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“The Dreaded Phase 4”: What Happens When Credit Spreads Finally Rise

August 19, 2017 Tyler Durden 0

With investors, traders, analysts and pundits focused on the chaos in the White House, and the daily barrage of escalating geopolitical and social news, whether terrorist attacks in Europe or clashes in inner America, the market is finally starting to notice as Friday’s last hour sell-off demonstrated. And yet, according to one of the best minds on Wall Street today, Citi’s Matt King, what traders should be far more concerned about, is not who is in the Oval Office or how bombastic the war of words between the US and North Korea may be on any given day, but rather what central banks are preparing to unleash in the coming months. To underscore this, two weeks ago, King made a stark warning when he summarized that we are now more reliant on central banks banks holding markets together than ever before:

“with asset prices displaying a high degree of correlation with central bank liquidity additions in recent years, that feedback loop makes the economy, upon which both corporate profitability and bank net interest margins depend, more reliant on central banks holding markets together than almost ever before. That delicate balance may well be sustained for the time being. But with central banks beginning to move, however gingerly, towards an exit, is it really worth chasing the last few bp of spread from here?”

One week later, he followed up with what was arguably his magnum opus on why the market is far too complacent about the threat to risk assets from the upcoming rounds of balance sheet normalization, summarized best in the following charts, showing the correlation between central bank asset purchases and the returns across global stock markets. The unspoken, if all too familiar, message was that riskier financial assets, such as credit and equities, have been artificially boosted by central bank actions, actions which are soon coming to an end whether voluntarily in the case of the Fed, or because the central bank is simply running out of eligible bonds to monetize, in the case of the ECB and BOJ.

In short, King is worried the global market is about to enter another tantrum.

Is he right?

To answer that question, another Citi strategist, Robert Buckland, admitting that “we are (always) worried”, takes a look at where we currently stand in the business cycle as represented by Citi’s Credit/Equity clock popularized also by Matt King in previous years.

For those unfamiliar, here is a summary of the various phases of the business cycle clock:

  • Phase 1: Debt Reduction – Buy Credit, Sell Equities

Our clock starts as the credit bear market ends. Spreads turn down as companies repair balance sheets, often through deeply discounted share issues. This dilution, along with continued pressure on profits, keeps equity prices falling. For the present cycle, this phase began in December 2008 and ended in March 2009. Global equities fell another 21% even as US spreads tightened.

  • Phase 2: Profits Grow Faster Than Debt – Buy Credit, Buy Equities

The equity bull market begins as economic indicators stabilise and profits recover. The credit bull market continues as improving cashflows strengthen company balance sheets. It’s all-round risk-on. This is usually the longest phase of the cycle. This began in March 2009, and according to most Wall Street analysts, is the phase we find ourselves in right now. Equity and credit investors both do well in this phase.

  • Phase 3: Debt Grows Faster Than Profits – Sell Credit, Buy Equities

This is when credit and equities decouple again. Spreads turn upwards as fixed income investors become increasingly worried about deteriorating balance sheets. But equity markets keep rallying as EPS rise. Share prices are also boosted by the effects of higher corporate leverage, often in the form of share buybacks or M&A. This is the time to favour equities over credit.

  • Phase 4: Recession – Sell Credit, Sell Equities

In this phase, equities recouple with credit in a classic bear market. It is associated with a global recession, collapsing EPS and worsening balance sheets. Insolvency fears plague the credit market, profit warnings plague the equity market. It’s all-round risk-off. Cash and government bonds are usually the best-performing asset classes.

* * *

The reason why Citi is concerned where exactly in the business cycle the US economy and capital markets are to be found at this very moment, is that as Goldman showed recently, corporate leverage has never been higher…

… and yet, corporate spreads remain at or near all time lows. Behind this paradox is – once again – the active intervention of central banks, and explicitly the ECB, which starting in March of 2016 announced its plans to start purchasing corporate bonds, sending corporate spreads to record lows, and in some cases, pushing junk bonds yields below matched US Treasurys.

Or, as Citi puts it, “Central banks hold back the clock

Citi credit strategists suspect that this central bank intervention decoupled credit spreads from the underlying company balance sheets. As corporates lift leverage, we would normally expect the credit clock to enter Phase 3. Spreads should widen to reflect higher Net debt/EBITDA ratios. But that hasn’t happened in this cycle. In the last 18 months, corporate leverage has risen but credit spreads have fallen.

Buckland’s summary is an echo of what we posted nearly a month ago in The ECB’s Impact On The Bond Market In One Chart : “It seems that the corporate leverage clock has marched on to Phase 3, but the central banks have managed to hold the credit spread clock back in Phase 2.

