Foreigners Dump US Treasuries As They Liquidate A Record Amount Of US Stocks

Earlier this week, DoubleLine's Jeff Gundlach held his latest webcast with investors in which he warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the yield went from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.

This is also why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all time highs.

Which brings us to today's latest monthly TIC data which showed that, as Gundlach would expect, the holdings of the two largest foreign US creditors, China and Japan, declined to multi year low.

As shown in the chart below, China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold US reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.

Chinese holdings of U.S. Treasuries declined for a fourth month to $1.151 trillion in September, from $1.165 trillion in August, a $14 billion decline. Despite the drop, China remained the biggest foreign creditor to the U.S., followed by Japan whose Treasury holdings also dropped by $2 billion to $1.028 trillion, the lowest since 2011.

Investors have been searching for clues whether China is dumping its vast holding of U.S. Treasuries to retaliate against U.S. tariffs, though Beijing has given no indication it’s doing so; meanwhile while the TIC data is relatively accurate, it tends to be revised rather materially which is why it is certainly possible that China's real holdings, when adjusted for valuation and currency changes, are far lower.

Of course, instead of selling Treasurys, China may have decided to hold on to its reserves and allow the yuan to depreciate against the USD, but not too much: so far 7.00 has emerged as a "red line" for the PBOC. The Chinese currency has already depreciated more than 4 percent against the dollar in the past year amid signs of an economic slowdown and capital outflows. In September, China’s foreign-exchange reserves stockpile fell by $22 billion to touch the lowest level since July 2017, however much of that number was due to valuation adjustments.

Going down the list, while Russia's Treasury liquidation was well documented in June and July, two new aggressive sellers of US paper emerged in the latest data: France, whose Treasury holdings declined from $118.4BN to $97.7BN...

... and Ireland, which sold over $25BN Treasuries in September, bringing the total to $290BN.

Not everyone was a seller: the infamous Belgium, host of Euroclear, added $10 billion to $164.7BN, likely working on behalf of some unknown foreign entity, while Saudi Arabia added another $6.6BN, bringing its total to a record $176.1BN, perhaps in hopes of showing Trump just what a good friend of the US it is.

Finally, away from US Treasuries, and looking at total flows, foreigners added a total of $7.5BN in long-term US securities, led by nearly $30BN in Agencies.

What was perhaps more notable is that in September, foreigners sold another $16.9BN in US stocks, the 5th consecutive month of selling, matching a record long stretch of foreign sales of US equities, and one during which official and private foreign investors sold a total of $102 billion over the past 5 months, a record high.

The bottom line: Trump told the world he doesn't need its generosity to either fund the US deficit or prop up stocks, and according to recent data, the world has taken up Trump on his dare, and has been actively liquidating US securities.

Source: TIC

Fonte: qui

How The Bubbles In Stocks And Corporate Bonds Will Burst

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peak, which was already a precariously high level to begin with.

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

Please watch my presentations about the U.S. corporate debt bubble and stock market bubble to learn more:

Billionaire fund manager Jeff Gundlach shares similar concerns as me, saying “The corporate bond market is going to get much worse when the next recession comes. It’s not worth trying to wait for that last ounce of return, or extra yield from the corporate bond market.” Another billionaire investor, Paul Tudor Jones, put out a warning this week, saying “it is in the corporate bond market where the first signs of trouble will emerge.” GE’s terrifying recent credit meltdown may be the initial pinprick for the corporate debt bubble, but make no mistake – it is not an isolated incident. GE may be the equivalent to Bear Stearns in 2007 and 2008 – just one of the first of many casualties.

Anyone who thinks that the Fed can distort the credit markets for so long without terrible consequences is extremely naive and will be taught a lesson in the days to come.

Authored by Jesse Colombo via RealInvestmentAdvice.com

The Fed Will Continue To Tighten Until Everything Breaks

The Fed will continue on its current course no matter the cost, because there is a greater strategy in play. Here are the details…

by Brandon Smith via Alt-Market

Around three years ago, in September 2015, I wrote an article titled ‘The Real Reasons Why The Fed Will Hike Interest Rates‘ in which I predicted that the Federal Reserve, in the face of criticism, would soon pursue a program of interest rate hikes into economic weakness. I argued that this plan would be somewhat similar to what the Fed did in the early 1930’s; an action that prolonged the Great Depression for many more years. So far, my prediction has proven to be correct.

