Let China win. It’s good for America.

By Joshua Kurlantzick

(David Doran/for The Washington Post)

When Chinese officials announced in 2013 that they would open an Asian Infrastructure Investment Bank to primarily fund big construction projects across the Pacific, they launched a slow-motion freak-out in Washington. As they went around the world inviting governments to join, Obama administration officials pressured their allies in Asia, Europe and elsewhere not to. The AIIB, headquartered in Beijing, would allow China to expand its influence throughout Asia, the White House fretted. “We are wary about a trend toward constant accommodation of China,” one Obama aide complained to the Financial Times after Britain joined 56 other nations in signing up to fund power plants, roads, telecommunications infrastructure and other ventures. It was a rare public critique of a U.S. ally.

The campaign against China’s bank is hardly unique. Since the Obama administration came into office, its Asia strategy has been to fear and combat nearly every move by China to flex its muscles, which Beijing has done through aid grants, trade deals, energy exploration, new diplomatic initiatives and military relations with other nations. This anti-China strategy might be one of the only areas of agreement between the president and Republicans. Donald Trump, for instance, says he wants to battle China at every opportunity and promises to slap 45 percent tariffs on Chinese imports.

In some places, such as the South China Sea, the nation’s expanding power poses a real threat.

And it is frightening to see a xenophobic autocracy — one that cracks down ferociously on domestic critics and fosters a growing cult of personality around President Xi Jinping — gaining influence.

But wariness toward China has morphed into a muddled, obsessive and often mindless U.S. policy. It holds that any new Chinese action must be stopped; any new Chinese ally must be won over; any new Chinese ambition must be contained. The administration has become so fixated on countering Beijing that it fails to realize that some of the Chinese actions it is fighting do not imperil the United States’ interests. Meanwhile, the (largely futile) battle doesn’t just alienate allies. It also takes U.S. diplomats, money and arms away from places that truly matter to the United States. In some places, America would do best to let China win.
Since at least 1989, the year of the Tiananmen Square massacre and the end of a honeymoon in U.S.-China relations, Washington has regarded Beijing’s growing power with suspicion. But during the Clinton administration, China was still recovering economically and militarily from that debacle; it posed no real military or diplomatic threat to the United States or most U.S. partners in Asia. Then George W. Bush spent his presidency focused on the war on terrorism and largely put China issues to the side. By the time Barack Obama took office, however, China had become much more influential.

And the promise to end Middle Eastern wars gave the White House the bandwidth to focus on opposing it, often counterproductively.

The Asian Infrastructure Investment Bank — a relatively modest institution with an initial capitalization of about $100 billion, much of which China plans to provide — is one place where the United States should have simply stepped aside. In asking other nations not to join as founding members, U.S. officials sometimes argued that the institution would duplicate the older Asian Development Bank, a multilateral bank dominated by Japan and headquartered in the Philippines, a U.S. treaty ally, according to Obama administration Asia specialists. Other times, they argued that the new bank would undermine international financial and environmental standards for aid projects.

Yet the Asian Development Bank itself estimates that infrastructure in the continent’s poorer nations needs about $8 trillion in upgrades by 2020 if those countries want to remain globally competitive.

The idea of the AIIB is genuinely popular with these countries — as well as with some donor nations in Europe — and doesn’t threaten U.S. strategic interests.

Meanwhile, U.S. partners didn’t appreciate Washington telling them how to run every detail of their China policy. “The Obama administration has expended serious energy trying to dissuade its allies from joining the bank,” notes Elizabeth Economy, a China scholar at the Council on Foreign Relations, and still it couldn’t succeed, which just makes the administration look weak.

Washington could have helped the bank work with other global lending organizations — and might have even had some say over its agenda — but now officials from several of its founding member states tell me they’ll be less inclined to listen to the White House when it wants their help stopping other Chinese initiatives.

Beijing’s influence has also expanded in Southeast Asia. China has become the leading trading partner with many nations in the region, as well as the biggest donor to some poorer states. In November, it launched its first joint military exercises with U.S. treaty ally Thailand.

The Obama administration has overreacted to these perceived dangers by devoting significant resources to improving ties with mainland Southeast Asian states, several of which have deeply undemocratic or illiberal governments. It has worked hard for rapprochement with Burma, including visits from then-Secretary of State Hillary Clinton and Obama himself. The administration has upgraded defense ties with authoritarian or semi-authoritarian Cambodia, Laos and Malaysia, and may soon do so with Burma as well. Obama has built a close personal relationship with Malaysian Prime Minister Najib Razak, now in trouble for allegedly taking $600 million from a government fund.