Whatever the reason for the break in the business cycle, where we are currently located is critical as it could mean the difference between BTD across all assets, or, focusing on just a specific subset. In fact, it’s all about credit spreads: as Citi explains, the credit market has turned up (spreads start falling) before the equity market early in the cycle and turned down before the equity market (spreads start rising) later in the cycle. This is also shown in the next two charts below which show the progression of high yield spreads and global equity markets across the 4 phases of the cycle:

Going back to the original trhust of the article, if indeed credit spreads are finally starting to rise due to excess leverage/central bank concerns, in other words if we are finally shifting from Phase 2 to Phase 3, what are the implications?

Key among them, is the as spreads rise, volatility follows, and market dips become bigger and more frequent, jeopardizing the profitability of the BTFD “strategy.” Buckland explains:

If credit spreads do start to widen as central banks taper later this year, then we could finally move into Phase 3 of the credit/equity clock. What are the characteristics of this phase? And what are the investment implications for global equity investors?

 

Equities Up, But More Volatile

 

The credit/equity clock suggests that, despite widening spreads, equities can still generate decent returns in Phase 3. However, those returns are usually accompanied by higher volatility. This reflects the traditionally close relationship between credit spreads and volatility. As spreads rise, observed volatility (and the VIX) tend to follow (Figure 8). Investors should continue to buy the equity market dips, but these dips may get bigger and more frequent. While the headline equity market returns in Phase 3 are similar to Phase 2 (Figure 9), the risk-adjusted returns (Sharpe ratio) tend to be lower. The high return/low vol phase of the market cycle is over.

More importantly, this is the phase when bubbles emerge in full view, and in this case, the most obvious candidates for a bubble are global Growth stocks and US IT in particular.

It’s Bubble Time: Bubbles are common in these ageing equity bull markets. Indeed, all the great bubbles of the last 30 years have occurred in Phase 3 of the equity/credit clock (Figure 10). The late 1980s Phase 3 was dominated by Japanese equities, which rose to 44% of global market cap (now 8%). The late 1990s Phase 3 saw global Growth stock indices rising to unprecedented levels. The last cycle saw a sharp rerating of EM equities. All of these bubbles inflated even as credit spreads were rising. The bursting of these bubbles was a key driver of the subsequent bear markets.

 

Citi also issues a warning to value investors, whose “natural inclination to fight bubbles can get them into serious trouble at this point in the market cycle. The most obvious candidates for a bubble this time round are US Growth stocks and US IT in particular (Figure 10). We recently suggested that Growth stocks everywhere are looking expensive, but they are not yet in a bubble comparable to the late 1990s.”

But the most critical aspect of timing Phase 3 is because the “dreaded” Phase 4 follows right after. Citi explains: “The strategies that work in Phase 3 get smashed in Phase 4. This is when a global recession pushes both equities and credit into a bear market. Bubbles collapse.

The problem with the advent of Phase 4, however, is that Phase 3 is inbetween, and even if the party is nearly over for corporate bonds (and spreads), it can continue for equities according to Buckland.

But how long does Phase 3 continue?

That’s the question that everyone will soon be asking, and here is Citi’s attempt at an answer:

Investing in Phase 3 is a dangerous game. Equity markets are moving into overshoot mode. This is nice while it lasts, but the dreaded Phase 4 may not be too far away. The late 1980s Phase 3 lasted 16 months. The late 1990s lasted 32 months. But in 2007 it only lasted 4 months.

Adding to the complexities of timing the transition from Phase 3 to Phase 4 is that – as observed twice already in this cycle – credit markets can give head fakes, especially if central banks step in to stop the sell-off. This is why when Buckland cross checks against the rest of Citi’s Bear Market Checklist, he is comforted because even as “credit spreads are important factors in our checklist but they are not the only factors. The others help to reduce the head-fakes. For example, our bear market checklist helped us hold our nerve during the early 2016 sell-off even as credit spreads were signaling imminent doom.”

Right now, only 2.5 factors out of 18 are worrying (Figure 14). If credit spreads widen significantly, we may turn them amber/red. But, everything else being equal, 4.5/18 red flags would still suggest that it is too early to call the move into Phase 4. However, we will continue to watch closely.

* * *

So as Citi refuses to sound an alarm, despite its increasingly more concerned research reports, and warnings about credit spreads, especially in the junk bond space, in theory, some of the biggest names in finance are quietly moving for the exits in practice, and as Bloomberg reported this week, “investors overseeing about $1.1 trillion have been cutting exposure to the world’s riskiest corporate debt as rates grind too low to compensate for potential risks.

