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The next weapon in the war on cash: capital controls

Walking past Poundland this week, I saw a sign in the window: “Free to use cash”. Gosh, I thought, has it come to that already? Let me explain. I had been thinking about Haruhiko Kuroda introducing negative interest rates at the Bank of Japan. I’d been thinking about just how much of the bond market in Europe offers a negative yield to maturity (about 30%, UBS’s Bill O’Neill told me this week). And I had been reading an article written by one of my colleagues about what might bring negative interest rates to the UK.

So my convoluted thought process went a bit like this: when interest rates are negative – that is, you have pay the bank to keep your money in an account rather than the other way around — no one wants to have cash in the bank. Why would you want to see the nominal value of it fall every day? So it makes sense to use physical cash instead: no one has yet figured out how to take interest off actual notes and coins.

If the point of negative interest rates is to force people into spending money by taking their money away from them if they don’t, this use of real cash clearly stops the policy working particularly well. And that in turn means that our central bankers need to find ways to prevent us holding and using cash.

The obvious way is something I have written about here before – banning cash outright. But you could also make it something no one wants by perhaps putting a surcharge on using it, rather like the plastic bag charge recently introduced across the UK. You could for example insist that an extra 1p was charged on for every £1 of physical cash used.

China Continues To Buy More Gold As it Sells Other Foreign Reserves

China’s central bank continues to see the value of diversifying into gold as it continues to purchase the precious metal on a monthly basis in the midst of falling total reserves. According to media reports, the People’s Bank of China (PBOC) added 580,000 ounces of gold to its official reserves last month; the bank now hold a total of 57.18 million ounces of gold, an increase of 0.9% from December.

The news of China’s latest gold purchases follows more data from the PBOC, showing total foreign reserves fell $99.5 billion to $3.23 trillion in January, the lowest level since May 2012. It was also the second biggest decline in reserves, just behind December’s considerable $108 billion decline.

According to some analysts and economists, China has been busy selling some of its foreign reserves and buying the yuan to prop up its weakening currency and fragile stock market.

Jeffrey Nichols, senior economic advisor at Rosland Capital and managing director at American Precious Metals Advisors, said that he is not surprised to see China buying more gold while it sells its other reserves like U.S. dollars and U.S. Treasuries.

QE Has Not Worked – Period!

“Clearly, QE has not worked. We have not had one year of 3%+ growth since the Great Recession and are barely averaging 2%. Yes, if your measure is the stock market and other financial assets that have inflated, then QE has worked quite well. But the boost QE was supposed to deliver just hasn’t reached Main Street.

One of the basic tenets of QE and other related policies is that if you want to increase consumption, you lower the cost of borrowing. But if out-of-control borrowing was the original problem, then QE as a solution is kind of like drinking more whiskey in order to sober up. And if you reduce the earnings of those who are savers so that they are no longer able to spend, the whole purpose of the original project – to foster economic growth – is defeated.

But we (central bankers) can’t acknowledge that, because if we did, we’d have to admit that our theories don’t work. And we all know, because God knows, that our theories are correct.” John Mauldin, Thoughts from the Frontline – Tokyo Doubles Down

U.S. recession signals are intensifying. The QE boost that hasn’t reached Main Street will be taken away from Wall Street in the next recession. I wrote a piece this week for Forbes entitled, U.S. Recession Signals Intensify . The hard reality is we are due (some say overdue) for a recession and evidence suggests the next one is heading our way. Equity market declines are at their worst during recession as you’ll see in the following chart. View the next chart with a stiff drink in hand. To this, as advisors, we must defend!

Hacker dumps data on 10K DHS employees, threatens FBI next

An unknown hacker on Sunday posted the details of almost 10,000 Department of Homeland Security (DHS) employees online, which he claimed to obtain by hacking the Justice Department. The hacker, who tweets from the account @DotGovs, is now threatening to dump the information of 20,000 FBI employees on Monday.

The DHS database appears to be genuine. Ahead of the dump, the hacker shared the information with Motherboard, which conducted a spot check of the database and found most of the entries matched up. The @DotGovs account also tweeted out a series of screen grabs that appear to be an internal Justice Department platform as well a list of accessible drives.

