zaterdag 18 november 2017

Philip Giraldi; How America's Deep State Operates To Control The Message

It is not possible to overstate the power of certain constituencies and corporate lobbies in the United States. These pressure groups, joined by powerful government agencies, many of which have secret agendas that focus on national security, constitute what is increasingly being recognized as “Deep State America.” Deep State is the widespread belief that there exists in many countries an entrenched and largely hidden infrastructure that really controls the national narrative and runs things. It explains why, for example, a country like the United States is perpetually at war even though the wars have been disastrous failures ever since Korea and have not made the nation more secure. To be sure, certain constituencies have benefitted from global instability and conflict, to include defense industries, big government in general, and the national security state. They all work together and hand-in-hand with the corporate media to sustain the narrative that the United States is perpetually under threat, even though it is not.
The recent exchanges over the Russia-US relationship exhibit perfectly how the Deep State operates to control the message. American President Donald Trump briefly met with Russian President Vladimir Putin in Vietnam. Putin reportedly told Trump that Russia “absolutely had not meddled” in the 2016 US election and Trump then told reporters that he believed the Russian leader meant what he said, “which is good.” As d├ętente with Russia is not considered desirable by the Deep State, there was an immediate explosion of a contrary narrative, namely that Trump believes a Russian “enemy” and does not trust what his own intelligence agencies have told him about 2016 because he is being "played" by Putin. This story was repeated both on television news and in all the mainstream newspapers without exception, eventually forcing Trump to recant and say that he does believe in US intelligence. Not a single major media outlet in the US reported that it just might be possible that Putin was telling the truth and that the intelligence community, which has been wrong many times over the past twenty years, might have to look again at what it considers to be evidence. No journalist had the courage to point out that the claims of the Washington national security team have been remarkably devoid of anything credible to support the conclusions about what the Russian government might or might not have been up to.
That is what a good journalist is supposed to do and it has nothing to do with whether or not one admires or loathes either Putin or Trump. That the relationship between Moscow and Washington should be regarded as important given the capability of either country to incinerate the planet would appear to be a given, but the Washington-New York Establishment, which is euphemism for Deep State, is actually more concerned with maintaining its own power by marginalizing Donald Trump and maintaining the perception that Vladimir Putin is the enemy head of state of a Russia that is out to cripple American democracy. Beyond twisting narratives, Russiagate is also producing potentially dangerous collateral damage to free speech, as one of the objectives of those in the Deep State is to rein in the current internet driven relatively free access to information. In its most recent manifestations, an anonymous group produced a phony list of 200 websites that were “guilty” of serving up Russian propaganda, a George Soros funded think tank identified thousands of individuals who are alleged to be “useful idiots” for Moscow, and legitimate Russian media outlets will be required to register as foreign agents.
Driven by Russophobia over the 2016 election, a group of leading social media corporations including Facebook, Google, Microsoft and Twitter have been experimenting with ways to self-censor their product to keep out foreign generated or “hate” content. They even have a label for it: "cyberhate". Congress is also toying with legislation that will make certain viewpoints unacceptable or even illegal, including a so-called Anti-Semitism Awareness Act that would potentially penalize anyone who criticizes Israel and could serve as a model for banning other undesirable speech. “Defamatory speech” could even eventually include any criticism of the government or political leaders, as is now the case in Turkey, which is the country where the “Deep State” was invented....

Xi Jinping Pledges To "Strengthen Relationship" Between Saudi Arabia And China

In what can only be described as a masterful play to entice Saudi Arabia to list shares of Aramco in Hong Kong (assuming the kingdom follows through with the listing, which is reportedly in jeopardy) Chinese state media reported Friday that Chinese President Xi Jinping pledged to strengthen the relationship between China and Saudi Arabia as the latter tries to reform its economy. According to the South China Morning Post, Xi vowed to strengthen cooperation between the two states at a time when the Middle Eastern kingdom is facing a political shake-up at home, and heightened tensions with Lebanon and Iran. Xi’s vow of friendship came with the crucial qualifier that the relationship between the two countries wouldn’t be affected by shifting international circumstances. No matter how the international and regional situation changed, China’s determination to deepen strategic cooperation with Saudi Arabia would not change, President Xi Jinping told Saudi King Salman in a telephone conversation, according to a report by China’s state broadcaster CCTV. “China supports Saudi in its efforts to safeguard its sovereignty and achieve greater development,” Xi was quoted as saying.
Of course, that’s an implicit threat that China might come to KSA’s aide if the simmering hostilities between the kingdom and Iran explode out into a military conflict between the two regional rivals. However, the SCMP also stresses that China has a strong relationship with Iran as well. Hong Kong is reportedly still in consideration to host the Aramco IPO. And while China will presumably play the dual role of investor and adviser as the Kingdom seeks to diversify its economy into other industries besides energy, including technology and manufacturing, KSA has in returned promised to assist Xi’s “one belt, one road” economic reform program. King Salman told Xi that Saudi Arabia was willing to become China’s “important partner” in the Gulf. The kingdom also intended to play a role in China’s “Belt and Road Initiative” and cooperate with Beijing in the energy and financial sectors, he said Though Chinese media reports didn’t delve into too much detail about the recent purge orchestrated by Crown Prince Mohammed bin Salman, the call between the two leaders obviously follows an event two weeks for KSA, where its leaders reportedly pressured Lebanese Prime Minister Saad Hariri to resign as soon as possible.
Hariri had to go, allegedly, because he was deemed too soft on Hezbollah, the shiite militant group that’s affiliated with Iran and is also an important powerbroker in Lebanon. Two weeks ago, dozens of Saudi princes and officials were detained on corruption charges, a move that is believed to have helped Crown Prince Mohammed bin Salman to consolidate his power. And yesterday the Financial Times exposed the “corruption crackdown” for what is truly is: A naked cash grab meant to refill KSA’s foreign currency reserves while allowing it the financial flexibility to help ensure the Aramco IPO is executed at the best possible price. Lebanese President Michel Aoun this week accused Saudi authorities of “detaining” Hariri, but Riyadh said he was free to leave the kingdom “when he pleases”. Hariri was reportedly supposed to arrive in France on Friday. Saudi Arabia was also seen as a protagonist in leading 11 other nations to sever diplomatic ties with Qatar earlier this year, a move meant to punish KSA’s tiny neighbor for having too close a relationship with Iran. Despite Xi’s promise, China also maintains warm relations with Iran, meaning the likelihood that China would become involved in a military struggle against either Iran or Saudi is probably low.
According to the SCMP, China has bolstered its presence in the region by forging closer ties with both countries. Of course, Saudi has plenty to gain from closer relations with China, including expanding its foothold in the world’s largest import market for crude. During King Salman’s first official trip to China in March, the two countries signed deals, including some in the oil sector, worth a combined US$65 billion, the SCMP noted. However, if the feud between Saudi Arabia and Iran intensifies - and that looks likely, the threat of a geopolitical conflict will become impossible to ignore. What then?

