Category Archives: Economy and Meltdown

Angry China Slams Moodys For Using “Inappropriate Methodology”

The market may have long since moved on from Moody’s downgrade of China to A1 from Aa3 (by now even long-only funds have learned that in a world with $18 trillion in excess liquidity, the opinion of Moodys is even more irrelevant), but for Beijing the vendetta is only just starting, and in response to Tuesday’s downgrade, China’s finance ministry accused the rating agency of applying “inappropriate methodology” in downgrading China’s credit rating, saying the firm had overestimated the difficulties faced by the Chinese economy and underestimated the country’s ability to enhance supply-side reforms.

In other words, Moody’s failed to understand that 300% debt/GDP is perfectly normal and that China has a very explicit exit strategy of how to deal with this unprecedented debt load which in every previous occasion in history has led to sovereign default.

The Ministry of Finance reaction came after Moody’s first, and very, very long overdue, downgrade of China since 1989 citing concerns about risks from China’s relentlessly growing debt load as shown below.

“China’s economy started off well this year, which shows that the reforms are working,” the ministry said in a statement on its website.  Actually, it only shows that China had injected a record amount of loans into the economy at the start of the year, and nothing else. And now that the credit impulse is fading, the hangover has arrived.

 

Moody’s on Wednesday also downgraded the ratings of 26 Chinese government-related non-financial corporate and infrastructure issuers and rated subsidiaries by one notch. It also downgraded the ratings of several domestic banks, including the Agricultural Bank of China Limited’s long-term deposit rating from A1 to A2.  It also eventually downgraded Hong Kong and said credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close economic, financial and political ties with the mainland.

So how did China defend its position? The same way US companies fabricate their own numbers to confuse shareholders: with “pro forma” arguments.

For example Moody’s noted that the importance Chinese authorities have attached to maintaining robust growth would result in sustained policy stimulus, and such government spending would contribute to rising debt across the economy. “We expect the government’s direct debt burden to rise gradually toward 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade,” Moody’s noted.

To this, the MOF responded that government bonds reached 27.33 trillion yuan ($3.97 trillion) at the end of 2016, or about 37% of the country’s GDP. The proportion is much lower than the 60% picket line delimited by the EU, the ministry said.  Liu Xuezhi, a senior analyst at the Bank of Communications, said that the proportion of government bonds to GDP has been continuously dropping since peaking in 2013, largely due to the government efforts to manage debt.

“I think Moody’s reasons are debatable,” he said.

Of course, what the MOF forgot to mention is the roughly 200% in corporate debt issued in large part by entities that are State-owned enterprises, and which the government for mostly refuses to go bankrupt over fears of mass riots, civil disobedience and even war.  As a result virtually all of China’s corporate debt is effectively sovereign.

That did not prevent China from spinning more propaganda.

Zheng Xinye, associate dean of the School of Economics at the Renmin University of China, also told the Global Times on Wednesday that the government has taken effective measures, such as bond swaps and perfecting the issuance and management system of local government debt, to rein in bond risks.  Liu added that China’s fiscal revenue has been rising since 2009. “Besides, the Chinese government has income channels which other countries don’t, such as land transfer money and State assets. Therefore, I don’t think China would be facing serious financial pressure, at least not in the next few years,” he told the Global Times on Wednesday.

Zheng also said that the government wouldn’t need to use fiscal measures to stimulate growth, as the effects of supply-side reforms would sustain the economy’s momentum.  He may have even said it with a straight face.

Additionally, China took offense at Moody’s forecast that China’s growth will slow to 5% in five years, because of a smaller working-age population and continuing production slowdown. 

To this, Liu said the chances are very slim for China’s economy to slip to 5 percent in the next five years. “I believe China’s GDP growth will remain above 6.5 percent at the end of 2020, as China has abundant room for policy adjustments to support economic growth,” Liu said. It has even more abundant room to goalseek its data to whatever it wants, however, without the benefit of “creating” 40% of GDP in the form of new credit, China’s economy will implode.

Zheng disagreed, and said the economy has not shown any signs of sliding.

One place where China’s apparatchiks were right is that Moody’s downgrade would hurt overseas investor confidence in the Chinese market or collaborations with domestic companies.

“It would also make it more difficult for domestic companies to seek financing in overseas markets,” Liu noted.  But Liu said domestic financial markets would not be affected as much, because they’re not entirely open. And for a good, if scary, explanation of what happens as China’s debt issuance shift domestically, read this morning Bloomberg piece “China’s Downgrade Could Lead to a Mountain of Debt.”

