Wednesday, 30 March 2016

Fed’s “Chair,” Asia Now Drives Policy.

Baltic Dry Index. 409 +03        Brent Crude 39.30

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

Brexit odds checker.

Brexit Quote of the Day.
...for, as long as but a hundred of us remain alive, never will we on any conditions be brought under EUSSR rule. It is in truth not for glory, nor riches, nor honours that we are fighting, but for freedom – for that alone, which no honest man gives up but with life itself.

Declaration of Westminster July 24th 2016, with apologies to the Declaration of Arbroath April 6th 1320.
Unreality. The great disconnect. On ZIRP and NIRP, bad news is good news. The final bubble grows. The Fed’s talking chair yesterday confirmed that outside events now drives the world’s leading central bank’s policy. The Great Nixonian Error of fiat money has returned to start eating up the original people of the free lunch. Fiat money is now everybody’s problem. Stay long fully paid up physical gold and silver, held outside of the financial houses who might hypothecate it for their own larcenous use, Corzine style. The next Lehman just got one day closer. That this all goes down is a given. The only unknowns are when, why, and how bad.

It’s our currency but it’s your problem.
US Treasury Secretary, John Connally. 1975.

Janet Yellen is worried about global growth—and Wall Street loves it

Published: Mar 29, 2016 6:45 p.m. ET
Janet Yellen offered up her best impression of a dove Tuesday. In other words, the Federal Reserve chairwoman stressed her intent to gradually lift benchmark interest rates off ultralow levels.

Unsurprisingly, Wall Street cheered the prospect of an ever slower approach to raising interest rates as she spoke at a highly anticipated speech at the Economic Club of New York. The Dow Jones Industrial Average DJIA, +0.56% and the S&P 500 index SPX, +0.88%  both posted their highest settlements of 2016.

The dollar DXY, -0.06% turned south and yields for rate-sensitive Treasurys TMUBMUSD10Y, +0.14% TMUBMUSD02Y, -0.51%  touched one-month lows.

What is worth taking note of is Yellen’s increased focus on forces outside of the U.S. as she outlines a plan to gingerly normalize interest rates, reiterating an updated March policy statement and the Fed’s reduced expectations for rate increases in 2016 (two versus an earlier projection for four).

In a note, Deutsche Bank DB, -0.91% chief international economist Torsten Slok pointed out that Yellen & Co. have been more influenced by events in the rest of the world since late May.

Mentions of China, the dollar and the term “global” have been more readily used by the Yellen as the emergence of negative interest rates in Japan and Europe have underscored consternation about the state of the world economy and. in particular, a slowdown by the world’s second-largest economy: China. Slok’s bar graph below illustrates the point:

----Yellen’s remarks follow a string of conflicting comments from Fed officials who have been referred to as the “gang of five” by some. Those individuals include Atlanta Fed President Dennis Lockhart, St. Louis Fed President James Bullard, San Francisco Fed President John Williams, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Patrick Harker, who hinted at rate increases as early as April in a series of speeches ahead of Yellen’s.

All the moves make some market participants puzzled as to why Fed lifted interest rates for the first time in nearly a decade back in December only to take what looks like a long pause now.

Yellen Says What Markets Want to Hear

March 29, 2016 2:38 PM EST By Mohamed A. El-Erian
Markets had a predictable immediate reaction to comments by Federal Reserve Chair Janet Yellen on Tuesday that they interpreted as relatively dovish signals about the thinking of the world’s most important central bank.

Within minutes of her remarks, risk assets rose, government bond yields fell, the dollar weakened and the VIX declined. Sustaining this trend will require two policy signals, one short-term and one longer-term -- assuming that the global economic environment remains relatively stable.

She used her much-anticipated lunchtime speech to the Economic Club of New York to paint a cautious and measured picture of the U.S. economy, and of the delicate balance that Fed policy makers must maintain.

The Fed chair acknowledged that the overall mixed U.S. picture for 2016 so far contained encouraging signs, including the continued strengthening of the labor market. Yet she also emphasized “external” risks, including slowing global economic conditions, the level of the dollar and market reactions to China’s currency policy. She even recognized the influence of some structural headwinds to growth and the unusual uncertainty facing the inflationary outlook.

This cautious assessment of the economy was accompanied by a rather measured appraisal of what the Federal Reserve can do to further support growth as part of its dual-mandate of maximum employment and stable inflation.

She argued that the Fed had not run out of policy ammunition and stressed the need for careful policy gradualism within a cautious approach overall -- music to the ears of markets that have been conditioned to depend on the Fed to suppress financial volatility and push asset prices higher. But she also cautioned about the extent to which the central bank can continue to be effective. And she refrained from venturing into the debate about negative interest rates, which has been fueled by the decision of her counterparts in Europe and Japan to push theirs below zero.

