The Biggest Economic Story Going Into 2015 Is Not Oil Submitted by Tyler Durden on 12/19/2014 12:46 -0500 in Share 4 Submitted by Raul Ilargi Meijer via The Automatic Earth blog , Isn’t it fun to just watch the market numbers roll by from time to time as you go about your day, see Europe markets up 3%+, Dubai 13%, US over 2% (biggest two-day rally since 2011!), and you just know oil must get hit again? Well, it did. WTI down another 3%+. I tells ya, no Plunge Protection is going save this sucker. And oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that. That is, in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And I’m not talking Putin, he’ll be fine, as he showed again today in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is. The US dollar will keep rising more or less in and of itself, simply because the Fed has ‘tapered QE’, and much of what happened in global credit markets, especially in emerging markets, was based on cheap and easily available dollars. There’s now $85 billion less of that each month than before the taper took it away in $10 billion monthly increments. The core is simple. This is not primarily government debt, it’s corporate debt. But it’s still huge, and it has not just kept emerging economies alive since 2008, it’s given them the aura of growth. Which was temporary, and illusionary, all along. Just like in the rest of the world, Japan, EU, US. And, since countries can’t – or won’t – let their major companies fail, down the line it becomes public debt. One major difference from the last emerging markets blow-up, in the late 20th century, is size: emerging markets today are half the world economy . And they’re about to be blown to smithereens. Sure, oil will play a part. But mostly it will be the greenback. And you know, we can all imagine what happens when you blow up half the global economy … Erico Matias Tavares at Sinclair has a first set of details: Emerging Markets In Danger There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever . The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012. MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today. Source: US Federal Reserve. This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator. As yields go up the value of these emerging market bonds goes down, resulting in losses for the investors holding them. The surge of the US dollar in recent months could magnify these losses: if the bonds are denominated in local currency they will be worth a lot less to US investors; otherwise, the borrowers will now have to work a lot harder to repay those US dollar debts, increasing their credit risk. Any losses could end up being very significant this time around, as demand for emerging markets bonds has literally exploded in recent years. Average Annual Gross Debt Issuance ($ billions, percent): 2000 – Today. Source: Dealogic, US Treasury. Note: Data include private placements and publicly-issued bonds. 2014 data are through August 2014 and annualized. As the graph above shows, the issuance of emerging market corporate debt has risen sharply since the depths of the 2008-09 financial crisis.These volumes are very large indeed, and now account for non-trivial portions of investors’ and pension funds’ portfolios worldwide. As a result, emerging markets corporations are now leveraged to the hilt, easily exceeding the 2008 highs by almost a multiple to EBITDA. And why not? With foreign investors desperate for yield as a result of all the stimulus and money printing by their central banks, they were only too happy to oblige. And they were not alone. Governments in these countries were also busy doing some borrowing of their own, as their domestic capital markets deepened. foreign investors have also piled into locally denominated bonds of emerging markets governments. Countries like Peru and Latvia now have over 50% foreign ownership of their bonds. But there are big speculative reasons behind the recent money flows going into these countries – which could reverse very quickly should the tide turn. If investors end up rushing for the emerging markets exit for whatever reason, with this unprecedented level of exposure they might be bringing home much more than a bruised ego and an empty wallet. For one, European banks are hugely exposed to emerging markets. Any impairment to their books would likely make any new lending even more difficult, at a time when there is already a dearth of non-government credit in Europe. And if emerging economies falter, where will the growth needed to repair Western government and private balance sheets come from? It used to be said that when the US economy sneezes the rest of the world catches a cold. Now it seems all we need is a hiccup in emerging markets. That’s what you get when emerging markets are both half the global economy AND they’ve accomplished that level off of ultra-low US Fed interest rates and ultra-high US Fed credit ‘accommodation’. All you have to do when you’re the Fed is to take both away at the same time, and you’re the feudal overlord. Our favorite friend-to-not-like Ambrose Evans-Pritchard does what he does well: provide numbers: Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone , and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates. Officials from the BIS say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30 percentage points since 2009. Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late. Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut. World finance is rotating on its axis, says Stephen Jen, from SLJ Macro Partners. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar . “Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers . Hold it there for a moment. I don’t think it’s the US economy (its recovery is fake), it’s the US dollar. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015,” he said. This time the threat does not come from insolvent states. They have learned the lesson of the late 1990s. Few have dollar debts. But their companies and banks most certainly do, some 70% of GDP in Russia, for example. This amounts to much the same thing in macro-economic terms. Private debt morphs into state debt since governments cannot allow key pillars of their economies to collapse. These countries have, of course, built $9 trillion of foreign reserves, often the side-effect of holding down their currencies to gain export share. This certainly provides a buffer. Yet the reserves cannot fruitfully be used in a recessionary crisis because sales of foreign bonds automatically entail monetary tightening. .. these reserves are a mirage. If you deploy them in such circumstances, you choke your own economy unless you can sterilize the effects. Investors are counting on the European Central Bank to keep the world supplied with largesse as the Fed pulls back. Yet the ECB could not pick up the baton even if it were to launch a blitz of quantitative easing, and there is no conceivable consensus for action on such a commensurate scale. The world’s financial system is on a dollar standard, not a euro standard. Global loans are in dollars. The US Treasury bond is the benchmarks for global credit markets, not the German Bund. Contracts and derivatives are priced off dollar instruments. Bank of America says the combined monetary stimulus from Europe and Japan can offset only 30% of the lost stimulus from the US. What more can I say? This is the lead story as we go into 2015 two weeks from today. Oil will help it along, and complicate as well as deepen the whole thing to a huge degree, but the essence is what it is: the punchbowl that has kept world economies in a zombie state of virtual health and growth has been taken away on the premise of US recovery as Janet Yellen has declared it. It doesn’t even matter whether this is a preconceived plan or not, as some people allege, it still works the same way. The US gets to be in control, for a while, until it realizes, Wile E. shuffle style, that you shouldn’t do unto others what you don’t want to be done unto you. But by then it’ll be too late. Way too late. As I wrote just a few days ago in We’re Not In Kansas Anymore , there’s a major reset underway. We’re watching, in real time, the end of the fake reality created by the central banks. And it’s not going to be nice or feel nice. It’s going to hurt, and the lower you are on the ladder, the more painful it will be. Be that globally, if you live in poorer countries, or domestically, if you belong to a poorer segment of the population where you are. In both senses, the poorest will be hit hardest. It’s the new model along which the clowns we allow to run the show, do so. Unless ‘we the people’ take back control, it’s pretty easy to see how this will go down. * * * Still not convinced... Barclays notes this is already one of the worst sell-offs in EM credit since the crisis... Average: 4.17647 Your rating:None Average:4.2 (17votes)
The Ebola Story Doesn’t Smell Right Paul Craig Roberts The federal government has announced that thousands of additional US soldiers are being sent to Liberia. General Gary Volesky said the troops would “stamp out” ebola. The official story is that combat troops are being sent to build treatment structures for those infected with ebola. Why combat troops? Why not send a construction outfit such as an engineer battalion if it has to be military? Why not do what the government usually does and contract with a construction company to build the treatment units? “Additional thousands of troops” results in a very large inexperienced construction crew for 17 treatment units. It doesn’t make sense. Stories that don’t make sense and that are not explained naturally arouse suspicions, such as: Are US soldiers being used to test ebola vaccines and cures, or more darkly are they being used to bring more ebola back to the US? I understand why people ask these questions. The fact that they will receive no investigative answer will deepen suspicions. Uninformed and gullible Americans will respond: “The US government would never use its own soldiers and its own citizens as guinea pigs.” Before making a fool of yourself, take a moment to recall the many experiments the US government has conducted on American soldiers and citizens. For example, search online for “unethical human experimentation in the United States” or “human radiation experiments,” and you will find that federal agencies such as the Department of Defense and Atomic Energy Commission have: exposed US soldiers and prisoners to high levels of radiation; irradiated the testicles of males and tested for birth defects (high rate resulted); irradiated the heads of children; fed radioactive material to mentally disabled children. The Obama regime’s opposition to quarantine for those arriving from West Africa is also a mystery. The US Army has announced that the Army intends to quarantine every US soldier returning from deployment in Liberia. The Army sensibly says that an abundance of caution is required in order to minimize the risk of transferring the ebola outbreak to the