Fed Raises Interest Rates, EU Extends QE, Commodities Fall, Global Debt Rises & IMF Makes China a Reserve Currency

After talking about raising interest rates for two years, frustrating both US and International markets by saying one thing and doing another, the Federal Reserve finally made a decision and raised US interest rates .25%.  Outside the Fed there was no clear consensus.  Historically, the main reasons interest rates are raised is to curtail inflation and slow growth, neither of which apply, as we are currently experiencing deflation. The Federal Reserve’s own growth estimates are less than half of what they estimated for 2015 and if they go much lower, will almost be non-existent.  In October, the Atlanta Fed lowered growth estimates for the third time this year to .9%, joining the IMF who has also lowered global growth expectations for the third time.  Raising interest rates usually causes a country’s currency to strengthen, which makes its exports cost more than other nations.  Last month the US experienced the largest trade deficit in history and higher interest rates will likely make it worse.

A weakening global economy, soaring dollar, and global petro-recession with an associated inventory overhang are hurting exports and widening the deficit despite the improvement once expected with the big drop in oil prices,”  – Action Economics of Boulder, CO

The EU is lowering interest rates to help their economy and the US is raising interest rates to help theirs. Both nations are suffering from the same problems: deflation, low growth and too much debt, so which is the right course of action?  A mediocre jobs report comprised of part-time, full-time, mostly low paying jobs and seasonal Christmas hiring, is not a compelling reason to raise interest rates.    At this point, most  world economies and markets are not preforming well, and there are very few nations buying anything, so where is our growth going to come from?

Atlanta Fed’s Q3 ‘GDPNow’ Forecast Plunges to 0.9% (10.1.15) http://globaleconomicanalysis.blogspot.com/

U.S. Posts a Record Deficit in Manufacturing Trade (11-4-15)

IMF Downgrades Global Economic Outlook Again (10-6-15) WSJ

Fed Rate Hike is Six-Eight Months Too Late Says Sam Zell (12-16-15) Bloomberg Video

Fed Ends Zero-Rate Era; Signals 4 Quarter-Point Increases in 2016 (12-16-15)

The IMF, US and international business leaders and Congress do not seem to be very confident in the Federal Reserve.  Congress has recently passed several measures curtailing and adding more scrutiny and oversight to the Fed’s decision making ability.  These changes are a result of concerns about certain actions that the Fed took during the 2008 crisis.  The Fed just adopted these changes on Nov 30th .

“Many lawmakers had said the Fed operated with too few restrictions as it tried to keep big banks and other firms afloat during the 2008 financial crisis, when the central bank used its emergency lending powers for the first time since the Great Depression.”  – Wall Street Journal

Finding well-paying jobs is becoming more difficult, defaults are increasing, and many companies are announcing layoffs.  Profits and revenue are falling in tandem for the first time in six years.  Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter, according to Thomson Reuters.  Sales are on pace to fall 4%, the third straight quarterly decline.   The last time sales and profits fell in the same quarter was in the third period of 2009.

Fed Adopts Dodd-Frank Bailout Limits (11-30-15) WSJ | http://www.wsj.com/articles/fed-set-to-adopt-final-emergency-lending-rule-1448889633

Yellen & White House Step Up Opposition to Fed Oversight Bill (11-18-15)

Fed Has Caused Global Uncertainty (10-9-15)

Fed’s Policies How Wrong Have They Been (10-5-15) Bloomberg Video

Fitch Warns of “Historic Junk Milestone” As US Defaults Surge (12-15-15) by ZeroHedge

Kraft to Slash 2,600 More Jobs, Close Seven Plants (11-4-15) WSJ

Maersk Line to Cut 4,000 Jobs as Market Deteriorates (11-4-15) WSJ

Wal-Mart Preparing to Cut Hundreds of Headquarters Jobs This Week (10-1-15) WSJ

U.S. Companies Warn of Slowing Economy (10-26-15) WSJ  http://www.wsj.com/articles/u-s-companies-warn-of-slowing-economy-1445818298