Raul Ilargi; How Broke Is The House Of Saud?

Trying to figure out what on earth is happening in the Middle East appears to have gotten a lot harder. Perhaps (because) it’s become more dangerous too. There are so many players, and connections between players, involved now that even making one of those schematic representations would never get it right. Too many unknown unknowns. A short and incomplete list of the actors: Sunni, Shiite, Saudi Arabia, US, Russia, Turkey, ISIS, Syria, Iran, Iraq, Libya, Kurds, Lebanon, Hezbollah, Hamas, Qatar, Israel, United Arab Emirates (UAE), Houthis, perhaps even Chechnya, Afghanistan, Pakistan. I know I know, add your favorites.
# So what have we got, or what do we know we’ve got? We seem to have the US lining up with Israel, the UAE and Saudi Arabia against Russia, Iran, Syria, Hezbollah. Broadly. But that’s just a, pun intended, crude start. Putin has been getting closer to the Saudis because of the OPEC production cuts, trying to jack up the price of oil. Which ironically has now been achieved on the heels of the arrests of 11 princes and scores of other wealthy and powerful in the kingdom. But Putin also recently signed a $30 billion oil -infrastructure- deal with Iran. And he’s been cuddling up to Israel as well. In fact, Putin may well be the most powerful force in the Middle East today. Well played?! He prevented the demise of Assad in Syria, which however you look at it at least saved the country from becoming another Iraq and Libya style failed state. If there’s one thing you can say about the Middle East/North Africa it’s that the US succeeded in creating chaos there to such an extent that it has zero control left over any of it. Well played?! One thing seems obvious: the House of Saud needs money. The cash flowing out to the princes is simply not available anymore. The oil price is a major factor in that. Miraculously, the weekend crackdown on dozens of princes et al, managed to do what all the OPEC meetings could not for the price of oil: push it up. But the shrinkage of foreign reserves shows a long term problem, not some momentary blip...


Another sign that money has become a real problem in Riyadh is the ever-postponed IPO of Saudi Aramco, the flagship oil company supposedly worth $2 trillion. Trump this week called on the Saudi’s to list it in New York, but despite the upsurge in oil prices you still have to wonder which part of that $2 trillion is real, and which is just fantasy. But yeah, I know, there’s a million different stocks you can ask the same question about. Then again, seeing the wealth of some of the kingdom’s richest parties confiscated overnight can’t be a buy buy buy signal, can it? Looks like the IPO delay tells us something. And then you have the 15,000 princes and princesses who all live off of the Kingdom’s supposed riches (‘only 2,000’ profit directly). All of them live in, relative, wealth. Some more than others, but there’s no hunger in the royal family. Thing is, overall population growth outdoes even that in the royal family. Which means, since the country produces nothing except for oil, that there are 1000s upon 1000s of young people with nothing to do but spend money that’s no longer there. Cue mayhem...


And things are not getting better, Saudi Arabia loses money on every barrel it produces. There are stories about them lowering their break-even price, but let’s take that with a few spoonfuls of salt. A 25% drop in break-even prices in just one year sounds a bit too good. Moreover, main competitors like Iran would still have a much lower break-even price. So even if prices would rise further, the Saudi’s might only break even while Iran gets much richer. Running vs standing still.
# Saudi Arabia Leads Gulf Nations in Cutting Break-Even Oil Price; Saudi Arabia, OPEC’s biggest oil producer, is also a leader when it comes to slashing the crude price the country needs to balance its budget. The kingdom will need oil to trade at $70 a barrel next year to break even, the IMF said Tuesday in its Regional Economic Outlook for the Middle East and Central Asia. That’s down from a break-even of $96.60 a barrel in 2016, the biggest drop of eight crude producers in the Persian Gulf. The break-even is a measure of the crude price needed to meet spending plans and balance the budget...


Gulf oil producers are cutting spending and eliminating subsidies after crude plunged from more than $100 a barrel in 2014 to average just over half that this year. The need to curb spending is more urgent with the Organization of Petroleum Exporting Countries cutting output to reduce a global glut. Oil will trade at $50 to $60 a barrel for the “medium term,” the IMF said. So a thorough cleansing job of the royal family is perhaps inevitable, albeit very risky. King Salman and crown prince Mohammed bin Salman are up against a very large group of rich people. But there’s no way back now...