What “strategic imbalance” would result if Washington’s influence in these parts of the region diminished? Countries like Cambodia and Burma are still largely irrelevant to U.S. investors and strategic interests. The United States began boosting ties with Burma five years ago, but American investors have sunk only $2 million in officially counted investment into the country since 2011, largely because the business climate there remains atrocious. In Cambodia, U.S. companies invested about $85 million in 2014, the last year for which figures are available. (By contrast, American executives sent $290 million to tiny Luxembourg in 2015, a nation whose population is 4 percent of Cambodia’s.)

Its AIIB failure may have made the United States look weak and miserly, but its focus on competition in unimportant parts of Southeast Asia has real consequences. Washington needs Chinese help to halt Iran’s nuclear program, combat climate change and protect global cybersecurity. The White House can fairly complain about Xi’s repressive regime and his rapid military buildup, but needlessly alienating Beijing only makes the world’s most important bilateral relationship harder. China has responded harshly to U.S. attempts to mitigate its influence in its own neighborhood, repeatedly delivering veiled public warnings to Southeast Asian nations that side with Washington on major issues and offering massive assistance to countries like Cambodia for moving closer to China.

Sparking confrontation over important issues such as the South China Sea is worth it, but raising disputes over places like Cambodia is not.

Africa is another place where the obsession with pushing back at most forms of Chinese influence has not helped. It’s true that some, though hardly all, Chinese investment and aid on the continent does not conform to international environmental and anti-corruption standards.

But sub-Saharan nations have generally welcomed this support. Pew surveys last year found that China is more popular in Africa than on any other continent. It is now the largest trading partner across sub-Saharan Africa, a relationship that will only deepen.

Beijing and Washington have sometimes cooperated in Africa (battling Ebola and trying to strengthen the African Union), but often the two powers have competed for clout. In South Sudan, for instance, they have competed for influence over the government of the young country, alienating many Sudanese in the process and undermining cooperation in one of the most fragile parts of the continent. In November, China announced that it would be constructing a de facto military base in Djibouti, one of the most strategically important places in Africa because militaries there can project their power into the Middle East. The United States has a major base in Djibouti, and U.S. officials reportedly are worried about Chinese encroachments so nearby.

But allowing Beijing to build its influence in Africa would come at only a minimal cost to U.S. interests, because China is hardly the African colossus it has been portrayed to be; the Djibouti base is still its first overseas military facility. “Observers often dramatically overstate the scope of Chinese official finance — loans and aid — pledged to Africa,” writes Deborah Brautigam of the Johns Hopkins School of Advanced International Studies, one of the most accomplished scholars of China- Africa relations. She adds that China treats Africa no more rapaciously than any other foreign power: It does not try to take African land, win all of Africa’s resources or push out other major players that have security interests on the continent.

And other than the largest economies such as Nigeria and South Africa, the places where China wields greater influence — Mozambique, Angola, Zambia — are not central to U.S. companies or U.S. military strategy. No wonder African writers and analysts have called for China and the United States to put aside their differences so they can focus on jointly fighting poverty, improving the business climate, combating disease and building infrastructure.

The tiny islands of the Pacific are another region of unneeded competition. There, in search of natural resources and a broader rejection of Taiwan’s independent government, Beijing is boosting aid and encouraging Chinese firms to invest in Fiji, Papua New Guinea and smaller nations such as the Solomon Islands. This does not represent a zero-sum challenge to American power. “The rise of Chinese influence, which is driven predominantly by diverse commercial interests, does not presage a new era of geo-strategic competition,” says a report from the Lowy Institute, a leading Australian think tank. Scholars there say China has projected minimal hard power far into the Pacific.

Still, Obama administration officials see a battle for supremacy. As Clinton told the Senate Foreign Relations Committee in 2011: “Let’s put aside the moral, humanitarian, do-good side of what we believe in, and let’s just talk straight realpolitik. We are in a competition with China” in the Pacific islands. So the White House has increased U.S. diplomatic representation in the region, boosted aid dramatically and rhetorically pointed to a competition between Beijing and Washington. It has done so even though most Pacific nations are tiny economies and the U.S. Navy retains a massive advantage over China’s in speed, technology and basing throughout the Pacific. The White House strategy inevitably diverts scarce U.S. diplomatic resources from other parts of the globe while leaving island nations feeling compelled to choose between closer ties with China or with the United States. The result might embarrass Washington: Many of these nations might prefer China for its lavish aid and possible investment.

Despite China’s growing global influence, its image in many regions, including in Asia, is still weak. In the past decade, its relations with many of its neighbors have soured, largely because of its aggressive claims in disputed coastal waters. The same Pew surveys that found favorable views of China in Africa also showed that negative opinions were much higher in Asian nations such as India, the Philippines, Japan and Vietnam, where 74 percent of people had an unfavorable view of China. In Europe, Australia and parts of Latin America, initial excitement in the 2000s about the impact of new Chinese investment and aid has given way to decidedly mixed views among citizens and governments about Beijing, including fears that China will not play by trade rules, will steal technology and will make investments that offer little benefit to local economies.