Despite the fact that the Fed keeps raising rates as it tightens the noose around the supposed economic “recovery”, there are still many people out there who refuse to accept that the central bank would deliberately implode the fiscal bubble that it has spent the last ten years inflating. Even today, I still see arguments proclaiming that the Fed will be forced to pull back if stocks fall beyond 15% to 20%. I also see claims that Fed officials like Jerome Powell had “better start looking for another job” because Donald Trump won’t be happy with Fed policies that could cause a crash. This is pure delusion from people who do not understand how the Fed operates.

First and foremost, let’s be clear, the Federal Reserve is an autonomous entity that does not answer to government oversight. It never has and it probably never will. This reality is supported by admissions by former Fed officials like Alan Greenspan, who publicly noted that the Fed answers to no one.

The central bank functions in quite the opposite capacity from what many people assume. As Carroll Quigley, prominent American historian and mentor to Bill Clinton, noted in his book Tragedy And Hope:

“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank … sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”

In other words, governments do not assert control over central banks; central banks assert control over governments. That said, there are some exceptions to this rule. For example, an act of Congress can be used to enforce a full audit of Fed activities, something which has never been done.

Fed propaganda asserts the lie that the bank is audited annually by the Government Accounting Office (GAO), but this is NOT an audit of Fed financial actions and policy initiatives. Rather, it is an audit of minor expenditures. Knowing how many pencils and desks the Fed purchases in a year does not help us to understand the bank’s influence over our economic security. All other audits of the Fed are done internally by the Fed’s own Board of Governors. This is hardly transparent or independent.

The only time the public has gained access to even a partial government audit of Fed activities was during the audit of TARP. This alone exposed trillions of dollars in bailouts and overnight loans to various banks and corporations, many of which were foreign.

The GAO did nothing in terms of regulatory action against the Fed after it was revealed that they were funneling trillions in capital into foreign corporations. All they did was make a ledger of the transactions, and remained silent on the rest.

I remind readers of this history and the conditions surrounding Fed actions because I want to drive the point home that, for now, the Fed and other central banks dictate the rules of the game. Some may say this has changed with the election of Donald Trump, but I disagree. If anything, as long as Trump is in office, the Fed will chase higher interest rates and steeper balance sheet cuts. They will not stop until markets break. And, the only solution (shutting down the Fed entirely) also comes with a set of extreme fiscal consequences.

There is a wall of cognitive dissonance when some in the public are confronted with this notion. They prefer to believe in a set of standard lies rather than accept that the Fed is a saboteur of our financial system. Here are those lies, listed in no particular order…

Lie #1: The Fed Is Unaware Of The Bubbles it Creates

Mainstream economists and Fed officials alike use this lie regularly. Not once has the Board of Governors of the Fed ever been audited or punished in light of an economic crisis they created. When central bank culpability is obvious, they simply claim they had no idea the fiscal bubble was as inflated as it became. The disaster “surprised them”.

The Fed’s creation of easy credit and zero oversight, not to mention its opposition to any regulation of derivatives, fed the bubble prior to 2008. Then they ignored all obvious warning signs that the bubble was about to burst. But what about the current “everything bubble” that the Fed has created through near zero interest rates and endless fiat money manufacturing? Well, Fed officials openly admit to their involvement.

As the former head of the Federal Reserve Dallas branch Richard Fisher admitted in an interview with CNBC, since 2009, the U.S. central bank has made its business the manipulation of the stock market to the upside:

“What the Fed did — and I was part of that group — is we front-loaded a tremendous market rally, starting in 2009.

It’s sort of what I call the “reverse Whimpy factor” — give me two hamburgers today for one tomorrow.

I’m not surprised that almost every index you can look at … was down significantly.” [After the first Fed rate hike]

The Fed knows when it is conjuring a bubble environment; they just won’t admit it as the bubble is deflating and economic pain is everywhere.

Lie #2: The Fed Is Unaware That It’s Tightening Policies Cause Extreme Economic Contraction

So, if the Fed is aware when it causes a bubble, is it aware when it is popping a bubble? Absolutely. As Ben Bernanke admitted in a speech in 2002:

“In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Bernanke was referencing Milton Friedman’s assertion that the Fed’s tightening policies in the early 1930’s, after they had made markets dependent on easy credit through the 1920’s, had caused negative feedback in the system at the perfect time, destabilizing any possible recovery for years to come.

