The Deadly Math Of America’s Faux Prosperity

Authored by Tom Luongo,

Record Deficits, Stronger Dollar Equals Record China Trade Deficit

Sometimes math is a real bitch.   Donald Trump is a smart guy.  I know he knows math.

Too bad he’s ignoring it.

Here’s the gig.  The title says it all.  Government spending is rising rapidly.  More actual money is flowing into the US economy.  Where is that spending going?  To buy cell phones, computers, cars, office supplies and all the rest.

It doesn’t matter if the purchase is made at Best Buy through a Purchase Order, the money still goes to stuff built and imported from China.  The second order effect is that even if it goes to subsidize a farmer in Iowa or a defense contractor in California, that money winds up in the hands of a consumer who does what?

Goes to Best Buy and buys a new TV.  This isn’t rocket science folks, it is simple cause and effect.

More money chases those goods.  Despite the naysayers, Apple is selling a crap-ton of $1200 phones…. built where?  China.

So, the budget deficit thanks to record spending is fueling the very trade deficit with China that Trump is complaining about daily.

Here’s the math.

Big Badda Boom

First up is the budget deficit numbers through nine months of fiscal year 2018, courtesy of Zerohedge.

This resulted in a June budget deficit of $75 billion, better than the consensus estimate of $98BN, and an improvement from the $147 billion deficit in May and as well as slightly less than the deficit of $90.2 billion recorded in June of 2017.This was the second biggest June budget deficit since the financial crisis…

…The June deficit brought the cumulative 2018F budget deficit to over $607BN during the first nine month of the fiscal year, up 16% over the past year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

The post has a ton of charts to illustrate the point, but it’s mostly unnecessary.  The US Treasury is issuing debt at an astounding rate to cover this budget.  Spending goes up as tax receipts do thanks to lower tax rates and increasing growth.

More Ticky, More Washy

The second part of the title is the latest figures released on the trade deficit with China.

Trump and Navarro Will Hate This Chart

Taking this one step further we have the exploding interest payments on the $21 trillion pile of debt the US Treasury has racked up.  $1.18 trillion of which is owed to….?


As anyone who runs a house knows, when you get a raise what happens to your debt load if you increase your spending to match the raise in earnings?

Nothing.  It stays the same.

If you are smart, your debt is all fixed-rate, so your monthly outlays stay the same.  But, guess what?  A lot of the US’s debt is inflation-linked TIPS (Treasury Inflation Protected Securities).

TIPS are basically a variable-rate mortgage against your labor folks.

So, debt-servicing costs are rising quickly with the slightest rise in interest rates.

Because when you paying 1% on $100 a rise to 2% doesn’t hurt much.  But, when that 1% marginal rise in interest rate is on $20,000, now its real money.  In your household you cut back on spending.

Does the government do that?  Nope.

Keynesian thinking dominates economic thought.  Even Chicago School guys like Chief Economic Advisor Larry Kudlow are effectively Keynesian when it comes to money issuance.

So, inherent in this equation is the increasing interest payments on a portion of the US’s debt held by China.  That’s not something tariffs can fix.

Yuan Moar?

The third part of the math is the Yuan.  China, to combat a slowing credit growth as the Fed pulls back on dollar liquidity is devaluing the Yuan to keep its banking system liquid.

Cheap yuan means cheaper Chinese goods.

Hybrid war tactics like tariffs and monetary policy adjustments are double-edged swords.

For countries that don’t prepare themselves they are left vulnerable to shifts in central bank credit creation.  The severity of that vulnerability, however, can be managed by the opposing central bank.

Remember last month when the TIC report told us that Russia dumped half of its US Treasury holdings?   It caused the yield on the 10-year note to rise above 3.00%, threatening a major technical breakdown which momentum traders could have piled onto and caused a whole lot more pain for the Treasury Department.

And that was only just under $50 billion worth.

China doesn’t have to start with such a drastic measure.  In fact, Russia held off on this course of action for the past four years.  In fact, after the Ruble crisis of 2014/15, Russia reloaded its stock of US Treasury ammunition.

China, however, has started the Yuan devaluation process along with loosening monetary policy to support its domestic banking sector.  And expect this to continue as communications between the Trump administration and China’s Ministry of Finance is on hold.

For President Trump, the math is clear.  And will continue to be clear.  And it is saying, “Stop blaming others for your problems.  Clean up your own house, first.”  In the short-term Trump will look like he’s winning this trade war.

Capital inflow to the US will support this policy.  China’s stock markets will underperform the US’s. But, that will be a function of safe-haven flows, not because the US’s finances are structurally sound.

