maandag 18 maart 2019

Market Update

# The SPX and NDX are finishing a 5th wave advance off the lows on 3/8. This projects a short-term high by Mon/Tues we are looking for a 5th wave higher by 3/18-3/19. We could see an important high near the 3/20-3/21 Full Moon/Spring Equinox...


# The NDX and SPX both gave us sideways 4th wave consolidations into Friday's Triple Witching expiration but then rallied to rallied in a 5th wave to make highs for the week. Assuming that the 5th wave is symmetrical to wave 1 on 3/8, we get a target of ES 2847 by 3/18-3/19. There is also a notable bearish divergence of the McClellan Oscillator which argues for a potential short-term top by the 3/20-3/21 Full Moon/Spring Equinox.
# The VIX continues to melt down but we may see a 5-wave down pattern complete by Monday/Tuesday. The E-mini may be doing an a-b-c correction from Friday's high that could bottom on Monday. We could see a final push up to the symmetry target at 2847 by Tuesday.
# Crude oil continues to move higher and we are also expecting a run up into the 3/20 Full Moon with a potential target of $60.
# Gold tagged $1306 on Friday and looks like it may want to undercut last week's low by the 3/20 Full Moon.
# The USD declined in 5-waves on the hourly chart and is bouncing, that may be confirming an important top at 97.71....

Wild Swings

Over the last couple of weeks we discussed the “wild swings” in the market in terms of price movements from overbought, to oversold, and now back again. The quote below is from two week’s ago but is apropos again this week. “Despite the underlying economic and fundamental data, the markets have surged back to extremely overbought, extended, and deviated levels. On virtually every measure, markets are suggesting the fuel for an additional leg higher in assets prices is extremely limited.” Just for visual sake, the chart below compares the last three weeks of wild gyrations...


The chart below also shows the short-term reversal of the market as well. Note how in just a few days the market went from overbought, to oversold, back to overbought...


Importantly, as I specifically noted last week: “This short-term oversold condition, and holding of minor support, does set the market up for a bounce next week which could get the market back above the 200-dma. The challenge, at least in the short-term, remains the resistance level building at 2800.” Despite the rally, the bounce is still largely at risk for the three following reasons:
1) The market has not reversed to levels which normally signals short-term bottoms. The red lines in the bottom four panels denote periods where taking profits, and reducing risk, has been ideal. The green lines have been prime opportunities to increase exposure. As you will note, these indicators tend to swing from extremes and once a correction process has started it is usually not completed until the lower bound is reached. Important Note: This does not mean the market will decline sharply in price. The current overbought conditions can also be resolved by continued consolidation within a range as we have seen over the last two weeks...


2) The divergence between stocks and bonds still signals that “smart money” continues to seek “safety” over “risk.” Historically, these bond market generally has it right...


3) The weekly chart below shows the S&P 500 hitting an all-time high last September before falling nearly 20% into the end of 2018. While the first two months of 2019 has seen an impressive surge back to its November highs, the market is starting to build a pattern of lower highs, and lower bottoms. More importantly, both relative strength and the MACD indicators are trending lower and negatively diverging from the markets price action...

The Goldilocks Warning

Lately, there has been an awful lot of talk about a “Goldilocks economy” here in the U.S. Despite a rather severe slow down globally, it is believed currently the domestic economy is going to continue to chug along with not enough inflation to push the Fed into hiking rates, but also won’t fall into recession. It is a “just right” economy which will allow corporate profits to grow at a strong enough rate for stocks to continue to rise at 8-10% per year. Every year…into eternity. Does that really make any sense? Particularly as we are looking at the longest expansion cycle in the history of the U.S. The problem is in the rush to come up with a “bullish thesis” as to why stocks should continue to elevate in the future, they have forgotten the last time the U.S. entered into such a state of “economic bliss.” You might remember this:
* “The Fed’s official forecast, an average of forecasts by Fed governors and the Fed’s district banks, essentially portrays a ‘Goldilocks’ economy that is neither too hot, with inflation, nor too cold, with rising unemployment.” – WSJ Feb 15, 2007 
Of course, it was just 10-months later that the U.S. entered into a recession followed by the worst financial crisis since the “Great Depression.” The problem with this “oft-repeated monument to trite” is that it’s absolute nonsense. As John Tamny once penned:
* A “Goldilocks Economy,” one that is “not too hot and not too cold,” is very much the fashionable explanation at the moment for all that’s allegedly good. “Goldilocks” presumes economic uniformity where there is none, as though there’s no difference between Sausalito and Stockton, New York City and Newark. But there is, and that’s what’s so silly about commentary that lionizes the Fed for allegedly engineering “Goldilocks,” “soft landings,” and other laughable concepts that could only be dreamed up by the economics profession and the witless pundits who promote the profession’s mysticism. What this tells us is that the Fed can’t engineer the falsehood that is Goldilocks, rather the Fed’s meddling is what some call Goldilocks, and sometimes worse. Not too hot and not too cold isn’t something sane minds aspire to, rather it’s the mediocrity we can expect so long as we presume that central bankers allocating the credit of others is the source of our prosperity.” 
# John is correct. An economy that is growing at 2%, inflation near zero, and Central banks globally required to continue dumping trillions of dollars into the financial system just to keep it afloat is not an economy we should be aspiring to. But despite commentary the financial system has been “put back together again,” then why are Central Banks acting? Via Bloomberg: “Led by the Fed, many central banks have either held back on tightening monetary policy or introduced fresh stimulus, soothing investor fears of a slowdown. Fed Chairman Jerome Powell says he and colleagues will be patient on raising interest rates again, while European Central Bank President Mario Draghi has ruled out doing so this year and unveiled a new batch of cheap loans for banks. Elsewhere, authorities in Australia, Canada and the U.K. are among those to have adopted a wait-and-see approach. China, at its National People’s Congress this month, signaled a willingness to ease monetary and fiscal policies to support expansion”...


Unfortunately, today’s “Goldilocks” economy is more akin to what we saw in 2007 than most would like to admit. Job growth is slowing down...


Along with economic growth...


And recession risks are rising sharply...


However, it isn’t just the economy that is reminiscent of the 2007 landscape. As noted above, the markets also reflect the same. Here are a couple of charts worth reminding you of. Notice that at the peaks of both previous bull markets, the market corrected, broke important support levels and then rallied to new highs leading investors to believe the bull market was intact. However, the weekly “sell signal”never confirmed that rally as the “unseen bear market” had already started...


Currently, relative strength as measured by RSI on a weekly basis has continued to deteriorate. Not only was such deterioration a hallmark of the market topping process in 2007, but also in 2000...


The problem of suggesting that we have once again evolved into a “Goldilocks economy” is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations. It is true that the bears didn’t eat Goldilocks at the end of the story, but then again, there never was a sequel....

Sven Henrich; Deception Is All They Have Left

We’re back in the phase of markets where bears look like idiots and bulls look like geniuses. In 2018, following the US tax cuts, a growing economy and expanding earnings had bears look the fools as markets moved on to record high after record high. By September and October bears had thrown in the towel so relentless was the constant drift higher amid shrinking volumes, dying volatility and uniform bullish consensus. It was a very deceptive environment as divergences and negative signals were ignored and markets ended up dropping 20% into December. Now, ironically, it’s a slowing economy and slowing earnings, the very thing bears had predicted last year, that has bears on the ropes again. Why? Because it’s not the economy stupid. It’s liquidity. The oversold rally emerging from the depths of the December carnage has morphed into a liquidity bonanza as record buybacks are flushing relentlessly through the system and central banks have flip flopped on their previous policy stances...


With algos latching onto any tweet or newsflash promising a coming recovery from the current slowing growth environment (think China deal) the liquidity machine has once again set markets on a relentless path of magic levitation accentuated by overnight gaps and market open ramps, tight intra-day ranges and magic risk free Fridays. All the while volatility being relentlessly crushed. Bad economic data? No problem. No China deal? Not a bother, it’ll come someday. Brexit chaos? It’s just fun and giggles. All that matters is liquidity. Indeed on Friday we saw the lowest volatility print of not only of 2019, but as I had outlined on twitter the lowest print since the $DJIA highs in early October of 2018:
* $VIX 12.50; Lowest $VIX read since the beginning of October when markets were near all time highs and complacency ran rampant...