These professional investors are worried for all the reasons voiced by Citi above: leverage is at record highs, yet even with the recent market turmoil stemming from North Korea and US political tensions, the Bloomberg Barclays index of junk bonds is yielding just above all time lows, or 5.3%, 100 bps below its 5 year average.

How much longer will it stay here, and how much longer will the market assume that we are still in Phase 2 instead of Phase 3? Some of the world’s biggest money managers aren’t waiting to find out, to wit:

JPMorgan Asset Management, AUM: $17 billion (for Absolute Return & Opportunistic Fixed-Income team)

  • In early July told Bloomberg they have cut holdings of junk debt to about 40 percent from more than half.
  • “We are more likely to decrease risk rather than increase risk due to valuations,” New York-based portfolio manager Daniel Goldberg said.

DoubleLine Capital LP, AUM: about $110 billion

  • Jeffrey Gundlach, co-founder and chief executive officer, said in an interview published Aug. 8 he’s reducing holdings in junk bonds and emerging-market debt and investing more in higher-quality credits with less sensitivity to rising interest rates.
  • European high-yield bonds have hit “wack-o season,” Gundlach said in a tweet last week.

Allianz Global Investors, AUM: $586 billion

  • David Newman, head of global high yield, said in an interview his fund has begun trimming its euro high-yield exposure because record valuations make the notes particularly vulnerable in a wider selloff.

Deutsche Asset Management, AUM: 100 billion euro ($117 billion) in multi-asset portfolios

  • Said earlier this month it has reduced holdings of European junk bonds.
    The funds are shifting focus to equities, where there is more potential upside and higher yields from dividends, according to Christian Hille, the Frankfurt-based global head of multi asset.

Guggenheim Partners, AUM: >$209 billion

  • Reduced allocation to high-yield corporate bonds across core and multi-credit strategies to the lowest level since its inception, according to a third-quarter outlook published on Thursday.
  • Junk bonds are “particularly at risk due to their relatively rich pricing,” portfolio managers including James Michal say in outlook report.

Brandywine Global Investment Management, AUM: $72 billion

  • Fund has cut euro junk-bond allocations to a seven-year low because of valuation concerns, Regina Borromeo, head of international high yield, said in an interview this month

* * *

Of course, the final complication, and what Citi did not mention, is that virtually all of the “safe” indicators in Citi’s “recession/Phase 4 checklist” above are a function of funding pressures (or lack thereof) and thus, credit spreads. By the time there is a blow out in spreads – and yields – it will be too late to time the phase shift appropriately as the economy is likely already in a recession at that point. Which is why we find the Citi’s spread guidance most useful:

What might tell us that the shift into Phase 4 is imminent? We find that US HY credit spreads (currently 400bp) of around 600bps are high enough to indicate an oncoming recession. The equivalent level for US IG spreads (currently 110bp) is around 175bp. Historically, equities have been able to handle spreads rising up to these levels, but anything higher gets dangerous.

Ultimately, the catalyst that finally sends the market (and economy) hurtling out of Phase 2 and Phase 3 and into the “Dreaded” Phase 4, will likely be the simplest, and oldest one in the book: more sellers than buyers… and as the list above shows, the sellers have arrived.

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Hugh Smith: “We Need A Social Revolution”

August 19, 2017 Tyler Durden 0

Authored by Charles Hugh Smith via PeakProsperity.com,

In the conventional view, there are two kinds of revolutions: political and technological. Political revolutions may be peaceful or violent, and technological revolutions may transform civilizations gradually or rather abruptly – for example, revolutionary advances in the technology of warfare.

In this view, the engines of revolution are the state—government in all its layers and manifestations—and the corporate economy.

In a political revolution, a new political party or faction gains converts to its narrative, and this new force replaces the existing political order, either via peaceful means or violent revolution.

Technological revolutions arise from many sources but end up being managed by the state and private sector, which each influence and control the other in varying degrees.

Conventional history focuses on top-down political revolutions of the violent “regime change” variety: the American Revolution (1776), the French Revolution (1789), the Russian Revolution (1917), the Chinese Revolution (1949), and so on.

Technology has its own revolutionary hierarchy; the advances of the Industrial Revolutions I, II, III and now IV, have typically originated with inventors and proto-industrialists who relied on private capital and banking to fund large-scale buildouts of new industries: rail, steel manufacturing, shipbuilding, the Internet, etc.

