Why The Collapse Of Saudi Arabia Is Inevitable

On Tuesday 22 September, Middle East Eye broke the story of a senior member of the Saudi royal family calling for a ‘change’ in leadership to fend off the kingdom’s collapse.
In a letter circulated among Saudi princes, its author, a grandson of the late King Abdulaziz Ibn Saud, blamed incumbent King Salman for creating unprecedented problems that endangered the monarchy’s continued survival.
‘We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself,’ warned the letter.
Whether or not an internal royal coup is round the corner – and informed observers think such a prospect ‘fanciful’ – the letter’s analysis of Saudi Arabia’s dire predicament is startlingly accurate.
Like many countries in the region before it, Saudi Arabia is on the brink of a perfect storm of interconnected challenges that, if history is anything to judge by, will be the monarchy’s undoing well within the next decade.

This post was published at David Stockmans Contra Corner on September 29, 2015.

So Much For The US Export Boom – – -Shipments Heading Down For 2015

/ September 30, 2015
Hopes for an American export boom are wilting under the weight of a strong dollar and global economic strains.
U. S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U. S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.
The weak trade performance is restraining overall economic growth, a sign of how troubles in China and other major economies are dinging the U. S. economy.
‘Foreign demand remains the weakest part of the economy,’ said Jim O’Sullivan, chief U. S. economist at consulting firm High Frequency Economics.
It didn’t seem that way in 2010, when President Barack Obama set a goal of doubling exports over five years. Some big cities took up the challenge, including Portland, Ore.
Facing a battered economy at home, Vanessa Keitges, president of Portland-based Columbia Green Technologies, lined up sales in Belgium and New Zealand. In Canada, she chased public-building projects and Wal-Marts. Within three years, one-quarter of the green-roofing company’s sales were outside the U. S.

This post was published at David Stockmans Contra Corner By MARK PETERS and BEN LEUBSDORF The Wall Street Journal.

World Set For Emerging Market Mass Default – – Even The IMF Sees It

The International Monetary Fund (IMF) has issued a double warning over higher US interest rates, which it said could trigger a wave of emerging market corporate defaults and panic in financial markets as liquidity evaporates.
The IMF said corporate debts in emerging markets ballooned to $18 trillion (12 trillion) last year, from $4 trillion in 2004 as companies gorged themselves on cheap debt.
It said the quadrupling in debt had been accompanied by weaker balance sheets, making companies more vulnerable to US rate rises.
‘As advanced economies normalise monetary policy, emerging markets should prepare for an increase in corporate failures,’ the IMF said in a pre-released chapter of its latest Financial Stability Report.
It warned that this could create a credit crunch as risks ‘spill over to the financial sector and generate a vicious cycle as banks curtail lending’.

This post was published at David Stockmans Contra Corner on September 30, 2015.

Jim Chanos: China’s Emperor Down To His Underwear

The best-known China bear says the emperor is not yet naked, but getting there.
For the past several years, well-known hedge fund manager Jim Chanos of Kynikos Associates has been an outspoken China bear. He explains how he became concerned that the world’s second largest economy was headed for trouble and discusses why any country, whatever its political ideology, will end up paying for economic missteps.
Lynn Parramore: You’ve been skeptical towards China for a long time. What did you see that set off alarm bells?
Jim Chanos: Way back in fall of ’09 we were looking at why the global mining business was actually doing so well through the teeth of the recession, the crisis of 08-09. I knew intuitively it was because China was a vast source of demand for commodities, but I didn’t know how much until my real estate analysts put some numbers up on the white board. One of them said that as of the summer of 09, China had 5.6 billion square meters of real estate under development, both approved and pending. He said half of that was apartment buildings and half of it was commercial and mixed-use. I said, wait a minute – you’ve got the decimal point wrong because 5.6 billion square meters is 60 billion square feet. And it can’t be. He looked at me and checked the numbers a few times and said, ‘It’s 5.6 billion square meters.’
That was the ‘ah-ha’ moment. If half of that was office and mixed commercial space, – 30 billion square feet out of the 60 – and China has 1.2 -1.3 billion people, then you’ve got a 5′ x 5′ office cubicle for every man, woman, and child in the country! That’s all been built, by the way. I think the latest number on that time series shows 10.6 billion meters currently under development.

This post was published at David Stockmans Contra Corner on September 30, 2015.