And let’s be clear: This program is in full control and will remain so until something breaks. $SPX may only be 4% off of its all time highs, but don’t think for a minute that the dovish parade will end any time soon. Next week central banks around the world will gather and keep touting their market supportive dovish tones, led by the US Fed which is now, according to Pimco, rumored to perhaps announce the end of their QT program for this year. Why cling to dovishness now that markets have recovered most of their losses? Maybe, just maybe, central banks are looking at the bigger picture which suggests any renewed selling could prove disastrous...


Yet, amid all this bullishness and dovishness, the market action has also become overtly reminiscent of last year. Divergences that were ignored in September when I penned Lying Highs are once again making their presence felt, rendering this rally perhaps an exercise in deception as well. I said it last summer, and I say it again: Divergences don’t matter until they do, but when they do they matter greatly, hence bulls may be only one proper sell-off away from major trouble for a proper pullback would awaken the slumbering beasts of negative divergences. For now bulls remain in full control of the action and bears need to prove their case.
# Keep in mind that so far this year markets remain inside the trading range of 2018, making 2019 currently an inside year. It can’t be stated with integrity that $SPX would be currently trading anywhere near 2800 if the Fed had not turned dovish. For 10 years central banks have successfully levitated asset prices by being dovish. For 3 months in 2018 they weren’t dovish and it blew up in their faces. The big debate for 2019 will be if being dovish will once again succeed keeping the boogeyman at bay. So far the answer is a resounding yes. We’ll see what happens when the $VIX acts up for real. But don’t worry, Wall Street can’t even think of any catalyst for $VIX to rise. And so complacency was made great again and that, in itself, may be an act of deception....

Doug Casey Destroys The Modern Monetary Theory Miasma

The left has a new obsession; Modern Monetary Theory (MMT). MMT is an economic theory which essentially argues that the U.S. government wouldn’t need to collect taxes or borrow money to finance spending. It could simply print more money if necessary. Now, this concept isn’t new. It’s been around for decades. But its popularity has skyrocketed, thanks to endorsements from Democratic presidential candidate Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez (AOC), the new rising star of the Democratic Party. This new breed of socialist Democrats has embraced MMT because it would make all their crazy ideas possible. The national debt, deficits, and inflation concerns would no longer stand in the way of projects like the Green New Deal or universal healthcare/housing/education. In short, MMT would give the government a green light to spend money even more recklessly than it does now. That’s a problem. So here's Doug Casey to discuss this matter at length...


* Justin: Doug, what do you make of Modern Monetary Theory? Would this economic framework help or hurt the U.S. economy?
* Doug: MMT centers around the notion that the economy in general, and money in particular, should be the creatures of the State. It’s not a new idea, the meme has been around in one form or another since at least the days of Marx. MMT basically posits that the wise and incorruptible solons in government should create as much currency as they think is needed, spend it in areas they like, and solve any problems that occur with more laws and regulations. It’s nothing new. Just a more radical version of the economic fascism that’s dominated the U.S. since at least the days of the New Deal. It’s just another name for an old, and very stupid, set of economic ideas. By stupid I mean, “showing an inability to predict the indirect and delayed consequences of actions.” Politicians are now talking about the supposed benefits of MMT. Pseudo-economists are doing their abstruse and incomprehensible mathematical computations about how it might affect the economy. The public will easily be convinced they’ll get something for nothing. But what we should be talking about here is moral principle. It’s not a question of whether MMT will work or not work. It won’t. It will work about as well as the economic policies of Venezuela and Zimbabwe. Or Argentina, where I am at the moment. These schemes have never worked in all of history. They result in a vastly lower standard of living, along with social strife. MMT is about radically increased government control. The argument shouldn’t be over whether MMT will “work” or not. The argument should be about whether it’s moral and proper for people in the government, whether elected or appointed – to print money to change the economy into something that suits them better.
* Justin: It’s obvious that you find MMT, like other interventionist economic theories, to be immoral. Why is that?
* Doug: Money represents the hours of your life that you spent earning it. That’s the basic principle here. It represents concentrated life, all the things you want to have and do for yourself, and provide for others in the future. When these people destroy the value of money, they’re destroying part of your life. “Inflation” isn’t caused by greedy butchers, bakers, and gasoline makers. It’s caused by an excess of purchasing media. MMT will give the State total control of its quantity and quality. If the government increases the money supply by, say, 10 times, general prices will go up by 10 times. The value of your dollar savings will drop 90%, perhaps most Americans won’t care, because they have no savings, just debt. In any event, some people will get hold of a lot more of that 10x increase than others. And they’ll get hold of it earlier, before prices really take off. Who? Inevitably cronies. Look, absolutely every government intrusion into the economy, whether it’s taxes or regulations or inflation, always benefits the people in and around the government. And damages society as a whole. But they’re sold to the voters, to the hoi polloi, to the “head count,” as something that will put them on easy street. Which is a lie, of course. But that’s not what the argument should be about. The average guy doesn’t understand economics; he doesn’t think, he feels. Furthermore, nobody talks about whether cockamamie ideas like MMT are morally right or wrong. Instead, they have pointless and ridiculous arguments about whether it works or not. Well, it doesn’t work. But that’s a distraction. This matter is essentially a moral question, not a technical question.
# Does somebody in government have a right to determine your economic destiny? Or not? The fact that Alexandria Ocasio-Cortez (AOC) an ambitious, terminally ignorant, morally crippled 29-year-old Puerto Rican bartender, is setting the tone for this whole discussion tells you how degraded the U.S. has become. It’s well on its way to turning into a giant welfare and police state. But, as you know, I always look on the bright side. Which is that, if you give yourself a little psychological distance, this is all a comedy. AOC, The Donald, Bolton, Bernie Sanders, Pocahontas, Hillary, Kamala, etc. They’re all dangerous megalomaniacs. But the chimpanzees listen to them, choose teams, hang on to their every word, support them, and are easily incited to hoot and pant at each other. The American public is going to get exactly what it deserves. I have no sympathy for them. Or about as much as I would have had for the Romans in the fifth century, when the empire was collapsing.
* Justin: Doug, you’re correct to point out that AOC has endorsed MMT. Stephanie Kelton, Bernie Sanders’ economic advisor during his last presidential run, is also a proponent of MMT. So this idea is gaining traction with Democrats. Of course, neither the White House nor Congress dictates monetary policy. That’s the Fed’s job. And current Fed Chair Jerome Powell has already come out and called MMT “wrong.” Former Treasury Secretary Larry Summers also recently called MMT “grotesque.” That said, what are the chances MMT or some version of it gets implemented?
* Doug: Interesting. It may be the first thing Summers has ever been right about in his whole life. As for Powell, he’s a non-entity, a lifelong bureaucrat plucked from obscurity, for God knows what reason, by The Donald. Trump has bizarrely bad judgment in the people he surrounds himself with. From that silly woman who was on The Apprenticewith him, to his lawyer Cohen, to Jared and Ivanka, Bolton. it’s like he goes out to the highways and the byways to round up the lame, the halt, and the philosophically blind. Regardless of his rhetoric, he’s very partial to warmongers and Deep State types. But back to MMT. The chances of MMT being implemented are extremely high. It will almost certainly happen, at least after the next election, for several reasons. One, the government is now running a deficit of roughly $100 billion a month; that will soon be $200 billion. They’ll be desperate for more revenue, which MMT will give them. Second, with demographics, the youth and non-white voters, as they are, the Democrats will get a lot more traction in 2020. Third, the U.S. will be in the midst of a gigantic crisis; it will be blamed on Trump, regardless of how much of it’s his fault. There are a number of other reasons the Democrats will win. But that’s a subject for another conversation.
# They’re going to try every cockamamie idea they can to keep the ball rolling. Lots more controls of all types. More debt. More inflation. MMT is just going to be part of it. I don’t doubt they’ll try for a Constitutional Convention. It’s going to be a desperate situation, ending in a catastrophe. Not in the distant future but the near future. We’re on the cusp of the Greater Depression. I know I’ve been saying this for years. But the idea of America has gradually degraded since about the time of Teddy Roosevelt, and the original Progressives. Then faster with World War I, faster yet with the New Deal, faster yet with World War II, the Great Society, the Nixon devaluation, the Reagan deficits, the War on Drugs, the War on Terror. The only good news, and it’s super good news – is that science and technology have advanced as well. That’s maintained the general standard of living. Unfortunately, the State always gets first dibs on tech developments, and uses them against society. This long-term trend is now going hyperbolic. The next big example of this is the Social Credit System being implemented in China. And soon everywhere else. It’s a pity that philosophy and morality have meanwhile only advanced at a snail’s pace. In fact, they’ve been going backward. It’s a very dangerous situation when we’re talking about nuclear, and even more advanced, weapons. The bottom line? You can practically plan your life around their grasping the straw of MMT.
* Justin: Doug, I know you object to MMT on moral grounds. But let’s face it. Most people don’t see monetary policy this way. They believe the Fed should play a role in guiding the economy, whether it’s through setting interest rates or adjusting the money supply. Could you tell me why MMT would be better or worse than the current economic framework that the Fed employs?
* Doug: Yes. Abolish the Fed, and the system of fractional reserve banking. Reduce the size of the U.S. government by about 90%. Default on the national debt, so that future generations of Americans aren’t made into serfs, there are a number of things. But the chances of a change in the long-term trend at this point are approximately zero. Put it this way: The chances are slim and none. And Slim’s out of town.
* Justin: Doug, proponents of MMT say it would work because of the U.S. dollar’s status as the world’s reserve currency. Basically, they argue that the U.S. borrows in its own currency. Therefore, it can’t go bankrupt because it can just print more dollars when it needs to. What’s wrong with this thinking?
* Doug: The U.S. dollar isn’t going to remain king forever. It’s in the process of being dethroned as we speak. The Chinese, the Russians, and basically every other major economic power on the planet want to get rid of dollars. They realize dollars are the unbacked liability of a bankrupt government, even at this point. They don’t like having to use the dollar every time that they want to transfer assets. They don’t like the fact that everything they buy and sell in dollars has to be cleared through New York and is monitored by the U.S. government, their enemy. They understand how foolish it is to keep sending real goods to the U.S. in return for paper dollars, printed in unlimited amounts. I suspect the rest of the world, believe it or not, is going back to gold. Simply because a trustworthy money is needed. They don’t trust each other’s currencies any more than the dollar. At this point, the question from a practical point of view is, “What should you do with your money?” You should own a lot of physical gold and silver. Keep a lot of it outside your home country. At some point within the lifetime of most people reading this right now, the dollar will lose all its value. It’s really serious. Of course, I’ve been predicting gloom and doom for many years. It’s happened in slow motion, not an instantaneous catastrophe. We’ll see what happens as we enter the trailing edge of the storm. Likely later this year....