The state may direct and fund technological revolutions as politically motivated projects, for example the Manhattan project to develop nuclear weapons and the Space race to the Moon in the 1960s.

These revolutions share a similar structure: a small cadre leads a large-scale project based on a strict hierarchy in which the revolution is pushed down the social pyramid by the few at the top to the many below.  Even when political and industrial advances are accepted voluntarily by the masses, the leadership and structure of the controlling mechanisms are hierarchical: political power, elected or not, is concentrated in the hands of a few at the top. Corporations are commercial autocracies; leadership is highly concentrated and orders are imposed on the bottom 99% of employees with military-like authority.

Social Revolutions Are Not Top-Down

But there is another class of revolution that does not share this hierarchical structure, nor does it manifest in the large-scale, top-down power-pyramids of the state and private corporations: social revolutions are bottoms-up affairs, lacking centralized leadership and hierarchical control mechanisms.

Social revolutions eventually influence the state and private sector, but they do not require the permission, funding or leadership of these hierarchies; as a rule, social revolutions drag the state and corporate sectors forward, kicking and screaming, as the social fabric and values of the populace change and the state and corporate sector cling to the status quo.

Examples of recent social revolutions include the civil rights movement of the 1950s and 60s, the Counterculture of the 1960s, and the gay rights movement.  The leadership of the state resisted each revolution, and was essentially forced to adapt to the new social order as it became mainstream.

Once corporations figured out ways to profit from the transformed social order, they quickly introduced new products and fresh marketing: all-Caucasian advertising, for example, gave way to targeted ethnic advertising and mixed-race national advert campaigns.

When social revolutions are suppressed by the state, they may spark a political revolution as the socially oppressed come to see the overthrow of the autocratic political order as a necessary step towards liberation. 

In other cases, social revolutions may have little immediate impact on the political stage. Faith-based social secular movements–for example, the Second Great Awakening in the early 19th century– were not overtly political; their eventual political impact (temperance, woman’s rights and support for the abolition of slavery) may manifest decades later.

In summary: social revolutions may generate political waves, but they need not be overtly political to do so, nor do they rely on political, financial or technological hierarchies to transform society.

The Decline of Social Groups and the Erosion of the Social Order

Robert Putman’s 2000 book Bowling Alone: The Collapse and Revival of American Community, documented the decline of social connections and what we might calling belonging in American society with reams of data. This erosion of social bonds is not limited to social groups such as bowling leagues; it is secular, spanning every social type of connection from family picnics to community and neighborhood groups.

If we extend Putnam’s findings to the core human bonds of family and friendships, we find the same fraying of social ties; people have fewer close friends, are more isolated and lonely, and family relationships are increasingly superficial or characterized by alienation.

The factors feeding this broad-based decline of connectedness and social capital are many: the nation’s economic mode of production has changed, requiring two incomes where one once sufficed, and globalization has increased both the demands on those with jobs and the number of adults who have fallen out of the work force.

This winner-takes-most economy has been accompanied by the rise of political divisiveness, a brand of politics that fosters us-versus-them disunity and the erosion of common ground in favor of demonized opponents and all-or-nothing loyalty to one party or cause.

The technological revolutions of broadcast television and radio homogenized the mainstream media even as they provided superficial substitutes for social engagement. The technologies of social media, mobile telephony and narrowcast echo-chambers of uniform opinion have created even more addictive forms of distraction that are not just shredding social connectedness—they’re destroying our ability to form and nurture social bonds, even within the family.

This dynamic was explored in a recent essay in The Atlantic, Have Smartphones Destroyed a Generation?

Any careful observer of present-day family life would add that the addictive draw of mobile telephony has also damaged the parents’ generation and the family unit itself.

Cui Bono: To Whose Benefit?

Longtime readers know I often begin an inquiry with the time-tested question: cui bono, to whose benefit? Who has benefited from the erosion of the social fabric and social capital, from the politics of divisiveness and the mass addiction to the technologies of superficial connectedness?

While we can take note of soaring corporate profits, and draw a causal connection between these profits and the modern-day “always connected to work” lifestyle of high-productivity corporate employees, it’s difficult to argue that corporations have benefited directly from the loss of social capital that characterizes American life. 

Rather, it seems that the corporation’s relentless pursuit of narrowly defined self-interest, i.e. maximizing profits by whatever means are available, has laid waste to boundaries between work and home life as collateral damage.

In a similar fashion, purveyors of smartphones and the software and content that render them so addictive don’t necessarily benefit directly from the destruction of intimate, authentic social bonds, but they certainly have prospered from the feeding of the smartphone addiction. Once again, the loss of authentic social connectedness is collateral damage.

