely low gas prices across the country would spur people to head to the shops and buy, buy, buy. But so far, that's not happening.
People aren't buying big things or small things. Retail sales are down. Home construction and sales came in weaker than expected, and orders for durable goods (think appliances and furniture) have fallen in three of the last fourth months.
On top of that, businesses aren't helping boost growth much either. While hiring has remained strong, there have been pullbacks in manufacturing and industrial production.
But the greatest headwind appears to be the strong U.S. dollar. It makes American goods more expensive to people overseas, and is also problematic for U.S. companies trying to bring their profits from abroad back home. They lose money on the currency exchange.
All of this weighs down gross domestic product (GDP), the measure of economic activity. The Atlanta Fed dramatically cut its growth forecast in mid-March after seeing how weak American trade was so far this year. Companies as varied as Caterpillar, Coke and Apple have all warned that the strong dollar will likely hurt their bottom line this year.
Bad sign for the rest of the year? While this not the start anyone wanted to see, something very similar happened last year. Growth was actually negative in the first quarter of 2014. But the economy rebounded quickly in the spring and summer, and the U.S. finished last year with healthy 2.4% growth for the year. ()
Fed and Wall Street economists are still largely optimistic about the rest of the year. In fact, most still predict better growth in 2015 than last year.
All eyes will now turn to the latest jobs report on Friday. Despite the problems so far this year, hiring has remained strong. CNNMoney's Survey of Economists predicts 244,000 jobs were added in March. Anything less than 200,000 will be seen as a miss.
Chicago drew closer to a fiscal free fall on Friday with a rating downgrade from Moody's Investors Service that could trigger the immediate termination of four interest-rate swap agreements, costing the city about $58 million and raising the prospect of more broken swaps contracts.
The downgrade to Baa2, just two steps above junk, and a warning the rating could fall further still, means the third-biggest U.S. city could face even higher costs in the future if banks choose to terminate other interest-rate hedges against fluctuations in interest rates. All told, Chicago holds swaps contracts covering $2.67 billion in debt, according to a disclosure late last year.
"This is an unfortunate wake-up call for anyone still asleep over the fiscal cliff facing the city of Chicago," said Laurence Msall, president of the Chicago-based government finance watchdog, The Civic Federation.
Chicago's finances are already sagging under an unfunded pension liability Moody's has pegged at $32 billion and that is equal to eight times the city's operating revenue. The city has a $300 million structural deficit in its $3.53 billion operating budget and is required by an Illinois law to boost the 2016 contribution to its police and fire pension funds by $550 million.
Cost-saving reforms for the city's other two pension funds, which face insolvency in a matter of years, are being challenged in court by labor unions and retirees.
State funding due Chicago would drop by $210 million between July 1 and the end of 2016 under a plan proposed by Illinois Governor Bruce Rauner.
Given all the financial pressures, both Moody's and Standard & Poor's, which affirmed the city's A-plus rating, warned on Friday that Chicago's credit ratings have room to sink.
Moody's said Chicago's rating could be cut if Illinois courts find pension reform laws enacted to shore up the state's financially ailing pension system and for two of Chicago's retirement systems are unconstitutional. A ruling by the Illinois Supreme Court on one of the laws could come as early as this spring.
S&P warned of a multi-notch downgrade if the city fails to come up with a sustainable plan this year to pay its escalating pension contributions.
In a report, Moody's noted that the downgrade to Baa2 moves the city closer to termination of 11 more swaps deals. Termination on those contracts would potentially cost Chicago an additional $133 million, Moody's noted.
Chicago has the financial resources at hand to cover the initial $58 million termination payments on the four swaps if the city is unable to renegotiate terms, Moody's said.
"The city's available liquidity is more than sufficient to cover these termination costs," Moody's stated.
If the rating falls below Baa3, Chicago could be forced to pay about $1.2 billion if banks that provide liquidity facilities like letters of credit for city debt demand immediate collateral, Moody's said.
In an affidavit late last year, the city's chief financial officer, Lois Scott, acknowledged that a single-step downgrade by either Moody's or S&P could trigger about $50 million in immediate payments and expose the city to variations in interest rates.
A spokeswoman for Chicago Mayor Rahm Emanuel did not immediately respond to a request for comment.
The downgrade and violation of terms on the swaps agreement likely will become an issue in Emanuel's re-election campaign. The first-term mayor, a former chief of staff to President Barack Obama, failed on Tuesday to win a majority of votes in a primary election, and faces a runoff vote April 7 against a Cook County commissioner, Jesus "Chuy" Garcia.