$11 trillion in global stock market wealth was wiped out in the 3rd quarter of 2015, and central bank creditability also dropped along with commodities.  China stepped up monetary easing with its sixth interest rate cut in a year to combat deflationary pressures and a slowing economy.  Japan also decided to expand its QE, but Japan’s ability to continue its stimulus maybe short lived.  Late in October, European Central Bank President Draghi all but committed to a fresh stimulus for the euro-area in December. This caused EU markets to rally, but contrary to expectations, Draghi’s six month extension of the 60B per month euro printing and lowering rates to negative .3% , was less than expected and markets reacted negatively.  Nineteen Euro nations now have negative .3% interest rates (which means depositors lose .3% on their deposits) and a number of other EU nations have even higher negative rates.  Many of these nations are also issuing negative coupon rates on their sovereign bonds, which means these bonds are guaranteed to lose money. No one knows how these negative interest rates are going to affect the market, because this has never happened before.

$11 Trillion in Global Stock Market Wealth Was Wiped Out In Q3 & It’s Not Over (10-3-15) http://davidstockmanscontracorner.com/72140/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

QE to Infinity the Central Banks Are Heading for Monetary Mayhem (10-26-15) The Telegraph by Liam Halligan | http://www.telegraph.co.uk/finance/comment/11952876/Mario-Draghi-gives-the-V-sign-but-a-dangerous-QE-day-looms.html

China Cuts Interest Rates as Policy Divergence with U.S. Widens (10-23-15)

ECB’s Stimulus Moves Fall Short of Market Expectations, Hammering Stocks (12-3-15)

BOJ’s $2.5 Billion ETF Boost Seen Having Little Impact on Stocks (12-18-15)

Sell the Euro the ECB Is Fixing to Trash Its Money (11-9-15) by ZeroHedge

40% of European Government Bonds Sport Negative Yields and More May Follow (12.2.15)

Less than Zero Living With Negative Interest Rates (12-8-15) WSJ

IMF Adds Chinese Yuan to Reserve Currency List & SDR Basket
Anointing the yuan as a reserve currency is in part a simple acknowledgment of China’s economic heft: The country now accounts for more than 15% of the global gross economic output, nearly triple what it was a decade ago.  And for the Chinese, the yuan’s higher status is part of a larger strategy to boost the country’s economic leverage.” -Bloomberg

China has ramped up lending to foreign governments, greatly expanded trades settled in yuan and created emergency credit facilities for other governments.  Earlier this year, China launched the Asian Infrastructure Investment Bank, an institution analysts say was designed in part to rival the Washington-based World Bank.  The IMF’s decision will eventually put the yuan alongside the US Dollar, euro, British Pound and Japanese Yen in the fund’s reserve currency basket, with the IMF giving more weight to China’s currency than either the yen or pound.

SDR (Special Drawing Rights) were created in 1969 to boost global liquidity as the Bretton Woods system of fixed exchange rates unraveled.  The SDR basket currently includes the USD, euro, yen and pound.  While the SDR is not technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket to meet balance-of-payments needs.  The equivalent of about $280 billion in SDRs were created and allocated to members as of September 2015, compared with about $11.3 trillion in global reserve assets.   SDR status is significant as it serves as “a seal of approval” from the IMF that the yuan is indeed an internationalized currency, AXA analysts said in May.  Not even three weeks after the IMF decision, China is already dropping its peg to the USD which will cause the yuan to devalue, making it more competitive and far less sensitive to Fed interest rate hikes.  China de-pegging from the USD has far more advantages than disadvantages and will definitely create problems for the US.

China Joins World’s Elite Currency Club (11-30-15) WSJ

China’s Dollar-Depegging Signal Likely a Bet on More Greenback Strength (12-11-15) WSJ http://blogs.wsj.com/economics/2015/12/11/chinas-dollar-depegging-signal-likely-a-bet-on-more-greenback-strengthening/

A Strong Dollar Hurts China More Than the US (12-8-15)

Poor Earning Reports & Company Buybacks
This US earnings season is on track to be the worst since 2009, as profits from oil & gas and commodity related companies plummet.  Data compiled by Bloomberg shows that, out of the three quarters of S&P 500 that have reported results thus far, profits are down 3.1 percent on a share-weighted basis. This would be the greatest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines.  Earnings growth turned negative for the first time in six years in the second quarter this year and David Stockman wrote:

“At this point, 75% of S&P 500 companies have reported Q3 results, and earnings are coming in at $93.80 per share on an LTM basis. That happens to be 7.4% below the peak $106 per share reported last September, and means that the market today is valuing these shrinking profits at a spritely 22.49X PE ratio.  And, yes, there is a reason for two-digit precision. It seems that in the 4th quarter of 2007 LTM earnings came in at 22.19X the S&P 500 index price. We know what happened next!”