The problem is twofold, of course. The Fed was allowed to fuel a fraudulent market bubble in the first place. Then, it was allowed to pop the bubble in the most destructive way through tightening policies (like higher interest rates), which crushed Main Street support. If this sounds familiar, it is, because the same tactic is being used by the Fed today.

In an October 2012 meeting of the Federal Reserve, minutes indicate that Jerome Powell was highly vocal about what would happen if the Fed pulled support from debt addicted markets by raising interest rates and cutting assets:

“My third concern — and others have touched on it as well — is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month — it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.

I think we are actually at a point of encouraging risk-taking, and that should give us pause.

Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”

Jerome Powell is now the Fed Chairman, and yet, he is following through with the same tightening actions that he warned about in 2012. He is pretending that the tightening process will be painless even though fundamental economic conditions are just as weak now as they were six years ago. Again, Powell knows the Fed is going to cause a crash, but he is moving forward anyway and he is not warning the public about the danger.

Lie #3: The Fed Is The Center Of Establishment Power, Therefore They Need The U.S. Economy To Thrive

While it is true that the Fed is currently in charge of the dollar as the world reserve currency, the idea that the Fed is somehow indispensable to the global establishment has always bewildered me. Everything the Fed has done since its inception in 1913 has been designed to diminish the U.S. economy and erode the purchasing power of our currency. I ask, at what point has the Fed ever taken an action which did NOT result in a bubble or a bubble collapse? At what point has the U.S. economy ever improved at a fundamental level because of the Fed, rather than diminished in the wake of a fake recovery the Fed conned the public into believing in?

What else does the Fed do besides sabotage?

I believe the truth is that the Fed does not care about the U.S. economy, or even the survival of the dollar, as is obvious in their actions. The Fed is merely a puppet entity of larger institutions like the Bank for International Settlements or the International Monetary Fund. These institutions seek centralization at a global level, with a global currency system and global economic authority, as they have openly admitted to in their own publications. The U.S. economy as we know it today, and the Fed by extension, are expendable in this pursuit.

The Fed will continue on its current course no matter the cost, because there is a greater strategy in play. In fact, some elites may even welcome a shutdown of the Fed at this time because this opens the path for the death of the dollar as the world reserve currency and the introduction of a new world monetary system, while all the consequences surrounding the shift can be blamed on political chaos and coincidence.

To drive the point home, I leave readers with a revealing quote from Christine Lagarde, the head of the IMF, as she outlines why crisis in national economies is actually good for the IMF:

“When the world around the IMF goes downhill, we thrive. We become extremely active because we lend money, we earn interest and charges and all the rest of it, and the institution does well. When the world goes well and we’ve had years of growth, as was the case back in 2006 and 2007, the IMF doesn’t do so well both financially and otherwise.”

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The Era Of Gains Is Over

Ever since the central banks became serial bubble blowers twenty years ago, household wealth has mostly been driven by asset price inflation:

But this has been a quixotic pursuit. Created by pulling tomorrow's prosperity into today, these asset price bubbles are unsustainable, and invariably suffer violent corrections at their end.

So far, the central banks have responded to these corrections by simply doing more of the same, just at greater and greater intensity. To keep the current Everything Bubble going, the world's central banks have not only had to more than quintuple their collective balance sheets, but have recently had to resort to the extreme (desperate?) measure of injecting the greatest amount of liquidity ever in 2016 and 2017.

History has shown us that the height an asset bubble reaches is proportional to the damage it wreaks when it bursts. Applying this logic, the coming pop of the Everything Bubble will be devastating.

So devastating that analysts like John Hussman forecast a 0% (or worse) total market return over the next twelve years:

Moreover, the primary driver and supporter of asset price appreciation over the past seven years, central bank easing, is now gone. For the first time since the GFC, the collective central bank liquidity injection rate (the solid black line in the below chart) is now net zero.

And plans to tighten much further from here have been clearly committed and communicated to the world:

As a consequence, we fully expect yesterday's capital gains to become tomorrow's capital losses.  What goes up on thin-air money comes down with its removal.