The People’s Bank of China will respond with liquidity injections that will look increasingly desperate and will result in a wave of defaults and a slow-down.

The dollar will rise and the trade deficit will persist.  So will the budget deficit.

Because math.

*  *  *

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A Brief History Of US Covert Action In Syria – Part 1

In part 1 of this corrective history of the Syrian proxy war which notable Middle East experts have lately urged is important and essential reading, William Van Wagenen thoroughly dismantles the dominant media myths that have persisted throughout seven years of conflict. 

Part I: The Myth of US ‘Inaction’ in Syria, by William Van Wagenen via The Libertarian Institute

When the Russian military intervened in the Syrian war in October 2015, many in the Western press complained bitterly, demanding that US planners intervene directly in Syria on behalf of the anti-government rebels in response. Reuters alleged that “The Middle East is angry and bewildered by US inaction in Syria,” arguing that “The question on everyone’s mind is: will the United States and its European and regional Sunni allies intervene to stop President Vladimir Putin from reversing the gains made by mainstream Syrian rebels after more than four years of war? Few are holding their breath.” 

The Washington Post similarly argued that Russian president Vladimir Putin was “exploiting America’s inaction,” while the Guardian lamented the “western inability to care enough about the plight of Syrians.” As Russian and Syrian forces battled rebels one year later in Aleppo, more dramatic accusations of US inaction emerged, with Foreign Policy describing US policy in Syria under Obama as “inaction in the face of genocide.”

The idea that the United States has not intervened in Syria and is guilty of “inaction,” is a myth however. The United States and its Western and Gulf Allies have intervened in the Syrian conflict from early on. US planners have been fighting what the New York Times described as a “$1 Billion Secret C.I.A. War in Syria” while providing weapons to rebels through a program considered “one of the costliest covert action programs in the history of the C.I.A.” Starting in the fall of 2012, the US and its Gulf partners, under the direction of then CIA director David Petraeus, were openly sending “a cataract of weaponry” into Syria. It is likely that such shipments began much earlier without public acknowledgment, via the “rat line” from Libya, as reported by journalist Seymour Hersh. 

US Special Envoy to Syria Michael Ratner, in a meeting with members of the Syrian opposition, explained that “The armed groups in Syria get a lot of support, not just from the United States but from other partners,” while Secretary of State John Kerry added in the same meeting, “I think we’ve been putting an extraordinary amount of arms in,” and “Qatar, Turkey, Saudi Arabia, a huge amount of weapons [are] coming in. A huge amount of money.”

Sectarian Mass Murder

Also a myth is the idea that any US intervention in Syria would seek to protect civilians. While allegations that Syrian and Russian forces were committing genocide in Aleppo proved baseless, US planners have themselves supported rebels intent on committing genocide and sectarian mass murder. This was clearly evident in the Syrian city of Latakia, which by the time of the Russian intervention in October 2015 was on the verge of falling to a coalition of Syrian rebel groups including al-Qaeda (known in Syria as the Nusra Front) and the US-armed and funded Free Syrian Army (FSA).

Robert Worth of the New York Times writes that “In Latakia, some people told me that their city might have been destroyed if not for the Russians. The city has long been one of Syria’s safe zones, well defended by the army and its militias; there are tent cities full of people who have fled other parts of the country, including thousands from Aleppo. But in the summer of 2015, the rebels were closing in on the Latakia city limits, and mortars were falling downtown. If the rebels had captured the area — where Alawites are the majority — a result would almost certainly have been sectarian mass murder. Many people in the region would have blamed the United States, which armed some of the rebels operating in the area. . . Andrew Exum, who worked in the Pentagon at the time, told me that the military drew up contingency plans for a rapid collapse of the regime. The planning sessions were talked about as ‘catastrophic success [emphasis mine].’”

Alawite civilians in Latakia faced the prospect of being massacred if rebels had been able to capture the city, due to the virulently anti-Alawite views of Nusra Front members. Nusra religious clerics draw on the writings of the fringe 14th century Islamic scholar Ibn Taymiyya to argue that Alawites are “infidels” deserving of death. Syria analyst Sam Heller described Nusra clerics as promoting “toxic — even genocidal — sectarianism.” Rebels from the FSA, which have fought alongside and “in the ranks” of the Nusra Front throughout the conflict, also posed a threat to Alawite civilians in Latakia. 

Though typically considered moderate in the Western press, many FSA battalions have been armed and funded by the Syrian Muslim Brotherhood (MB). Thanks to the influence of Brotherhood ideologue Said Hawwa, the Syrian Brotherhood strongly promoted the anti-Alawite sectarian views of Ibn Taymiyya from the 1960’s until the 1980’s. This anti-Alawite sectarianism re-emerged in segments of the Syrian opposition, including in elements of the FSA, when peaceful protests and armed insurrection against the Syrian government simultaneously erupted in Syria in the spring of 2011.