# Saudi Banks Freeze More Than 1,200 Bank Accounts in Anti-Corruption Purge; Saudi Arabian banks have frozen more than 1,200 accounts belonging to individuals and companies in the kingdom as part of the government’s anti-corruption purge, bankers and lawyers said on Tuesday. They added that the number is continuing to rise. Dozens of royal family members, officials and business executives have been detained in the crackdown and are facing allegations of money laundering, bribery, extorting officials and taking advantage of public office for personal gain. Since Sunday, the central bank has been expanding the list of accounts it is requiring lenders to freeze on an almost hourly basis. Much more will have to follow that. Doing a half way job is far too risky once the job has started. Not even $800 billion sounds like all that much. Separate families and factions within the royal family have had decades to accumulate wealth.
# Saudi Crackdown Targets Up to $800 Billion in Assets; The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter. Several prominent businessmen are among those who have been arrested in the days since Saudi authorities launched the crackdown on Saturday, by detaining more than 60 princes, officials and other prominent Saudis, according to those people and others. The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of “persons of interest” and said the move is “in response to the Attorney General’s request pending the legal cases against them.” The most visible, and perhaps richest, of all those arrested,in western eyes, is Al-Waleed. The Bloomberg estimate of his wealth that came out this week is $19 billion. But their own article seems to indicate a much higher number. He owns 5% of Apple -says Bloomberg-, and that share alone would be worth $45 billion.
# Alwaleed, Caught in Saudi Purge, Has Assets Across the World; Apple, Alwaleed bought 6.23 million shares, or 5 percent, of the computer and mobile-device maker for $115.4 million in 1997. He made these purchases between mid-March and April of that year while the company was still struggling to turn itself around. He has since continued to hold the stake while Apple’s valuation has soared to as high as $900 billion. Going through all these numbers, you can imagine why the ruling family, or rather the rulers within that family, are getting nervous. And that’s where we get to an interesting piece by Ryan Grim at the Intercept, who says it’s not even 32-year-old crown prince Mohammed bin Salman, known as MBS, or King Salman, 81, who control the kingdom these days, it’s the United Arab Emirates (UAE) -and maybe Washington-. The coup has already been perpetrated.
# Saudi Arabia’s Government Purge, And How Washington Corruption Enabled It; The move marks a moment of reckoning for Washington’s foreign policy establishment, which struck a bargain of sorts with Mohammed bin Salman, known as MBS, and Yousef Al Otaiba, the United Arab Emirates ambassador to the U.S. who has been MBS’s leading advocate in Washington. The unspoken arrangement was clear: The UAE and Saudi Arabia would pump millions into Washington’s political ecosystem while mouthing a belief in “reform,” and Washington would pretend to believe that they meant it. MBS has won praise for some policies, like an openness to reconsidering Saudi Arabia’s ban on women drivers. Meanwhile, however, the 32-year-old MBS has been pursuing a dangerously impulsive and aggressive regional policy, which has included a heightening of tensions with Iran, a catastrophic war on Yemen, and a blockade of ostensible ally Qatar. Those regional policies have been disasters for the millions who have suffered the consequences, including the starving people of Yemen, as well as for Saudi Arabia, but MBS has dug in harder and harder. And his supporters in Washington have not blinked. The platitudes about reform were also challenged by recent mass arrests of religious figures and repression of anything that has remotely approached less than full support of MBS. The latest purge comes just days after White House adviser Jared Kushner, a close ally of Otaiba, visited Riyadh, and just hours after a bizarre-even-for-Trump tweet. Whatever legitimate debate there was about MBS ended Saturday, his drive to consolidate power is now too obvious to ignore. And that puts denizens of Washington’s think tank world in a difficult spot, as they have come to rely heavily on the Saudi and UAE end of the bargain.
# As The Intercept reported earlier, one think tank alone, the Middle East Institute, got a massive $20 million commitment from the UAE. And make no mistake, MBS is a project of the UAE, an odd turn of events given the relative sizes of the two countries. “Our relationship with them is based on strategic depth, shared interests, and most importantly the hope that we could influence them. Not the other way around,” Otaiba has said privately. The kingdom’s broke. Not today, or tomorrow morning, but crown prince MBS is able to look at the numbers and go: Oh Shit! And if he doesn’t see it, he has Kushner (re: Israel) and Al-Otaiba to fill him in. All three relative youngsters -MBS is 32, Kushner is 36, Otaiba is 43- are exceedingly nervous by now. And then you get war, or the threat of war. War in Yemen, a blockade of Qatar, and now ‘mingling’ in Lebanon with the somewhat mysterious removal of billionaire PM Hariri,allegedly on an Iran/Hezbollah assassination plot, and outright threats against Iran and Hezbollah: Lebanon’s Hariri Visits UAE As Home Crisis Escalates; Lebanon’s outgoing prime minister, Saad al-Hariri, made a brief visit to the United Arab Emirates from Saudi Arabia on Tuesday despite a deepening crisis back home and a rise in regional tensions triggered by his surprise resignation. Hariri announced his resignation on Saturday during a visit to his ally Saudi Arabia and has not yet returned to Lebanon. He said he believed there was an assassination plot against him and accused Iran, Saudi Arabia’s arch-rival, and its Lebanese ally Hezbollah of sowing strife in the Arab world. His resignation has thrust Lebanon back into the frontline of the regional rivalry that pits a mostly Sunni bloc led by Saudi Arabia and allied Gulf monarchies against Shi‘ite Iran and its allies. Hariri’s office said he had flown to Abu Dhabi on Tuesday and then returned to Riyadh, but it gave no reason for the trip. It also did not say when he would return home. Hariri’s Future TV channel said he would also visit Bahrain but gave no reason.
# In short: billionaire PM Hariri is a puppet. Just perhaps not of Saudi Arabia, but of Abu Dhabi. Whether he’s under house arrest in Riyadh, as has been suggested, is still unclear. But it’s a safe bet that he didn’t fly to Abu Dhabi, and back, alone, or of his own accord. He went to receive instructions. Saudi Arabia Accuses Iran Of ‘Direct Military Aggression’ Over Yemen Missile; Saudi Arabia’s crown prince has accused Iran of “direct military aggression” by supplying missiles to Houthi rebels in Yemen, raising the stakes in an already tense standoff between the two regional rivals. Mohammed bin Salman linked Tehran to the launch of a ballistic missile fired from Yemen towards the international airport in the Saudi capital of Riyadh on Saturday. The missile was intercepted and destroyed. “The involvement of the Iranian regime in supplying its Houthi militias with missiles is considered a direct military aggression by the Iranian regime,” the prince said on Tuesday during a phone conversation with the UK foreign secretary, Boris Johnson, according to the state-run Saudi Press Agency. He added that the move “may be considered an act of war against the kingdom”. Iran has called Riyadh’s accusations as baseless and provocative.
# We have no way of knowing what is true or not about this. We do know that Saudi Arabia have been executing a barbaric war in Yemen. With weapons from the US, UK, et al. So someone firing back wouldn’t be that far-fetched. Regardless, Pepe Escobar, a journalist who knows much more than his peers, or at least doesn’t hold back as much as them, doesn’t see this end well for MBS, UAE, Israel, US, and whoever else is in their corner. Another losing war for the US in the Middle East? We’re losing count. The Inside Story Of The Saudi Night Of Long Knives; A top Middle East business/investment source who has been doing deals for decades with the opaque House of Saud offers much-needed perspective: “This is more serious than it appears. The arrest of the two sons of previous King Abdullah, Princes Miteb and Turki, was a fatal mistake. This now endangers the King himself. It was only the regard for the King that protected MBS. There are many left in the army against MBS and they are enraged at the arrest of their commanders.” To say the Saudi Arabian Army is in uproar is an understatement. “He’d have to arrest the whole army before he could feel secure.” The story starts with secret deliberations in 2014 about a possible “removal” of then King Abdullah. But “the dissolution of the royal family would lead to the breaking apart of tribal loyalties and the country splitting into three parts.
It would be more difficult to secure the oil, and the broken institutions whatever they were should be maintained to avoid chaos.” Instead, a decision was reached to get rid of Prince Bandar bin Sultan, then actively coddling Salafi-jihadis in Syria, and replace the control of the security apparatus with Mohammed bin Nayef. The succession of Abdullah proceeded smoothly. Power was shared between three main clans: King Salman (and his beloved son Prince Mohammed); the son of Prince Nayef (the other Prince Mohammed), and finally the son of the dead king (Prince Miteb, commander of the National Guard). In practice, Salman let MBS run the show. And, in practice, blunders also followed. The House of Saud lost its lethal regime-change drive in Syria and is bogged down in an unwinnable war on Yemen, which on top of it prevents MBS from exploiting the Empty Quarter, the desert straddling both nations. The Saudi Treasury was forced to borrow on the international markets. Austerity ruled, aversion to MBS never ceased to grow; “There are three major royal family groups aligning against the present rulers: the family of former King Abdullah, the family of former King Fahd, and the family of former Crown Prince Nayef.” Nayef, who replaced Bandar, is close to Washington and extremely popular in Langley due to his counter-terrorism activities. His arrest earlier this year angered the CIA and quite a few factions of the House of Saud, as it was interpreted as MBS forcing his hand in the power struggle.
According to the source, “he might have gotten away with the arrest of CIA favorite Mohammed bin Nayef if he smoothed it over but MBS has now crossed the Rubicon though he is no Caesar. The CIA regards him as totally worthless.” The source, though, is adamant; “There will be regime change in the near future, and the only reason that it has not happened already is because the old King is liked among his family. It is possible that there may be a struggle emanating from the military as during the days of King Farouk, and we may have a ruler arise that is not friendly to the United States.” In the end, it all comes down to a familiar theme: follow the money. And we need to seriously question the economic reality of Saudi Arabia. That graph above of their foreign reserves looks downright grim. With money comes power. Who loses money loses power. Saudi Arabia is bleeding money. The population surge is uncanny, and there are no jobs for all these young people. Perhaps the best they can do is be a US/Israel puppet in an attempt to ‘redo’ the map of the Middle East, but that has not been a very successful project off late -like the past 100 years-. Then again, when you’re desperate you do desperate things. And when you’re a 32-year-old crown prince with more enemies than you can keep track of, you use what money is left to;
1) keep up appearances,
2) steal what others have gathered,
3) buy weapons up the wazoo, and
4) go to war.
It all paints a very dark picture for the world. Russia won’t stand for attacks on Iran. And Iran won’t let attacks on Lebanon/Hezbollah go unanswered. All that is set to push up oil prices further, and all parties involved are just fine with that. Because they can buy more weapons with the additional profits. I’ll leave you with Nassim Taleb’s comments on the situation. After all, Nassim’s from Lebanon, and knows that part of the world like the back of his hand...