And while this is going on, interest rates are suddenly exploding higher around the world after spending a decade at all-time historic lows:

We've detailed in depth the math behind the depressive effect this must have on asset prices in our recent report The Weighted Average Cost Of Capital. And as we look to the long term future (i.e., next several decades), compared to the past secular 30-year decline of interest rates down to 0%, rates have only one direction to go from here: Up.

All this taken together means that the era of amassing financial wealth from swiftly-rising capital gains is over.

It was a "shooting fish in a barrel" bonanza for most investors because no critical thought was required to make money; with the central banks hell-bent on creating a universal wealth-effect, the price of nearly every asset was on a one-way elevator ride.  All one had to do was buy blindly -- "buy the dip" and "buy the all-time high" -- and watch one's "wealth" increase.

But after three destructive bubbles in just two decades, the Fed and its brethren will not be able to blow a fourth. The system won't be able to withstand it. 

Our slowing global economy will require decades of recovery to heal itself from the massive over-leveraging and malinvestment binge we've been on.

So the existential question facing investors is: What will drive wealth accumulation in the coming era?

Investors are going to soon realize that without dependable gains, income becomes paramount. Specifically, income that will retain its purchasing power as inflation and interest rates rise.

As we look to the future and see anemic gains, slowing economic growth/return to recession, and a rising cost of living, those who own passive income streams will find themselves much better positioned for a sustainable retirement. Or for simply remaining afloat financially.

What If The Central Banks Print Like Crazy?

Yes, the central banks may attempt to flood the world with liquidity during the next recession. But the amounts required to reverse the growing deflationary pressures will be truly gargantuan -- very likely several multiples of the easing we've seen since 2009.

At those levels, extreme/hyper-inflation becomes the concern. Prices of everything will shoot the moon. But especially those of assets with income streams that adjust with the inflation rate (rents, dividends, etc).

Income-producing investments, which are generally backed by real assets (real estate, oil & gas wells, factories, etc) should keep up their relative purchasing power better than today's high-flying and often profitless securities.

And if it all ends in hyperinflationary currency collapse, income investors usually have more senior ownership claims on those underlying real assets. Those assets will still have intrinsic value, which will be priced in whatever new currency succeeds the old.

Submitted by Adam Taggart of Peak Prosperity

Is The Long-Anticipated Crash Now Upon Us?

Is this the market's breaking point?

I admit: I'm a permabear.

This is no surprise to those who know and have followed me over the years. But I'm publicly proclaiming my 'bearishness' because doing so might open up a needed and long overdue dialog.

Here's my fundamental position:  Infinite growth on a finite planet is impossible. 

Cutting to the chase, this is why I predict a major crash/collapse across stocks, bonds and real estate is on the way. 

The recent market weakness seen over the past two weeks is nothing compared to what's in store.  As we’ve been carefully chronicling, bubbles burst from ‘the outside in’, starting at the weaker places at the periphery before progressing to the center.

Emerging market equities are now down -26% from their January highs and -18% year-to-date.  China's stock market is down -32%, even with substantial intervention by the government to prop things up.

The periphery has been weakening all year, and the contagion has now spead worldwide.

Taken as a whole, global equities have shed some $13 trillion of market capitalization for a -15% decline:

The rot has spread to the core with surprising speed. Now even the formerly bullet-proof US equity markets are stumbling.

The S&P 500 is now negative on the year:

It’s been obvious for a long time to those who have watched The Crash Course that endless growth is simply not possible. Not for a bacteria colony in a petrie dish, not for an economy, not for any species on the planet. Eventually, when finite resources are involved, limits matter.

But the vast majority of society pretends as if this isn't true.

The US government is (and has been for decades) adding to its massive pile of debt at a rate far faster than it's income (GDP) is growing. Pension managers have a horizon measued in decades, and yet they buy stocks and bonds that can only pay off if endless growth occurs (e.g., 100+ P/E ratios). Much of today's buildings and public works will need to be rebuilt/replaced within the next 50 years, yet no one is certain whether we'll have enough affordable energy to do so.

In regards to the financial markets specifically, history has given us clear lessons to heed. 1929, 1987, 2001 and 2008 each showed us that when the world gets so manic that investors must believe in perpetual perfection/endless growth to justify current asset prices, a painful correction ensues as the limits of reality re-assert themselves.