The Trump Collapse Scapegoat Narrative Has Now Been Launched

Authored by Brandon Smith via Alt-Market.com,

Last week was a rather crazy one for the news feeds, with cyber attacks and “Comey memos” and a host of other wild mayhem, it may have been difficult for many people to keep track of it all. That said, there was one event that I think went partly under the radar, and I think it is an important signal for anyone concerned with the ongoing process of economic collapse in the U.S.

Generally, the American public holds very little vigilance when it comes to economics. They are distinctly unaware of fundamental indicators such as commodities demand, energy usage, manufacturing, imports, exports and international shipping, etc. What they do take note of, and what the mainstream news will tell them about in 30 second blurbs, is the state of unemployment and whether stock markets were down for the day or up for the day. These two “indicators” are the extent of the average person’s exposure to fiscal health.

This is why the Federal Reserve and the establishment have been meticulous over the past several years in their efforts to keep employment statistics highly manipulated to the positive side and why they have been injecting untold trillions into stocks around the world through various measures including no cost overnight loans.

However, over the past couple of years something has changed. As I warned they would do in 2015 in my article The Real Reasons Why The Fed Will Hike Interest Rates, central banks including the Fed have been backing off of stimulus measures and they have now begun a series of interest rate hikes. Look at it this way — imagine the economy has a terminal disease and the only thing keeping it alive is a highly addictive drug called “free money.” It’s a rather terrible life, barely worth living, but the economy still has a faint pulse as long as the drug is administered. Now, what would happen if the Fed suddenly cuts off the drug supply? Well, the economy will die in a very frantic and horrible way.

Low interest rates and Federal Reserve loans represent the purest form of the free money drug, even more so than the bailouts and QE. And now, those interest rates are rising, and the drug is being taken away.

These marginal rate hikes might not seem like much — .25 basis points here and .25 basis points there. And they are not much, unless you are a corporation borrowing billions of dollars at a time so that you can stave off your exposure to quadrillions in derivatives debt and so that you can purchase massive shares in your own stock to keep its value artificially elevated. Cycling this borrowed cash and paying the Fed back is rather easy for such corporations as long as the loans are essentially free. But when they have to start paying interest on that cash, even at a low rate, the costs add up at lightning speed.

ANY interest rate hikes in this environment make borrowing from the Fed untenable for corporations seeking to prop up their stocks and the stock market at large.

In my estimation, based on previous Fed measures such as the removal of QE from the system in 2014, it takes around six to eight months for the effects of policy shifts by the Fed to become visible on the main street economy and in equities. I believe we are about to see the effects of interest rate hikes on our system within the next couple of months.

I put very little value in stock markets as an indicator of anything. In reality, stocks are a fraudulent circus based on perceived value and perceived demand rather than true value and demand. In most cases, stocks crash in the FINAL phase of an economic collapse, not in the beginning phase. If you decide to start preparing for a crisis after a stock market decline then you are probably too late.

I am revisiting this topic here because I want to remind people that the full and tantamount blame for any economic crisis (and the final phase market crash) in the near future is placed on the Federal Reserve and international banks. All future shocks to the financial system were made possible because the establishment and the Fed have gutted our economy, stuffed it with the fluff of fiat stimulus and left it to lumber aimlessly since 2009.

Now, because of the Fed’s efforts, stocks have been rising for quite some time with only a few moments of obstruction, due again, to their policy shifts. These efforts have conjured a 20,000 point Dow Jones, but nothing else positive for the economy. The one constant, though, has always been low interest rates.

With interest rates increasing, I would point out that market behavior has changed. The meteoric rise has stalled. In the past few months stocks have barely budged 1 percent either up or down per week. Except for last week when something strange happened; markets suddenly dropped nearly 400 points in a single day. Why? Well, that is a subject up for debate, but the majority of mainstream news outlets will tell you that it was all Donald Trump’s fault.

I have been warning since long before the election that Trump’s presidency would be the perfect vehicle for central banks and international financiers to divert blame for the economic crisis that would inevitably explode once the Fed moved firmly into interest rate hikes. Every indication since my initial prediction shows that this is the case.

The media was building the foundation of the narrative from the moment Trump won the election. Bloomberg was quick to publish its rather hilariously skewed propaganda on the matter, asserting that Trump was lucky to inherit an economy in ascendance and recovery because of the fiscal ingenuity of Barack Obama. This is of course utter nonsense. Obama and the Fed have created a zombie economy rotting from the inside out, nothing more. But, as Bloomberg noted rightly, any downturn within the system will indeed be blamed on the Trump administration.