Meeting Between Trump And Xi Said To Be Delayed Till June

So much for the (delayed) April meeting between Trump and Xi. According to a report by the SCMP, the meeting between US President Donald Trump and Chinese counterpart Xi Jinping to end the trade war which was tentatively pushed back from March to April, may be pushed back again, this time to to June, as the two leaders "will not be able to finalise an agreement by April."
* It had initially been hoped that they would be able to reach a deal more quickly, but one source who has been briefed on the arrangement told the South China Morning Post that a meeting in April was less likely, while another said the summit could be held in June. 
# As previously reported (almost daily), while the two nations have been stepping up negotiations on the text of the trade agreement, a SCMP source confirmed once again of the growing rift within the Trump administration regarding the deal with China, where the main division is how much importance will be attached to an enforcement mechanism to ensure the Chinese side lives up to its side of the bargain, or whether it will be enough to secure an agreement in principle and declare success. Originally Trump and Xi were expected to meet at Trump’s Mar-a-Lago private resort in late March, but US ambassador to China Terry Branstad later said the summit had been delayed because the deal was still under discussion. Then, to much fanfare - with the narrative spun that a delayed meeting was only further proof of the two sides working hard to reach a deal - it was reported that the two leaders would meet in April, but the timetable now appears to have been put back once again. It is not yet known where Trump and Xi would meet in June, but the Chinese president is also expected to travel to Osaka in Japan for the G20 summit.
# For those who have missed the key hurdles to the signing of an official deal, the story goes like this: while the US has been content with China's promises to purchase more goods from the US for the next few years, the White House has been pushing China to address what remain the biggest long-standing grievances including the alleged theft of intellectual property, forced technology transfer and unfair competition. US trade rep Lighthizer has been one of the main figures pushing for an enforcement mechanism to ensure that Beijing lives up to any pledges it gives. But Beijing is growing alarmed by the proposals and argued that enforcement must be “two-way, fair and equal”. The tough stance taken by Washington’s top trade negotiator has won bipartisan support in the US Congress, where Democrats are now insisting that Trump not rush to deliver a weak deal just to boost markets, as well as respect from his Chinese counterparts who describe him as detail-oriented and unlikely to back down.
* “Lighthizer is a very professional and experienced trade negotiator. Talking to him is the right track to take,” another source said. Lighthizer is a tough negotiator but China pays high respect to him. China needs to step up its research on him”.
# Meanwhile, critics have suggested that Trump’s enthusiasm for more tariffs may have eased because of the recent stock market fall, Trump reportedly said that a trade deal would propel the Dow some 2,000 point higher, suggesting that Trump's only goal is micromanaging of the stock maret - and concerns over the wider US economy, particularly from farmers who rely on exports to China. It has also been suggested that the reforms to China’s economic policies demanded by the US could take years to enact. In the latest developments over trade talks, during a St Patrick’s Day reception at the White House on Thursday, Trump said: “We’ll have news on China. Probably one way or the other, we’re going to know over the next three to four weeks.” He added that China had been “very responsible and very reasonable,” saying: “If that one gets done, it will be something that people will be talking about for a long time.”
# Regardless of yet another potential postponement to the meeting between the two presidents, the two sides are working to keep momentum going, and this week official Chinese state news agency Xinhua said “concrete progress” had been made following a phone conversation between Vice-Premier Liu He and US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Thursday. The news, predictably, helped propel markets higher on the now traditional "trade war optimism" narrative when in reality the two sides appear to be drifting ever further apart as the easy aspects of the negotiation have all be ironed out, and now the only outstanding items remaining are those which will make any any meaningful deal impossible....

Boeing's Doomed 737 Max

I don’t like flying. I consider it unnatural, unhealthy and fraught with peril. But I do it all the time. For me, it’s either fly or take an ox cart. In fact, I’ve been flying since I was six years old – from New York to Paris on a lumbering Boeing Stratocruiser, a converted, double-decker WWII B-29 heavy bomber. I even had a sleeping berth. So much for progress. Lots can go wrong in the air. Modern aircraft have thousands of obscure parts. If any one of them malfunctions, the aircraft can be crippled or crash. Add pilot error, dangerous weather, air traffic control mistakes, mountains where they are not supposed to be, air to air collisions, sabotage and hijacking. I vividly recall flying over the snow-capped Alps in the late 1940’s aboard an old Italian three-motor airliner with its port engine burning, and the Italian crew panicking and crossing themselves. Some years ago, I was on my way to Egypt when we were hijacked by a demented Ethiopian. A three day ordeal ensued that included a return flight to New York City from Germany, with the gunman threatening to crash the A-310 jumbo jet into Wall Street, a grim precursor of 9/11. My father, Henry Margolis, got off a British Comet airliner just before it blew up due to faulty windows...