U.S. popularity, by contrast, has recovered from the lows of the Bush administration, particularly across the Pacific. A 2014 poll of people in 11 Asia-Pacific countries, conducted for the Center for Strategic and International Studies, found that nearly 80 percent of respondents, including those in many countries that viewed China unfavorably in the Pew study, supported a more robust U.S. economic and security presence in Asia — a percentage that would have surely been lower during the 2000s. But the exercise of soft power rests on lasting positive perceptions, and it does not help for Washington to cultivate strongmen such as Malaysia’s Najib or Kazakhstan’s Nursultan Nazarbayev while promoting democracy elsewhere. It leads people in these countries to see little difference between U.S. and Chinese foreign policy.

The real challenges posed by China require all of America’s focus at a time when the United States is shrinking its Army and is no longer the only global economic superpower. Those challenges include China’s claims in the South China Sea, through which half the world’s trade passes, and its exertions in the East China Sea, which would give Beijing the right to block Japanese boats and fighter planes from the region around northeast Asia. And China is racing to modernize its navy to help support these power grabs. These are the developments worth fighting.

The right strategy requires a nuanced understanding of where the United States should pick its stands against a rising China and where it is necessary to concede some power. In Southeast Asia, for instance, that means helping the countries most likely to have to defend themselves in the South China Sea (including Vietnam and the Philippines) while worrying less about mainland states (such as Burma).

Nuance also demands a political environment in which leaders can talk about ceding some international influence to China. This will not be easy: Any pol who plays down American global dominance can become a target for opponents. But it shouldn’t be politically toxic to admit that China is becoming more powerful and that a more reasoned U.S. foreign policy would be one that wields U.S. resources judiciously. We should marshal our capital for the challenges that are truly challenging.

After Crisis, Banks’ Model Faces Disruption

Lenders are more profitable than ever, but margins are shrinking, regulations are pinching and nimble competitors are swirling

By Max Colchester and Margot Patrick

From a cramped office in East London, Tom Blomfield, a 30-year-old Brit, is preparing to take on the banking sector with a lender that employs a handful of people, charges no transaction fees and probably won’t make that many loans.

Mondo, a snazzy mobile checking-account app, will, however, be very cheap to run. Lumbering traditional banks should be worried, says Mr. Blomfield. “There is a massive change coming.”

Following the financial crash, lenders have broadly been able to repair their balance sheets.

Globally, banking has never been more profitable. Total bank profits in 2014 hit $1 trillion, a record high bolstered mainly by growth in Chinese banks, according to global consulting firm McKinsey & Co. The banking sector is also near its 2012 peak, with roughly $135 trillion in assets.

But for established lenders, cracks have appeared in their business models. Margins are shrinking. Rock-bottom interest rates have pinched profits, new regulations have jacked up costs and a host of nimble competitors threaten to chip away at their businesses. Meanwhile, global economic growth looks muted and worries are increasing around China. “We are in an environment where nothing is good,” Andrea Orcel, president of UBS AG’s investment bank, said recently.

Big banks spent the past five years wading through regulatory reforms. Now a main battlefield for banks is how they can squeeze profit growth out of lower-cost operations and put their balance sheet to work. Return on equity, a key measure of profitability, crashed after the crisis as banks digested pools of bad loans and restructured their operations. Average pre-crisis returns of 14% have given way to the new normal of around 9% for big global Banks.  

Faced with investor pressure to increase returns, the response from most developed banks has been to slash headcount and refocus resources, eliminating whole swathes of activities that regulators deem risky. More than 100,000 jobs have been cut at U.S. and European banks since 2012.

HSBC Holdings PLC, Europe’s biggest bank by assets, has exited 15 countries and around 80 businesses since 2011. European investment banks including Barclays PLC and Deutsche Bank AG are beating a global retreat and shedding unprofitable clients. In the U.S., J.P. Morgan Chase & Co. has cut its balance sheet as regulators pressure lenders to become more manageable.

“We have seen banks reduce their proprietary trading, reduce their investment-banking operations and cut back on the activities that really give rise to heavy exposures,” said David Strachan, a Deloitte LLP partner and former financial regulator.

As banks fall back, others are gradually taking up the slack. The so-called shadow-banking sector has boosted its share of the world’s financial assets, according to a November Financial Stability Board report. Insurers are increasingly funding long-term loans for infrastructure projects. In some cases traditional bank lending is being bypassed almost completely. Since 2009 eurozone banks have cut lending to companies by €590 billion but financing via bond markets grew by €415 billion, says Morgan Stanley. Loans also make up a smaller portion of U.S. bank balance sheets since the crisis, data show.