Moody's based its one-notch downgrade affecting $8.3 billion of general obligation bonds to Baa2 with a negative outlook on the city's growing costs related to its big unfunded pension liability.
Chicago is defending a 2014 Illinois law that boosted pension contributions by the city and its workers to two of its retirement funds and reduced benefits. In the affidavit and in testimony earlier this month in Cook County Circuit Court, Chicago CFO Scott quantified the city's exposure to a variety of credit instruments as a result of further rating downgrades.
Under a three-notch downgrade, Chicago would default on about $2.8 billion of credit facilities, including letters of credit, that the city would likely not be able to replace, according to Scott. Moody's analysts said most of Chicago's $806 million of variable-rate GO bonds are tied to swaps.
The city, under Mayor Rahm Emanuel, has eliminated hundreds of millions of dollars in risk by terminating or renegotiating 18 interest rate swap or swaption contracts and those efforts are continuing, spokeswoman Libby Langsdorf said last month.
Shawn O'Leary, a senior research analyst at Nuveen Investments, said banks tend to renegotiate terms on swap agreements.
"I would be surprised if the parties demand termination payments," he said.
Some Chicago debt is trading at worse levels than bonds sold by Illinois, which is paying the biggest yield penalty among states in the U.S. municipal bond market due to its own fiscal woes.
The spread on Friday for Chicago bonds due in 2019 over the market's benchmark triple-A scale hit 125 basis points, which is 25 basis points over Illinois' so-called credit spread, according to Municipal Market Data.
The labor force participation rate hovered between 62.9 percent and 62.7 percent in the eleven months from April 2014 through February, and has been 62.9 percent or lower in 13 of the 17 months since October 2013.
Prior to that, the last time the rate was below 63 percent was 37 years ago, in March 1978 when it was 62.8 percent, the same rate it was in February.
"The civilian labor force participation rate, at 62.8 percent, changed little in February and has remained within the narrow range of 62.7 to 62.9 percent since April 2014," the BLS said in its release on the February employment data.
92,898,000 Americans were not in the labor force in February, according to data released from the Bureau of Labor Statistics (BLS) on Friday.
The labor force participation rate is the percentage of the civilian noninstitutional population who participated in the labor force by either having a job during the month or actively seeking one.
In February, according to BLS, the nation’s civilian noninstitutional population, consisting of all people 16 or older who were not in the military or an institution, reached 249,899,000. Of those, 157,002,000 participated in the labor force by either holding a job or actively seeking one.
The 157,002,000 who participated in the labor force was 62.8 percent of the 249,899,000 civilian noninsttutional population, which matches the 62.8 percent rate in April, May, June, and October of 2014 as well as the participation rate in March of 1978. The participation rate hit its lowest level since February 1978 (62.7 percent) in September and December of 2014.
BLS points to the aging of the baby boom generation as a key factor affecting the labor force participation rate:
"In 2000, baby boomers were aged 36 to 54 years and were in the group with the highest participation rates: the prime-aged group 25 to 54 years old. The participation rate for women in this group was 76.7 percent and for men was 91.6 percent, so that the overall participation rate of the group was 84.0 percent. The participation rate of the next-older age group, that 55 years and older, was 32.4 percent, so the difference between the two age groups was 52 percentage points.”
But, with the passage of every year after 2000, a segment of the baby-boomer population passes into the 55-years-and-older age group, thus moving from a group with a high participation rate in the labor force to an age category with a much lower participation rate, causing the overall participation rate to decrease, BLS explained.
“The baby boomers’ exit from the prime-aged workforce (with the highest participation rates) into the 55-years-and older age groups (with much lower participation rates) will ultimately lower the overall labor force participation rate, leading to a slowdown in the growth of the labor force."
In February, 92,898,000 people did not participate in the labor force. These Americans did not have a job and were not actively trying to find one. When President Obama took office in January 2009, there were 80,529,000 Americans who were not participating in the office, which means that since then, 12,369,000 Americans have left the workforce.
Of the 157,002,000 who did participate in the labor force, 148,297,000 had a job, and 8,705,000 did not have a job but were actively seeking one -– making them the nation’s unemployed.
The 8,705,000 job seekers were 5.5 percent of the 157,002,000 Americans actively participating in the labor force during the month of February. Thus, the unemployment rate for that money was 5.5 percent.
Temperatures are warming and potential homebuyers are coming out to shop, but they are finding precious little for sale.
Weak housing construction and the growth of the single-family rental market have pushed down supply for sure, but one nagging leftover of the housing crash is literally trapping potential sellers in their homes: Negative equity.