Which brings me to the current Boeing crisis. After a brand new Boeing 737 Max crashed in Indonesia it seemed highly likely that there was a major problem in its new, invisible autopilot system, known as MCAS. All 737 Max’s flying around the world should have been grounded as a precaution. But America’s aviation authority, the Federal Aviation Administration (FAA), allowed the Max to keep flying. The FAA is half regulator and half aviation business promoter, a clear conflict of interest. The crash of a new Ethiopian 737 Max outside Addis Ababa under very similar circumstances to the Lion Air accident set off alarm bells around the globe. Scores of airlines rightly grounded their new Max’s. But the US and Canada did not. The FAA continued to insist the aircraft was sound. The problem, it was hinted between the lines, was incompetent third world pilots. It now appears that America’s would-be emperor, Pilot-in–Chief Donald Trump, may have pressed the FAA to keep the 737 Max’s in the air. Canada, always shy when it comes to disagreeing with Washington, kept the 737 Max’s flying until there was a lot of evidence linking the Indonesia and Ethiopian crashes.
# Trump finally ordered the suspect aircraft grounded. But doing so was not his business. That’s the job of the FAA. But Trump, as usual, wanted to hog the limelight. By now, the 737 Max ban is just about universal. Interestingly, Ethiopia refused to hand over the crashed 737’s black boxes (actually they are red) to the FAA, as is normal with US-built aircraft. Instead, Addis Ababa sent the data boxes for analysis to BEA, France’s well-regarded aviation accident investigator. Clearly, Ethiopia lacks confidence in the veracity and impartiality of the FAA and the White House. Today, Trump professes vivid interest in Boeing’s well-being. Last May, however, Trump cancelled an Iranian order to Boeing for $20 billion in airliners which had originally been signed under the Obama administration. Israel’s fingerprints were all over this cancellation. Iran desperately needs new aircraft to replace its fleet of decaying, 1960’s passenger aircraft that have become flying coffins. Boeing (I am a shareholder) will recover from this disaster unless the 737 Max’s center of gravity is dangerously unstable.
# The mystery autopilot system will be reconfigured and pilots properly trained to use it. Air France had a similar problem when it introduced the new A320. But Boeing, not third world pilots, is at fault. There’s another key factor. I’ve been writing for decades that passenger aircraft should return to the three-man crew they had 40-50 years ago. The position of flight engineer was supposedly eliminated by cockpit automation. Today, aircraft are so electronically complex they need a specialist on board who can deal with problems. Pilots should not be expected to be masters of computer technology. A third crew member is essential when things go wrong. But employing one costs money. It seems rock-bottom fares remain more important than safety....

Peter Cecchini; 'Command-And-Control' Is Here, "It's Neither Durable Nor Stable"

Like it or not, central banks are now the most influential, global financial market participants. Sovereign rates and risk are now only rarely a function of market forces. Central banks have asserted this influence in the name of moderating business cycles and associated financial market volatility. How could such a paternalistic and noble desire for business cycle moderation be misguided? Because the road to perdition is paved with good intentions. The Great Moderation, a term oft cited before 2008 but little referenced since, was attributed to Fed maestro, Alan Greenspan. Unfortunately, had he still been chairman, his encore would have been the catastrophic meltdown in global financial markets and real economic performance. This discordant meltdown necessitated the use of ZIRP (zero interest rate policy) and QE (quantitative easing). Since then, the move off the zero-interest rate bound in late-2016 marked the end of an almost 40-year secular trend towards lower interest rates. The end of this secular trend confronts the Fed and other developed central banks with a new challenge.
# With rates still so close to the zero bound and with balance sheets still so swollen, when an economic downturn comes, what tools will be effective? Central banks have slowly begun to run out of assets to credibly buy. This is leading to a new, creeping narrative: MMT (Modern Monetary Theory), a theory that Larry Fink labeled last week as ‘garbage.’ I agree. Because there’s so little central banks can do, they are anxious to prevent another downturn before it starts. As a result, we’ve witnessed the Fed’s most recent dovish pivot, the ECB’s less hawkish tone, and the BoJ’s seeming admission to a QE addiction it has no intention of kicking. For short periods and when used prudently, QE is a useful tool, especially when used to purchase risk-assets that have suffered a liquidity dislocation – such as mortgage-backed securities (MBS) in 2008. It can alleviate this kind of credit crunch by directly targeting and suppressing risk premia. When applied more broadly to suppress risk-free term premia, it may pull forward demand in the real economy. In turn, that ought to help create a virtuous, reinforcing growth cycle. So, why has growth been so modest in this economic cycle and why has inflation globally, even in economies like Brazil, been somewhat absent (at least for now)? It’s simple. rolonged monetary policy accommodation (and especially QE) has led to the inefficient allocation of resources, especially in developing economies. They have benefited from lower internal rates as capital flowed from low-rate developed economies to higher rate developing ones. This fueled an investment boom that led to overcapacity, especially in basic industries. China, in particular, is suffering from this hangover right now as it attempts to eliminate overcapacity and associated debt. It’s not an easy task, and it has managed to do it only in fits and starts. In turn, global inflation has been largely absent this cycle as overcapacity persists.
# Resurrect the Austrians. Austrian theory, popularized by Nobel prizewinner Friedrich Hayek, generally suggested that market prices reflect a totality of information unknowable to any single policy actor. This information, when available to market participants and economic actors collectively, determines the allocation of resources in an economy. Moreover, the Austrian theory of the business cycle suggests that bank credit issuance is generally the cause of economic cycles. Ludwig von Mises first articulated this idea, and it was later amplified by Hayek. Mises believed that when banks extend credit at artificially low interest rates, business engage in “malinvestment.”
* According to Mises, “there is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” 
# Ben Bernanke got a big laugh from economists in Atlanta on January 4th. A few minutes after Janet Yellen said, “I don’t think expansions just die of old age,” he replied, “I like to say they get murdered.” Strategists cite this idea ad nauseam to support their bullish views. On its face, it appears that Bernanke believes the business cycle rests firmly in the hands of life-preserving central bankers. If this interpretation is correct, it drips of potentially tragic hubris. Finally, even if he’s correct, what’s the role of market forces in a central bank controlled environment? Let’s consider an extreme scenario: MMT. Consider a world in which all central banks are implementing aggressive QE policies ad infinitum. MMT suggests that as long as a country (and by implication its corporations) issues debt in its own currency, the country should be able to indefinitely fund debt issuance vis-à-vis creation of new reserves. Those reserves are used to purchase the treasury’s issuance. But something just doesn’t feel right about this.
# What does such a scenario imply for global capital flows and sovereign risk pricing? In such a world, it’s likely that economies would become isolated. What would be the incentive for countries to remain open to foreign capital flows? Rather than a deficit nation relying upon savers in surplus nations to fund deficits, the country’s central bank would simply fund the shortfall with printed currency. Thus, cross border capital flows would atrophy. In fact, global capital flows would be an unwelcome influence on capital costs that central banks would instead want to control. Indeed, the emergence of populist governments globally is also an apparent symptom of globalization’s infringement on sovereignty and the ability of monetary and fiscal policy to control economic outcomes. In an MMT world, a country’s printing press might replace its nuclear weapons as its enemies’ next existential threat. To what lengths would countries go to sabotage each other’s financial systems in an MMT world? As the Fed attempts to normalize, most other developed or large developing central banks continue to stimulate. Indeed, I have argued that the Fed will act slowly to cut interest rates, precisely because it does not want to resemble Europe and Japan. Thus, it will first start by stopping the balance sheet runoff, but ultimately, economic conditions will force it to cut again, most likely in early to mid-2020. Another likely eventuality is that balance sheet engorgement will resume sometime later.
# The world has become dependent on low interest rates and central bank intervention. The issuance of debt facilitated by fiat rates has pulled forward future demand, perhaps to its ultimate limit, and a misappropriation of capital has ballooned global goods supply. How does a QE all-the-time and all-over-the-world exist in seeming perpetuity? How does risk ‘price’ in capital markets when the cost of capital is constantly set too low? It’s a difficult concept with which to wrestle. In essence, markets are no longer pricing risk; rather, a central command and control mechanism, global central banks, is pricing risk for the markets. I would argue this condition is neither durable nor stable....