The hacked DHS database includes individuals listed as everything from contractors and special agents to intelligence analysts and technicians. An agency spokesman said the DHS is looking into the purported disclosure but that "there is no indication at this time that there is any breach of sensitive or personally identifiable information."

Motherboard reports that the FBI database, which the hacker leaked to the publication with the DHS trove, also appears to be genuine. The hacker told Motherboard that he obtained the data by first compromising a Department of Justice email account. He declined to elaborate how he gained access to the account.

One major oil CEO thinks the industry is in a 'severe and prolonged down cycle'

The oil industry has taken it on the chin over the last few months. Prices have fallen along with revenues, and the renaissance in US oil production has turned into a nightmare.

According to Diamond Offshore Drilling CEO Marc Edwards, the bad dream for the oil industry isn't going to end anytime soon.

"For a little over a year, I have expressed view, we are facing a severe and prolonged down cycle," he said during his company's quarterly earnings call Monday. "And today it seems clear that the oversupply of drilling capacity may persist well into 2017 and possibly beyond."

Diamond is one of the largest offshore drilling providers in the US. The issue for the company is that offshore drilling is much costlier than land drilling, and as companies cut back on costs, it makes sense to start with more capital-intensive projects. Diamond reported a loss of $245 million in the fourth quarter of 2015, and a loss of $274 million for all of 2015. Additionally, the company eliminated its quarterly dividend, which it had paid since 1997.

Are Electric Cars Really Green?

White House Seeks $1.8 Billion for Zika Virus Response

President Barack Obama is asking Congress for $1.8 billion to help get ready to fight the Zika virus, which is spreading across the Americas fast and which doctors fear may cause severe birth defects. The money would go for mosquito control, training programs and laboratory capacity to test for the virus, the White House said in a statement.

"The Pan American Health Organization reports 26 countries and territories in the Americas with local Zika transmission," the White House said. "The Centers for Disease Control and Prevention reports 50 laboratory-confirmed cases among U.S. travelers from December 2015 - February 5, 2016. As spring and summer approach, bringing with them larger and more active mosquito populations, we must be fully prepared to mitigate and quickly address local transmission within the continental U.S., particularly in the Southern United States."

The CDC is sending teams to Brazil to help investigate whether and how Zika might cause microcephaly, a serious birth defect marked by incomplete brain development and other problems. The National Institutes of Health is encouraging work on a vaccine to prevent Zika and is racing to develop better tests to diagnose Zika.

Right now there is no quick test to detect Zika infection. Quick tests can get Zika mixed up with other common mosquito-borne infections, such as dengue and chikungunya.

A Multi-Decade Credit Bubble Is Coming To An End

Crude has rallied about 5% off of last month’s low. The Brazilian real closed Friday at 3.90, having posted a decent rally from the January closing low of 4.16 to the dollar. Brazilian equities have bounced about 10%. This week saw Brazil’s currency rally 2.4%. In general, EM currencies and equities have somewhat stabilized, notably outperforming this week. Stocks posted gains in Brazil, Turkey and China. From Bloomberg: “Yuan in Longest Weekly Rally Since 2014 as China Raises Rhetoric.” The dollar index this week dropped 2.6%, which most would have expected to lend some market support.

If crude, commodities, EM, the strong dollar and the weak yuan were weighing on global market confidence, why is it that global financial stocks have of late taken such a disconcerting turn for the worse?

Thursday headlines: “Credit Suisse posts first loss since 2008”; “Credit Suisse shares crash to 24-year low.” This week saw Credit Suisse sink 15.2%, pushing y-t-d losses to 30.4%. European financial stocks continue to get hammered, some now trading near 2009 lows. Notably, Societe Generale this week fell 8.7% (down 25% y-t-d), Credit Agricole 6.1% (down 21%) and Deutsche Bank 5.2% (down 30%). From Bloomberg’s Tom Beardsworth: “Credit-default swaps tied to subordinated debt issued by Deutsche Bank rose to the highest since July 2012…” The STOXX Europe 600 Bank Index dropped 6.2% this week, boosting y-t-d declines to 19.9%. FTSE Italia All-Shares Bank Index sank 10.1%, increasing 2016 losses to 30.6%.