While the Syrian and Russian militaries managed to protect Latakia and prevent a massacre of the city’s Alawite civilians, the broader effort to prevent the fall of the country to al-Qaeda and its FSA allies exacted a huge toll on Syria’s Alawites. The Telegraph noted that already by April 2015, “The scale of the sect’s losses is staggering” and that of some 250,000 Alawite men of fighting age “as many as one third are dead” and that “Alawite villages nestled in the hills of their ancestral Latakia province are all but devoid of young men. The women dress only in mourning black.”

Welcoming ISIS as a Bulwark against Assad

While arming rebels threatening the massacre of Alawite civilians in Latakia, US planners were at the same time welcoming the potential massacre of Syrian civilians in Damascus. The Syrian capital was on the verge of falling to the Islamic State (ISIS) in the summer of 2015 after ISIS, with the help of Nusra, captured all of the Yarmouk Palestinian refugee camp in the southern Damascus suburbs. The New York Times acknowledged the ISIS threat to Damascus at this time, observing that “By seizing much of the camp” ISIS had “made its greatest inroads yet into Damascus,” while the Washington Post noted that “Their new push puts [ISIS] within five miles of the heart of the capital . . . even as they are on the retreat in Iraq.”

In a private meeting with members of the Syrian opposition, Secretary of State John Kerry acknowledged that US planners had actually welcomed the ISIS advance on Damascus, in an effort to use it as leverage to force Assad to give up power. Kerry explained that, “the reason Russia came in is because ISIL [ISIS] was getting stronger. Daesh [ISIS] was threatening the possibility of going to Damascus. And that is why Russia came in. They didn’t want a Daesh [ISIS] government and they supported Assad. And we know this was growing. We were watching. We saw that Daesh [ISIS]was growing in strength. And we thought Assad was threatened. We thought we could manage that Assad might then negotiate. Instead of negotiating, he got Putin to support him [emphasis mine].”

Because the US was bombing ISIS in defense of its Kurdish allies in Northeastern Syria and its Iraqi government allies in Northwestern Iraq, the fact that US planners at the same time welcomed the ISIS push on Damascus against the Syrian government was largely obscured.

Had Damascus fallen to ISIS, it is clear that many civilians in the city, including Christians, Alawites, Shiites, members of the LGBTQ community, and pro-government Sunnis, would have been killed. While commenting on the Russian intervention, Michael Kofman of the Wilson Center acknowledged that “Assad may be irredeemable in the eyes of the United States, but it is equally clear that a high human price would be paid when the Islamic State [ISIS] or al-Nusra seizes the major population centers in Syria that he still controls.”

Suicide Bombers and US Anti-tank Missiles

It is also clear that US planners were deliberately supporting al-Qaeda (Nusra), despite its genocidal intentions towards Syria’s Alawites, by flooding Syria with weapons. Because FSA brigades that received funding and weapons from the US and its Gulf Allies were fighting side by side with militants from Nusra throughout the country, in practice much of the money and weapons sent to the FSA ultimately benefited al-Qaeda.

For example, US-made TOW anti-tank missiles sent by US planners to FSA groups in Idlib played a crucial role in helping Nusra conquer the entire province in the spring of 2015. Syria analyst Hassan Hassan observed in Foreign Policy during this period that “The Syrian rebels are on a roll” and that “The recent offensives in Idlib have been strikingly swift — thanks in large part to suicide bombers and American anti-tank TOW missiles,” which the FSA and Nusra deployed in tandem. Syria analyst Charles Lister, also writing in Foreign Policydescribed how US planners explicitly encouraged the FSA groups they were arming to fight alongside Nusra in Idlib. Rebel victories in Idlib, in particular the town of Jisr al-Shughour, allowed Nusra and the FSA to then threaten the massacre of Alawites in Latakia.

When Russia intervened militarily in Syria in October 2015, US planners responded by immediately increasing shipments of TOW anti-tank missiles to FSA groups, some of which then helped Nusra capture the strategic town of Murek in central Syria one month later in November 2015.

This prompted Daveed Gartenstein-Ross of the Foundation for Defense of Democracies (FDD) to observe that “it is impossible to argue that U.S. officials involved in the CIA’s program cannot discern that Nusra and other extremists have benefited” from CIA weapons shipments to Syrian rebels, “And despite this, the CIA decided to drastically increase lethal support to vetted rebel factions following the Russian intervention into Syria in late September.”