zondag 17 maart 2019

Deutsche And Commerzbank Begin Formal Merger Talk

Confirming weeks of speculation, on Sunday the senior management of Deutsche Bank and Commerzbank announced they have begun exploratory merger talks after the executive boards of Germany’s two largest listed lenders agreed to evaluate the benefits of a tie-up. The decision to start formal talks was taken by the boards on Sunday after the German government signaled over the weekend that it would support the restructuring needed to make a success of the tie-up. “We confirm that we are engaging in discussions with Commerzbank,” Deutsche Bank said at midday on Sunday in a regulatory statement, adding that “there is no certainty that any transaction will occur”. Similarly, Commerzbank informed investors that both lenders “have agreed today to start discussions with an open outcome on a potential merger”. A detailed due diligence process would commence next week when the banks would set up a number of committees to explore specific questions the FT reported, noting that talks would start immediately.
# The Wall Street Journal and other media previosuly reported earlier that the two lenders’ chief executives were speaking about a potential deal, with the WSJ adding that the German finance ministry stands ready to support a deal. The announcements signaled that discussions between the two banks that already had started informally are entering a new phase. German securities laws require companies to disclose publicly information material to investors about potential deals when talks reach a certain threshold, such as formal endorsements by senior bank officials. Deutsche Bank’s management board was expected to talk in a meeting scheduled for this morning about various options for the bank, including a potential merger with Commerzbank, people close to Deutsche Bank said. And while the banks had considered a merger for years, under different CEOs, previous talks ended before any formal announcements were made. While the exploratory talks “won’t be over in a week”, the FT quoted a source who said the protracted negotiations over a deal that would create the eurozone’s second-largest lender after BNP Paribas, with €1.9tn in joined assets and more than 140,000 employees.
# In a note to employees published, Deutsche Bank chief executive Christian Sewing said: “we will only pursue options that make economic sense”. Sewing also said executives have a responsibility to consider options like possible mergers. He asked employees to stay focused on clients, adding that no deal is certain. “Experience has shown that there may be a lot of potential economic and technical factors that could hinder or prevent such a step,” Sewing said in his note. Yet while investors will likely cheer a tie up between Germany's two biggest banks, the labor unions are hardly excited. The German service sector union Verdi, which opposes the deal, expects that in a worst-case scenario, up to 30,000 jobs would be cut. “I think that’s a realistic number,” a senior manager at one of the banks told the FT, adding that he saw no outlook where unions would back the transaction.
# Yet while the banks' workers will suffer thousands of synergies, the advising investment banks are already counting their year-end bonuses: until recently, Commerzbank had engaged bankers but they told peers no deal was actively being negotiated. The tone of that message changed in the past week, suggesting talks were on and details being hammered out, according to people close to the Frankfurt-based banks. The German finance ministry has signaled to the banks that it supports a deal and in fact stands ready to support tens of thousands of job cuts the banks say are necessary for a deal to make economic sense, according to an official close to Finance Minister Olaf Scholz. A combination of the two banks would result in a behemoth with €1.8 trillion in assets, over 140,000 global employees and nearly €34 billion in revenue yet generating a paltry €1.1 billion in net income...


Still, the massive jobs losses could quickly escalate into yet another political scandal for Germany's government: Commerzbank is 15% owned by the German government following its bailout during the 2008 financial crisis. Since 2016, it has cut staff and narrowed its focus to deposit-taking and commercial lending. It has boosted its customer base and loan volumes to the prized German midsize companies. However, the bank continues to struggle in a highly competitive German market, home to almost 1,600 banks. The competition, including against state-backed lenders, has put pressure on its margins.
# Deutsche Bank, which is far more dependent on trading and investment-banking businesses, has lost market share in core areas, ceding business to stronger U.S. banks. Deutsche Bank has struggled with higher funding costs than many rivals, making profits harder to come by for each euro in revenue the bank earns. As the Journal adds, DB executives suggested a combined Commerz-Deutsche Bank would benefit from lower funding costs, using a bigger pool of retail deposits to its advantage. Whether that will be sufficient to offset the exodus of the bank's top bankers who have been denied bonus increases for two years, remains to be seen. So what would a combined bank look like? As the following Bloomberg charts demonstrate, the resulting bank would be Europe's 4th largest, behind HSBC, BNP and Credit Agricole...


Some more good news: after years of declining revenue, the combined company would at least return to where DB was in 2015. Alas, the trend will still be lower...


Unfortunately for shareholders, despite the revenue boost, costs will likely remain largely flat with little contribution from massive synergies as both banks have already laid of thousands...


Finally, and perhaps most disappointing for the combined banks, while a deal would leave only one German bank with global reach, the combined firm wouldn’t be dominant at home. A merged Deutsche-Commerzbank would control less than 10% of German bank branches and would still face competition from savings and cooperative lenders according to Bloomberg. Those firms aren’t under the same pressure to generate profits and they have ruled the market for retail banking...


Meanwhile, the real reason behind the slump in the German bank's profit, the ECB's NIRP policies, will continue for the foreseeable future....

Trump Again Threatens Europe With Tariffs: Expect Instant Global Recession

Trump is hopping mad the EU for at least seven reasons. Mad enough to foolishly smack them with tariffs? I Believe so. MarketWatch reports Trump Threatens Europe With Tariffs and Vows Veto as Senate Rejects Border Emergency. As the U.S. and the EU struggle to iron out their differences on trade, Trump said, “they are willing to talk to us and if they don’t talk to us, we’re going to do something that’s going to be pretty severe economically. We’re going to tariff a lot of their products.” The president was almost certainly referring to imports of cars from the EU, a threat he has made in the past. Trump made his comments to reporters as he met with Irish Prime Minister Leo Varadkar in the Oval Office. Trump also said on Twitter he anticipated a “large scale” trade deal with the United Kingdom, which is facing a delayed exit from the European Union. Before the Senate voted on terminating Trump’s national emergency, he told reporters, “I’ll probably have to veto it,” and predicted his veto wouldn’t be overturned by Congress. The Senate passed its resolution 59-41, with 12 Republicans including Mitt Romney and Marco Rubio voting for it, prompting a one-word Trump tweet in response. The declaration is already the subject of a legal challenge. Trump has attempted to coax Republicans into voting his way on the issue and painted those who vote against him as standing with House Speaker Nancy Pelosi and for crime and open borders.
# Seven Reasons Trump is Hopping Mad;
* Trump wants a trade deal that includes agriculture. The EU says no.
* Trump wants Germany to increase military spending, Germany has plans to cut military spending according to Eurointelligence. I do not know if Trump is aware of this yet. Discussion below.
* Trump wants Germany to scrap Nord Stream 2, a gas pipeline between Russia and the EU underneath the Baltic Sea. The EU sided with Germany.
* Trump wants the EU to buy US Liquid Natural Gas, but the EU instead will buy from Russia because its cheaper. This is part of the Nord Stream 2 issue.
* Trump wants the EU to abide by his sanctions on Iran. Instead, the EU created a mechanism in which European suppliers can trade with Iran in euros rather than dollars as a means to get around US sanctions. The mechanism is little used, if at all, but the idea infuriates Trump.
* EU tariffs on US cars are higher than US tariffs on EU cars. US tariffs on EU SUVs and Trucks are way higher than EU tariffs on US trucks and SUVs but that doesn't matter.
* Trump does not want Germany to use 5G technology from China's Huawei. Germany said it will go ahead. It is almost forced to. The reason is Germany is far behind the US. Its 4G technology is made by Huawei. My understanding is that there is compatibility between 4G and 5G if the vendor is the same. Thus, Trump's demand could set back Germany a couple of years.
# German Military Spending. Spiegel Online has a terrific story that Olaf Scholz is torpedoing the planned increased in the German defence budget. Germany is spending only a meagre 1.2% of GDP on defence. Ursula von der Leyen, defence minister, recently proposed an increase in the defence budget to 1.5% by 2023, which would at least show minimal convergence towards the Nato spending target of 2%. But Olaf Scholz, her arch-enemy in the cabinet, is promising a mere €3bn increase, cumulatively over four years. This would leave the defence spending quota effectively unchanged. Since the inflation rate for defence equipment is above the average inflation rate, Spiegel notes that this constitutes a de facto cut in military expenditures.
# Instant Global Recession. One of the reasons Trump is anxious to close a deal with China is so he can blast the EU with a massive dose of Tariffs. I do not think he wants two simultaneous trade wars. This is another reason to expect Trump to not demand too much from China in a deal. Should Trump rule that EU cars are a threat to US security, as he has threatened to do, the EU will retaliate strongly. The end result would be an instant global recession. We are on the cusp of one anyway....