Fortune Magazine, adding to the narrative, outlined the view that the initial stock rally surrounding Trump’s election win was merely setting the stage for a surprise market crash.

I continue to go one further than the mainstream media and say that the Trump administration is a giant cement shoe designed (deliberately) to drag conservatives and conservative principles down into the abyss as we are blamed by association for the financial calamity that will occur on Trump’s watch.

Last week’s sudden market bloodletting is important in this regard; 400 points down is hardly a flesh wound to a 20,000 point Dow, but the media’s reaction to it was very revealing on what the future has in store. Multiple news outlets responded by immediately connecting the drop to Trump and the absurdity surrounding the “Comey memo” — a memo which no one in the public has seen proof of. The claim is that this level of turmoil around Trump might lead to impeachment and that the threat of impeachment would kill the stock market bounce which the media also claims was driven by Trump’s promises of corporate tax cuts. It’s a lie built on another lie.

It is interesting to me that the mainstream media never said the market drop was caused by “Comey’s turmoil,” or by “The Washington Post and The New York Times’ turmoil.” No, they called it “Trump’s turmoil.” Last week’s stock dive was, in my opinion, the official launch of the Trump collapse narrative. The establishment was beta testing it for months, but now, the program has gone live.

Every single stock decline from now on, as well as the ultimate economic crash, which will become visible to the public in short order, will be blamed on Donald Trump and conservatives by extension. As I said, he is the perfect scapegoat.

I have been very critical of Donald Trump recently, and it is my view, according to the evidence and his swift retraction of nearly every promise he made to the voters during his campaign, that Trump is controlled opposition. But, I would never lay the blame for our fiscal decline at his feet. Trump does not have the power to create that kind of disaster; only the global banks have that power. I’ll say it again — the Federal Reserve is raising interest rates into a major financial downturn. This will be the trigger for the next phase of collapse, not any drama surrounding Donald Trump. Everything else, from Comey to North Korea, is distraction.

The Fed has done this before. In fact, the Fed has a habit of raising interest rates at the onset of economic instability or right in the middle of a downturn, as it did in 1928-1929 triggering the Great Depression, and in 1931, adding fuel to the fire of financial catastrophe. These particular catalyzing policy actions are partly what Ben Bernanke was referring to on Nov. 8, 2002, in a speech given at “A Conference to Honor Milton Friedman, the Paul Snowden Russell Distinguished Service Professor Emeritus, On the Occasion of his 90th Birthday.”

“In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn.

 

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Ben Bernanke finished his astonishingly honest assessment with a lie. They are indeed doing it again… but this time they have made sure they have a president and an entire political ideal to blame it on.

Another Insurer Quits Obamacare Leaving 25 Counties In Missouri With No Healthcare Options

Blue Cross Blue Shield of Kansas City (Blue KC) has just joined the growing ranks of insurers across the country that have decided they’ve lost just about enough money on Obamacare.  According to a press release issued earlier today, Blue KC’s CEO said the company has lost $100 million on the Obamacare exchanges since 2014, a fact that prompted their decision to exit their 32-county service area.

Blue Cross and Blue Shield of Kansas City (Blue KC) today announced the company’s decision to not offer or renew individual Affordable Care Act (ACA) plans in the company’s 32-county service area in Kansas and Missouri for 2018. This decision will affect Blue KC members with both on- and off- exchange individual plans but does not affect individual plans that were purchased on or prior to October 1, 2013.

 

“Since 2014, we’ve expended significant resources to offer individual ACA plans to increase access to quality healthcare coverage for the Kansas City community,” said Danette Wilson, President and CEO of Blue KC. “Like many other health insurers across the country, we have been faced with challenges in this market. Through 2016, we have lost more than $100 million. This is unsustainable for our company. We have a responsibility to our members and the greater community to remain stable and secure, and the uncertain direction of this market is a barrier to our continued participation.”

 

“This decision is necessary at this time, but we’ll continue to work with federal and state legislators to identify solutions that will stabilize the individual market and bring costs down for our members, the community and Blue KC,” said Wilson.

The move will leave residents in 25 Missouri counties, or roughly 19,000 Obamacare enrollees, with no healthcare options in 2018. 

Missouri

 

Of course, this follows similar developments in both Iowa (see “Obamacare Implosion: Last Major Healthcare Provider Pulls Out Of Iowa Leaving No Options In 2018“) and Tennessee (see “Knoxville, TN Could Be Ground Zero For The Obamacare Explosion“) in the past several weeks.  To be fair, after Humana’s exit from Obamacare left 16 counties surrounding Knoxville with no health plans, Blue Cross Blue Shield of Tennessee stepped in to cover that area, though it’s unknown whether someone would step up to do the same in Missouri.