US. http://abcnews.go.com/Health/army-quarantines-general-soldiers-fighting-ebola/story?id=26486775 However, the White House has not endorsed the Army’s decision, and the White House has expressed opposition to the quarantines ordered by the governors of New York and New Jersey. http://www.foxnews.com/politics/2014/10/27/joint-chiefs-call-for-quarantine-troops-returning-from-ebola-zone/ Apparently pressure from the White House and threats of law suits from those subject to quarantine have caused the two states to loosen their quarantines. A nurse returning from treating ebola patients in West Africa has been cleared by New Jersey for discharge after being symptom-free for 24 hours instead of the 21-days it takes for the disease to produce symptoms. The nurse threatened a lawsuit, and the false issue of “discrimination against health care workers” has arisen. How is it discrimination to quarantine those with the greatest exposure to ebola? Once symptoms appear, an infected person is dangerous to others until the person is quarantined. As the CDC now has been forced to admit, after stupidly denying the obvious fact, the current ebola strain can spread by air. All it takes is a sneeze or a cough or a contaminated surface. http://www.washingtonsblog.com/2014/10/cdc-finally-gets-right-ebola-spreads-aerosols-3-feet.html In other words, it can spread like flu. Previous denials of this fact helped to create the suspicion that the new ebola strain is a weaponized biowarfare strain created by US government labs in West Africa. As University of Illinois law professor Francis Boyle has revealed, Washington placed its biowarfare laboratories in African countries that did not sign the convention banning such experimentation. http://www.paulcraigroberts.org/2014/10/20/us-government-master-criminal-time/ Washington’s deviousness in evading the convention that the US government signed has produced another suspicion: Did the new ebola strain escape, perhaps via some lab mishap that infected lab workers, or was the strain deliberately released in order to test if it works? See: http://www.paulcraigroberts.org/2014/10/26/evidence-us-development-testing-airborne-ebola-robert-wenzel/ and http://www.paulcraigroberts.org/2014/10/20/us-army-withheld-promise-germany-ebola-virus-wouldnt-weaponized/ The only intelligent and responsible policy is to stop all commercial flights to and from ebola areas. Health worker volunteers should be transported by military aircraft and should be required to undergo the necessary quarantine before being transported back to the US. Why does the White House oppose the only responsible and intelligent policy? Why is Congress silent on the issue? The resistance to a sane policy fosters the suspicions that the government or some conspiracy group intends to use ebola to declare martial law and herd the population or undesirable parts of it, into the FEMA camps that Halliburton was paid to construct (without the public ever being told the reason for the camps). It is certainly strange that a government involved in long-term wars in the Middle East, the purpose of which is unclear to the public, and in fomenting conflict with both Russia and China, two countries armed with nuclear weapons, would so recklessly create more suspicions among the public of its motives, intentions, and competence. Democracy requires that the public trust the government. Yet Washington does everything possible to destroy this trust and to present a picture of dysfunctional government with hidden and undeclared agendas.
The Real Housing Recovery Story Submitted by Tyler Durden on 01/22/2013 17:34 -0500 Census Bureau China Guest Post headlines Housing Inventory Housing Market Housing Starts Reality Recession recovery Underwater Homeowners Unemployment Volatility Via Lance Roberts of Street Talk Live , Imagine that your financial advisor called you up one day and said: "Great news...your investment portfolio gained 1% in January which is an annualized return of 12%. However, we have to subtract .05% from that return because historically January's return has only been 0.95% since 1950. This brings our seasonally adjusted return to 11.4%." Of course, after the SEC pays a visit to the advisor to correct his performance reporting measures, the simple reality is that "what you see is what you get." While this example may seem a little farfetched - this is exactly what happens with a variety of economic reports that are released by various government agencies and member organization/lobby groups. The reasoning for such data manipulations is not a nefarious scheme; but rather an attempt to smooth what is normally very volatile data. This is particularly the case with housing related data. As an example the chart below shows the data released by the Census Bureau for housing starts on both a non-seasonally and seasonally adjusted basis. As you can see there is an extreme amount of volatility in the non-seasonally adjusted data. The Census Bureau takes the reported monthly housing starts data and annualizes it. Therefore, if 10,000 homes were started in January it is reported as 120,000 on an annualized basis. Then a seasonal adjustment factor is added to account for seasonal weather and demand patterns. For example let's take a look at the housing start data that was just released for December of 2012. The headlines read that "Housing starts surged by 12.1% in December proving that the housing recovery is back." In reality the numbers were as follows: December starts: 61,500 (down 2.8% from November) Annualized December starts: 738,000 Reported