The Flaws In The Climate Change Story

As I've written in the past, you can accept all the claims by the climate change scientists that climate change is occurring, and that it's caused by human behavior. Even under all those assumptions, climate change predictions are still wrong, and have been consistently wrong for about 30 years since climate change scientists have begun making them. The reason that climate predictions are consistently wrong is that climate scientists simply ignore very important issues. I've tried raising these issues with client scientists, but they simply blow me off since these issues don't fit their narrative. Here are two very important issues that client scientists ignore:
# One issue is technology, how will advances in nanotechnology and biotechnology and the Singularity affect climate change? Climate scientists don't say, and how can they? There are scientists and researchers in every city in the world looking for solutions to the carbon emission and climate change problem. If a solution can be found, then it will be found, and no climate change agreement is needed, since the company that finds a solution stands to make a billion dollars.
# The second issue is war. Every continent of the world has had massive wars each century for millennia that have killed half the population. That this will happen this century is 100% certain. If the coming world wars kill half the population through nuclear weapons, ground war, disease and famine, then how will that affect climate change? Climate claim that climate change is caused by human activity, and that large reduction in population will completely remove whatever threat the climate scientists are predicting.
With regard to technology, Generational Dynamics predicts that the Singularity, the point in time when computers will be more intelligent, more able, and more creative than humans, will occur around 2030. Each year we're increasingly able to see some of the components that will bring that about. Artificial intelligence is under development in every research lab in the world, and is advancing rapidly. Every military in the world is doing research on robots, vehicles and aircraft that can kill enemies without human intervention. Combine all that with 3D printing, and you can imagine a world where computer entities are more intelligent than humans, can duplicate themselves, and can fight against humans. Even if you don't believe in that scenario, there's no doubt that a great deal of new technology is being developed that can mitigate the climate change problem. Think about how much technology has been developed in the last 50 years, and think about how technology development is growing exponentially faster. With or without the Singularity, climate scientists have absolutely no clue what the temperature will be at the end of the century, because they have absolutely no clue what technology will be developed to mitigate it....

Climate Change Superstars Germany And Norway Humiliated At Climate Change Conference

The latest annual United Nations Climate Change Conference, COP23, ended on Friday accomplishing nothing a new collection of news stories about politicians from countries around the world taking credit climate change leadership, and expressing outrage that Donald Trump announced leaving the previous climate change agreement, and thereby allowing the world to slide into planetary climate disaster. German Chancellor Angela Merkel in particular has been a world leader in feigned environmental concern. Years ago, she promised to close Germany's nuclear power plants, saying that they were too dangerous. She has repeatedly lambasted Trump for pulling out of the Paris climate change agreement.
But it now turns out that Germany is not anywhere close to meeting its CO2 emission commitments, and in fact is going backwards. Germany's carbon emissions haven't declined for nearly a decade, and in fact have been increasing for the last three years. Germany did reduce carbon emissions in the 1990s, but even that accomplishment is dodgy. In 1991, Communist East Germany merged with West Germany to form today's Germany. East German factories were still the same ones that the Soviets had built in the 1950s when they annexed East Germany, and by 1991 those old, creaky factories were spewing huge amounts of environment poisons, including CO2. During the 1990s, the West Germans spent huge amounts of money to modernize the East German factories, and in doing so they reduced carbon emissions. But those were the easy days. The commitment to close all nuclear power plants by 2022 means that Germany's huge economy is going to depend on coal for energy, and today 40% of German energy supply is coal-based. So Merkel is going to have to do a U-turn on either nuclear-generated energy or coal-generated energy, and either way, there is no chance at all that Germany will meet its climate change commitments. Council on Foreign Relations
Norway is another environmental superstar that is having similar problems. Norway, with its cold, clean, crisp Nordic climate, has always appeared to be an environmental model, if you didn't count the fact that it's a major producer of oil and gas, which are its most important exports. In 2015, Norway awarded oil licenses to Statoil, Chevron and other companies, allowing them to drill for oil in Norwegian waters in the Barents Sea. Well, Greenpeace and other environmental groups are suing Norway, saying that the awards are unconstitutional because "Under article 112 of the constitution, the Norwegian state has a duty to not hurt the climate." According to Greenpeace: "Our goal is that the court agrees with us that licenses awarded in the Barents Sea are invalid and should be withdrawn because it violates future generations’ right to a healthy environment." The attorney representing Norway evoked laughter in the courtroom by saying: "This is a type of constitutional activism we have not seen before and that is different from our legal tradition in Norway. This is an American-style use of our judicial system. It would stop all future oil licenses awarded off Norway and would imperil hundreds of thousands of jobs." What the examples of Germany and Norway show is that the whole climate change program is a fantasy put forth by politicians for domestic purposes. Ironically,  Trump is the only politician willing to tell the truth. Reuters

Kinshasa, the capital city of Democratic Republic of Congo, has benefited enormously from carbon emissions