But sure, Republicans are ruining healthcare in America.

The 5 Possible Outcomes Of The OPEC Meeting

Authored by Nick Cunningham via OilPrice.com,

The highly-anticipated OPEC meeting is taking place this week, but unlike the last few meetings, the hype and excitement is much less palpable. That is largely because the end result is thought to be a foregone conclusion.

Last week, Saudi Arabia and Russia telegraphed the events of the May 25 meeting, announcing support for a nine-month extension of the existing production cuts – 1.2 million barrels per day (mb/d) from OPEC plus 558,000 barrels per day (bpd) from a group of non-OPEC countries. With the two most important oil producers in agreement, the meeting should be quick and easy.

“The decision seems to be almost a done deal,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets. “There seems to be a very high harmony in the group.”

 

But if we have learned anything from the OPEC meetings over the last several years, it is that nothing should be taken for granted. Time and again the cartel seems to surprise the markets. Saudi Arabia’s energy minister hinted over the weekend that the OPEC meeting could have more drama than many analysts currently expect.

“Everybody I talked to… expressed support and enthusiasm to join in this direction, but of course it doesn’t preempt any creative suggestions that may come about,” Saudi energy minister Khalid al-Falih said at a news conference in Riyadh.

So even as a consensus has formed on one particular outcome, here are several possible “surprise scenarios” that could come out of the OPEC meeting this week, ordered by least to most bullish for oil prices.

1. No extension. This would be the most disastrous for oil prices, as OPEC abandons its collective action and returns to full production. With the oil market still suffering from oversupply, a return to higher output would cause WTI and Brent to meltdown, crashing into the $40s or quite possibly lower. However, this most extreme bearish scenario is also probably the least likely outcome.

 

2. 6-month extension. A rollover of the existing cuts for another six months. This had been the most widely-assumed scenario until only recently. Global inventories remain elevated, and extending the cuts through the end of the year probably won’t be enough to bring inventories back into the five-year average range. With the markets wanting more, a six-month extension would, at this point, be seen as a disappointment and would likely push oil prices down.

 

3. 9-month extension. Extending the cuts through the end of the first quarter of 2018 is now the market’s working assumption, and will be met with a sigh of relief. But since it has become the new baseline, a strong rally in prices is probably unlikely.

 

4. 9-month extension plus more countries join in. Khalid al-Falih hinted that new additions to the pact could be forthcoming. “We believe that continuation with the same level of cuts, plus eventually adding one or two small producers,” he said over the weekend. The addition of a couple marginal producers would add a little bit of a psychological punch to the agreement, but probably wouldn’t alter the supply/demand balance in any fundamental way. This outcome probably would be met with a rise in oil prices by a few dollars per barrel.

 

5. 9-month extension with deeper cuts. This scenario is the one to watch out for, as many analysts see the odds of much more aggressive cuts growing. An OPEC source recently told Reuters that the group was considering making deeper output reductions. “All options are open,” the source said. Deeper cuts could come in several different forms. The collective output quota of 32.5 mb/d could be lowered, with country-specific limits tightened. This would be a heavy lift, but if agreed to, would lead to a much stronger price impact, immediately pushing up crude benchmarks substantially. Another way to make deeper cuts would be to remove the exemptions given to Libya and Nigeria. Both countries were not subject to any limits in the initial six-months, and both have added output and signaled more production growth in the near future. It is not clear that they would agree to limits, given their serious economic and security troubles.

OPEC has a tendency to surprise, so any of these outcomes – or others – are possible. Still, an extension of the existing cuts for nine months appears to be the most likely scenario. At the same time, OPEC has sort of backed itself into a corner – it has raised expectations to such a degree that anything less would be considered a major disappointment.

Fragile Markets? US Equity Futures Flash-Smash… For No Good Reason

First VIX dumped-n-pumped this morning, then Russell 2000 (ETF and Futures) flash-crash at lunch time, and now, amid heavy volume, someone decided it was the perfect time to panic-buy S&P, Dow, and Nasdaq futures…

 

Very heavy volume for early asia trading…

 

Some contest to Russell 2000’s and VIX’s earlier flash crash…

 

As BofAML so eloquently pointed out…

The hunt for a narrative to explain this utter farce has started… Did Bitcoin algos just get switched on to trade S&P minis? Bitcoin just topped $2500!