Bulls vs. Bears

My permabear-ishness is a by-product of peering into the future and not being able to align society's hopes with what I see as the current trajectory of the world.

As a baby boomer, this sets me apart somewhat from my age cohort, many of whom have benefitted as our generation has lived beyond its means. But it’s not all unusual to find young adults, peering ahead into a diminished future, who share my views. 

So when I look at today's markets, I ask: What’s the purpose or point of investing in financial assets that, by definition, depend upon a logical fallacy (endless growth) being true? None at all.

Now, in the short term, if you believe yourself to be smarter and more nimble than the rest, maybe you can find advantage in speculating over the short term. (And good luck with that, by the way...)

But for the average person? Is parking money in a 401k in a general index fund(s), crossing one’s fingers and hoping that the next twenty years will behave like the last twenty a good bet? Not if sustained economic growth continues to remain elusive the way it has since the 2008 crisis.

The Bull Trap

By definition, stock market bulls believe in growth, specifically endless growth. They believe, over time, the markets will head ever upwards.

As I’ve said I don’t believe that endless growth is possible. But more than that, I think, were it possible, it would be harmful to humans and planetary life in general.   

I used to believe in growth. In my early career as a consultant, I even helped companies chase it. But as I became more familiar with the scientific data and connected a few dots, I realized my views regarding growth were naive. And in some cases entirely backwards.

For instance: In my MBA courses, I was taught that at a high enough price, new supply will always emerge to meet the market demand. 

But a tiny bit of inquiry quickly reveals that the economy doesn’t deliver resources, instead we have an economy because there are natural resources to use.  No resources, no economy. The economy is a subset of the natural world, not the other way around. 

Most people get that intuitively, but it remains a mystery why so many stumble on the idea that ever moreeconomic growth requires ever more resources. They ignore the reality that, at some point, resource limits matter.

And within the resource story, energy is THE master resource. No energy and you can’t have anything else. No economy. Nothing.   

Even more precisely, surplus energy (also called "net energy") is what powers everything you and I hold dear about our amazing, just-in-time, global lifestyle. If a Cheetah expends more calories hunting than it actually catches, it dies.  Every organism only thrives if it has a surplus of chemical energy compared to what it expends. 

Simply put, humans are using up hundreds of millions of years of stored ancient sunlight (via fossil fuels) in the equivalent of a geological microsecond. It's been a one-time-only bonanza for our species. One that is fast approaching it's end.

Hey, it’s been fun. And we’re doing some really cool things with all that surplus fossil energy, like space travel and smart phones. But one thing we haven't done is invest for a future that will function when all that tasty surplus fossil energy is gone.

And as we've often written about, the ramifications are already beginning to be felt, and will only get worse over the coming decades.

A critical factor is that our system for running the world is becoming increasingly unstable. As surplus energy decreases, we are using more and more debt to pull tomorrow's prosperity into today to keep the party going.

But that can't last forever. And as 2008 showed us, when the debt stops growing, even briefly, the whole system shudders to a stop. Our current system of credit/money is either expanding or threatening to collapse. It no longer has a middle ground:

The Social Fabric Is Starting To Rend

This idea of growth being dependent on surplus energy is not a very difficult train of logic to follow. But as I’ve learned the hard way when delivering this message over the years, data and logic rarely changes people's behavoir. 

People's actions are governed by their beliefs, which are stubbornly housed in our brain's emotional limbic system, not in the more rational cortex. When beliefs get challenged, emotions flare up. Data is irrelevant. Logic doesn’t matter. The backfire effect mushrooms and takes over.

We are now at the most important inflection point in all of human history, yet practically nobody knows about it. But try to raise people's awareness and – wow – does it ever challenge their belief systems. Fear and anger are the first emotions to get triggered, and listeners quickly search for any reason to reject the information.

This is wack-job conspiracy theory! This is failed Malthusian claptrap! This is fear-mongering! You're underestimating human ingenuity! If this were really true, I'd be reading about it in the media!

Over the years, I've heard thousands of these 'reasons' to reject looking critically at the data. It no longer bothers me, as I recognize it for what it truly is: an attempt to protect oneself from having to grapple with the possibility that the promise of endless growth, which our current prosperity is based on, just might not be real.