The question is, if earning reports are so bad why are some companies still positive, and why is the market still high?  One reason is company buybacks.  The WSJ reported: “Corporate stock buybacks are climbing toward a post-financial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports.   Stock repurchases boost earnings per share, even if total earnings don’t change, by reducing the number of shares.  Critics have said that buybacks represent an artificial, short-term method of boosting profits. Some companies have made large buybacks in quarters when earnings were soft, leading to complaints that they were simply managing earnings.”

This Is the Worst U.S. Earnings Season Since 2009 (11-4-15) http://www.bloomberg.com/news/articles/2015-11-04/this-is-the-worst-u-s-earnings-season-since-2009

This Time Is The Same But Worse (11-3-15) by David Stockman http://davidstockmanscontracorner.com/76822-2/

Is the Surge in Stock Buybacks Good or Evil? (11-22-15) WSJ | http://www.wsj.com/articles/is-the-surge-in-stock-buybacks-good-or-evil-1448188684?alg=y

Beware The “Massive Stop Loss” – JPM’s Head Quant Warns This Unexpected Downside Catalyst Looms Next Week (12-9-15) by ZeroHedge  | http://davidstockmanscontracorner.com/beware-the-massive-stop-loss-jpms-head-quant-warns-this-unexpected-downside-catalyst-looms-next-week

Commodities & Emerging Markets
“The commodity-price slump and the slowdown in China’s economy are crippling developing nations’ ability to borrow abroad, even as international debt sales from advanced nations remain at a five-year high.”  -Bloomberg

Issuance by emerging-market borrowers slumped to a net $1.5 billion in the third quarter, a drop of 98% from the second quarter, according to the Bank for International Settlements (BIS).   This is the biggest downtrend since the 2008 financial crisis and it reduced global sales of securities by almost 80%.  The BIS just released its latest international banking statistics, showing cross-border lending fell by $910 billion (£589 billion), an enormous slump, and the largest since the fourth quarter of 2008.

Bloomberg Business wrote: “While nobody expects industry giants such as Rio Tinto Group or BHP Billiton Ltd. to go bust, higher-cost producers and those unable to raise more cash are vulnerable as a measure of base-metals prices heads for a third straight annual decline. The loss of value means more companies are getting closer to default, Moody’s Investors Service said Wednesday.  A gauge of contracts on the London Metal Exchange has slid 26 percent this year, the most since 2008, to near the lowest in six years.”

Oil & gas prices should remain low for the next six months, because the Saudis & OPEC not only decided to increase production, but they removed the oil production cap, and OPEC is not scheduled to meet again until June of 2016.  Bloomberg reported: One place where production is projected to fall is the U.S., where oil drillers have idled more than half the country’s rigs in the past year. The number of active oil rigs in the nation fell to 545, the least in five years.”

Emerging Markets Debt sales Down 98% In Q3 (12-6-15) by Bloomberg Business

What’s Happened to International Bank Lending? (10-23-15) https://agenda.weforum.org/2015/10/whats-happened-to-international-bank-lending/

Why the Global Mining Industry Is Heading For Bankruptcy Court (12-4-15) by Bloomberg Business

OPEC Won’t Cut Production to Stop Oil’s Slump (12-4-15)

Sovereign Debt
Global sovereign debt is growing exponentially; the EU, China and Japan are all printing currency at record high levels. President Reagan’s former budget director, David Stockman wrote:

“The global economy has been on a credit binge for the past two decades. Since 1994, total credit market debt outstanding has soared from $40 trillion to $225 trillion or by nearly 4X the growth of GDP during the same period.  But now that debt super-cycle has crested, and that’s exceedingly bad news for profits.”

ZeroHedge reported, “According to Hong Kong-based “Autonomous Research”, the real figure may be closer to 21% when one takes into account the aforementioned shadow banking sector.”

Bloomberg reported: “Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks.  Crisscrossing provinces from Shandong to Xinjiang, she’s seen too much — from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered.”