Chaos Breaks Out As Yellow Vests Clash With French Police

Saturday's Yellow Vest protests have escalated in intensity as clashes with the police grew increasingly violent. After weeks of more moderate protests, France's Yellow Vests are back in full swing following the end of President Macron's unsuccessful 'great debate', during which thousands of town halls were conducted over a two-month period in the hopes of solving national issues through citizen debates...


Up to half-a-million people participated in 10,000 meetings across the country to discuss social issues ranging from taxes, which the French pay the most of any OECD country in the world, to democracy and climate change...

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"We have been patient but now we want results," Yellow Vest Laurent Casanova told AFP. And with no meaningful changes after nationwide cathartic venting, the Yellow Vests are back to angry demonstrations as the protests kick off their 18th week with an 'ultimatum' rally, marked by lootings, fires, and mayhem that organizers maintain are due to a radical minority...


In December, Macron attempted to assuage angry protesters with 10 billion ($11.2 billion) in tax cuts and other benefits for low-wage pensioners.

Algos Are "Using And Even Controlling Us!"

One researcher is warning everyone that “we are setting ourselves up for technological domination.” Dionysios Demetis warned that algorithms are “using and even controlling” human beings. Humans are surrounded by algorithms and one researcher is not all that thrilled about the future prospects of technology and its grip on humanity. “Our exploration led us to the conclusion that, over time, the roles of information technology and humans have been reversed,” Demetis, a professor at the Center for Systems Studies at Hull University in Yorkshire England, wrote in an essay for The Conversation. “In the past, we humans used technology as a tool. Now, technology has advanced to the point where it is using and even controlling us.” This is not the first time Demetis has tried to warn humanity of the problems with advanced technology either. Demetis built on a paper he published last year with Allen Lee, a professor at Virginia Commonwealth University, in the Journal of the Association for Information Systems.
# The researcher also contends that we are in fact “deeply affected by them in unpredictable ways,” and humans made it that way. “We have progressively restricted our own decision-making capacity and allowed algorithms to take over.” Demetis says that the worst case scenario would be a complete takeover of machines and artificial intelligence. Already, most of the trading in foreign exchange markets is determined by algorithms that call the shots within tiny fractions of a second as opposes to humans, who are now seen as an “impediment.” “The people running the trading system had come to see human decisions as an obstacle to market efficiency,” Demetis wrote....

"This Country Has Gone To Hell": Total Chaos In Venezuelan Oil Capital After Blackout

Venezuela's oil capital, Maracaibo, was ransacked and looted in the midst of a blackout that hit the country around March 7. Even as the lights started to come back on, looting continued and residents overpowered disputed President Nichloas Maduro's security forces. Store owners are just now starting to clean up, according a new Bloomberg article, which paints a picture of Venezuela as a country on the edge of total anarchy...


Enrique Gonzalez, an 18 year old bus conductor said: “If people made enough to make ends meet, we wouldn’t be trying to get by like this. This country has gone to hell.” His driver, at the time, was pillaging a Pepsi warehouse, where thousands of bottles had been looted in hours and where people were now ripping out spare copper wire and scrap metal. Empresas Polar SA, a Venezuelan food giant, reportedly saw its Pepsi plant lose thousands of cases of beer and soda, 160 pallets of food, 22 trucks and five forklifts. A home improvement shopping center also saw its 50 stores looted by people who broke through its iron gates and glass doors. Travel agencies, cosmetic stands and snack shops were all pillaged among the chaos...


Bernardo Morillo, 60, who built and manages the mall told Bloomberg: “It’s hard to swallow. The national guard stood by as this vandalism happened and the firefighters didn’t even show.’’ Ricardo Costa, vice president of the Zulia state chapter of the Fedecamaras business group said: "Security forces were useless as people took anything of value, including cash machines, door frames, ovens, computers and surveillance cameras." The country's Centro 99 food market saw looters pick its shelves clean. “They even carried off the lard and flour to bake bread in their bare hands,’’ the store's manager said. The looting started last Saturday afternoon after an ice company, on a hot day, demanded that it be paid in dollars. A crowd instead tore through its factory and then continued onto nearby pharmacies and stores. By the evening, the entire city was taken over by people seeking out life's necessities by any means necessary...


* The country's blackout took an already flammable situation and threw a match on it. Maduro's handling of the situation has prompted the U.S. and other nations to instead recognize opposition leader Juan Guaido as the rightful head of state. Maduro has concentrated his power, in the form of resources and troops, in Caracas, the country's capital. But the recent chaos in Maracaibo, a city of 1.6 million, shows the rest of the country is in tumult and not even the largest cities are safe.
* Maduro blamed the blackout on a U.S. cyberattack last week. When power was restored, many transformers and substations wound up bursting into flames. There were long lines of people at water trucks, streams and burst pipes. As far as protection, "a single municipal squad car was seen" during a day of looting in the city and the officers within warned that "no protection" was on its way. Costa continued: “How is it possible that a thousand guardsmen are deployed to repel 50,000 protesters, but when a thousand looters come to a mall only 50 were sent?’ You could say this began because people are hungry, but the looters didn’t take just food, it morphed into aimless vandalism. Everyone knows that working here means working in anarchy, that anything can happen to you at any moment," one local watchman said while watching his store disintegrate in front of him. “They’re pulling wires, air conditioners, pipes, they’re literally running off with the roof’’....

The Canary In The Semiconductor-Chip Fab

As ECRI shared with CNBC, the canary in the semiconductor-chip fab has already keeled over and, according to our leading index, there’s no resurrection in sight.​​​​​​..


The chart shows that the volume of global semiconductor shipment growth has collapsed, plunging over 20% since August, and its growth rate has tanked to a ten-year low...


Because the semiconductor industry is highly cyclical, growth in ECRI’s Global Leading Manufacturing Index (GLMI, top line) reliably anticipates turning points in semiconductor shipment growth, and clearly predicted this downturn. Bottom line, with GLMI growth still plummeting, there is no light at the end of the tunnel, and semiconductor demand will fall further....

Trump Administration, Canada And EU Hit Russia With Fresh Sanctions

The US State Department announced on Friday that it would be joining the European Union and Canada to impose new sanctions against Russia in response to the Kremlin's "continued aggression in Ukraine." Sanctions will apply to six "individuals who orchestrated the unjustified November 25 attack on three Ukrainian naval vessels near the Kerch Strait." Also sanctioned by the United States are eight companies, including six Russian defense firms, "including shipbuilding companies; two individuals involved in the NOvember sham "elections" in Russia-controlled eastern Ukraine; and two Russian energy and construction companies operating in Crimea."
# Read the State Department announcement: Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated six Russian individuals and eight entities in response to Russia’s continued and ongoing aggression in Ukraine. Today’s action targets individuals and entities playing a role in Russia’s unjustified attacks on Ukrainian naval vessels in the Kerch Strait, the purported annexation of Crimea, and backing of illegitimate separatist government elections in eastern Ukraine. These actions complement sanctions also taken today by the European Union and Canada, and underscore the strength and commitment of the transatlantic partnership to counter Russia’s continued destabilizing behavior and malign activities. “The United States and our transatlantic partners will not allow Russia’s continued aggression against Ukraine to go unchecked. This joint initiative with our partners in the European Union and Canada reinforces our shared commitment to impose targeted and meaningful sanctions in response to the Kremlin’s attempts to disregard international norms and undermine Ukraine’s sovereignty and territorial integrity,” said Treasury Secretary Steven T. Mnuchin. “The international community is strongly aligned against Russia’s naval attacks in the Kerch Straight, purported annexation of Crimea, and support for the illegitimate separatist-conducted elections in eastern Ukraine.”
# OVERVIEW. Five years after its invasion of Ukraine and its attempted annexation of Crimea, Russia continues to undermine Ukraine’s sovereignty and territorial integrity while failing to implement its obligations under the Minsk agreements. On November 25, 2018, Russian authorities opened fire on and rammed three Ukrainian ships off the coast of Crimea, seizing the ships and capturing 24 Ukrainian crew members, who remain illegally detained in Russia. Russia also continues its occupation of Crimea, and the Kremlin has also backed illegitimate elections held by Ukrainian separatists in the so-called Donetsk People’s Republic on November 11, 2018. As a result of today’s designations, all property and interests in property of the designated individuals and entities are blocked, and U.S. persons are generally prohibited from transacting with them. Moreover, any entities owned 50 percent or more by these designated persons are also blocked by operation of law.
# Designations Related to Russia’s Attack in the Kerch Strait OFAC today sanctioned four Russian officials who were involved in the Kerch Strait attack. OFAC designated Gennadiy Medvedev, the Deputy Director of the Border Guard Service of Russia’s Federal Security Service; Sergey Stankevich, the Head of the Border Directorate of Russia’s Federal Security Service; and Andrey Shein, the Deputy Head of the Border Directorate and Head of the Coast Guard Unit of Russia’s Federal Security Service. Medvedev and Stankevich directly controlled and organized the attack against the Ukrainian ships and their crew, while Shein participated in the operation against the seized Ukrainian ships and crew. OFAC also designated Ruslan Romashkin, the Head of the Service Command Point of the Federal Security Service of the Russian Federation for the Republic of Crimea and Sevastopol. Medvedev, Stankevich, Shein, and Romashkin are being designated pursuant to Executive Order (E.O.) 13661 for being officials of the Government of the Russian Federation...