seasonally adjusted December starts: 954,000 (Up 12.1% from November) Seasonal adjustment to December starts: +216,000 Historically, the data smoothing methodology was "close enough" and the variations were, more or less, worked out over time. However, in the current economic environment, the seasonal adjustment process may be overstating that actual activity that is occurring within the underlying economy. With housing currently making a very small contribution to overall economic activity, just slightly more than 2.5% as shown in the chart below, the difference between the "real" economic impact of 61,500 homes being started nationwide versus 954,000, of which 216,000 were a mathematical seasonal adjustment, can be quite dramatic. However, as in our financial advisor analogy, when it comes to the impact of the "housing recovery" on the economy "what we see is what we get" and nothing else. Therefore, in the quest to determine what the actual contribution to the overall economy that housing will provide, we need to look at the full process of housing on an actual basis. The Housing Process Activity Index (HAPI) The housing process begins with the permit to build a home which leads to the start of the construction process, the completion and the sell to an end buyer. The reason for looking at all four components is that many permits that are filed do not result in a start, many starts do not lead to completions and there are many completions that remain unsold for quite some time. The Housing Process Activity Index (HAPI) takes into account all four variables. However, instead of utilizing seasonal adjustment factors and annualizing the monthly activity, as with the Census Bureau, I use a 12-month average of the actual monthly activity to smooth the data. The chart below shows the HAPI as compared to its individual HAPI subcomponents. This tells us quite a different story than what the media is currently reporting. On average over the last twelve months there were: 67,000 permits for new privately owned housing 65,000 housing starts each month 54,300 completions 30,900 sales What this tells is that out of the 67,000 permits, on average, that were pulled each month to build a home only 30,900 actually wound up being completed and sold. This is a very different picture than the recent months seasonally adjusted data that showed: 903,000 permits 954,000 starts 686,000 completions 377,000 sales (as of November) It is important to note that I am NOT contesting the manner in which the Census Bureau reports its housing data. I am, however, suggesting that the method used in the current economic environment may be overstating the actual activity that is occurring. By smoothing the non-seasonally adjusted data using a monthly average we see a very different perspective to the data. The HAPI begins to potentially answer the questions of why housing remains a low economic contributor and why construction employment is still mired at very low levels. While housing has improved somewhat from the post-crisis lows it is far weaker than the majority of headlines actually suggest. Housing inventory has declined sharply from its peaks that have primarily been driven by speculative all-cash investors turning lower priced homes, and buying homes in bulk from banks, to be turned into rentals. Furthermore, a large portion of the "housing start" story has been in the multi-family apartment space . As shown in the chart below the percentage of apartment starts, 5-units or more, is currently at some of the highest levels on record and has surpassed the peak seen in the last recession. Currently, there are still more than 25% of homeowners underwater which limits their ability to move, refinance or sell their homes. However, as prices rise, there are two issues that begin to attack the housing story: 1) As prices reach levels where underwater homeowners can sell they will likely do so out of a psychology need to escape the "trap," which will bring a large supply of homes back onto the market, and; 2) rising prices will eventually erode the profitability of buying homes for rentals which will bring the speculative frenzy that has been the driver of the recent recovery to a halt. The housing recovery is ultimately a story of the "real" unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. Also, we should not discount the psychology of home ownership has dramatically changed since the crash as many of the "millennials" saw the financial damage their parents suffered and are opting out of taking such a perceived risk. As I stated recently the optimism over the housing recovery has gotten well ahead of the underlying fundamentals. The overarching problem is that the housing market that is almost exclusively dependent on the continued push to artificially suppress interest rates combined with massive amounts of direct stimulus, and incentives, to bailout current homeowners and banks. This intervention is causing an artificial supply suppression which is likely to create a backlash in the future as the current supply/demand conditions are unsustainable. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market. It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak. The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins. While many hopes have been pinned on the 2012 stimulus fueled, China investing, and supply-deprived housing recovery as "the" driver of economic growth in 2013 - the data suggest that may be quite a bit of wishful thinking. 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