While it seems quite clear that political groups have fueled divisiveness to their own benefit, does the state (government in all its forms) benefit from the fraying of the social order? It’s difficult to discern a direct benefit to the state, though it might be argued that a fractured populace is easier to control.

But the erosion of the social order has gone beyond fracture into disintegration, and it’s hard to see how class wars and social disunity benefit the state, which ultimately relies on some measure of social unity for its authority, which flows from the consent of the governed.

It’s Time To Take Our Future Back

In Part 2: Rescuing Our Future, we focus on the self-evident truth that governments and corporations cannot restore social connectedness and balance to our lives.  Only a social revolution that is self-organizing from the bottom-up can do that. And we detail out the specific steps each of us can and should take to develop the values and skills required to form and maintain authentic social wealth—the wealth of friendship, of social gatherings, of belonging. It takes courage and independence to swim against the toxic tides of our economy and society. The good news is that true wealth is within reach of everyone. The steps we each need take are clear; it’s just a matter of having the will to invest the time and effort. Do you have it?

Click here to read the report (free executive summary, enrollment required for full access)

 

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Bitcoin Cash Explodes To Record Highs Over $900 – Here’s Why

August 19, 2017 Tyler Durden 0

After meandering around $300 for the last two weeks, Bitcoin Cash has rocketed higher in the last few days – now trading at record highs over $900. As Bitcoin Cash has surged, Bitcoin has been falling (now back below $4000) as Bitcoin Cash mining profitability becomes more appealing to miners.

Bitcoin Cash has surged to a new record high in the last few days, now triple the market cap of Ripple and over half the market cap of Ethereum…

 

And Bitcoin has been sliding…

 

So just what is going on with BCH? Coinivore explains… As blocks continue to process, BCH edges its way closer to the legacy Bitcoin’s network mining profitability.

 It’s what could be known as the “flippening,” and block 479808 is the block to watch if it’s going to happen (this weekend), Coindesk reported.

 

Block 479,808 (set for this weekend) will likely trigger a difficulty adjustment downwards 50%, and if the prices of bitcoin and bitcoin cash stay the same, this means miners will make almost double on bitcoin cash what they would on bitcoin.

 

As BCH mining profitability becomes more appealing to miners, the chance of other mining pools using hash power for BCH is greater, especially if the new kid on block Bitcoin Cash’s markets continue to rise.

 

Now, why would miners abandon the legacy Bitcoin? Because BCH chain’s difficulty has also dropped, and at the same time the price has risen over 75% in the last two days. As such, Bitcoin cash mining (BCH) is now currently 2% percent more profitable to mine than the legacy Bitcoin (BTC).

 

Another reason is the legacy Bitcoin blockchain charges higher fees on transactions, so miners must take into account the extra 1.5 BTC per block on Bitcoin (about $6,000 USD) while Bitcoin Cash offers very low fees under $50 USD.

All around BCH just seems like the more attractive opportunity for miners.

The original economic code that led to Bitcoin’s great success is alive and well in the form of #BitcoinCash. Watch what happens next: pic.twitter.com/H9SeCvGR8C

— Roger Ver (@rogerkver) August 18, 2017

Additionally, Coindesk notes that new exchange volume is also helping drive BCH higher

While both bitcoin and bitcoin cash share a transaction history, there’s at least one major differential that changes their markets – bitcoin cash didn’t inherent bitcoin’s expansive global exchange network.

 

This means while bitcoin is widely available for trading across continents, only a few major players stepped up early to add Bitcoin Cash.

 

Still, signs suggest more exchanges could soon see a value in doing so. Case in point, the trade volume in bitcoin cash observed during the recent run was largely denominated in the South Korean won today.

 

Yesterday, about $1.2 billion of the $2 billion in total bitcoin cash trade volume, or around 56%, appeared to be transacted in won on just three South Korean exchanges  – Bithumb, Coinone and Korbit – according to data from CoinMarketCap.

 

Such a strong regional showing could indicate pent up demand – but whether it’s from sellers seeking to sell, or buyers looking to buy, that remains unclear.

 

Prior to the increase, though, bitcoin cash trading volume was relatively light earlier this week, and it increased roughly tenfold today.

Finally, we note that Faster processing times may be appealing, as CNBC reports that Bitcoin Cash faster processing is what likely caused 40 percent of investors increasing their bet on it.