A new breed of competitors are circling bank customers, offering cheaper and easier ways to get loans, make payments and transfer money. “There’s growing anxiety that digital disruptors will skim the cream and pinch banks’ profits whilst many banks struggle to move fast enough to re-engineer legacy systems,” said Huw Van Steenis, head of European bank research at Morgan Stanley.

Faced with the disruptive threat, some banks have entered into a tentative embrace with the tech companies that challenge them. For instance, J.P. Morgan will start using online lender On Deck Capital Inc. to help make loans to some of the bank’s roughly 4 million small-business customers. Others are just buying up the competition. Spanish bank Banco Bilbao Vizcaya Argentaria SA bought mobile banking app Simple.

The danger is still on the horizon. So far the new breed of fintech companies has been “remarkably undisruptive,” said Anshu Jain, Deutsche Bank’s former co-CEO. The sector is still small and most of the new players have shied away from taking risk onto their own balance sheets.

Worryingly for banks, the results from cost cutting have been mixed so far, says Carola Schuler, a managing director at Moody’s Investors Service. Many banks appear to be standing still in their efforts to improve their ratios of cost to income. “Cost cutting may just offset shrinking margins here and there,” said Ms. Schuler. “High regulatory costs and [fines] also have the potential to offset some of the cost-cutting efforts that have been taken by banks.”
Based out of an office once occupied by a venerable London broker, Mondo is hoping it can ramp up pressure on banks. The startup hopes to get its U.K. banking license by the end of this year, says Mr. Blomfield. “We will see what happens.”

Will 2016 be The Year The Fed Fails?

By: Clif Droke

To many economists, the biggest mistake the Fed has made has been a lack of aggression in raising interest rates. After all, they reason, the U.S. job market is as strong as it has been since 2007 and the economy, even if sluggish, is at least back on an even keel. These same observers cheered the Fed's decision to raise the Fed funds rate in December by a quarter percentage point.

Yet there is even more reason to worry that the raising of the Fed funds rate last month may have been a policy blunder of major proportions. In this commentary we'll briefly examine the distinct possibility that the Fed has put the U.S. financial market on the cusp of another troublesome year ahead.

Many investors and analysts believe that the quarter percent rate hike enacted by the Fed at its December meeting is inconsequential. Some analysts, however, believe otherwise. One such analyst is Bert Dohmen, editor of the Wellington Letter. In a recent article he points out that in order for the Fed to achieve its goal of raising the benchmark interest rate to 0.25% from virtually zero, it has to drain reserves from the banking system. It does this through "reverse repos," which means it sells Treasury bonds to banks and receives payment via the bank's reserves. In short, it amounts to decreasing the amount of liquidity in the banking system.

On December 31, 2015, the Fed did almost $475 billion of reverse repos, according to Dohmen.

"Of course, this is not permanent," he writes, "but usually measured in a few days or less. But it does reduce the ability of banks to lend to each other for that time. The above was a record amount, exceeding the prior record of $339.48 billion on June 30, 2014, 1.5 years ago. On Jan 5, 2016 the fed did a reverse repo of almost $170 billion for one day."

He points out that the Fed must continue doing this in order to keep the Fed Funds at or above 0.25%. In doing so, the Fed is draining liquidity from the financial system at a time when liquidity is in great demand. E.D. Skyrm, managing director of Wedbush Securities, has calculated that starting at zero, the Fed's rate hike to 0.25% is "infinite" in percentage terms.

He further estimates the Fed needs to drain between $310B and $800B in liquidity to achieve this.

As if that weren't enough, comments by St. Louis Fed President Bullard this week suggest the Fed is completely oblivious to the effects that rate increases are having on the financial market.

Incredibly, Bullard suggested that four more rate increases were likely in 2016, underscoring the Fed's total blindness to the global market crisis.

The Fed, duly chastised by its dilatory response to the 2008 crisis, claimed for years that it would vigilantly prevent another bubble from forming in the credit market. Yet there is growing evidence that it has failed miserably in that duty as well. Credit analysts Edward Altman and Brenda Kuehne, in an article entitled "Credt Market Bubble Building" (Business Credit, March 2015), observed last year that a bubble was building in the high yield corporate debt market. They pointed out that the corporate high yield (HY) and investment grade (IG) sectors had been refinancing and increasing their debt financing continuously since 2010 when the Fed began ramping up its loose money policy.

They also wrote that "new HY issuance topped $200 billion in 2012 and almost matched that in 2013," adding that corporate debt issuance was even more substantial in Europe in 2013-14.