# Africa has benefited enormously from carbon emissions. Above is a picture of Kinshasa, the capital city of Democratic Republic of Congo (DRC). You can see the skyscrapers, apartment buildings, roads, cars, and other infrastructure made possible by research and manufacturing performed by the West. If it hadn't been for the West's CO2 emissions, the people of Kinshasa would still be living in thatch huts and driving around in carts pulled by donkeys and camels. Africa is as responsible as anyone else is for carbon emissions because of the enormous benefits they get. And what would happen if a huge pot of money were given to Joseph Kabila, the president of DRC, to mitigate climate change. Where would that money go? Anyone who knows anything about what's going on in Africa knows the answer. Kabila would use the money to provide support and weapons to government militias slaughtering, raping and mutilating thousands of people in Kasai province, where 3.9 million people have already been forced to flee their homes. Deutsche Welle
I've been writing about climate change conferences, and it's always been clear that they have nothing to do with mitigating any climate problems. They have only one objective: To force the US and other western countries to pay billions of dollars to leaders of "underdeveloped" countries, so that those leaders can use the money to pay their cronies, pad their bank accounts, and buy weapons to kill their enemies. I'm not aware of any proposal coming out of a climate change conference that would actually reduce carbon emissions. And the examples of Germany and Norway described above illustrate this.... Radio France International and Xinhua

vrijdag 17 november 2017

Gold Gains As Stocks Slide, Yield Curve Crashes And Dollar Dumps

Economic Data continues to surprise to the upside (compared to what had been terrible expectations), is this as good as it gets?


But credit, the yield curve, and now stocks are not loving it. Small Caps were the only major index green today...


The Dow and S&P 500 fell for the 2nd week in a row, something they haven't done for 3 months. Small Caps best on the week (followed by Nasdaq thanks to yesterday's panic buy)...


Futures show the crazy moves this week better...


VIX was slammed late on today in a desperat ebid to get the S&P green on the week...


But while stocks rebounded briefly, FX carry wasn't...


And nor was the bond market...


Big week for tax-related stocks...


SFIX went public today at $15...


While US HY bond prices ended the week higher (thanks to yesterday's melt up), but still remains well below its 200DMA...


US HY spreads rose for the 4th week in a row...


European HY Fund assets crashed to their lowest since June 2016...


Treasuries were mixed on the week with the front-end higher in yield and back-end lower...


The US Treasury yield curve crashed almost 10bps this week, the biggest flattening since Dec 2016 to its flattest since Nov 2007...


Note that is the flattest 2s10s since Oct 2007. The last 3 times it was this flat, the US economy was in recession...


The Dollar Index had its worst week in over 2 months, dropping to 1-month lows (this is also the first consective weekly decline in the dollar index since July)...


Yen and Euro strength weighed the most on the dollar this week (AUD and CAD were weaker as oil slipped)...


USDJPY was clubbed like a baby seal this week (worst in 2 months, today was USDJPY's worst drop since May). It seems 114.000 to 112.00 is the corridor...


Gold had its best week in over a month, surging back above its 50DMA towards the $1300 level. Bitcoin had another big week, getting as close to $8000 as possible (up 45% from its lows last weekend)...


Finally, we note that in the weeks since MbS launched his 'corruption' crackdown in Saudi Arabia, only one asset has really shone...

Europe To Be Flooded With 2nd Refugee Wave, UN Warns

Back in 2015, at the height of Angela Merkel's "open door" admission policy which in addition to granting German entry to over 1 million refugees, many of whom turned out to be radical jihadists and sent her approval rating crashing to the lowest in her career, the German chancellor realized that the great migration wave from the middle east into Central Europe, originally meant to reinvigorate Europe's aging demographics (and prompted Deutsche Bank to even boost its German GDP forecast), maybe was not such a great idea, and was just not worth the risks and trade offs. And while in the subsequent two years Germany in particular, and Central Europe in general managed to avoid another mass migration wave with most refugees gated either in Turkey or Italy, a second wave of migration into Europe now may be imminent as the situation in refugee camps in Africa and the Middle East is only getting worse, the head of the UN World Food Programme said. He added there is a clear link between hunger and migration.
Speaking to German newspaper Die Zeit, the executive director of the UN's World Food Programme, David Beasley, said that living conditions, mostly food distribution, in refugee camps in crisis-affected regions had deteriorated dramatically before the European migrant crisis struck in 2015. “We paid a heavy price for this mistake and I'm afraid we're about to make it once again,” Beasley believes. According to the UN food chief, while many asylum seekers wanted to stay in their home region, the lack of food has driven them away. “If they don’t have enough food, they will leave. And many of them would go to Europe,” Beasley said. Beasley also warned that while the UN has been seemingly making progress in fighting world hunger over the last 10 years, the number of people suffering hunger worldwide has now dramatically increased again; he added that the food crisis is caused mainly by wars and climate change. Yemen is threatened by famine because Saudi Arabia is blocking the country’s ports, preventing aid deliveries, urging Gulf countries not to stand aside but instead join the food aid program for crisis-stricken regions, Beasley said.
A WFP report from March says that some 108 million people across the globe faced “crisis food insecurity or worse,” a dramatic increase from 2015 when the figure was 80 million. The document says that major food crises were fueled by “conflict, record-high food prices and abnormal weather patterns.” The number of asylum seekers in the EU during the second quarter of 2017 reached 149,000, according to statistical data from Eurostat. The applications mainly came from Syria, Nigeria and Afghanistan. Germany, Italy, France, Greece and the UK account for almost 80 percent of all first-time applicants in the union, the data shows. Of course, for Europe's political oligarchs none of the above social dimensions of the migrant tragedy matters, but one thing does: the chart shown below which demonstrated that as of December 2015, there was a direct correlation between the approval rating of establishment politicians and the migrant flood hitting Europe...


If Beasley is right, and Europe is indeed about to be flooded with millions of disgruntled migrants, the anti-establishment wave that brought brexit and countless subsequent tremors, will seem like a walk in the park next to the nationalistic backlash that will soon follow....

Gold Up Most In 3 Months, Spikes Above Key Technical Level

Gold continues to shine in the post-Saudi-coup world...


And the precious metal just broke above its 50-day moving average, after bouncing off its 200-day on Tuesday...


This is gold's best day in 3 months...


Gold is gaining as the dollar index slumps to near 1-month lows...


Of course, it's USDJPY that really matters (and it just broke below 112.00)...

As Oil Heads For Down-Week, Crude Stakes Are Huge

After five straight weeks higher, read by many as confirmation of how awesome the global coordinated recovery must be, WTI and Brent dropped this week as inventories rose, demand outlooks dimmed, and OPEC hope faded...


As Jeffrey Snider notes, there is a titanic struggle going on right now in the oil market. On the one side of the futures market are the usual pace setters, the money managers. Last week, the latest COT data available, they went the most net long since March. If it continues, it will close in on the most positive futures position since the record long they established back in February. Normally that would be insanely bullish for oil prices. But just as in February/March another part of the futures market has intervened on the other side. Back then it was the oil producers who rising inventory forced into a larger and larger offsetting net short (hedge). This time, however, it is the swap dealers who are short for reasons that aren’t really clear. The weekly COT report for the last week in October showed a record net short for dealers, just beating their most extreme position from the middle of 2013 at -424k contracts. In the first week and November, they blew away that record at -470k...