China finds many ways to avoid accurate reporting, but bottom line, China is facing a massive debt crisis.  Greece signed its third bailout deal with the European Commission, most doubt they will be able to keep it, so a Greek exit is still very possible.  Italy’s poor growth and massive amounts of non-preforming loans could put them in a worse position than Spain if they do not improve soon.

Not to be out done, US spending, debt and unfunded mandates, dwarf the rest of the world.  Last month I sent out an article  titled, “US Govt Reports Soc\Sec Medicare & Soc\Sec Disability not Solvent & Fed Reserve Reports US Banking System Unsound,” explaining how the US government and the Fed, by their own calculations, admit that these programs are insolvent and the US banking system is unsound (visit  this page for the article and supporting info.).  Central banks around the world are selling US government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the 2008 financial crisis. Some nations are cashing out while the USD is high and buying their own securities, because they know it’s not going stay that way.

This Time Is The Same But Worse (11-3-15) by David Stockman http://davidstockmanscontracorner.com/76822-2/

The Greece Debt Watch (11-6-15) http://www.bloomberg.com/news/articles/2015-11-06/the-greece-debt-watch

Greece’s Five Ticking Time Bombs (12-8-15) http://www.bloombergview.com/articles/2015-12-07/greece-s-ticking-timebombs-keep-grexit-on-the-radar

China’s Banking Sector May Be Sitting On $3 Trillion Neutron Bomb (11-4-15) by ZeroHedge http://davidstockmanscontracorner.com/chinas-banking-sector-may-be-sitting-on-3-trillion-neutron-bomb/

Credit Sleuths in China Uncover Bad Debt Dwarfing Official 1.5% (10-29-15)


Italy’s Bad Debt Hair Is Getting Uglier (12-10-15) | http://www.bloombergview.com/articles/2015-12-09/italy-s-banks-need-relief-from-bad-debt

Singapore Set to Suffer Indonesia’s Defaults as Well as Its Smog (10-19-15)

Once the Biggest Buyer, China Starts Dumping U.S. Government Debt (10-7-15) | WSJ

China’s Selling Tons of U.S. Debt. Americans Couldn’t Care Less (10-18-15)

On Dec 31, 2014, the Dow closed at 17,823 and as of Friday at 1:00 PM the Dow was 17,128 wiping out all 2015 gains and 695 point of 2014 gains.  A whopping $1.2 trillion worth of corporate bonds in the United States have just been downgraded by rating agencies and the US junk bond market is in a free fall; the contagion has now spread to the corporate band market.  “The Price declines are alarming and worrying,” said Ahluwalia, JPMorgan’s head of global CLO research.

The US budget deal was not good, as it raised the debt ceiling for two years and removed spending caps, paving the way for the US to deficit spend and increase their indebtedness.  Over and over again most of the articles in publications like Bloomberg and The Wall Street Journal are saying that the situation in which the US, and other countries and global markets currently find themselves in, are almost exactly like they were in 2007-2008 precipitating the global financial meltdown.   The amazing thing, is that, as obvious and clear as signs may be, very few people are doing anything about it.  The central banks have almost maxed out their credit cards and as interest rates rise they will not be able to pay the interest maintenance on their already accumulated debt, not to mention the increase.  2015 was a tumultuous year for international economies and world markets and things are lining up for 2016 to be no less volatile, with many challenges ahead.

Age of Bubble Finance Crackup Phase New York, NY (What Should You Do) (11-26-15) David Stockman

The Best Worst Budget Deal (10-27-15) WSJ | http://www.wsj.com/articles/the-best-worst-budget-deal-1445986699

Junk-Bond Rout Deepens (12-10-15) WSJ | http://www.wsj.com/articles/junk-bond-selloff-intensifies-after-funds-demise-1449857705

Junk Bonds Are Tanking and Icahn Says Meltdown `Just Beginning’ (12-11-15)

Junk Contagion Spreads to Investment Grade Bonds Plunge to 2-Year Lows, Treasury Liquidity Collapses, CLOs Next (12-15-15) by ZeroHedge | http://www.zerohedge.com/news/2015-12-14/junk-contagion-spreads-investment-grade-bonds-plunge-2-year-lows-10y-liquidity-implo

Financial Disaster Dead Ahead (11-6-15) by Michael Snyder | http://davidstockmanscontracorner.com/financial-disaster-dead-ahead/

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