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David Stockman Warns “Don’t Forget About The Red Swan”

August 19, 2017 Tyler Durden 0

Authored by David Stockman via The Daily Reckoning,
Given the anti-Trump feeding frenzy, we continue to believe that a Swan is on its way bearing Orange. But if that’s not enough to dissuade the dip buyers, perhaps the impending arrival of the R…

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Bannon: “The Trump Presidency That We Fought For Is Over”

August 19, 2017 Tyler Durden 0

In his first interview shortly after the White House announced that it was parting ways with Trump’s chief strategist, Steve Bannon told the Weekly Standard on Friday afternoon that “the Trump presidency that we fought for, and won, is over.” After confirming his departure Bannon said that “we still have a huge movement, and we will make something of this Trump presidency. But that presidency is over. It’ll be something else. And there’ll be all kinds of fights, and there’ll be good days and bad days, but that presidency is over.”

In his interview with the conservative publication, Bannon predicted that in the wake of his departure, Trump’s administration would “be much more conventional” as his absence from the White House would make it “much harder” for Trump to pave a way forward on issues like “economic nationalism and immigration.” He also predicted that republicans would “moderate” Trump:

“I think they’re going to try to moderate him,” he says. “I think he’ll sign a clean debt ceiling, I think you’ll see all this stuff. His natural tendency—and I think you saw it this week on Charlottesville—his actual default position is the position of his base, the position that got him elected. I think you’re going to see a lot of constraints on that. I think it’ll be much more conventional.”

In Bannon’s view, his departure is not a defeat for him personally but for the ideology he’d urged upon the president, as reflected in Trump’s provocative inaugural address in which he spoke of self-dealing Washington politicians, and their policies that led to the shuttered factories and broken lives of what he called “American carnage.” Bannon co-authored that speech (and privately complained that it had been toned down by West Wing moderates like Ivanka and Jared).

“Now, it’s gonna be Trump,” Bannon said. “The path forward on things like economic nationalism and immigration, and his ability to kind of move freely . . . I just think his ability to get anything done—particularly the bigger things, like the wall, the bigger, broader things that we fought for, it’s just gonna be that much harder.”

He also warned that things are about to get worse for Trump as even more people depart his side, warning of a ‘jailbreak’ of moderate Republicans.

“There’s about to be a jailbreak of these moderate guys on the Hill”—a stream of Republican dissent, which could become a flood. Bannon also said that he once confidently believed in the prospect of success for that version of the Trump presidency he now says is over.

Asked what the turning point was, he says, “It’s the Republican establishment. The Republican establishment has no interest in Trump’s success on this. They’re not populists, they’re not nationalists, they had no interest in his program. Zero. It was a half-hearted attempt at Obamacare reform, it was no interest really on the infrastructure, they’ll do a very standard Republican version of taxes.

“What Trump ran on- border wall, where is the funding for the border wall, one of his central tenets, where have they been? Have they rallied around the Perdue-Cotton immigration bill? On what element of Trump’s program, besides tax cuts-which is going to be the standard marginal tax cut-where have they rallied to Trump’s cause? They haven’t.”

As for what happens next, as reported late on Friday, Bannon said that he is eager to get back to Breitbart and lead the opposition from there.

“Now I’m free. I’ve got my hands back on my weapons,” he said. “Someone said, ‘it’s Bannon the Barbarian.’ I am definitely going to crush the opposition. There’s no doubt. I built a f-cking machine at Breitbart. And now I’m about to go back, knowing what I know, and we’re about to rev that machine up. And rev it up we will do.”

Specifically, the target of his attacks will be the ‘globalists’ and liberals he believes have taken over the White House. They include National Security Adviser H. R. McMaster, advisor Gary Cohn, Trump’s daughter Ivanka and son-in-law Jared Kushner.

* * *

With Bannon’s departure conceding control of Trump’s inner circle to the so-called “Goldman globalists”, the question is how Trump’s message will evolve in the coming days with the “nationalist” element purged. With Trump having been granted the option of sounding like a more centrist President, will he continue with his usual rhetoric. Bloomberg is convinced that the answer is “more of the same” especially since Trump won’t risk losing his core base, although that may no longer be in his control, especially if Bannon is about to unleash a stinging attack on Trump’s inner circle.

For the clearest sign of what Trump’s post-Bannon posture – and administration – will look like, look no further than the coming debt ceiling negotiation (and/or crisis): on Friday, Goldman raised its odds of a government shutdown to 50%, a fact which also spooked the market sending the S&P to session lows at the close. If Trump is unable to build some political goodwill in the coming days on the back of the Bannon departure, those odds will steadily grow to 100% over the next few weeks.

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CalExit 3.0: New Petition Calls For Cali Secession…3rd Time’s A Charm?