It clearly matters because in 2017 the oil market has changed. It may be the inventory story, or it may be the exit of producers from hedging that inventory and other products. Whatever the case, money managers just aren’t setting the price like they used to. And it could be that managers have changed their market activities, too, where other parts of the futures market are now cueing off (shorting) this possible difference. I honestly don’t know what it is, but I can safely point out where it is...


Now with swap dealers apparently showing very, very strong conviction on the short side, oil prices can’t gain any traction beyond the $57 established by in all likelihood geopolitical risk. The fundamentals of oil continue to favor the dealers over the managers, with oil inventories remaining at the same crisis “rising dollar” levels. Being slightly better than 2016 is not a real achievement toward clearing the leftover physical imbalance, not when oil inventories are instead still consistent with late 2014. With 2017 nearly over, there should have been much more progress toward 2013 levels of stock long before now if there was ever going to be a realistic chance to balance the oil market next year (at the most optimistic)...


Instead, it indicates yet again a demand problem, as in lack of materializing upside demand due to, as always, economic constraints that in the mainstream aren’t ever considered real (like when the oil crash was called repeatedly a “supply glut”). Pushing the expected rebalancing date into 2019 or even (more realistically) 2020 creates greater downside not upside risks...


That may be why dealers have jumped all over the shorts; if it is geopolitical risks driving oil prices higher, and maybe what managers are betting on now, then if or when they fade the negative fundamentals of oil will be re-imposed on the price. That seems to be what the futures curve is saying, too...


Backwardation indicates expected balance, but at a very low price rather than a rebounding one. In the latest oil pullback since last week, the curve has moved lower in unison, with the same almost identical indicated backwardation rather than toward any serious rewind toward contango. One additional factor to consider is those record and near-record opposite futures positions. What happens if the oil price starts to move in either direction? There may need to be a whole lot of covering by whichever side ends up on the losing end, perhaps turbocharging the price as it begins to move whatever way it decides to go. There is right now a lot at stake in the crude market, and it’s not just about oil....

Turkish Lira, Bonds Plunge After Erdogan Tells Central Bank "It's On The Wrong Path"

Turkish lira plunged near record low 3.9/USD this morning and bond yields spiked over 12.5% for the first time in history as investor anxiety escalated following President Erdogan's attack on the nation's central bank, decrying it's "wrong path." Currency crisis...

And bond market panic...


As Bloomberg reports, Turkish President Recep Tayyip Erdogan signaled an end to his uneasy truce with the new central bank chief, attacking the institution now run by Governor Murat Cetinkaya for its repeated revisions to economic targets and “wrong path” to tackle soaring inflation. “They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered,” Erdogan said in a speech on Friday in Ankara. “Results speak for themselves.” “We will solve this, things can’t go on like this,” Erdogan said, vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high. “We can’t make this a taboo,” he said, rejecting the idea that central bank independence means he shouldn’t comment on interest rate policy.
The comments come as a slew of economic stimulus measures implemented in the wake of a 2016 coup attempt have helped push growth up while driving core inflation to 11.8 percent in October, the highest since 2004. “We’re back at Erdoganomics 101,” said Cristian Maggio, head of research at TD Securities in London. “I would have expected him to start shouting at the central bank only once the lira was on a more solid footing versus the U.S. dollar and euro. We’re clearly not there yet, so that makes me think that he’s more concerned about growth, a concern that we share.”

"Nightmare On Bond Street": HY Turmoil Leads To Third Largest Junk Outflow In History

Following this month's drop in junk bond prices and the 40 bps spread widening in high yield last week, the largest since November 2016, Bank of America has come up with an apt title for its weekly fund flow report: "Nightmare on Bond Street"...


And with good reason: last week, US junk bond funds and ETFs reported a $4.43bn outflow this past week - the third largest outflow on record and the largest since August 2014. This follows a smaller $0.94Bn outflow the prior week. Non-US HY contributed an additional $2.3bn worth of redemptions, bringing the global junk outflow figure to -$6.7bn, also the 3rd largest ever...


The near record outflows accompanied the second most aggressive round of selling in the US junk bond market in 2017. The weakness in performance only trails a sell-off that occurred in March, when spreads widened by 61 points in less than three weeks according to FT. “It was very much a flows driven sell-off last week and in the beginning of this week,” said Tim Schwarz, a credit analyst with Investec Asset Management. “We saw a lot of pockets of illiquidity.” According to EPFR, roughly half of the US HY withdrawals came last Friday, when more than $2bn left the space in one day. Since then, the outflows have been slowly declining each day, from $585mn on Monday to $494mn yesterday.
Somewhat surprisingly, large outflows such as the most recent bout are not correlated with subsequently weak performance. In fact, out of the 15 largest-ever daily high yield outflows recorded, next 3 month returns have been positive 10 times, with an average annualized return of 7.2%. According to BofA, this is likely because most of the spread widening occurs just before the flood of withdrawals, providing an opportunity to capture excess returns should the selloff prove to be temporary. Indeed, as BofA's credit strategist note, given Thurdsday's strong secondary performance, "we think such is likely to be the case in last week's episode as investors have once again embraced a buy-the-dip mentality." In contrast, EPFR also reports that flows for other fixed income asset classes were relatively stable. However, the large outflows from high yield and loans resulted in a net $1.32bn outflow from all bond funds and ETFs, after a $2.27bn inflow in the prior week...



Inflows to high grade were little changed at $3.31bn, down from $3.41bn a week earlier. Inflows to short-term fixed income increased (to $0.65bn from $0.27bn) while inflows outside of short-term declined (to $2.66bn from $3.15bn). Inflows were higher for high grade funds (to $1.83bn from $1.52bn), but lower for ETFs (to $1.48bn from $1.89bn). Inflows to global EM bonds weakened to $2.66bn from $3.15bn, mostly driven by local currency funds / ETFs. Inflows to munis instead improved to $0.34bn from $0.28bn. Finally, inflows to money markets were close to flat at $0.02bn, down from a $7.58bn inflow in the prior week...



Speaking to the FT, Robert Cusack, a PM at WhaleRock Point Partners, said that the recent high-yield sell-off could be short lived, likening it to the brief but rapid move higher in credit premiums earlier this year. But Cusack added that he is still looking to reduce exposure to the asset class. “It’s a topic each week in our investment committee meetings and we have been discussing the risk reward in high yield now,” he said. “Our next move is to reduce our exposure in high yield.” Meanwhile, there were no problems in equity land: flows to stocks improved to a $3.2 billion inflow, which however once again masked an ongoing divergence, as $9.9bn of this amount went to ETFs. Active, human managers, saw another outflow, this time for $6.7 billion as the non-ETF financial sector continues to die a slow, painful death....