Some 5.4 million homes, or 10.4 percent of all homes with a mortgage, were still in a negative equity position, or "underwater," in the fourth quarter of 2014, according to CoreLogic, as their owners owe more on the mortgage than the home is currently worth. This is down considerably —18.9 percent, from a year ago—but it still keeps these borrowers from putting their homes on the market, because they would lose money.
Additionally, of the 49.9 million U.S. homes with a mortgage, approximately 10 million (20 percent) have less than 20 percent equity, and 1.4 million have less than 5 percent, according to CoreLogic. These homeowners also would have a difficult time selling because not only would they lose money in the process, but they also might not qualify for a new mortgage.
"Negative equity continued to be a serious issue for the housing market and the U.S. economy," said Anand Nallathambi, president and CEO of CoreLogic. "We expect the situation to improve over the course of 2015."
Improvement will come with higher home prices. Rising prices in 2014 brought more than 1 million borrowers into a positive equity position. The problem, however, will take considerable time to work through and will continue to affect not only housing supply, but also consumer spending overall.
Adding to the issue is that the bulk of negative equity is concentrated at the lower end of the housing market. Owners of less expensive homes are three times more likely to be underwater than owners of expensive homes, according to a recent note by economists at Deutsche Bank.
These less expensive homes are where supply is lacking most. Builders are concentrating on higher-end homes, because that's where they can get the margin they need. First-time homebuyer demand is growing, but lower-priced homes are just not there for the buying.
A hedge fund manager who warned about the last financial crisis is seeing parallels of that run-up in the market today.
"I think it is a truly scary time," Andy Redleaf, CEO of $4.2 billion hedge and mutual fund manager Whitebox Advisors, said in an internal memo Sunday night obtained by CNBC.com.
Redleaf wrote that the stimulus used to put fresh money in markets could end poorly, just like loose credit standards in housing before 2007 crushed that market.
"We do not know exactly where all the credit creation of this cycle has gone. Certainly money sits idly as excess reserves, but just as certainly money that would not exist but for unconventional monetary policy has distorted prices and resource allocation," Redleaf wrote.
He noted that the oil market—which recently crashed from around $100 a barrel to $43 today—may have been overly inflated by China "buying on easy credit" and other excess money going to oil producers who in turn increased supply.
Redleaf also said that stock markets may similarly be propped up by sovereign wealth funds and the Swiss central bank owning large amounts of equities.
"There are some parallels with the collapse in home prices which preceded the financial crisis," he explained.
Redleaf has some history in predicting crises.
"Sometime in the next 12 to 18 months, there is going to be a panic in credit markets," Redleaf wrote to investors in December 2006. "The driver in the credit market panic of 2007 or 2008 will be a sudden, profound and pervasive loss of faith in the alchemy of structured finance as currently practiced."
Redleaf also is worried about the euro's drop in value.
Goldman Sachs recently predicted the common currency would hit 80 U.S. cents by the end of 2017.
"I have no idea, and the bullish consensus on the dollar strike (is) as one-sided as anything I can remember, but it would be quite a remarkable move," Redleaf wrote of that prediction.
That move could mean big trouble.
"It strikes me as completely plausible that a further decline in the euro triggers a recession in the U.S.," Redleaf wrote. "The U.S. has a bear market, high-yield spreads move to 1998 type levels (1,000-1,200 [basis points]), U.S. weakness and market tightening of credit probably make the recession global."
A spokesman for Minneapolis-based Whitebox declined to comment.
The firm was founded by Redleaf in 2000. The bulk of its assets are in private hedge funds, but about $1 billion are in public mutual funds.
The firm's largest hedge fund, Whitebox Multi-Strategy, is up 1.4 percent net of fees this year through January, according to performance figures obtained by CNBC.com. The fund has produced an annualized return of 14 percent net of fees since inception in January 2002.
"This gap between the 1% and the rest of America, and between the US and the rest of the world, cannot and will not persist," warns renowned trader Paul Tudor Jones during his recent TED Talks speech, as he addressed the question - can capital be just? Hoping to expand the "narrow definitions of capitalism," that threaten the underpinnings of society, Tudor Jones exclaims, "we're in the middle of a disastrous market mania," adding "one of worst of my life." Perhaps most ominously, he concludes, historically this ends "by revolution, higher taxes or wars. None are on my bucket list."
Can capital be just? As a firm believer in capitalism and the free market, Paul Tudor Jones II believes that it can be.
Tudor is the founder of the Tudor Investment Corporation and the Tudor Group, which trade in the fixed-income, equity, currency and commodity markets. He thinks it is time to expand the “narrow definitions of capitalism” that threaten the underpinnings of our society and develop a new model for corporate profit that includes justness and responsibility.