August 19, 2017 Tyler Durden 0

A new group of CalExit activists are hoping they can secede (see what we did there?) where two predecessor groups failed in efforts to force California’s independence from the United States of America.  Ironically, you would think that removing Ca…

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UK Opposition Leader Calls For “People’s QE” – It’s Venezuela With Tea & Cakes

August 19, 2017 Tyler Durden 0

Authored by Daniel Lacalle via The Mises Institute,

It is sad to see that, facing the evidence of the failure of demand-side policies and money printing, many commentators propose some of the most outdated and failed policies in modern economic history. In the UK, Mr. Jeremy Corbyn, the new leader of the Labour Party, believes that the government spends too little. With a current 44.4% of GDP public spending, saying the government spends “too little” is an insult to taxpayers and efficient public bodies alike.

But Mr. Corbyn wants to penalize the private sector creating the largest transfer of wealth from savers and taxpayers to government ever designed… The People’s QE (quantitative easing).

In Europe, we are already used to the follies of magic solutions from populist parties. Syriza, Podemos, and others always come up with “magic” and allegedly “simple” ideas to solve large and complex economic issues, and always fail when reality kicks in, but there are few that match the monumental nonsense of the wrongly-called “People´s QE”. It is the “Government´s QE”, rather.

Why Is this People’s QE a Bad Idea?

The analysis starts from the right premise. Quantitative Easing, as we know it, does not work, and creates massive imbalances. So what do they propose? Sound money? Erasing perverse incentives of printing money and unjustifiably low rates? No. Doing exactly the same, but passing the massive perverse incentive of currency debasement to politicians who, as we all know, have no perverse incentive whatsoever to overspend (note the irony).

The UK policy of increasing money supply in the past has always been based on two premises to avoid hyperinflation and currency destruction: the independence of the central bank as a central pillar of monetary policy, and the constant sterilization of asset purchases (ie, what it buys is also sold to monitor market real demand). The balance sheet of the Bank of England has remained stable since 2012, coinciding with the highest economic growth period, and is below 25% of GDP.

Corbyn´s People´s QE means that the central bank will lose its independence altogether and become a government agency that prints currency whenever the government wants, but the increase of money supply does not become part of the transmission mechanism that reaches job creators and citizens in the real economy. All the new money is for the government, with the Bank of England forced to buy all the debt issued by a “Public Investment Bank”.

The first problem is evident. The Bank of England would create money to be used indiscriminately for white elephants, a disastrous policy as seen in many EU countries, that only leaves overcapacity and a massive debt hole. By providing the public investment bank with unlimited funding, the risk of irresponsible spending is guaranteed. In a country where citizens are aware of wasteful public infrastructure, this is not a small risk. However, the monetary imbalances created by this policy would generate a massive “crowding-out” effect and incentivise cronyism, as the private sector would suffer the consequences of inflationary and tax pressures as well as unfair competition from government and its crony sectors.

The second problem is that rising public debt, even if “monetized” (hidden in the balance sheet of the investment bank), would still cripple the economy even with perennial QE. Printing money does not reduce the risk of rising imbalances as we are seeing all over the world. And the new bank´s potential losses would be covered with more taxes.

The idea of building lots of bridges and airports all over the place to “create” jobs would be mildly amusing if it hadn’t failed time and time again and forgets the cost of running those infrastructure projects once built, apart from the debt incurred. All paid by the taxpayer, who guarantees the capital of the Public Investment Bank.

The third problem is that inflation created by these projects is paid by the usual suspects, the private sector, and citizens, who do not benefit from this spending as the laws of diminishing returns and debt saturation show.

The Socialist idea that governments artificially creating money will not cause inflation — because the supply of money will rise in tandem with supply and demand of goods and services — is simply science fiction. The government does not have a better or more accurate understanding of the needs and demand for goods and services or the productive capacity of the economy. In fact it has all the incentives to overspend and transfer its inefficiencies to everyone else. As such, like any perverse incentive under the so-called “stimulate internal demand” fallacy, the government simply creates larger monetary imbalances to disguise the fiscal deficit created by spending and lending without real economic return: Creating massive inflation, economic stagnation as productivity collapses and impoverishing everyone… except itself.

These policies lead to tax increases, a higher cost of living and, above all, destroying a large part of the British private sector as the government monopolizes the major sectors of the economy and increases taxes for the rest.

These dangerous magic-solution policies have already been implemented in the past. They are nothing more than the Argentine model of Kirchner and Kiciloff disguised in Anglo-Saxon terms, a model that has only created stagflation. It is also the Venezuela model (Mr. Corbyn was a defender of Chavez and his economic policies). To think that the government can decide how much money is created and spend it on whatever it wants without thinking of the consequences for the economy.