"In a nutshell," Altman and Kuehne concluded, "market acceptance of newly issued high-yield junk bonds has been remarkable, with record amounts issued at relatively low interest rates.

This reinforces that a seemingly insatiable appetite exists for higher yields in this low-interest rate environment." Further, the authors found that HY corporate bonds in 2015 carried a higher default risk than those outstanding in 2007. The outcome of this can be clearly seen in the following graph of the SPDR High Yield Bond ETF (JNK), which is testing levels not seen since the depths of the 2008-09 credit crisis.

JNK Daily Chart

And so it would appear that after feeding another credit market bubble with its persistent zero interest rate policy of the last few years the Fed is committing a far more grievous error by raising rates at the worst possible time.

Perhaps the biggest danger for central banks this year is hubris. The Fed spent the better part of last year insisting that benchmark rate would be raised at some point in 2015. It also consistently (and correctly, I maintain) passed on raising rates in meeting after meeting. Only when December's policy meeting came around did the Fed finally see fit to raise the benchmark interest rate. There was essentially no justification for raising the rate; it seemed merely a case of the Fed feeling obligated to keep a promise it had made months earlier. In other words, the Fed was merely trying to save face.

Robert Campbell, in the latest issue of his Campbell Real Estate Timing Letter, made an observation about market forecasters that could easily be applied to central bankers. He wrote:

"It's [a] natural tendency for humans to stock to a given forecast come hell or high water.

Instead of adjusting to changing conditions, most investors get married to their outlook for the markets - which only proves they would rather be right than change their positions according to changing realities and make money. I know it sounds crazy but it's human nature: most people would rather defend a bad idea (or investment position) - and prove they are right - than admit they made a mistake (and change and be happy)." [www.RealEstateTiming.com]

Is it just possible that the Fed is oblivious to the bear market now underway in the equity market, along with the threat of additional weakness being imported from overseas? Could it actually be serious about wanting to incrementally raise interest rates (thereby tightening money availability) in 2016 when the data argues it should be doing everything to make liquidity more plentiful? While the jury is still deliberating those questions, the preliminary evidence would answer both questions in the affirmative.

Fed Chair Janet Yellen has been painted as a monetary dove by many Fed watchers, yet her actions since assuming control of the Fed have been anything but dovish. Despite the many threats posed by the global economic crisis, the Fed is acting as if the U.S. is perfectly insulated against any ripple effects from global weakness. She appears blithely unaware that her misguided monetary policy stance risks undoing the equity market rebound her predecessor helped engineer in the years following the credit crisis.

Wouldn't it be ironic if in 2016 the Fed's lack of sensitivity to the threat posed by the global crisis turns out to be its downfall? The Fed appears to have painted itself into a corner with its monetary policy decisions. Rates are too low to be used as an effective weapon against a further deflationary threat from overseas. To lower the Fed funds rate from here would be to admit that it made a mistake in raising it in the first place. It's unlikely the Fed would do this since it fears anything that would potentially undermine its credibility and smack of indecision.

Moreover, it's unlikely that the Yellen Fed would risk the appearance of being unduly aggressive by increasing liquidity at this early stage of the crisis. History shows the Fed, like most institutions, to be a reactionary creature. If the Fed under Bernanke was late in aggressively loosening monetary policy in 2008 when the credit conflagration was in full flame, why should we expect anything different from Yellen.

The Fed isn't the only central bank that seems to be underestimating the potential danger of the global crisis. European Central Bank (ECB) President Draghi famously pledged his bank would do "whatever it takes" to reverse the deflationary undercurrents within the euro zone.

Yet the ECB has failed to live up to that promise to date. Although the ECB recently lowered its deposit rate from -0.2 percent to -0.3 percent and extended its 60-billion-euro monthly asset purchase program, the ECB hasn't shown the necessary urgency commensurate with the magnitude of the crisis. The result of the bank's efforts to date has been an anemic euro zone economy and a lack of confidence among the region's investors.

The lack of urgency among central bankers and investors alike is troubling since it means - from a contrarian's perspective - that the global crisis likely has a lot further to run before it abates. In the meantime, traders and investors should continue to maintain a defensive posture and avoid new long commitments due to the continuing internal weakness.

sábado, enero 23, 2016



Gold Outlook For 2016

by: Arkadiusz Sieroń

- What will the price of gold be in the next year?

- Will 2016 be better than 2015 for the yellow metal?

- What factors will affect the price of gold in the new year?