February 4 – Bloomberg (Tom Beardsworth): “European banks and insurers’ financial credit risk rose to the highest in more than two years, following a $5.8 billion loss at Credit Suisse Group AG and signs of a slowdown in the global economy. The cost of insuring subordinated debt climbed by 19 bps to 254 bps, the highest since July 2013, based on the Markit iTraxx Europe Subordinated Financial Index. An index of credit-default swaps tracking senior financial debt jumped six bps to 110 bps. Both indexes have risen for six days in a row…”

Is that Quicken Loans Super Bowl ad an omen of another housing crash?

“Here’s what we were thinking: what if we did for mortgages what the Internet did for buying music, and plane tickets and shoes?" Quicken Loans asked in their 60-second Super Bowl ad Sunday, where the company advertised their new online tool Rocket Mortgage.

Using Rocket Mortgage, future homebuyers can get a mortgage on their phones, according to the ad. And more homebuyers are good for America, the ad suggests, because they encourage patriotic consumption with more people buying more stuff like couches, blenders and lamps.

“What we’re saying is that a strong housing market filled with responsible homeowners is important to the economy,” Quicken Loan’s chief executive Bill Emerson tells The Wall Street Journal.

While some criticized the ad’s promotion of unabated consumerism, most took issue with the way it evokes the environment leading up to the 2007-2009 subprime mortgage crisis, especially punctuated by the ending tagline: “Push Button, Get Mortgage.” That crisis led directly to a global financial crisis, and then to the Great Recession.

U.S. bank stocks and bonds clobbered by recession worry

U.S. bank stocks and bonds took a pounding on Monday as recession fears compounded concern about their exposure to the energy sector and expectations that global interest rates are unlikely to rise quickly.

The S&P 500 financial index, already the worst performing sector this year, fell 2.6 percent and now stands more than 20 percent from its July 2015 high, confirming the sector is in the grip of a bear market.

Shares of Morgan Stanley slid 6.9 percent in their largest one-day drop since November 2012, while rival Goldman Sachs fell 4.6 percent. Both stocks closed at their lowest since the spring of 2013.

Meanwhile, bonds issued by U.S. banks extended their decline, with the yield premium demanded by investors to hold these securities, rather than safer U.S. Treasury debt, climbing to the highest in three-and-a-half years, according to Bank of America Merrill Lynch Fixed Income Index data.

4.9 Percent Unemployment Can’t Be True Amid 15 Percent Food Stamp Participation Rate

Let’s face it, the “jobs number” is arguably the most politically massaged economic number there is. There have long been questions about its validity but now with the rate at an extremely low 4.9% the number just feels absurd.

I live in a relatively prosperous part of the United States not far from Washington DC which has aggregated much of the country’s wealth over the past few years. And even here one can feel 2008 looming still. People are getting along but even in the pleasant leafy suburbs the standard of living for many is lower than pre Crash. And what is particularly frustrating is that it appears that we may see another leg down in the relatively near future.

Fundamentally the powers that be want the number low not because it necessarily reflects the job market accurately but because a low jobless rate (in the eyes of some) helps conjure “animal spirits” as the economist John Maynard Keynes put it. In other words if people think the jobless rate is low, that the economy is improving, that their neighbor down the street is doing OK, that makes people more likely to engage in economic activity. If people THINK things are OK maybe they’ll spend (creating aggregate demand) like everything is OK.

But despite what many very smart economists still seem to think the economy doesn’t work that way over the medium to long term. (If indeed it can even in the very short term really.) The economy is much more than the confidence game so many believe it to be. It needs sound underpinnings to create real actual optimism and investment. Today’s easy money and increased debt levels have just made things worse.

Day Of Reckoning: The Collapse Of The Too Big To Fail Banks In Europe Is Here

There is so much chaos going on that I don’t even know where to start. For a very long time I have been warning my readers that a major banking collapse was coming to Europe, and now it is finally unfolding. Let’s start with Deutsche Bank. The stock of the most important bank in the “strongest economy in Europe” plunged another 8 percent on Monday, and it is now hovering just above the all-time record low that was set during the last financial crisis. Overall, the stock price is now down a staggering 36 percent since 2016 began, and Deutsche Bank credit default swaps are going parabolic. Of course my readers were alerted to major problems at Deutsche Bank all the way back in September, and now the endgame is playing out. In addition to Deutsche Bank, the list of other “too big to fail” banks in Europe that appear to be in very serious trouble includes Commerzbank, Credit Suisse, HSBC and BNP Paribas. Just about every major bank in Italy could fall on that list as well, and Greek bank stocks lost close to a quarter of their value on Monday alone. Financial Armageddon has come to Europe, and the entire planet is going to feel the pain.