Housing Starts, Permits Rebound In October After Storm-Soaked September

Following September's storm-driven tumble, October has seen a big rebound in Housing Starts (+13.7% MoM) and Permits (+5.9% MoM) both beating expectations, as multi-family starts explode. Housing starts printed above all analysts' guesses (4 standard deviations above expectations) for the biggest monthly jump in a year...


The surge in starts was driven by a major rebound in multifamily units...


That is a 37.4% increase month over month in October multifamily starts with only a 5.3% increase in single family starts. However, multifamily starts are still down 9.6% YoY (single-family starts are up just 0.7% YoY) and overall housing starts are down 2.9% YoY. Single-family permits reached a new cycle high...


Finally some context for the recovery, these are the same level of starts/permits seen in 1993...

Mueller Subpoena Spooks Dollar, Sends European Stocks, US Futures Lower

Yesterday's torrid, broad-based rally looked set to continue overnight until early in the Japanese session, when the USD tumbled and dragged down with it the USDJPY, Nikkei, and US futures following a WSJ report that Robert Mueller had issued a subpoena to more than a dozen top Trump administration officials in mid October. And as traders sit at their desks on Friday, U.S. index futures point to a lower open as European stocks fall, struggling to follow Asian equities higher as the euro strengthened at the end of a tumultuous week. Chinese stocks dropped while Indian shares and the rupee gain on Moody’s upgrade. The MSCI world equity index was up 0.1% on the day, but was heading for a 0.1% fall on the week. The dollar declined against most major peers, while Treasury yields dropped and oil rose.
Europe's Stoxx 600 Index fluctuated before turning lower as much as 0.3% in brisk volumes, dropping towards the 200-DMA, although about 1% above Wednesday’s intraday low; weakness was observed in retail, mining, utilities sectors. In the past two weeks, the basic resources sector index is down 6%, oil & gas down 5.8%, autos down 4.9%, retail down 3.4%; while real estate is the only sector in green, up 0.1%. The Stoxx 600 is on track to record a weekly loss of 1.3%, adding to last week’s sell-off amid sharp rebound in euro, global equity pullback. The Euro climbed for the first time in three days after ECB President Mario Draghi said he was optimistic for wage growth in the region, although stressed the need for patience, speaking in Frankfurt. European bonds were mixed. The pound pared some of its earlier gains after comments from Brexit Secretary David Davis signaling a continued stand-off in negotiations with the European Union...


In Asia, the Nikkei 225 took its time to catch up to the WSJ report that US Special Counsel Mueller has issued a Subpoena for Russia-related documents from Trump campaign officials, although reports pointing to North Korea conducting 'aggressive' work on the construction of a ballistic missile submarine helped the selloff. The Japanese blue-chip index rose as much as 1.8% in early dealing, but the broad-based dollar retreat led to the index unwinding the bulk of its gains; the index finished the session up 0.2% as the yen jumped to the strongest in four-weeks. Australia’s ASX 200 added 0.2% with IT, healthcare and telecoms leading the way, as utilities lagged. Mainland Chinese stocks fell, with the Shanghai Comp down circa 0.5% as the PBoC’s reversel in liquidity injections (overnight net drain of 10bn yuan) did little to boost risk appetite, as Kweichou Moutai (viewed as a bellwether among Chinese blue chips) fell sharply. This left the index facing its biggest weekly loss in 3 months, while the Hang Seng rallied with IT leading the way higher. Indian stocks and the currency advanced after Moody’s Investors Service raised the nation’s credit rating. The dollar was pressured even as tax reform moved a step forward given Trump-Russia probe came back into focus. Two-year Treasury yield hit a fresh high and bonds slipped. The euro stayed on course to its best week in two months as Draghi remains bullish on prospects of higher wages; the kiwi hit its lowest level since June 2016.
Meanwhile, the U.S. Treasury yield curve remained on investors’ radar, reaching its flattest levels in a decade, reflecting a belief that the Federal Reserve will continue to raise interest rates. The U.S. House of Representatives passed a tax overhaul expected to boost share prices if it becomes law. The legislative battle now shifts to the Senate. As Bloomberg notes, as "Washington took one step closer to tax reform and China’s central bank injected the most cash since January into its financial system this week, investors have been trying to decide if resilient global growth and strong earnings forecasts warrant sticking it out in equities. Lofty valuations contributed to fund managers paring back some exposure after global shares reached record highs earlier this month." As earnings season drew to a close with 90 percent of U.S. and European companies having reported, analysts said results were supportive but weaker than the previous quarters. “While they look good overall, the strong momentum apparent since Q1 is now fading,” said Societe Generale analysts, adding that consensus earnings estimates are no longer being raised for U.S. or euro zone stocks.
As also reported on Thursday, Fed's Williams suggested that central banks should consider unconventional policy tools for use in the future, including higher inflation targets and income targeting. Williams also suggested that negative rates need to be on list of potential tools if the US enters a recession, even as he said that a December hike, followed by 3 hikes in 2018 is perfectly reasonable. "What really matters is gradual normalisation not timing, should raise rates to around 2.5% in the next couple of years" he said adding that "Low inflation in a way is lucky as it allows strong growth, however, if it does not pick up over the next few years he will re-think the rate path." Oil prices were on track for weekly losses, slipping from two-year highs hit last week on signs that U.S. supply is rising and could potentially undermine OPEC’s efforts to tighten the market. U.S. light crude stood at $55.53 a barrel, up 0.7 percent on the day but still within its trading range in the past couple of days. It was down 2.1 percent on the week. Brent futures hit a two-week low of $61.08 a barrel but last stood 0.3 percent higher at $61.53. It was down 3.1 percent for the week. Economic data today includes housing starts, building permits.
# Market Snapshot;
- S&P 500 futures down 0.1% to 2,583.25
- STOXX Europe 600 down 0.2% to 384.06
- Nikkei up 0.2% to 22,396.80
- Topix up 0.1% to 1,763.76
- Hang Seng Index up 0.6% to 29,199.04
- Shanghai Composite down 0.5% to 3,382.91
- German 10Y yield rose 1.1 bps to 0.387%
- Euro up 0.2% to $1.1795
- Brent Futures up 0.7% to $61.78/bbl
- Brent Futures up 0.7% to $61.78/bbl
- Gold spot up 0.3% to $1,282.59
- U.S. Dollar Index down 0.3% to 93.69
# Top Overnight News;
- House Republicans pass tax bill, while Senate Finance Committee approves different version
- Special Counsel Robert Mueller is said to have served President Donald Trump’s election campaign a subpoena in mid-October seeking documents related to Russia contacts
- ECB President Mario Draghi said he was confident for wage growth in the euro area
- While U.K. Brexit Secretary David Davis said there would be some clarity on the Britain’s divorce bill with the European Union in a “a few more weeks,” there are signs that talks with EU leaders are in a new stand-off
- Japanese PM Shinzo Abe says he will push through initiatives to boost productivity and compile a new economic policy package next month
- Canada is open to a Mexican proposal to review the North American Free Trade Agreement every five years instead of ending the deal automatically if not renegotiated, which the U.S. had demanded, Reuters reports, citing two unidentified government sources
- Senate Panel Approves Tax Plan as GOP Leaders Gird for Battle
- Murdoch Has His Pick of Suitors as He Ponders Fox’s Fate; Sky Rises Most Since June on Interest From Comcast, Verizon
- Chinese Stocks Tumble as State Media Warning Triggers Selloff - India’s First Moody’s Upgrade in 14 Years Bets on Reforms
- Draghi Says Confidence on Inflation Will Help Drive Wage Gains
- China Issues Draft Rules to Curb Asset Management Product Risks
- Bitcoin Flirts With Record $8,000 High, Leaving Sell-Off Behind
- PDVSA Looks Like a ‘Zero’ to Man Who Ran Elliott’s Argentina Bet
- Manafort Spent Millions on Home Updates But Numbers Don’t Add Up
- Tesla Seals Order From Michigan Grocery Chain for Semi Trucks
- Luxoft Holding Second Quarter Adjusted EPS Beats Estimates....