“Deal with the Devil”

Nusra did not only benefit from fighting alongside FSA rebels armed with US-supplied weapons, but acquired many of these weapons themselves. That Nusra regularly purchased weapons from the Western-backed military councils supplying the FSA was confirmed in October 2014, when the New York Times reported that Shafi al-Ajmi, a Nusra fundraiser, told a Saudi news channel that “When the military councils sell the weapons they receive, guess who buys them? It’s me.”

That al-Qaeda was purchasing US supplied weapons seemed of little concern to US planners. When journalist Sharmine Narwani asked why US-supplied weapons allegedly meant for FSA groups were showing up in Nusra hands, CENTCOM spokesman Lieutenant Commander Kyle Raines responded: “We don’t ‘command and control’ these forces—we only ‘train and enable’ them. Who they say they’re allying with, that’s their business.”

Obama administration officials themselves acknowledged tacit US support for al-Qaedaadmitting in November 2016 to the Washington Post that they had struck “a deal with the devil,” years before, “whereby the United States largely held its fire against al-Nusra because the group was popular with Syrians in rebel-controlled areas and furthered the U.S. goal of putting military pressure on Assad,” thereby confirming long standing Russian accusations that the US had been “sheltering al-Nusra.”

Ben Rhodes’ Bombshell Confirmation

More recently, Ben Rhodes, deputy national security advisor under the Obama administration, acknowledged providing military support to Syrian rebels, even though it was clear that Nusra comprised a good portion of the Syrian opposition as a whole. Rhodes explained that “there was a slight absurdity in the fact that we were debating options to provide military support to the opposition at the same time that we were deciding to designate al-Nusra, a big chunk of that opposition, as a terrorist organization.”

Despite designating Nusra as a terror group already in 2012, US planners nevertheless provided weapons to the Syrian rebels, of which Nusra comprised a “big chunk,” for the next 7 years. As Sharmine Narwani observes, “U.S. arms have been seen in Nusra’s possession for many years now, including highly valued TOW missiles, which were game-changing weapons in the Syrian military theater. When American weapons end up in al-Qaeda hands during the first or second year of a conflict, one assumes simple errors in judgment. When the problem persists after seven years, however, it starts to look like there’s a policy in place to look the other way.”

US planners welcomed rebel gains in Syria, including by rebel groups advocating genocide against Syria’s Alawite population, such as ISIS and Nusra, because these gains bolstered the broader US goal of toppling the Syrian governmentin an effort to weaken its close allies, Iran and Hezbollah. US planners wished to see rebel gains in Syria, in spite of the obviously catastrophic consequences for Syrian civilians, including for Syria’s Sunnis, which rebel success would bring. US support for the rebels belies the myth of US “inaction” in Syria, and the myth that any US intervention would be for the sake of preventing massacres and even genocide, rather than in support of it.

* * *

In parts 2 and 3, we will review US support for rebel advances in the spring and summer of 2015 in Idlib, Latakia, Palmyra, Yarmouk, and Homs, and further describe how these rebel advances nearly led to the massacre of Syrian civilians in two of the country’s main population centers, Latakia and Damascus, if not for the Russian intervention which halted the rebel advance.

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Chaos At The NATO Summit Benefits Eurasian Integration

Authored by Federico Pieraccini via The Strategic Culture Foundation,

The chaos that has engulfed the NATO summit is yet further confirmation of the world’s transition from a unipolar to a multipolar order, with the return of great-power competition and different states jockeying for hegemony. Trump is adapting to this environment by seeking to survive politically in a hostile environment.

The meeting of the NATO countries in Brussels highlighted the apparent intentions of the US president towards his allies and the Atlantic organization. Trump’s strategy is to oblige the European countries to halt energy imports from Moscow and replace them with liquefied natural gas (LNG) from the US at a price that is obviously not cheap. The gas would come from the US by ship, entailing huge logistical costs that are not the case with regard to physical pipelines between Europe and Russia. This issue directly affects Germany and the Nord Stream II project, a deal worth billions of euros.

The reasons behind Trump’s behavior are twofold.

On the one hand, we have the politics of “America First”, with the intention of increasing exports of LNG while boasting of “successes” to the base.

The other purpose of Trump’s words is to highlight, sotto voce, the inconsistency of EU countries, who despite considering Russia an existential danger, nevertheless strongly depend on Russia’s energy exports.

To be fair to Trump, these same EU countries — fearful of Moscow but ready to do business with it — do not even spend 2% of their GDP on defense, while the US commits closer to 4%. For Trump this is surreal and intolerable. The NATO Summit began more or less with this anomaly, conveyed by Trump in front of the cameras to Jens Stoltenberg, the Secretary General of NATO, with Pompeo and the US ambassador to NATO on either side of him doing their best to remain impassive.