Spain Leaps Toward Political Breakdown

Desperately needed international investors dread it
The dust is not even close to settling after Catalonia’s latest experimental flirtation with nation building. The pro-independence coalition fell tantalizingly short of gaining a majority of seats (62 out of 135). Now it needs the support of the anti-capitalist separatist party Popular Unity Candidacy (CUP) to secure a pro-independence majority in the regional parliament.
The problem is that CUP, which advocates a Catalonian exit (Cat-exit) from the EU, the Eurozone, and NATO, as well as unilateral default on the region’s debt, seems determined to play hard ball. After picking up 10 seats in the election – a seven-point increase on 2011′s total – its lead candidate Antonio Baos has refused to endorse the reappointment of the region’s pro-business president Artur Mas, who Baos described as ‘tainted’ by corruption and the long shadow of austerity.
Kingmaker or Kingslayer?
In his role as Catalonia’s new kingmaker-turned-kingslayer, Baos also dismissed the possibility of CUP supporting a unilateral declaration of independence from Spain. Before the elections CUP had pledged that it would only support a unilateral declaration of independence if the pro-independence parties received a majority of the vote. It won 47%.

This post was published at Wolf Street on September 30, 2015.

We’ve Seen This Picture Before – – Global Markets Down $13 Trillion Already

The US stock market has been inflating almost continuously since Black Monday in October 1987 when the newly arrived Fed Chairman, Alan Greenspan, panicked and opened up the money spigots.
In fact, the S&P 500 had risen by nearly 1000% as of the recent May peak, but that was not owing to a traditional domestic business cycle or booming growth in the main street economy. To the contrary, real median household income in 1989 was $53,000 in constant 2013 dollars – – or exactly where it still sits today.

This post was published at David Stockmans Contra Corner on September 29, 2015.

Goodnight Janet; Credit Follows The ‘Dollar’ Now

On this side of the ‘dollar’ world, credit markets have all but written Janet Yellen into irrelevance. Despite her pleas (because of?) last week, there isn’t any part of money dealing or fixed income that is taking her ‘certainty’ about recovery and ‘inflation’ as even a partial setting. So lost is the FOMC, that everywhere you turn these markets are moving opposite.
Where that has to sting the most is ‘inflation expectations.’ Proving to be far more than just crude prices (which have largely been stable since August, at least in the view of not crashing again), breakevens are now at lows last seen in the dark days of 2009, surpassing that first ‘wave’ earlier this year. Trading in the past few days has seen TIPS hedging interest drop sharply, which can only count as credit markets giving up on the recovery narrative in full – once (to January 14) might be ‘transitory’, but twice eight months later and at new lows is goodnight Yellen.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ September 29, 2015.

Oil Debt Bubble Facing Total Collapse

Oil prices appear to be holding at about $45 per barrel, for now. Gasoline prices are finally coming down too. Here in the land of fruits and nuts we filled up our gas tank over the weekend with the cheap stuff for just $3.19 per gallon. What a deal.
The combination of over production, diminishing global growth, and the end of sanctions against Iran, could keep oil prices down for several years – or more. For southern California commuters, and other consumers, lower oil prices act like an income boost. The savings at the pump can be used to buy more goods.
Ordinarily, lower oil prices, and the potential for greater consumption, would serve to increase the Fed’s favorite metric…aggregate demand. Conceivably lower oil prices could give GDP a bump. So, too, they could allow consumers to pay down debt.
But this is hardly an ordinary, garden variety, cyclical oil price decline. Unfortunately, it is the great big bust that followed the great big boom in U. S. oil and gas development and production. What’s more, a lot of big bets, fueled with cheap credit, were made with the premise that oil prices would be much, much higher than $45 a barrel.
Persistently lower oil prices are undermining the paper financing structure that stimulated new oil and gas exploration and production. A similar event, triggered by the unexpected drop in house prices, occurred several years ago. Bank balance sheets were shredded. Thus any boost the economy gets from lower oil prices will be overwhelmed by the fallout of busted oil projects.

This post was published at David Stockmans Contra Corner by MN Gordon ‘ September 29, 2015.