The myth is that they say printing money will not cause inflation because it will increase productivity and the increase in money supply will come in tandem with more goods and services:

Inflation occurs when you have more money chasing the same or less amount of goods and services. If you have money creation that increases productivity, yes you have more money but you also have more goods and services…the supply of both increases in tandem, so you don’t necessarily have to have inflation.

It’s Been Tried Before 

The problem? It is simply a myth debunked by history. Every single attempt at this socialist myth of productivity, supply and demand moving in tandem because the government says so, fails. It never happens. The government does not have better or more detailed information than the private sector of what goods and services the economy needs, and even less knowledge of how to boost productivity because it does not have the incentive of profitability and efficiency, just of maximizing budget spending.

Productivity collapses as government overspends on white elephants and politically motivated investments with no real economic return. The supply of goods and services does not increase in tandem with money supply in an open economy dependent on imports like the UK’s. Basically, the theory sounds nice, it simply never happens.

At least, when private banks “create money”, they have an incentive to lend with a real economic return and to try to recover the principal, with an interest. They might fail, and therefore my defense of a minimum cash coefficient and sound money. However, the government has no such incentive, rather the opposite. To create money to spend on politically motivated items, and pass the imbalance through inflation and currency debasement to the productive sectors.

The lesson from Japan was clear: “Individual consumption only went up by around 0.1-0.2% of GDP and failed to increase long-run consumption. Overall, the program did not ignite inflation or help Japan out of its economic rut“. And the lessons from Chile with Allende, and Argentina with Kiciloff, are scary.

Corbyn forgets that the public sector cannot exist without private sector revenues. Printing money does not create prosperity, it dilutes it. Be it through current or other QEs.

The aristocrats of public spending always think that intervening on money creation and the economy is going to solve everything.

Do they know this will not work either? Yes, but the final objective is different. To make government control all aspects of the economy, whether it is in recession or in depression. For Corbyn, the government is infallible and any mistake it makes has to be blamed on an external enemy.

If Corbyn implements this “People’s QE”, it will be “Venezuela with tea and cakes”.

The People’s QE is the same as any other quantitative easing, a massive monetary imbalance today under the promise of solving it in the future. The current QEs will likely end with a financial crisis. The People’s QE would do the same. Except that the “alleged” beneficiaries, the “people”, will likely be drowned in inflation as the mirage of money supply and goods and services growing in tandem is proven as fake as it is in today’s QE programs. But without sterilization and transmission mechanisms, the inflation that is created today in financial assets would make prices soar due to devaluation.

Monetary imbalances always create inflation. Whether it is asset price inflation or goods, it is the symptom of aa larger problem. Because all monetary imbalances end with either a financial crisis, massive inflation or massive unemployment once the small and temporary effect of the monetary placebo ends.

The artificial creation of money without any support is always behind every crisis. The People’s QE has failed every time it has been implemented. This would not be different.

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10 dead as train derails in India

August 19, 2017 rbksa 0
Author: 
AFP
Sat, 2017-08-19 17:47
ID: 
1503154770204425100

NEW DELHI: Ten people were killed and dozens injured when an express train derailed in north India on Saturday, an official said.
Emergency workers were pulling people out of mangled, upended carriages and rushing the wounded to hospital after five coaches derailed early on Saturday evening.
“Ten people have died and dozens have been injured. Most of the injured have been taken to the hospital,” said P S Mishra, chief medical officer for the area, by phone.
Police said the casualties were being rushed to hospital, but they were unable to give numbers.
“There are certainly casualties but right now the focus is on evacuation,” senior police officer Jitender Kumar told AFP by phone from the accident site.
“We are shifting everyone to the hospital. We are trying to take out those trapped inside the coaches.”
Photographs from the scene in the north Indian state of Uttar Pradesh showed people climbing onto upended carriages to try to pull passengers out.
The accident is the latest disaster to hit India’s most populous state. It comes just a week after dozens of children died at a hospital that had run out of oxygen there.
India’s railway network is still the main form of long-distance travel in the vast country, but it is poorly funded and deadly accidents often occur.
Less than a year ago 146 people died in a similar disaster in Uttar Pradesh.
A 2012 government report said almost 15,000 people were killed every year on India’s railways and described the loss of life as an annual “massacre.”
Prime Minister Narendra Modi’s government has pledged to invest $137 billion over five years to modernize the crumbling railways, making them safer, faster and more efficient.

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