# DESIGNATIONS RELATED TO RUSSIA’S PURPORTED ANNEXATION OF CRIMEA. Today’s action also targets six Russian defense firms with operations in Crimea, several of which misappropriated Ukrainian state assets to provide services to the Russian military. Four of these entities are being designated pursuant to E.O. 13662 for operating in the defense and related materiel sector of the Russian Federation economy, and two entities are being designated pursuant to E.O. 13685 for operating in the Crimea region of Ukraine. Yaroslavsky Shipbuilding Plant is a Russian state-owned shipbuilding plant that has built vessels for Russia’s Federal Security Service (FSB) and the Russian Ministry of Defense. Yaroslavsky Shipbuilding Plant is also the project developer for a naval vessel that was completed at the Federal SUE Shipyard “Morye” in Crimea. Yaroslavsky Shipbuilding Plant is being designated pursuant to E.O. 13662 for operating in the defense or related materiel sector of the Russian Federation economy. Zelenodolsk Shipyard Plant, named after A.M. Gorky, is one of the largest ship manufacturers in Russia and has produced missile frigates and corvettes for the Russian Navy.
# The Zelenodolsk Shipyard Plant has collaborated with Crimea-based enterprise Skloplastic, which was unlawfully nationalized by the Russian government following its illegal invasion of Crimea in 2014. The Zelenodolsk Shipyard Plant is being designated pursuant to E.O. 13662 for operating in the defense and related materiel sector of the Russian Federation economy. AO Kontsern Okeanpribor (Okeanpribor) is a producer of hydroacoustic equipment and has supplied components to the Russian Navy. Okeanpribor has also collaborated on a naval project at the Federal SUE Shipyard “Morye” in Crimea. Federal SUE Shipyard “Morye” was designated by OFAC on September 1, 2016. Okeanpribor is being designated pursuant to E.O. 13662 for operating in the defense and related materiel sector of the Russian Federation economy. PAO Zvezda (Zvezda) is a supplier of diesel engines to the Russian Navy. Zvezda has also supplied components for Russian naval vessels that were being built at the Federal SUE Shipyard “Morye” in Crimea. Zvezda is being designated pursuant to E.O. 13662 for operating in the defense and related materiel sector of the Russian Federation economy.
# AO Zavod Fiolent (Fiolent) is a Crimea-based electronics manufacturer that has supplied parts for use in Russian military equipment. Fiolent was unlawfully seized by the Russian Federation following its annexation of Crimea in 2014. Fiolent is being designated pursuant to E.O. 13685 for operating in the Crimea region of Ukraine. GUP RK KTB Sudokompozit (Sudokompozit) is a Crimea-based producer of defense components that are supplied for Russian military use. Sudokompozit was unlawfully seized by the Russian Federation following its annexation of Crimea in 2014. Sudokompozit is being designated pursuant to E.O. 13685 for operating in the Crimea region of Ukraine. OFAC also designated the following two entities pursuant to E.O. 13685, due to their activities in Crimea. LLC SK Consol-Stroi LTD is being designated for operating in the Crimea region of Ukraine. LLC SK Consol-Stroi LTD, a limited liability company registered in the city of Simferopol, Crimea, is one of Crimea’s largest construction companies. LLC SK Consol-Stroi LTD is engaged in the construction of residential and commercial real estate in cities throughout the Crimea region including, among others, Feodosia, Kerch, Yalta, Simferopol, Sevastopol, and Yepatoria. LLC Novye Proekty is being designated for operating in the Crimea region of Ukraine. In 2016, Russian authorities awarded the private company Novye Proekty an oil and gas exploration license for the Crimean Black Sea shelf.
# The Crimean shelf is believed to be rich in hydrocarbons and authorities in Ukraine have reported that Ukraine lost about 80 percent of its oil and gas deposits in the Black Sea due to Russia’s purported annexation of Crimea. Novye Proekty’s license permits geological studies, prospecting, and the extraction of raw hydrocarbon materials from the Black Sea’s Glubokaya block. Prior to Russia’s purported annexation of Crimea the Glubokaya block was estimated to hold reserves of 8.3 million tons of crude and 1.4 billion cubic meters of natural gas.
# DESIGNATIONS RELATED TO ILLEGITIMATE SEPARATIST GOVERNMENT ELECTIONS IN UKRAINE. Today’s action also targets two Ukrainian separatists who were involved in the organization of the November 2018 illegitimate elections in the so-called Donetsk People’s Republic. These illegitimate elections clearly contradict Russia’s commitments under the Minsk agreements, and were strongly opposed by the United States and EU. Aleksey Alekseevich Naydenko is the Deputy Chair of the Central Election Commission of the so-called Donetsk People’s Republic. Naydenko is being designated for being responsible for or complicit in, or having engaged in, directly or indirectly, actions or policies that threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine. Vladimir Yurievich Vysotsky is the Secretary of Central Election Commission of the so-called Donetsk People’s Republic. Vysotsky is being designated for being responsible for or complicit in, or having engaged in, directly or indirectly, actions or policies that threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine....

Jeffrey Snider; QE5? The Fed Proposes A Repo Facility To Save The World

QT. Bank reserves. Balance sheet normalization. They really are going through all the motions in 2019. It’s as if officials can sense something just isn’t quite right. This would amount to a serious setback, of course, having assured the public repeatedly how the financial system has been remade into “resilient.” Janet Yellen, call your current office, Jay Powell’s Federal Reserve isn’t quite so sure any more about that whole bank crisis thing you said. It’s hard to gauge whether it is mainstream thought that is evolving, or merely the form of its continued stupidity. Nothing ever stands still in this world, but that doesn’t always represent progress. The Federal Reserve’s Vice Chairman for Supervision is Randall Quarles. He also chairs the Financial Stability Board. Both are resume-padding devices, filling out required requirements about pedigree. Thus, his opinions on monetary matters are given great consideration regardless of their content. Recently, speaking at a monetary policy forum, he made what sounds like a very odd claim:
* Occasionally we hear that banks feel they are under supervisory pressure to satisfy their [high-quality liquid assets] with reserves rather than Treasury securities, that’s not the case. I don’t think we should have an official preference for reserves. 
# What he’s really trying to say is that bankers are telling him, and presumably FRBNY, that they are worried about the level of bank reserves. The Fed is reducing that level as it winds down its four prior QE’s. As assets runoff the asset side of its balance sheet, unless something offsetting is done the remainder on the liability side, bank reserves, must fall by an equal amount...