After Glencore Shoe Dropped, Commodity Rout Starting To Look LIke A Financial Crisis

The 15-month commodities free-fall is starting to resemble a full-blown crisis.
Investors are reacting to diminished demand from China and an end to the cheap-money era provided by the Federal Reserve. A Bloomberg index of commodity futures has fallen 50 percent since a 2011 high, and eight of the 10 worst performers in the Standard & Poor’s 500 Index this year are commodities-related businesses.
Now it all seems to be coming apart at once. Alcoa Inc., the biggest U. S. aluminum producer, said it would break itself into two companies amid a glut stemming from booming production. Royal Dutch Shell Plc announced it would abandon its drilling campaign in U. S. Arctic waters after spending $7 billion. And the carnage culminated Monday with Glencore Plc, the commodities powerhouse that came to symbolize the era with its initial public offering in 2011 and bold acquisition of a rival in 2013, falling by as much as 31 percent in London trading.
‘With China slowing down and a lot of uncertainty, fears in the market have intensified, and the reduction in the pace of demand growth for all commodities has seemed to send everybody off the cliff,’ said Ed Hirs, managing director of a small oil producer who teaches energy economics at the University of Houston.

This post was published at David Stockmans Contra Corner on September 29, 2015.

This Is Not A Retest – – Take # 2

I first posted the attached three weeks ago, and here we are again, knocking on the door of the Bullard Rip low of last October 15th. While we will know soon enough whether this battered and bloodied bull will give up the ghost on this trip down and slice through 1867 on the S&P 500 or stage another half-hearted rebound, one thing cannot be gainsaid.
To wit, all the reasons for a deep correction ahead – – not merely the perennial Wall Street hyped ‘retest’ – – remain in tact; and a passel of new ones have appeared, too.
In addition to the global deflation waves lapping ever closer to these purportedly decoupled shores, we now have a Fed that has decisively rendered itself into a evident state of indecision and cacophonous gibberish.

This post was published at David Stockmans Contra Corner on September 28, 2015.

The 2% Inflation Hoax – – Central Bankers Are Clueless Everywhere

Japan’s Prime Minister Shinzo Abe declared last week that Japan is no longer suffering from deflation the day after his own government statistics showed that Japanese prices declined for the first time since QQE began. That is actually great news for the Japanese people, though Abe and Kuroda at the Bank of Japan continually pledge to end the relief. Abe’s direct synthesis, however, is jarring in that it is exposing the internal framework of global monetarism. Rational expectations itself may have once been nothing more than a forced equality in order to gain the ‘E’ in DSGE statistics, but in 2015 it is showing its true, modern manifestation of being ‘all talk.’
Central banks, for all the posturing, don’t actually do all that much aside from heap generous transaction premiums upon the broker class. In economic reality, bank reserves are divorced from function leaving room only for those who wish to believe in the magic. That is what all the fuss is about inflation expectations, since most people don’t care enough to figure out what a central bank actually does (this is especially true of economists). They are supposed to be taken at the word, which is fine when those words at least vaguely resemble what is transpiring or what has transpired.
Prime Minister Shinzo Abe’s updated plan for reviving Japan’s economy and achieving a GDP target of 600 trillion yen ($5 trillion) suggests a recognition that earlier policies are not doing the trick…
Japan’s inflation rate remained flat at 0.2 percent in August, according to data reported Friday, with core inflation excluding volatile food prices slipping 0.1 percent. A preliminary survey of manufacturers released Thursday showed a sharp drop in export orders. Recent corporate investment figures were likewise worse than expected.
To which Abe replied:

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider – September 28, 2015.

Malinvestment Report: China Opens Massive New Steel Complex Despite Sweeping Excess Capacity And 50% Plunge In Prices

Baoshan Iron & Steel Co. started production at its new project in China’s southern port city of Zhanjiang even as steel prices plunge amid sluggish demand in the country, which is facing its slowest pace of economic growth in 25 years.
The No. 1 blast furnace of the project, designed to have an annual capacity of 4.1 million metric tons of melted iron, was ignited Sept. 25, the company, China’s biggest publicly traded steelmaker, said in a filing to the Shanghai Stock Exchange on Sunday. The project will be fully operational a year later with an expected annual crude steel production of 8.75 million tons, it said. It usually takes three to six months of trial production before a new steel mill begins commercial operation.

This post was published at David Stockmans Contra Corner on September 28, 2015.