The million-dollar question is: what will the price of gold be in the next year? We do not know the exact numbers and we do not pretend that we know the future as other analysts often do (usually the same people, who deny making wrong forecasts). We can say that the precious metals market is quite likely to form its final bottom sometime this year. Within the scope of the fundamental analysis, we can offer some qualitative predictions for the gold market in 2016.
What will affect the price of gold in the next year?
The major force influencing the gold market will be, as in 2015, the changes in divergence in the monetary policies among major central banks in the world. Investors witnessed the starkest contrast between them in December, when the European Central Bank eased its monetary policy, while the Fed raised its interest rates. Last year, the gold price fell on the expectations of the Fed's hike and the resulting appreciation of the U.S. dollar against major currencies, and on the rise in the U.S. real interest rates (see the charts below).
Chart 1: The price of gold (yellow line, right scale, London PM Fix) and the U.S. dollar index (green line, left scale, Trade Weighted Broad U.S. Dollar Index) in 2015
Chart 2: The price of gold (yellow line, right scale, London PM Fix) and the U.S. real interest rates (green line, left scale, yields on 10-year Treasury Inflation-Indexed Security)
That divergence is likely to remain in 2016, as the U.S. economy grows faster than other developed economies. However, there are strong reasons to believe that the level of divergence in the Fed's stance compared to the rest of world would diminish or at least stabilize, which would ease the downward pressure on the price of gold.
Why? First, the ECB disappointed markets by extending, but not expanding its quantitative easing program, as it implicitly promised. It probably means that Draghi could not convince other voting members of the Governing Council (the eurozone' counterpart of the FOMC) to increase the level of quantitative easing as he had signaled to the markets. As the economic activity in the eurozone has picked up recently, there is less need for further monetary easing.
Second, the U.S. central bank's tightening cycle will be less aggressive than expected. Fed's officials ensure that the future path of rate hikes will be slow and gradual (the December FOMC minutes confirm that view). Instead of a meaningful tightening cycle that would restore positive real rates, the Fed is likely to deliver only a symbolic 25 basis point hike. In other words, there may be a "one-and-done" scenario, since the Fed delayed its hike for a few years (if the Fed had really been confident about the U.S. economy's strength to the extent that would justify a whole series of hikes, it would have raised the interest rate a long time ago). The recession officially ended in June 2009. Thus, in the next 6 months, we would be in the seventh year of the current expansion, while the average expansion since 1945 lasted less than five years. Investors should remember that 2016 is an election year, so the Fed may be reluctant to hike aggressively and risk recession, especially with the stubbornly low inflation.
Since the yellow metal serves as a safe-haven, the unexpected tail risks may affect its price this year. The black swans that could change sentiment toward the yellow metal and spur safe-haven demand for gold in 2016 are: China's hard landing, Britain's exit from the European Union, another edition of the eurozone crisis and a new global or U.S. recession. Given the fact that gold is mainly traded as a bet against the American economy, the U.S. recession could be the most important one.

According to JP Morgan, there is 23 percent likelihood that U.S. economy will enter recession in 2016 (and a 76 percent that it enters recession in the next three years), while the Citigroup gives it 65 percent chance. Indeed, data do not look encouraging: the global economy has already entered a dollar recession (global GDP measured in the greenback has fallen), the energy sector is already in a bust, the manufacturing and corporate profits are in a recession, and the junk bond markets are crashing, which often signals stock market turmoil. Needless to say, the U.S. recession would be ultimately positive for the gold market (although initially the greenback could be the king).
Actually, we are already observing positive changes in the attitudes in the marketplace that could support the price of gold. Investors, unsure about the Fed's normalization process, deteriorated liquidity in the global markets, the dubious prospects of the U.S. economy and elevated equity prices are resulting in a more conservative stance. The turbulence in the junk bond market clearly indicates that investors have become more risk-averse. The increased fear in the market may change the sentiment towards gold.
Summing up, the major forces affecting the gold market in 2016 will be the divergence in the monetary policies among major central banks in the world and the level of fear in the markets. The U.S. economy should grow faster than other developed economies, while the Fed is likely to remain less dovish than other central banks. Thus, the U.S. dollar is likely to further appreciate, which would be negative for the price of gold. However, the divergence in the anticipated paths of the Fed and the ECB interest rates should stabilize or narrow, as the U.S. central bank could be less restrictive than expected. Therefore, 2016 should be a better year for gold than 2015, especially since bad news (like the future rate hikes) have probably already been priced into the yellow metal. The possible recession in the U.S. would strengthen the shiny metal, while the black swan landing in Europe would boost the greenback and drag gold down.

The Big Short *Squeeze*

From my view, and previous comments, the oversold markets needed to be squeezed as too many investors were on one side of the boat.

The news backdrop hasn’t changed at all. Earnings and weakening economic data continue to meet lowered expectations.