In official training, a bank reserve equates to what Milton Friedman once called “high powered money.” It’s hard to make that argument today simply because no one, outside of a bank comptroller, has ever seen one. You can’t walk into a grocery store and walk out again with food in your hands leaving behind only bank reserves. They’d call that stealing, maybe counterfeiting, too. It is, quite simply, an accounting entry. It is one form of liability which banks may use to “fund” their balance sheet activities. That’s it. There were practically no bank reserves before the depths of the 2008 crisis; the US dollar system quite literally didn’t need them. This global eurodollar design redesigned what counted for “reserves.” Practically any bank liability will suffice, which is why there is such a demand for what banks can, but no longer want to, create. These other forms of reserves were imaginative and dynamic, compared to the stale inertness of what central banks deliver almost by accident.
# QE’s were meant to play upon expectations, that was their big purpose. In terms of operative money, at best an asset swap. But that’s no longer how officials want to play this. They can’t because, again, something just isn’t quite right. There is palpable monetary tightness in the US dollar system that not even these boom guys at the Fed can deny. It must be regulations, then. Basel III, among other showy things, required banks to submit to what amounts to a modern stab at a reserve requirement, this LCR, or liquidity coverage ratio. To satisfy the LCR, the big banks must hold, unencumbered, a sufficient stock of HQLA, or high quality liquid assets. The LCR itself works like a capital ratio, a flashy amalgam of byzantine calculations compiled in such a way that you never actually think or ask questions about them. It looks solid. Before 2008, people said the same thing about capital ratios and risk-weighted assets. But I digress too much. The purpose behind HQLA is quite simple in theory; if you hold a lot of non-toxic waste assets then when the funding markets seize up again like they did in the worst parts of 2008 you can survive anyway. The LCR begins with a 30-day extreme stress scenario; meaning, how much in HQLA you will have to have on hand to go 30 days without ST funding.
# But to do that, you will quite naturally have to liquidate those HQLA securities during the stress period. Thus, the emphasis and exhaustive definitions for what counts as “high quality.” In short, securities that won’t move much in value (or go up, as UST’s; small wonder why banks like holding them during times of unacknowledged turmoil) when the world is falling apart. You’d think there wouldn’t be any MBS or the like allowed here given what happened ten years ago, but I digress again. Here’s where they’re starting to get hung up: if I have to liquidate, say, billions upon billions of my UST’s it stands to reason you will have to liquidate, say, billions upon billions of your UST’s, and the guy over in the corner will have to do the same thing as well as the lady in Hong Kong on the phone with the fella in Zurich. If we all have to liquidate at the exact same moment, who is going to buy them all? More to the point, what will they use? To Federal Reserve officials like Randall Quarles who think about things this way, the answer is only Randall Quarles. And if the Fed is the only buyer in town, they are going to need a lot more reserves to be able to do this. What the Vice Chairman is trying to say, then, by claiming banks are worried about preferring reserves over UST’s is that they are nervous about the current level of reserves as insufficient for all scenarios, even less-than-adverse ones...


# According to him, they’ve been forced into choosing bank reserves (conveniently explaining QT). Somehow, though, despite this presumed preference for what the Fed offers, banks haven’t been able to buy UST’s (or lease them) fast enough...


This is like thinking about rebuilding your car’s engine from a manufacturer’s manual you downloaded off the internet because you ran out of gas on the highway once, and now the tank is back down close to “E” again and you’re getting worried. What policymakers are now thinking, and Bloomberg confirms that they’ve already surveyed the primary dealers on this very topic, is to set up a standing repo facility. To policymakers, this would mean no nervousness on the part of banks because with a standing repo facility they could liquidate their HQLA right at the Fed window in exchange for, you guessed it, bank reserves! The level of reserves would therefore be adjusted based upon market demand for them. Problem solved! Nobody nervous today, tomorrow, or ever. Bonus: the repo rate should therefore behave much more predictably as a side effect (exactly how this is supposed to work, that’s another day’s digression).
# The more astute among you will already notice that the net result of this scheme is, essentially, the very same as QE. Banks will still be swapping assets, only this time HQLA rather than “toxic waste”, for a higher reserve balance on account with FRBNY. The key difference, supposedly, is that the market is determining when and by how much the level of bank reserves will change. For those who remember 2011, in August that year the FOMC debated bailing out the repo market. Well, almost eight years later here they are finally getting around to doing just that. You would think people would be asking why. Bill English, the FOMC’s Secretary as well as an Economist, summed this up very well on the emergency conference call held August 1. One point six trillion of reserves, apparently, wasn’t excessive after all:
* With the funds rate up only a few basis points over the same period, a natural question is whether the repo rate has idiosyncratically diverged from the overall constellation of money market rates or whether it is a symptom of broad dislocations in money markets that could interfere with the transmission of the Committee’s intended monetary policy stance. 
# It’s difficult to parse as a layperson, of which I am one, but what he was saying here could not possibly have been overstated: either the repo market is just being kind of wacky, or the whole damn system might be broken, including how the central bank really fits into it (meaning, not really well if at all). Nothing to worry about; or everything is wrong. If they are still debating a repo rescue in 2019, that strongly proposes which one it really was. The Fed, as is its standard practice, chose instead to split the difference, hoping that nothing was really wrong while remaining ready to act should that hope be misplaced. It was. In September 2012, in its infinite wisdom, the FOMC voted for, get ready, another increase in the level of bank reserves; QE’s three then four in December 2012. The thinking behind the latter two QE’s was that by flooding the world with so many reserves, far more than the first two, printing money as many believed, there would always be more than enough. So, it’s a little hard to reconcile that view with 2018/19 being back to thinking about not enough again after a small rundown of the balance sheet. It’s like there is no amount of bank reserves that is enough. This exchange from the same August 1, 2011, conference call helps explain:
* MR. FISHER. I just want to get oriented here. I’ve been out of the country for a little bit, but when we last met as a Federal Open Market Committee, I think excess reserves were running around $900 billion, am I correct that they’re currently running about $1.24 trillion? Does anybody, Brian or anybody else, have a sense of those numbers?
MR. ENGLISH. Excess reserves are about $1.6 trillion, I believe, and they were at the time of the last meeting as well.
MR. FISHER. So we haven’t seen it all run into excess reserves then. That’s the point. There’s not much of a change.
MR. ENGLISH. Well, as Brian noted earlier, our operations determine the amount of reserves. So once we completed our purchase program at the end of June, reserves were whatever they were, and since then reserves have moved around, but they have not increased...


# Mr. Fisher is, of course, the Dallas Fed’s Richard Fisher who shall hereafter be known only as the monetary head fake guy. He demonstrates here that he actually doesn’t know how bank reserves work, so no surprise he was faked out by them. Which brings us all back to the real issue behind everything. The system didn’t need reserves before 2008, which is why voting members of the FOMC by 2011 really weren’t quite sure what they were or how they worked. Never mind trying to define exactly what was used as monetary alternatives during that period. Something, a lot of things were used that were not bank reserves...


# Why doesn’t the post-2008 system just go back to using those same things? Why isn’t any private entity stepping in and providing an acceptable alternative, what with Janet Yellen’s claim to low risk and this economic boom? Why would anyone need the Fed to still, after a whole decade no less, get involved in any of this at all? The level of bank reserves was inarguably irrelevant prior, but now their level is a question of paramount importance? You see, something very big is missing, intellectually as well as functionally...


A standing repo facility, no matter how backwards you go to get to one, amounts to the same thing: it’s a monetary shortage that requires some serious thinking about fixing. What’s being offered, of course, isn’t actually any kind of solution so we are left instead to try and answer my original conundrum. Is this evolving mainstream thinking, inching just a little closer to the real problem, or is it evolving stupidity by going back to bank reserves for a fifth time?


They keep using bank reserves, only changing a parameter every time they do. Maybe stop it with bank reserves! At least, I suppose, in 2019 they’re no longer stressing 2018’s ridiculous excuses about T-bills and temporary “special factors”...


We’ve all been taught since Econ 101 that Open Market Operations determine everything, starting with the interest rate on money. There actually isn’t a single interest rate on money, for one, and as the repo market’s ongoing, eleven-year (and counting) plight keeps proving neither OMO’s nor POMO’s have much effect especially at certain times. It’s like there is a whole other independent monetary system that doesn’t work the way everyone seems to still think. Maybe one day, if we are lucky, one enterprising honest official will go back and revisit Mr. English’s 2011 dichotomy and really absorbs what it would’ve meant, and could still mean....