It’s a good time for companies: in the US, corporate revenues are at their highest point in 40 years. The problem, Tudor points out, is that as profit margins grow, so does income inequality. And income inequality is closely linked to lower life expectancy, literacy and math proficiency, infant mortality, homicides, imprisonment, teenage births, trust among ourselves, obesity, and, finally, social mobility. In these measures, the US is off the charts.
“This gap between the 1 percent and the rest of America, and between the US and the rest of the world, cannot and will not persist,” says the investor.
“Historically, these kinds of gaps get closed in one of three ways: by revolution, higher taxes or wars. None are on my bucket list.”
Tudor proposes a fourth way: just corporate behavior. He formed Just Capital, a not-for-profit that aims to increase justness in companies. It all starts with defining “justness” — to do this, he is asking the public for input. As it stands, there is no universal standard monitoring company behavior. Tudor and his team will conduct annual national surveys in the US, polling individuals on their top priorities, be it job creation, inventing healthy products or being eco-friendly. Just Capital will release these results annually – keep an eye out for the first survey results this September.
Ultimately, Tudor hopes, the free market will take hold and reward the companies that are the most just. “Capitalism has driven just about every great innovation that has made our world a more prosperous, comfortable and inspiring place to live. But capitalism has to be based on justice and morality…and never more so than today with economic divisions large and growing.”
This is not an argument against progress, Tudor emphasizes. “I want that electric car, or the jet packs that we all thought we’d have by now.” But he’s hoping that increased wealth will bring with it a stronger sense of corporate responsibility. “When we begin to put justness on par with profits, we get the most valuable thing in the world. We get back our humanity.”
As one attendee noted, PTJ received a standing ovation...
In “Underwater Homeowners Here To Stay” we highlighted a report from Zillow which showed that negative equity has now become a permanent fixture of the US housing market. The report also showed that the percentage of homeowners who are underwater was flat from Q314 to Q414, breaking a string of 10 consecutive quarters of declines. We also recently noted that a completely ridiculous new home sales print that defied all logic notwithstanding, housing data, including starts and existing home sales, has come in below expectations. On a side note, home price appreciation has outpaced wage growth at a rate of 13:1, to which we would add:
Of course, the biggest determinant of home price appreciation over the past 2 years has nothing to do with US consumers, or household formation, as confirmed by the collapse in first-time homebuyers or the unprecedented depression in new mortgage origination, and everything to do with what we first suggested is one of the main drivers of the US housing bubble - foreigners parking their illegally procured cash in the US and evading taxes, now that US housing, with the NAR's anti-money laundering exemption blessing, is the new normal's Swiss Bank Account. That and flipping homes from one "all-cash" buyer to another "all-cash" buyer in hopes of a quick capital appreciation and the constant presence of the proverbial dumb money.
Against this backdrop, Deutsche Bank is out predicting that a sluggish US housing market is likely to impact the supply of MBS going forward. As DB notes, housing isn’t the GDP contributor it once was and not by a long shot. Not only that, but when it comes to recoveries, the housing market’s GDP contribution was 7 times below its post WW2 average in year one and has fared even worse since. Here’s DB with more:
The contribution of housing to US GDP continues to run at some of the lowest levels since the end of World War II. New construction of single- and multi-family homes, renovations, broker fees and the like still only make up a bit more than 3% of current GDP, well below the post-war average of 4.7%. Not only has the level of lift from housing come in low, but it has bounced out of the last official recession slowly, too. Housing on average has contributed a half a percentage point to GDP a year after the end of every post-war US recession. This time around, housing added only 7 bp. And the contribution of housing in the second and third years after the recent recession also has fallen well below post-war averages.
And while “insufficient supply” (not enough homes) was cited as a possible contributor to the existing home sales miss, DB notes that at least as of today, there appears to still be a “supply hangover” (although it's waning):
US homeownership started the decade at 66.9%, peaked in 2004 at 69.2% and ended at 66.5%. It has since dropped to 64.0%. The exodus of owners initially threatened to leave a lot of extra houses behind and reduce the need to build new ones. But investors have come in to pick up the keys, and many houses have found a new home in the market for single-family rentals. This has helped reduce the supply of distressed homes, although it’s still higher than the levels that prevailed in the early 1990s when homeownership last ranged around 64% . The supply hangover isn’t done but should be in the next two or three years.