The photo-op with Merkel did not go any better. Needless to say, the American media is being driven into a tizzy. The headlines blare: “Trump betrays the allies”; “End of NATO”. CNN is in a state of mourning. Brzezinski’s daughter (yes, that Brzezinski ) almost vomited from the tension on MSNBC’s Morning Joe.

In truth, Trump is engaging in a lot of public relations. When he makes these performances in front of the cameras, he is speaking directly to his electoral base, showing that he is keeping his promises by putting “America First”. To be honest, it would be more appropriate to declare, “America, b****h!”

To back his words up with actions, he slaps his allies with tariffs and sanctions against Russia, and now Iran, incurring huge losses for Europe. He mocks leaders like Merkel and Trudeau in public, and has humiliated Macron in front of the world.

In practical terms, Trump does not care whether Germany buys LNG from the United States. If this is to ever occur, then it will take 20 years, given the cost and time needed to build dozens of LNG facilities on the European and American coasts.

The summit between Trump and Putin in Helsinki could even lead to more drama if Trump wants to drive the media, liberals, neocons and his European allies into further conniptions.

It depends on the issues on his checklist that he has to deal with before the November midterm elections. I do not rule out seeing Kim Jong-un in Washington before then, or a summit between the US, Israel and Palestine — anything that will play to the desired optics. The issue is just that: all image, no substance.

Trump is focussing principally on triumphing in the November midterms, and to do so he needs to look like a winner. He will be keen to ensure the moneybags of the Israel lobby and Saudi Arabia keep flowing. In doing so, he will probably even win the 2010 presidential election. There is always the possibility that the Fed and other financial conglomerates will decide to commit harakiri and blow up the economy with a new financial crisis in order to get rid of Trump. It would be the deserved end of the US empire.

European politicians also await the midterms with great anticipation, hoping that this will be the end of the Trump nightmare. They still live in the same dreamworld of Hillary Clinton, believing that Democratic victory is possible and that Trump’s election was simply an anomaly.

They will not have woken from their nightmare when they come to realize that Trump has increased the number of Republicans in the House and Senate. Perhaps at that point, with sanctions in place against Russia and Iran and with huge economic losses and the prospect of another six years with Trump, a coin will drop for someone in Europe, and Trump will be seen as the catalyst for breaking ties with Washington and looking east towards a new set of alliances with China and Russia.

In conclusion, we are experiencing the full effects of the Trump presidency, which is destructive of and devastating for the neoliberal world order. As I said at least a year before he was elected, Trump is accelerating the decline of the United States as a lodestar for the West, representing Washington’s swan song as the only superpower.

It is not “America First”, it is Trump First. There is no strategy or logic behind it. There are only friendships, his personal ego, and the need to remain in the saddle for another six years. Meanwhile, get your popcorn ready in anticipation of the Helsinki summit.

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A Problem Emerges For Japanese Stocks: The Biggest Market “Whale” Can’t Buy Any More

When it comes to Japan’s risk assets, it is a widely – in incorrectly – accepted that only the Bank of Japan matters: and with Kuroda now a proud owner of nearly 80% of the country’s ETFs and the BOJ a top 10 shareholder in nearly 40% of listed companies, one can see where this perception comes from.

However, when it comes to Japanese, and international, stocks there is one whale that is far more impactful than even the BOJ when it comes to capital allocation and the fate of risk assets: Japan’s gargantuan Government Pension Investment Fund (or GPIF) – the largest in the world –  which manages 156 trillion yen ($1.41 trillion), and whose assets are broken down in 4 main categories: Japanese bonds, Japanese stocks, overseas bonds and overseas stocks. As the Nikkei notes, the GPIF earned the moniker as a “whale” in the stock market due to its massive holdings of domestic stocks. Previously, a greater weight was given to less risky domestic bonds, which amounted to 62% of total assets as recently as 2012.

The historical distribution of the GPIF’s asset holdings is shown in the chart below: what is notable is that as a result of a mandated shift in its asset allocation several years ago, the fund which traditionally had a conservative posture with the bulk of its assets – usually as much as 70% – in the form of domestic bonds, had since shifted to a stock-heavy allocation, with the target allocation for domestic and foreign stocks rising to 50%.

And here a problem has emerged, because the GPIF’s portfolio has exceeded its 25% allocation target for domestic stocks for the first time, a milestone that – unless the world’s largest pension fund changes  its strategy for stable returns – could have severely adverse consequences for local risk assets.