The collapse of the banks in Europe is dragging down stock prices all over the continent. At this point, more than one-fifth of all stock market wealth in Europe has already been wiped out since the middle of last year. That means that we only have four-fifths left. The following comes from USA Today…

The MSCI Europe index is now down 20.5% from its highest point over the past 12 months, says S&P Global Market Intelligence, placing it in the 20% decline that unofficially defines a bear market.

Europe’s stock implosion makes the U.S.’ sell-off look like child’s play. The U.S.-centric Standard & Poor’s 500 Monday fell another 1.4% – but it’s only down 13% from its high. Some individual European markets are getting hit even harder. The Milan MIB 30, Madrid Ibex 35 and MSCI United Kingdom indexes are off 29%, 23% and 20% from their 52-week highs, respectively as investors fear the worse could be headed for the Old World.

Senate report: Illegal immigrants benefited from up to $750M in ObamaCare subsidies

Illegal immigrants and individuals with unclear legal status wrongly benefited from up to $750 million in ObamaCare subsidies and the government is struggling to recoup the money, according to a new Senate report obtained by Fox News.

The report, produced by Republicans on the Senate Homeland Security and Governmental Affairs Committee, examined Affordable Care Act tax credits meant to defray the cost of insurance premiums. It found that as of June 2015, “the Administration awarded approximately $750 million in tax credits on behalf of individuals who were later determined to be ineligible because they failed to verify their citizenship, status as a national, or legal presence.”

The review found the credits went to more than 500,000 people – who are either illegal immigrants or whose legal status was unclear due to insufficient records. The Centers for Medicare and Medicaid Services confirmed to FoxNews.com on Monday that 471,000 customers with 2015 coverage failed to produce proper documentation on their citizenship or immigration status on time – but stressed that this does not necessarily mean they’re ineligible.

“Lack of verification does not mean an individual is ineligible for financial assistance, but only that a Marketplace did not receive sufficient information to verify eligibility in the time period outlined in the law,” CMS spokesman Aaron Albright said.

Gas is near $1 a gallon in some places

Forget $2 gas. Gas is getting close to the $1 mark in some parts of the country. There are at least eight states where some stations are now selling gas for less than $1.25 a gallon, according to GasBuddy.com. The cheapest gas at the moment is at a 7-Eleven in Oklahoma City, which is selling a gallon of regular for $1.11. In fact, more than a dozen other stations in that city have gas for $1.14 or less. Extremely cheap gas can also be found in Texas, Missouri, Ohio, Indiana, Illinois Michigan and Kansas.

Nationwide, the average price of a gallon of regular is down to $1.74, the cheapest it's been since early January 2009. A huge supply of gas is flooding the market, which is driving down wholesale gas prices. A gallon of regular gas was going for just 69 cents on the wholesale market in Oklahoma on Monday morning, according to Tom Kloza, chief analyst for the Oil Price Information Service. Most other regions have wholesale prices below $1.

Gas probably won't go below $1 a gallon, Kloza said, but cheap gas has become fairly common. "About one station in four nationwide is at $1.50 a gallon or less," he said.

Cheap gas is also the result plunging oil prices; a barrel of crude fell below the $30 mark again on Monday. There's a glut of oil on the market due to strong U.S. production, the end of Iranian sanctions and the refusal of some OPEC members like Saudi Arabia to cut back production to support prices.

Labor Secretary: The January Jobs Report Was Solid

Gold: The Metal That Central Banks Love To Hate

Gold is the one means of exchange that has outlived all others. Each and every paper currency that exists today, backed by the full faith and credit of the governments that print the bills and mint the coins, is relatively new compared to gold. Gold has been around for thousands of years.