And demand isn’t looking so hot either:
Demand has likely played a part in slow housing, too, starting with owners that bought their homes in the last decade. Thanks to a 38% drop in home prices nationally from 2006 to 2012, according to Case-Shiller, a lot of those owners walked out the front door without any equity and without the ability to reenter the market as buyers. This has almost certainly contributed to the drop in rental unit vacancies from 10.6% in mid-2009 to 7.0% today. As for potential new owners, Americans, even before the crisis, started moving into their own place at a much slower pace than the long-term average of 1.2 million new households a year, that is, until recently. Demand from former and potential new owners has been soft.
Even in the best case scenario is which supply falls and demand rises, banks’ reluctance to lend could end up hobbling the market for the foreseeable future.
Although the market seems to be clearing out the lingering housing supply and the economy and the labor market look likely to repair demand, the availability of credit could prove to be the lasting constraint. Today’s lending standards reflect limits designed to keep the last decade’s boom and bust from happening again. Borrowers today without the ability to repay will not get a loan. But it looks like some borrowers with the ability to repay—but with low FICO scores or with needs that keep them outside the agency or prime jumbo markets—will also not get a loan. The market is reducing risk today to avoid risk tomorrow. But it also is likely reducing housing growth today to avoid a downturn tomorrow.
And here's further confirmation of this from BofAML:
* * *
So there is your housing recovery in a nutshell: supply hangover, lackluster demand, and reluctant lenders all coalescing in a housing market whose contribution to US economic growth is virtually nonexistent.
And if you’re looking for the next shoe to drop, here’s a hint:
The sputtering U.S. economy created just 126,000 jobs in March as bad weather, weak consumer spending and flailing corporate profits resulted in the worst report since December 2013.
Economists expected nonfarm payrolls to rise 245,000 in March, with the unemployment rate holding steady at 5.5 percent, according to Reuters. February's numbers were revised lower to 264,000 from the initially reported 295,000, while January's number fell from 239,000 to 201,000.
The total fell well short of the 269,000 average over the past year and was the first time in 14 months that the number dropped below 200,000.
However, the overall unemployment rate held steady at 5.5 percent, as a generational low in labor force participation helps keep the figure low. A separate gauge that includes those who have stopped looking for work as well those employed part-time for economic reasons—the underemployed—edged lower from 11 percent to 10.9 percent.
The jobs numbers come as both the economy and corporate profits have been weakening substantially.
In its most recently estimate, the Federal Reserve's Atlanta branch is projecting the U.S. economy to show just a 0.1 percent growth rate in the first quarter. At the same time, corporate profits are expected to drop about 3 percent for the period and another 2 percent or so in the second quarter, according to S&P Capital IQ.
"We were due a clunker," said John Canally, chief economic strategist at LPL Financial. "It's probably the same things that are going to be impacting the earnings season in a couple weeks. It's the strong dollar hitting manufacturing, the port strike hitting manufacturing, it's the really awful weather...But across all sectors, it was just pretty soft."
Markets reacted negatively to the report, sending stock market futures lower and government bond yields and the U.S. dollar tumbling. Stock and bond markets are closed in the U.S. to mark Good Friday.
The conflicting economimc signals have put the Fed in a quandary: Central bank officials have been indicating a desire to raise short-term interest rates this year as the jobs market improves, but must contend with other parts of the economy that aren't as strong.
Talk on Wall Street quickly shifted from expectations for a rate hike in June to later in the year.
"Pretty much across the board a soft report," said Kathy Jones, fixed income strategist at Charles Schwab. "It has clearly pushed back expectations from a June rate hike on the part of the Fed. Now we're probably looking at a higher likelihood in September, if then, and a flatter yield curve."
Despite the weak headline numbers, there were some signs of wage pressures. Average hourly earnings rose 7 cents an hour to $24.86, representing a 2.1 percent gain that gets closer to the Fed's target. The average work week, though, declined one-tenth to 34.5 hours.
Full-time positions rose 190,000, while those working part-time declined 170,000. The total employment level increased just 34,000. The average duration of unemployment declined to its lowest level since February 2010 at 30.7 weeks.
The service sector, as has been typical during the jobs recovery, led the way with 40,000 new positions. Retail added 26,000 and health care grew by 22,000.
Weaknesses came in mining, which lost 11,000 jobs, and nursing care, which shed 6,000 positions. The normally reliable bar and restaurant industry, which added 66,000 in February and had been averaging 33,000 a month, contributed just 9,000 in March. Manufacturing lost 1,000 jobs.
It's Friday profit taking. Some guys want to go out in the Hamptons on weekends and spend 30k on hookers and blow so they sell off on Friday.
"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat."
-- Theodore Roosevelt
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Re: Financial Crisis - 2013 - ????
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