According to a filing last Friday, Japanese equities accounted for 25.14% of the GPIF’s portfolio at the end of March. That equates to over 40 trillion yen worth of shares covering roughly 2,300 issues.

Just like the BOJ, the fund is believed to be a major shareholder in many companies listed in the Tokyo Stock Exchange’s first section. In fact, the GPIF is often seen as a tack-on to the BOJ, because as the GPIF sells its Japanese bond holdings to the BOJ usually at prices well above market value, it opens up more space to buy equities, thereby creating a feedback loop in which the BOJ’s purchases of JGbs indirectly result in higher stock prices, with the GPIF as a conduit.

For now the strategy of dumping Japan’s pensions into the stock market has been a smashing success: in fiscal 2017, the GPIF posted an investment return of 10.08 trillion yen. There is just one problem: with the whale by far the biggest market player in Japan’s stock market, its buying was sufficient to lift stock prices, thereby creating a virtuous cycle in which the more the GPIF bought, the greater its return.

That may soon be over, however, now that the GPIF has hit its limit on how much domestic stocks it can buy.

* * *

The GPIF’s impact on Japan’s stock market in recent years has been staggering. Shinzo Abe’s government, hoping to boost the “wealth effect” by creating higher stock prices, resolved to reduce the GPIF’s reliance on Japanese government bonds while boosting stock holdings instead. In October 2014, the GPIF revised portfolio allocations and set a 50% aggregate target for equities at home and abroad.

According to the Nikkei, since 2014, the GPIF has bought an estimated 6.36 trillion yen more in domestic equities than it sold, equal to about 1% of the TSE first section’s market value.

“That computes to lifting the Nikkei Stock Average by about 1,000 points,” said Masahiro Nishikawa, chief fiscal policy analyst at Nomura Securities.

To be sure, worried that domestic investors will dump their shares now that the “whale” is no longer a backstop buyer for Japanese stocks, GPIF President Norihiro Takahashi said that although Japanese equities have topped the 25% goal, the ratio can exceed the target by a few percentage points. “Investment will not stop.” Translated: please don’t start a liquidation cascade.

And yet despite wishful thinking, “the GPIF is now less likely to be a force that elevates the market as it did in the past” the Nikkei admits, for the simple reason that it can no longer aggressively invest in stocks absent yet another change to its  asset allocation target.

Japanese bonds still occupy the largest slice of the GPIF’s portfolio, but to a lesser extent. As shown in the chart above, the allocation to bonds stood at 27.5% at the end of fiscal 2017, well below the 35% target. A big reason why the fund has had trouble procuring the bonds is because another whale, the Bank of Japan, is also mass purchasing JGBs.

Meanwhile, with the GPIF’s buying having created its own bullish sentiment, now that the buying is over the fund has two options: risk a sudden drop in the market, one which comes as the BOJ is creeping ever closer to its own QE end as Japan runs out of JGBs for sale, or expand the fund’s allocation to stocks further. And in an attempt to keep the party going a little longer, it is obvious that the choice will be the latter. Unfortunately, as both a Japanese and global recession – and market crash – gets ever closer, all this will do is jeopardize even more Japanese pensions.

The real question is just how angry Japan’s population, already the oldest in the world, will be once it learns that much – or all – of its pensions were lost in the government’s vain pursuit of further market gains, and to keep Abe’s popularity rating high. With the US economic cycle already the second longest in history, we doubt we will have long to wait for the answer.

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China GDP Growth Slows After Record Contraction In Shadow Banking Credit

Following the largest contraction in ‘shadow banking system’ credit, and a record low for M2 growth, fears were building that China’s economic growth prospects may lag expectations.

By way of background for tonight’s economic data deluge, here are the lowlights.

The drop in shadow bank was particularly sharp for the second month in a row: this has been the area where Beijing has been most focused in their deleveraging efforts as it’s the most opaque and riskiest segment of credit. And, as the chart below show, the aggregate off balance-sheet financing posted its biggest monthly drop on record in June

the lass granular M2 reading also posted a growth slowdown, rising only 8.0% in June, down from May’s 8.3%, below consensus of 8.4%, and the lowest on record.

Both of which do nothing to help China’s credit impulse. Investors see China’s liquidity tightening…

Commenting on the ongoing slowdown in China’s credit creation, Goldman said that the latest money and credit data highlighted the challenges the government is facing in loosening monetary policy.

But before we shift to the market’s perceptions, don’t forget, China’s trade surplus with the US just hit a Trump-tantrum-creating record high…

Oh, and don’t forget, Chinese stock markets have tumbled…

And bond markets have collapsed as defaults surge…

And Yuan has plunged…

So the big picture was not rosy heading into tonight’s big data deluge.