And I think many folks are nevertheless becoming aware of this on a subconcious level. It's that feeling in our gut we get when we see the 1% live so much better than the rest of us 99%. When we hear how "great" the employment rate is or the stock market is, yet we see so many households struggling to get by as the middle class get squeezed harder and harder between stagnant wages and the rising cost of living. When we see those who run our country and its corporations live by a different, more preferential, set of rules than the public is held to.

I think this explains why tensions and tempers are so high right now, even though very few seem to understand why. It explains why the country is so divided and increasingly desperate. It explains the hyper-partisanship, the turn to opioids, the pipe bombs.

To my way of thinking, a lot of the emotional energy being expended right now is due to the fact that our entire way of being is busy collapsing all around us.  Our main narrative of “how life works” is breaking down. This is resuting in an epidemic of grief, depression, anger and sorrow.

(Personal note: If you're near Turners Falls MA on November 6^th, 2018 I and a number of other PP members will be attending Stephen Jenkinson’s Nights of Grief & Mystery Tour, which delves into coping strategies for dealing with these emotions head-on. If you want to join us, send an email here).

Is The Crash Upon Us?

So with the wipeout of all 2018's market gains this week, is the next crash upon us? Is the financial system in the process of breaking down, as it did in 2008?

There are a number of indicators we watch closely here at Peak Prosperity. While many are showing signs of distress, we're not yet seeing the kind of systemic arrest we'd expect to see preceding a market seisure. 

For instance, even as equities have pulled back, the weakest credit element, here represented by the ETF “JNK” that tracks junk bonds, has barely even budged during the current sell-off:

What tipped me off as a pre-indicator of the 2008 crash was the movement in both the credit markets and the financial companies most dependent on them. Remember, "stocks are for show but bonds are for dough". The serious money playing in the bond market typcially seeks safety before the more risk-loving players in the equity markets catch on.

Similarly, the prices for 'safe haven' US Treasury hasn't rallied by all that much. If there were a panic brewing, we'd expect to see these spiking more violently, even with China beginning to sell their stash and the Fed pulling back:

That “bounce” doesn’t even bring US 20-year bonds back to even for the month of October, let alone return them to where they were in September.

Similarly, gold hasn't rallied that much either in US dollar terms (in euros and yuan is another matter):

Add to the above that the US economy is not (yet) in recession, and a full-blown crash looks unlikely to unfold before us right now.

BUT, what we are seeing in the markets is exactly the kind of precusor activity we would expect to see in the final stage leading up to a crash.

In Part 2: How Close?, we lay out the indicators we're watching most closely and what they're currently forecasting about the timing of a major market breakdown, as well as reinforce the importance of prudently preparing yourself *now*.

This equity correction has my full attention. No, I don’t think it’s the big one (yet). But, yes, I think the big one is not far behind

In the immediate here and now, focus on getting yourself prepared as best as you can and remain above the emotional fray that's tormenting so many people. It's only going to get worse from here.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access

Fonte: qui

Expect A "Lost Decade", Mish Warns Stock Market Rout "Only Just Starting"

Authored by Mike Shedlock via MishTalk,

October has been a terrible month for equities. Yet, this is only a start of what's to come...

Decline Barely Started

Despite the rout, the S&P is just barely down for the year.

Expect a "Lost Decade"

Why?

The Shiller PE Ratio also known as "CAPE", the Cyclically Adjusted Price-Earnings Ratio, is in the stratosphere. It's not a timing mechanism, rather it's a warning mechanism.

The main idea is that earnings are mean reverting.

On that basis, stocks are more overvalued than any time other than the DotCom era.

But that is misleading. In 2000 there were many sectors that were extremely cheap. Energy was a standout buy then. So were retail and financials.

It's difficult to find any undervalued sectors now other than gold.

Financial Crisis Coming

At 1:40 AM (this morning), I posted Eight Reasons a Financial Crisis is Coming.

It's been about 10 years since the last financial crisis. FocusEconomics wants to know if another one is due. The short answer is yes.

"Peak QE": This Is What Share Of The Market Central Banks Now Own

After a decade of unprecedented liquidity injections by central banks to preserve the western financial system, global QE has peaked.

First, the aggregate balance sheet of major central banks started to shrink earlier in the year, a reversal that took investors many months to notice but judging by recent market volatility, it is finally being fully appreciated.