There are a growing number of people on the planet that invest in and hold gold for security and wealth preservation. The argument for gold is that it is the best hedge for inflation. Paper money, or currency, has been cheap around the globe as low interest rate and quantitative easing policies by the world's central banks in the wake of the global financial crisis of 2008 have decreased interest yields and the cost of borrowing. The theory behind these policies is that economic stimulus comes from spending and borrowing rather than savings. Many people who buy and hoard gold do so out of a basic distrust of central bank policy. The irony in that is central banks are the largest holders of gold in the world, holding over 30% of all the gold ever produced in the history of the world.

2016 has started with a bang across all asset classes. Volatility has picked up in equities, debt, and currency and commodity markets. Meanwhile, one of the strongest markets out there this year is gold and historical volatility is actually declining - the rally has been a slow and steady affair.

The daily COMEX gold futures chart highlights that the yellow metal has appreciated by over 10.7% so far in 2016. At the same time, daily historical volatility has dropped from over 20% in late December to its current level of around 11.01%. This makes gold not only the best performer in 2016 but also a stable alternative to cash, which has been king this year. Gold is looking good. There are signs that both investment and speculative demand is returning to the market.

US inflation survey tumbles in red flag for Fed

An increasingly important gauge of U.S. inflation tumbled last month to its lowest level since the Federal Reserve Bank of New York began the survey in mid-2013, in what could be taken as another warning bell for the U.S. central bank.

The New York Fed's survey of consumers found expectations for inflation one and three years in the future fell as Americans were more cognizant of lower gasoline prices and costs of medical care and college.

One-year median expectations have fallen three months running and hit 2.42 percent in January, from 2.54 percent in December. The three-year ahead prediction was 2.45 percent last month, well down from 2.78 percent the previous month.

Respondents on the younger and older ends of the range, and those with lower education and income, drove the decline, said the New York Fed, whose survey has been increasingly cited by economists and central bankers themselves as a read on when inflation will return to a 2-percent target.

Greek markets plummet to 25-year low

Janet Yellen is finding herself increasingly fenced in

Federal Reserve Chair Janet Yellen's task is growing more intractable every day. And believe it or not, Friday's jobs report featuring a drop in the unemployment rate to 4.9 percent has made it only more difficult.

Back in December, encouraged by labor market gains and solid economic data, her policymaking committee raised interest rates by 0.25 percent, the first hike since 2006. What followed has been an embarrassment: Global financial market turmoil, a wipeout in crude oil prices, a stalling U.S. economy and a collapse in bond market expectations about inflation and rate hikes.

The Fed's December rate hike forecast fingered four quarter-point increases in 2016. However, the futures market assigns only a 50 percent chance of any rate hikes this year. As Yellen heads into her semi-annual testimony to Congress on Wednesday, it's an understatement to say she faces a difficult policy environment. Whether she can navigate it successfully will determine the path of stock prices, oil prices, the dollar, job growth and the strength of GDP growth in the months to come.

The problem is that the labor market seems to be tightening -- despite a comedown in the pace of U.S. economic growth as well as slowing corporate earnings growth. The labor tightness is resulting from falling productivity, fewer qualified applicants and the still-low percentage of Americans in the labor force. Wage inflation is also on the rise.

Here's Why We Should Think About Scrapping the $100 Bill - Forture

Scrap the penny? How about the $100 bill? There’s a new argument that calls for doing away with the c-note and other high-value banknotes because they facilitate crime, corruption, and terrorism.

According to a report by Peter Sands, former CEO of Standard Chartered Plc., entitled “Making it Harder for the Bad Guys,” around $3 trillion related to illegal activities and corruption are moved around globally every year, and authorities are successful in intercepting and seizing less than 1% of that. He argues that larger bills make smuggling and hiding sizable amounts of money easier for criminals, tax evaders, and terrorists.

“They play little role in the functioning of the legitimate economy,” Sands writes, “yet a crucial role in the underground economy.” He advocates getting rid of the $100 bill, 500-euro note, 1,000-franc note, and 50-pound note.

Business Insider reports that at a conference in London about terrorism networks, Europol director Rob Wainwright said that Sands “raises really serious questions about whether or not the European Central Bank, for example, should continue to produce and circulate these notes that make it easier for criminals and terrorists to hide their business, and to fund illegal activities.”

Tuesday 02.09.2016

NEWS to Disturb the Comfortable...

We don't tell you what to think,

but we give you something to think about.