Iraq Switches Sides – – Joins The Coalition Of The Un-Washington

Iraq joined Russia, Iran and Syria in a new agreement to strengthen cooperation against extremist group Islamic State, extending the Kremlin’s reach in the Middle East as it rivals Washington for influence.
U. S. and Russian officials held talks Sunday on the sidelines of a United Nations summit in New York to try to forge a common approach to fighting Islamic State, a day before President Barack Obama and Russian PresidentVladimir Putin were to hold their first formal meeting in more than two years at the U. N. The two had an informal encounter in November on the sidelines of a G-20 summit in Australia.
Iraq’s Defense Ministry said Sunday that the country had signed an intelligence and security cooperation pact with Russia, Iran and Syria, pledging to cooperate in collecting information about Islamic State. The deal effectively formalizes years of military collaboration among the four nations, which have intermittently been allies since the 1980s.
The deal is another challenge to U. S. influence in the Middle East at a time when Russia is deploying new military assets – primarily in support of Syrian President Bashar al-Assad – including fighter aircraft and attack helicopters in the coastal region of Syria.

This post was published at David Stockmans Contra Corner on September 28, 2015.

SP 500 and NDX Futures Daily Charts – Tripping the Grift

Stocks took a further beating today, and a heaping helping of that was in the direction of commodity trader Glencore thanks to a bit of sell side analysis.
Can you imagine if the Fed had raised rates last week and the market was selling off like this?
And I think it would have because this market is moving in synchronization with world markets, and most of them are rolling over from the recent asset bubble fueled by easy money for the rich and austerity for nearly everyone else.
The price of lack of reform and the moral hazard of allowing criminal behaviour to not only escape punishment and correction, but be richly rewarded with outrageous rewards, is beginning to come back and collect the wages of our apathy in the face of injustice and corruption.
Let’s see how the rest of the week goes.

This post was published at Jesses Crossroads Cafe on 28 SEPTEMBER 2015.

Red Deflation – – China Industrial Profits Down 8.8% Y/Y, Biggest Decline On Record

Chinese industrial companies reported profits fell the most in at least four years as the pillars of China’s infrastructure-led growth model suffered from a devalued yuan, a tumbling stock market and weak demand.
Industrial profits tumbled 8.8 percent in August from a year earlier, with the biggest drops concentrated in producers of coal, oil and metals, the National Bureau of Statistics said Monday in Beijing. It was the biggest decline since the government began releasing monthly data in October 2011, according to data compiled by Bloomberg.
China’s stock-market plunge and currency devaluation are adding new challenges for the world’s second-largest economy as it struggles with excess capacity, sluggish investment and weaker manufacturing. The nation’s official factory gauge slumped to a three-year low last month, while Bloomberg’s monthly gross domestic product tracker remained below the government’s 7 percent goal in August with a reading of 6.64 percent.
‘Companies are facing enormous operational pressures,’ said Liu Xuezhi, a macroeconomic analyst at Bank of Communications Co. in Shanghai. ‘The momentum of growth is weak, and the downward pressure on the economy is relatively large.’

This post was published at David Stockmans Contra Corner on September 28, 2015.

Mind The Global Dollar Short – – Emerging Markets Face Massive FX Debt Squeeze

The extent of emerging markets’ foreign-currency borrowing binge is laid bare in new number-crunching from CreditSights.
With EM currencies down a collective 15 percent since the start of the year, the cost of repaying debt and loans denominated in foreign currencies, such as the U. S. dollar and the euro for EM countries, is likely to increase.
With that scenario in mind, CreditSights analysts Richard Briggs and David Watts have analyzed cross-border lending data from the Bank for International Settlements and corporate bond index data from Bank of America Merrill Lynch to try to figure out just how big EM’s foreign debt bill could be.
First up are the BIS data on cross-border lending, scaled against a country’s foreign currency revenue (i.e. exports). Bank figures range from a mere 6 percent in South Korea to a whopping 56 percent in Brazil.

This post was published at David Stockmans Contra Corner on September 26, 2015.

Wholesale Money Markets Are Still Deteriorating – – Ignore Swap Spreads At Your Own Peril

The theme since August 24 in wholesale funding, eurodollar and Asian ‘dollar’, has been that even the global and intense liquidation was not enough to square the mighty imbalance that has been building. It’s a frightening prospect, but in money markets everywhere that is the only interpretation left. The media, unable to make heads or tails, finds small nuggets of accounts that seem to fit actual events while most importantly preserving the idea the ‘dollar’ world hasn’t endured in the middle of almost open chaos. That last part ‘can’t’ be because the Fed and economists keep saying it is impossible.
I focused yesterday on the eurodollar futures curve which has been about as conclusive as it gets – almost. The twin and very related market next to eurodollar futures is interest rate swaps. Where eurodollar futures are confirming the ugly, interest rate swaps are maybe even a step beyond.
irst, some relevant history. The interest rate swap rate is quoted as the counterparty paying fixed to receive some floating (usually tied to LIBOR, which is why eurodollar futures are entangled). Since there is credit risk involved in counterparties, it had always been assumed that the swap rate would have to trade above the relevant UST rate since the US government is assumed to be without it. That all changed during panic in 2008:

This post was published at David Stockmans Contra Corner on September 26, 2015.