Today Citigroup (C) stated Friday that long crude oil (and I assume energy stocks) was their investment of the year. Now who would fade that call? The bank was one of the arsonists to light the bulls’ oversold market attack.

Goldman Sachs earnings were much weaker than expected. Economic data this week continues to decline. Sure we had a bounce in PMI Manufacturing Index but the employment component remained negative; Existing Home Sales from December also experienced a large increase, but that was against a much weaker November report so it was a wash; the Oil Rig Count fell once again and Leading Indicators fell once again.

It doesn’t take much to stampede the herd as most bulls are waiting for more QE from the Fed, more central bank manipulation from the ECB, PBOC and BOJ. The thinking now is why get in their way.

My current thinking is the S&P 500 could rally 5-7% from Wednesday’s lows taking the index to between 1902 & 1956. Then we’ll see where things go. In the meantime, let the bulls have their way before trying to short.

Meanwhile from Davos the powers that be are concerned their input and control of markets and politicians was in danger.

Their all much worried about renegade populists like Trump and Sanders eroding their overwhelming influence.

One kingpin with a tin ear was Blackstone’s Billionaire and CEO Steve Schwartzman who was stunned to learn us commoners were pissed-off saying: “I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side. Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is this happening, why is that happening?” Easy for him to say from his perch high above us commoners.

So, stocks roared higher Friday allowing for the first weekly close higher in one month. For us it just means we’re not short-term oversold again.

Market sectors moving higher included: Just about everything.

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red). Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

1-22-2016 3-01-31 PM

Volume was still elevated but the rally didn’t feature as much as during selling.

Breadth per the WSJ was positive. 

1-22-2016 3-02-02 PM
12-17-2015 9-04-44 PM Chart of the Day

1-22-2016 3-02-53 PM

Charts of the Day















    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation has changed due to a variety of new factors including HFTs, new VIX linked ETPs and a multitude of new products to leverage trading and change or obscure prior VIX relevance.

The rallies Thursday and Friday were not unexpected given how oversold conditions had become. I’ve posted above where I thought the upside might be which again is 5-7% off Wednesday’s lows.

It’s the Fed’s turn to initiate more help for bulls a la QE4 and so forth.

Let’s see what happens. 

Debt Storm over Emerging Markets

By: Gordon Long

Something Appears Broken Somewhere?
Debt Storm over Emerging Markets
Full Report: Download pdf- - 21 Pages

Sovereign Debt in Peripheral Nations Becoming Impaired

Things are only getting worse quickly and investors need to understand this as reports like the following begin to surface:
The Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, the Fed indicated "under the table" that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses would exceed the current tier 1 capital tranches.
It will soon surface that many peripheral nations dependent on Energy and base commodities have intractable sovereign debt issues which cannot be solved like Saudi Arabia abruptly announcing it is privatizing its oil assets through an IPO of the $10T Saudi Aramco

Echo Boom

Credit Cycle Has Turned - Everything Is Now Resting on a Moving Floor

Credit Cycle

What investors need to realize is that the Credit Cycle has reversed after 8 years. It reverses because corporate free cash flow begin shrinking and therefore credit risk increases. It is a simple reaction to the realities of the numbers but is compounded when Debt levels to EBITDA rise significantly.

This is what is occurring and the markets are reacting. The heavily leveraged energy sector is being taken to the "wood shed" as are many levered mining and commodity conglomerates.

The Commodity complex and energy began falling when the realities of a potential US Taper program actually occurring were first realized. We have written extensively since the announcement by the US Federal Reserve of its "TAPER" program that an inevitable collapsing commodity market in Emerging Economies would be the catalyst for the next crisis.

Commodity Problems

We concluded in our 2014 Thesis paper "The Globalization Trap" that a good proxy for a slowing China would initially be commodity prices and in turn the levered players behind the massive commodity run - up. Make no mistake about it; China is in the process of a hard landing which is being once again temporarily camouflaged by credit expansion! This is a ticking time bomb with players like Glencore are 'ground zero'.

Number of Distressed Bonds

When the large Energy and Mining companies have their debt rated as junk it will lead to a waterfall of collateral shortfalls and margin calls, reminiscent of the ratings agency downgrade of AIG that culminated with the US bailout of the insurer. Commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans. In other words, there is about $75 billion in secured debt, collateralized by either inventory and/or receivables collateral whose value has cratered in the past year and as a result the LTV on the secured loans has soared.

This is the tip of the iceberg that is prompting the panicked banks to be more eager to provide funds to the suddenly distressed energy - trading sector than even the borrowers themselves.

Read Full Report

Weekend Edition: Doug Casey: Why Do We Need Government?