Early signs for June pointed to weakness. The official and Caixin PMIs indicated a slowdown in momentum – with export order gauges weakening.

China stocks were down, Yuan flat, and China 10Y bonds 3bps lower in yield as the data hit.

And this is what the data looked like..

  • China Q2 GDP YoY MET EXPECTATIONS rising 6.7% – equal to the weakest since Q1 2009 (against expectations of +6.7% but slowing from Q1 growth of 6.8% YoY)

  • China Retail Sales YoY BEAT rising 9.0% (against expectations of +8.8% and notably up from May’s 8.5% YoY – the lowest since May 2003)

  • China Industrial Production YoY MISS rising just 6.0% – weakest since Dec 2015 (against expectations of +6.5% and well down from May’s 6.8% YoY)

  • China Fixed Asset Investment YoY MET EXPECTATIONS rising 6.0% – the lowest on record (against expectations of +6.0% and down from May’s 6.1% YoY – record low)

Visually – down and to the left…

Not pretty. It is clear that momentum in the world’s second-largest economy is slowing amid deleveraging and intensifying trade friction with the US…

Though there is one silver-lining, as Bloomberg’s Enda Curran notes, the rebound in retail sales is noteworthy as it’s an indicator of confidence in the wider economy. Granted it was from a low base in May, but it shows that consumer confidence is holding up, despite the trade tensions – although auto sales are down 7% YoY (and petroleum is up 16.5% YoY). Also bear in mind that retail sales print is likely flattered by the fact that the yuan tumbled over 4% from end May through June.

In case those charts look a little odd to you, they do to us too… and amid the world’s craziest decade ever in terms of monetary policy experimentation, extremes of leverage and debt, nuclear armageddon proximity, and now global trade wars, somehow, China has managed to crush all uncertainty out of its business cycle…

It’s almost as if they rigged it?!

In many respects today’s numbers are already history (with most analysts expecting China to have an overall ‘OK’ first half of the year), it’s the second half that will be tougher.

Huatai Securities estimated in a report over the weekend that if the U.S. implements its tariff plan on $200 billion of Chinese imports, China’s exports growth should decrease by 0.8 percentage point and GDP growth by a quarter percentage point.

Finally, as a reminder,  if investors are hoping for China to reflate its way back out of this, Chinese billionaire Zhang Baoquan has a warning (via iFeng: 张宝全:中国人缺乏投资工具 把不动产当硬通货)

China now has two ‘bombs’, one ‘bomb’ is a real estate bubble and the other is a local debt. Any explosion to the Chinese economy is devastating.


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World’s Largest Shipping Company Collapses As Trade War Reality Strikes

While US equity markets (well a few mega-cap tech stocks anyway), the world’s largest shipping company is seeing its stock eviscerated as investor anxiety over trade wars finds an outlet that makes rational sense.

A.P. Moeller-Maersk A/S may struggle to make a profit this year after the U.S. and China descended into a trade war that is already showing stress in sentiment surveys…

As Bloomberg reports, Maersk, which is based in Copenhagen, has already lost almost a third of its market value this year as investors gird for more bad news… and it is losing value in line with the collapse in the US Treasury yield curve.

Trade protectionism means less demand, and history suggests the shipping industry will struggle to make the necessary supply cuts. What’s more, Maersk is now more exposed to shipping as the former conglomerate divests its energy business.

Per Hansen, an investment economist at Nordnet in Copenhagen, says Maersk is currently “in the eye of the hurricane” when it comes to the damage that will be inflicted by a trade war.

The company said earlier in the week it will need to temporarily scale back its service between Asia and North Europe as a result.

“It’s highly likely that Maersk’s valuations could sink to its trough valuations in the coming months as investors avoid shipping stocks until more excess capacity is being removed,” said Corrine Png, chief executive officer and founder of Crucial Perspective, a Singapore-based research provider focusing on transport.

So just keep buying Amazon and Netflix.. and keep buying bonds…

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Bill Maher: Trump Is The Most “Aggressively Stupid” President In US History

Bill Maher, the host of HBO’s Real Time, has released a new standup special – and, as one might expect, it features more than a few jokes at President Trump’s expense. While the US has had presidents in the past who were “stupid”, the country has never had a leader who is as “aggressively stupid” as Trump, Maher joked.

“We’ve had dumbass presidents, but we’ve never had one like this that is so aggressively stupid,” Maher said. Trump “takes pride that you cannot get information into his head.”

Maher joked that the president “takes pride that you cannot get information into his head.”

“He will insist like, that the stealth bomber is literally invisible. Or there’s such a thing as clean coal. Or that global warming is a hoax because it snows in the winter,” Maher said. “It’s like saying the sun isn’t real because last night it got dark,” he said.