The EM Currency Rout Continues – – Brazilian Real, South African Rand,Turkish Lira, Malaysian Ringgit Pummeled

It’s been another week of bloodshed in emerging markets, with the Brazilian real, South African rand and Turkish lira all pummelled to record lows as China growth concerns and uncertainty about U. S. rate hikes continue to bite.
Remarks by U. S. Federal Reserve Chair Janet Yellen late Thursday suggesting the central bank could still raise rates this year sparked fresh selling on Friday, with the Malaysian ringgit and Indonesian rupiah falling to their lowest levels since the Asian financial crisis in 1998.
‘EM currencies are being squeezed between concerns about the severity of China’s economic slowdown and increasing uncertainty regarding U. S. monetary policy,’ Nicholas Spiro, managing director at Spiro Sovereign Strategy, told CNBC.
‘Country-specific vulnerabilities, notably in Brazil and Turkey, are also weighing on sentiment – indeed more so than external factors in the case of many EMs,’ he said.
A rout in Brazil’s currency – what has shed almost 10 percent this month and almost 60 percent this year – against a backdrop of a political crisis and an economy mired in recession, has also soured sentiment towards other emerging markets.

This post was published at David Stockmans Contra Corner on September 26, 2015.

A True American Crony …

An Innocent Crime?
PARIS – Volkswagen CEO ‘falls on his sword,’ reports the Financial Times. The FT was speaking metaphorically, of course. Martin Winterkorn is German, after all, not Japanese.
A Japanese businessman in a similar circumstance would have his intestines on the floor by now.
Volkswagen supplies motor vehicles to the world – millions of machines that work at least as well as any other. We have one of its small diesel pickup trucks at the ranch in Argentina. It serves us well.
Volkswagen employs 600,000 engineers, machinists, accountants, metallurgists… and hundreds of other mtiers… all gainfully working in the modern economy. And judging from its revenues, the company is doing as much to make the world a better place as practically any other enterprise in the world.
Or perhaps not… Yesterday, Mr. Winterkorn resigned, after the company was caught rigging emissions tests. And VW stock plunged. Estimates of the fines, civil settlements, and other penalties the company will have to pay ran into the hundreds of billions of dollars.
What do you have to do to earn this kind of a flogging? How many customers did Volkswagen’s reckless engineering kill? How much money was stolen from buyers by its underhanded marketing techniques? How many women were raped in its showrooms, and how many pets drowned in its dark pools?
What’s this? None of the above? Apparently, not a single person suffered injury… and not a single pfennig was lost or stolen. The total measure of harm suffered by the public?

This post was published at Acting-Man on September 25, 2015.

Bill Gross: American Savers Are Being ‘Cooked Alive’

Bill Gross said the Federal Reserve needs to raise interest rates as soon as possible, trading some near-term market losses for longer-term stability and a healthier financial system.
If zero interest rates become the long-term norm, economic participants will soon run on empty because their investments aren’t producing the gains or cash flow needed to finance past promises in an aging society, he wrote in an investment outlook on Wednesday for Denver-based Janus Capital Group Inc. That’s already beginning to happen as Detroit, Puerto Rico, and, he predicts, soon Chicago, struggle to meet their liabilities.
‘My advice to them is this: get off zero and get off quick,’ Gross urged the central bankers. He said it’s time for a ‘new thesis’ that allows people in developed economies to save, enabling liability-based business models to survive and spurring more private investment, ‘which is the essence of a healthy economy. Near term pain? Yes. Long term gain? Almost certainly. Get off zero now!’
The Fed last week decided to keep its benchmark rate near zero, showing reluctance to end an era of record monetary stimulus in a time of market turmoil, rising international risks and slow inflation at home. Futures traders are betting the Fed is unlikely to act in October, as they put 43 percent odds on an increase by December and 51 percent by January, according to data compiled by Bloomberg.

This post was published at David Stockmans Contra Corner on September 24, 2015.