Second, beginning this month the Fed's bond portfolio run-offs as part of its QT are roughly offsetting the combined tapered net QE purchases by the ECB and BoJ. Worse, QT is now set to dominate.

Some facts: between mid-2008 and early 2018, the "Big-6" central banks expanded their balance sheets by nearly $15tn, most of it due to explicit targeted purchases of domestic assets (QE) in addition to other forms of liquidity injections (collateralised lending such as the ECB's TLTROs or FX interventions equivalent to foreign-asset QE).

According to Deutsche Bank estimates, the four major central banks involved in QE (Fed, ECB, BoJ and BoE) are now collectively holding $11.3tn of securities accumulated through their asset purchase programs.

Why is the above important? Because as Deutsche strategist Michal Jezek, now that liquidity is contracting makes for a timely moment for looking at the proportion of relevant asset classes owned by central banks and putting the ECB's corporate bond holdings into a wider context.

To begin, as Jezek confirms what we have been saying since the start of 2009, "clearly, QE matters." As central banks reduced the free float of some securities and QE has worked its magic on confidence and growth, asset valuations reached unprecedented levels while volatility became suppressed. A couple of years ago, a quarter of the global bond market was trading with a negative yield. With global QE fading, this proportion has now fallen by half but remains significant.

And the combined valuation of global bonds and stocks has more than doubled since the crisis, led by stocks.

So in light of the recent jump in volatility, and given potentially fragile valuations, QE tapering has been gradual and well telegraphed with the aim to minimize disruptions. Certainly in the case of the ECB CSPP, the market has focused on the taper for quite some time and while many believe it has been largely priced in, Italian bondholders are becoming increasingly uncertain if that is indeed the case.

That said, as DB cautiously admits, "the end of the overall ECB QE and start of global QT may not have been fully internalised by the market yet and the absence of a large, price-insensitive buyer of last resort should keep volatility higher."

To be sure, acquiring a portion (or most) of a securities market over time does not necessarily mean shrinking it. Consider that while the ECB took nearly €175BN of Eurozone corporate bonds out of circulation but net issuance over that period has nearly offset it and broader net issuance from global IG corporates in EUR has well exceeded that volume, as we show in our most recent Issuance and Fund Flows report.

However, QE does shrink the market compared to the counterfactual of no QE because the extra supply response (more issuance because the central bank is buying) should normally be a lot smaller than the net amount bought.

With that in mind, Deutsche Bank presents its estimates of the share of relevant asset classes owned by central banks. The most extreme case is Japan where the BoJ owns almost half of the JGB market, followed by the Eurozone where the ECB holds nearly a third of the relevant covered bond market. Other than that the central banks own 20-25% of their government bond markets and 15-20% of the relevant part of the ABS/MBS market.

As Jezek next notes, compared to all the above numbers, it might seem that there is less scarcity in the Eurozone corporate bond space with the ECB owning "only" about 8.5% of the relevant bond universe (and 20% of the CSPP-eligible subset worth €850bn +). While there is a much greater liquidity constraint than in government bond markets, it is probably true that if healthy net issuance continues, the ECB could carry on conducting meaningful net CSPP purchases well beyond 2018.

Why would they?

According to Deutsche, one reason is that they might decide to put more weight on corporate and less weight on government bonds in their upcoming reinvestment strategy, with zero net QE. Against that, there seems to be limited willingness of the ECB to take unsecured corporate exposures given their recent experience with the troubled Steinhoff and Atlantia credits in the CSPP portfolio. In other words, it now seems more likely that the ownership share will slowly begin to decline as net corporate purchases cease and the IG market keeps growing.

Unless of course the European bond market suffers a cardiac arrest, in which case the ECB will go all out again.

And while the BoE owns about 3% of the UK GBP IG market given its CBPS programme was limited in scale from inception, in bank-based Japan (with a less developed and small corporate bond market) the BoJ has accumulated some 15%, by our estimates.

Looking ahead, Deutsche Bank suggests that as global QT sets in, the turn in the credit cycle still seems relatively distant, with default rates low and still falling, while declining issuance in US high yield has kept spreads supernaturally tight.

The bank forecasts lower but still decent growth at least through 2020 with rate curves bear steepening in the next couple of quarters not only in Europe (consensus) but also in the US (non-consensus) before they start flattening into a slowdown.

Fonte: qui