BOE Warns Weekly Fund Redemptions Of 1.3% Would Break Corporate Bond Market

The Bank of England has done some timely and truly eye-opening research into the resilience of corporate bond markets. The research is contained in the Bank of England Financial Stability Paper No.42 and is titled “Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds” by Yuliya Baranova, Jamie Coen, Pippa Lowe, Joseph Noss and Laura Silvestri. The starting point of the analysis is to revisit the Global Financial Crisis (GFC) which saw $300 billion of related to subprime mortgages amplified to well over $2.5 trillion of write-downs across the global financial system as a whole. One of the problems was that the system was structured in a way that did not absorb economic shocks, but amplified them. The amplification came via a feedback loop. As the crisis unfolded, fears about credit worthiness of banks led to the collapse of interbank lending. Weaker banks had their funding withdrawn, which led to a downward spiral of asset sales and the strangling of credit in the broader economy...


The paper notes that, since then progress has been made and the Bank of England’s stress tests now include the feedback loop created by interbank loans. Indeed, the 2016 test showed that the potential for solvency problems to spread between UK banks through this channel has “fallen dramatically” since the crisis. Furthermore, interbank lending has been cut back and is more often secured against collateral. The report cautions that other feedback loops might be present, especially since banks only account for about half of the UK financial system. Indeed, a key objective for regulators is to assess how the non-bank part of the system, termed “market-based finance” in the paper, responds to economic shocks. In particular, could the non-bank system, which trades “market-based finance” (principally bonds), amplify shocks in a similar way to the banking system during the last crisis? The report characterises market-based finance and the related risks as follows. The system of market-based finance includes, among other parts, investment funds, dealers, insurance companies, pension funds and sovereign wealth funds. It supports the extension of credit and transfer of risks through markets rather than banks.
It has expanded rapidly since the crisis. At the global level, assets held by non-bank financial intermediaries increased by more than a third since the financial crisis. The potential spillover effects in market-based finance centre on ‘fire sales’ of assets, which affect prices of financial assets and functioning of markets. Participants in this part of the system can face incentives, or be forced into, sudden asset sales. The report sees the potential for another dangerous feedback loop developing from falling asset prices which lead to declines in net worth, prompting a withdrawal of funding which leads to more asset sales and further falls in prices. They are hardly reinventing the wheel here and what they’re really describing is the evidence that investors often behave pro-cyclically. It raises the valid concern that pro-cyclical behaviour is most dangerous in less liquid assets with short-notice redemption, the classic liquidity mismatch. The post-Brexit problem in 2016 in UK commercial property funds was a great example. These dynamics were illustrated clearly in 2016 in funds investing in UK commercial property. With the property market in hiatus following the United Kingdom’s referendum on membership of the European Union, these open-ended funds faced redemption requests from investors concerned about the prospect of future price falls and fearing that other redemptions would force the funds to suspend. The process was self-fulfilling and many funds were forced to suspend redemptions.
The report goes on to highlight the challenges for broker-dealer liquidity and hedge funds if asset managers aggressively sell securities in a crisis. It’s obvious stuff, that broker-dealer are less able to warehouse securities and less able to provide funding to hedge funds, which might be buyers, and could become forced sellers. The BoE models what would have when one type of shock, redemptions by open-ended funds - trigger selling by the funds with spillover effects for broker-dealers and hedge funds. The paper that follows seeks to model how the aggregate behaviour of several sectors within the system of market-based finance, including investment funds and dealers, could interact to spread and amplify stress in corporate bond markets. That focus stems from the growing importance of bond markets to the financing of the economy, alongside the rapid growth in holdings of such bonds in fund structures. It does not focus on individual companies; the analysis is conducted at a sector level. It is not concerned with the capacity of the sectors to absorb losses...


Basically, the model estimates the sensitivity of investment grade corporate bonds yields in Europe if funds sell the equivalent of 1% of their total assets on a weekly basis – which was similar run rate to the redemptions in October 2008 (4.2% over the month – see below). Since then, however, broker-dealer capacity has contracted and investment grade issue issuance risen sharply. Importantly, it also addresses the scale of redemptions which might overwhelm the ability of broker-dealers and hedge funds to absorb the selling. The model assumes that there is a shock leading to an initial round of redemptions which prompts investment funds to make asset sales. Broker-dealers require lower prices to compensate them for absorbing the selling which leads to a second round of redemptions and selling. After that, further selling “breaks” the market and leads to dislocated prices on the downside...


The paper explains the market-breaking points as follows; The level of redemptions at which the second-round price impact line ends is where dealers reach the limit of their capacity to absorb those asset sales by funds not purchased by hedge funds. We assume that market liquidity is tested at this point and refer to it as the market-breaking point. Transactions could still occur beyond this point, for example, if a dealer can immediately match a buyer and seller or if it sells other assets to purchase corporate bonds, but are assumed to take place at highly dislocated prices.
# Conclusion: The BoE paper estimates that a weekly level of redemptions from funds equivalent to 1% of their assets would increase investment grade corporate bond yields by 40 basis points. However, this is the key, it estimates that initial redemptions equivalent to only 1.3% of assets on a weekly basis would be “needed to overwhelm the capacity of dealers to absorb those sales, resulting in market dysfunction”, i.e. the market-breaking point. It describes this as an “unlikely but not impossible event.” We disagree, we are in a far bigger bubble than 2007-08....