Editor’s Note: In yesterday’s Weekend Edition, Casey Research founder Doug Casey debunked the myth that governments serve the common people. Today, Doug asks, “Why do we need government at all?”

This essay originally appeared in Doug’s hit book, Crisis Investing for the Rest of the 90s.


Rousseau was perhaps the first to popularize the fiction now taught in civics classes about how government was created. It holds that men sat down together and rationally thought out the concept of government as a solution to problems that confronted them. The government of the United States was, however, the first to be formed in any way remotely like Rousseau's ideal.

Even then, it had far from universal support from the three million colonials whom it claimed to represent. The U.S. government, after all, grew out of an illegal conspiracy to overthrow and replace the existing government.

There's no question that the result was, by an order of magnitude, the best blueprint for a government that had yet been conceived. Most of America's Founding Fathers believed the main purpose of government was to protect its subjects from the initiation of violence from any source; government itself prominently included. That made the U.S. government almost unique in history. And it was that concept – not natural resources, the ethnic composition of American immigrants, or luck – that turned America into the paragon it became.

The origin of government itself, however, was nothing like Rousseau's fable or the origin of the United States Constitution. The most realistic scenario for the origin of government is a roving group of bandits deciding that life would be easier if they settled down in a particular locale, and simply taxing the residents for a fixed percentage (rather like "protection money") instead of periodically sweeping through and carrying off all they could get away with. It's no accident that the ruling classes everywhere have martial backgrounds. Royalty are really nothing more than successful marauders who have buried the origins of their wealth in romance.

Romanticizing government, making it seem like Camelot, populated by brave knights and benevolent kings, painting it as noble and ennobling, helps people to accept its jurisdiction. But, like most things, government is shaped by its origins. Author Rick Maybury may have said it best in Whatever Happened to Justice?,

"A castle was not so much a plush palace as the headquarters for a concentration camp. These camps, called feudal kingdoms, were established by conquering barbarians who'd enslaved the local people.

When you see one, ask to see not just the stately halls and bedrooms, but the dungeons and torture chambers.

"A castle was a hangout for silk-clad gangsters who were stealing from helpless workers. The king was the 'lord' who had control of the blackjack; he claimed a special 'divine right' to use force on the innocent.

"Fantasies about handsome princes and beautiful princesses are dangerous; they whitewash the truth.

They give children the impression political power is wonderful stuff."


The violent and corrupt nature of government is widely acknowledged by almost everyone.

That's been true since time immemorial, as have political satire and grousing about politicians.

Yet almost everyone turns a blind eye; most not only put up with it, but actively support the charade. That's because, although many may believe government to be an evil, they believe it is a necessary evil (the larger question of whether anything that is evil is necessary, or whether anything that is necessary can be evil, is worth discussing, but this isn’t the forum).

What (arguably) makes government necessary is the need for protection from other, even more dangerous, governments. I believe a case can be made that modern technology obviates this function.

One of the most perversely misleading myths about government is that it promotes order within its own bailiwick, keeps groups from constantly warring with each other, and somehow creates togetherness and harmony. In fact, that's the exact opposite of the truth. There's no cosmic imperative for different people to rise up against one another…unless they're organized into political groups. The Middle East, now the world's most fertile breeding ground for hatred, provides an excellent example.

Muslims, Christians, and Jews lived together peaceably in Palestine, Lebanon, and North Africa for centuries until the situation became politicized after World War I. Until then, an individual's background and beliefs were just personal attributes, not a casus belli.

Government was at its most benign, an ineffectual nuisance that concerned itself mostly with extorting taxes. People were busy with that most harmless of activities: making money.

But politics do not deal with people as individuals. It scoops them up into parties and nations.

And some group inevitably winds up using the power of the state (however "innocently" or "justly" at first) to impose its values and wishes on others with predictably destructive results.

What would otherwise be an interesting kaleidoscope of humanity then sorts itself out according to the lowest common denominator peculiar to the time and place.

Sometimes that means along religious lines, as with the Muslims and Hindus in India or the Catholics and Protestants in Ireland; or ethnic lines, like the Kurds and Iraqis in the Middle East or Tamils and Sinhalese in Sri Lanka; sometimes it's mostly racial, as whites and East Indians found throughout Africa in the 1970s or Asians in California in the 1870s. Sometimes it's purely a matter of politics, as Argentines, Guatemalans, Salvadorans, and other Latins discovered more recently. Sometimes it amounts to no more than personal beliefs, as the McCarthy era in the 1950s and the Salem trials in the 1690s proved.

Throughout history government has served as a vehicle for the organization of hatred and oppression, benefitting no one except those who are ambitious and ruthless enough to gain control of it. That's not to say government hasn't, then and now, performed useful functions.

But the useful things it does could and would be done far better by the market.