Watch the clip below:

Maher was criticized last month when he said on his HBO show that he’s “hoping” for an economic disaster (exposing just how desperate some of Trump’s political opponents are for a victory) so that the ensuing recession would help blunt President Trump’s popularity (which has climbed since his inauguration) and result in him being voted out of office in 2020. Of course, Maher says nothing about Trump’s many accomplishments since taking office (negotiating a possible peace deal with North Korea and boosting economic growth). Recently, even the New York Times admitted that Trump “got from NATO everything Obama ever asked for.” Which begs the question: If Trump is an idiot, what does that make Obama?

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Junk Bond Crash Imminent? HY ETF Shorts Hit All Time High

It has been a tough year for junk bond funds, if not for junk bond spreads, which as we noted recently have shown impressive resilience and have solidly outperformed IG since the start of the year (largely thank to a scarcity in HY supply, and a deluge of IG bond issuance to fund a new M&A cycle as Goldman discussed last week).

Meanwhile, as junk has refused to sell off, junk bond funds have been far less lucky, and the constant stream of outflows that began before the start of 2018, hit a record 34 weeks of outflows at the start of July (it did however reverse last week, with a modest $0.5 inflow) prompting many to ask where is the high yield bid coming from?

To be sure, much of the negativity surrounding HY funds is the result of growing “late cycle” fears for credit (as discussed most recently last week), which according to Morgan Stanley will peak in just two months (and in December for stocks)…

… coupled with concerns about Trump’s global trade war.

Meanwhile, in a surprising development, even as junk bond spreads have failed to widen alongside their IG peers, investors are growing convinced it is only a matter of time before the junk bond market suffers an “event.”

But first, a quick trip down memory lane: investors will recall that immediately before and after the market VIXplosion on February 5, when countless vol ETFs imploded as a result of massive short gamma exposure to the VIX, one of the side effects was a surge in high yield ETF short interest as many were convinced that the vol-induced market shock would promptly slam junk bonds next. This is what JPMorgan wrote at the time:

Both HYG and JNK short interest are at their highs for the period we track data from, suggesting that institutional  investor participation via shorting ETFs has contributed to the sell-off in recent weeks. This is similar to the rise in the short interest ratio on the largest investment grade corporate bond ETF, LQD, which has moved higher during the same period this year, albeit from very low levels.

To the surprise of many, this did not happen, however the lack of a HY crash appears to have only cemented the bearish bias, because fast forward 6 months to today, when according to the latest JPMorgan Flows and Liquidity data the short interest in Global HY ETFs as a % of outstanding shares, is on the verge of hitting 25%, and is by far the highest on record.

How should one read this peculiar divergence in the data: on one hand, the record HY shorts point to the risk of a sharp blow out in credit spreads in the coming weeks should risk-off sentiment return, if traders start selling ahead of the ECB’s QE end at the end of the year, if trade war escalates further and hits the high beta credit space, or alternatively, if oil and energy names – all heavily represented in the junk bond sector – tumble as a result of a drop in oil.

Alternatively, should a negative catalyst not emerge, the risk for the shorts is one of a historic squeeze, and one which also collapses spreads to record tights.

Needless to say, the first outcome is more concerning from a broader, market perspective. And while a move wider in spreads would not be catastrophic, it could still lead to a broad liquidation panic at the synthetic credit level, at which point the main risk becomes the underlying threat latent within all ETF products, first voiced by Howard Marks in March 2015: “what would happen, for example, if a large number of holders decided to sell a high yield bond ETF all at once?” This is how Marks answered his own question:

in theory, the ETF can always be sold. Buyers may be scarce, but there should be some price at which one will materialize. Of course, the price that buyer will pay might represent a discount from the NAV of the underlying bonds. In that case, a bank should be willing to buy the creation units at that discount from NAV and short the underlying bonds at the prices used to calculate the NAV, earning an arbitrage profit and causing the gap to close. But then we’re back to wondering about whether there will be a buyer for the bonds the bank wants to short, and at what price. Thus we can’t get away from depending on the liquidity of the underlying high yield bonds. The ETF can’t be more liquid than the underlying, and we know the underlying can become highly illiquid.”

Of course, there is the very real possibility that “someone knows something”, and is putting on a massive short bet, even as the broader market refuses to budge. In any event, based on the record accumulation of junk bond ETF shorts, we may soon find out if Marks’ “worst case” scenario plays out as envisioned, and what exactly happens when everyone tries to sell a synthetic product that is far more liquid than its underlying constituents, especially during a market panic., or alternatively, a historic short squeeze.

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