Judging from the immediate reaction, the markets liked her overall message, which they interpreted as an indication of continued support from the Fed.
Reality. The global economy is ugly and getting uglier, teetering on the edge of an abyss.

ADB’s China growth forecast: Slow and getting slower

Published: Mar 29, 2016 10:51 p.m. ET
BEIJING — China’s growth will be at the bottom of Beijing’s target range this year and decline further in 2017 amid slower growth in the Asia-Pacific region, according to an annual economic outlook published by the Asian Development Bank.

The Manila-based multilateral bank forecast annual growth in China of 6.5% this year and 6.3% for 2017. The government at its annual parliament earlier this month set a target of 6.5% to 7% growth this year and an average of 6.5% over the next five years, a level that may economists believe can only be achieved by excessive monetary and fiscal stimulus.

Dragged down by the People’s Republic of China’s diminished prospects and a weak recovery in major industrial economies, the ADB said it expects the Asian region to post annual growth of 5.7% both this year and next, down from 5.9% in 2015.

“PRC’s growth moderation and uneven global recovery are weighing down overall growth in Asia,” said ADB economist Shang-Jin Wei in a report.

China, the world’s second-largest economy, continues to battle excess capacity and needs to move ahead with structural reform, the bank said.

China’s credit hose leaves many firms parched

By Rachel Morarjee March 29, 2016
China is pouring money into the economy. But the gush of credit – banks doled out $540 billion of new loans in January and February – is not reaching nimbler private companies. That is worrying, since they generate 80 percent of the jobs in China’s cities and 60 percent of GDP.

A Reuters analysis of Chinese listed companies that have reported 2015 earnings show their suppliers owe them – and they in turn owe customers – more money that at any time in the last decade. It takes listed firms almost 170 days to turn working capital into cash. It took just one month in 2006.

Listed companies are larger and better connected than their unlisted peers, and often have access to state-bank funding, so the mounting backlog hits smaller outfits hardest.

China’s official Purchasing Managers Index (PMI) survey reflects this stark disparity. It shows large companies are still expanding, but smaller and medium-sized peers are bearing the brunt of the economic slowdown. The PMI score for small firms fell to 44 in February 2016 from 48 a year earlier, even further from the 50 mark that separates expansion from contraction.

As ever in China, there are workarounds. For one, small businesses can turn to peer-to-peer lenders for cash, paying higher prices for bridging loans while they wait for customers to pay them. Reflecting this trend, the P2P business is booming. Overall P2P loans – a figure that includes other categories such as consumer lending – shot up in the first two months of the year to hit 243 billion yuan ($37 billion), versus 69 billion for the same period in 2015, according to data provider Wangdaizhijia.

Alternatively, if customers pay with bills of exchange, entrepreneurs can take these to the bank and trade them in at a discount for ready cash. This is increasingly popular too. Such discounting is now being done with 46 percent of all bills of exchange, up from 20 percent at the end of 2013, according to research firm CreditSights. That is the highest proportion since monthly data began in 2011.

However, both fixes are expensive and eat into profits. That just adds to the pain of the struggling small businesses which China needs to create jobs.

China bank profits flat-line as bad debts continue to soar

Tue Mar 29, 2016 4:27am EDT
China's Big Four state-run banks this week are set to report annual earnings growth that likely flat-lined after around a decade of terrific profitability, as a surge in soured loans continued unabated while economic expansion weakened.

Profit growth has slowed in recent years while the sector tackles its greatest challenge since the global financial crisis, with bad loans at a 10 year high while funds set aside to cover the losses fall close to regulatory limits.

While banks ramped up lending during a government stimulus drive during the meltdown, much of that lending went to industries where rapid expansion developed into over-supply as economic growth tapered, raising the risk of default and dragging on profits.

For 2015, analysts estimate net profit at the Big Four to range from 1 percent growth to 1 percent decline, showed Reuters calculations based on data from Starmine SmartEstimate.

Bank of Communications Co Ltd (601328.SS) (3328.HK), China's fifth-biggest lender, reports earnings on Tuesday, followed on Wednesday by Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS) (1398.HK) and Bank of China Ltd (BOC) (601988.SS) (3988.HK).

China Construction Bank Corp (601939.SS) (0939.HK) is also expected to report earnings on Wednesday, followed by Agricultural Bank of China Ltd (601288.SS) (1288.HK) on Thursday.

Fitch Ratings, in a research note on March 22, said banks are likely to announce "continued subdued earnings growth amid margin compression and asset deterioration."

Can anything rescue Japan from the abyss?

Mehreen Khan28 March 2016 • 4:07pm
“Shunto” season has failed to grip Japan.

The country’s annual Spring assault on wages seems to have passed with little more than a whimper this year despite being billed as one of the most anticipated economic events in Japan’s recent history.

Translating as “spring wage offensive”, Shunto marks the annual Japanese ritual of wage bargaining between business groups and labour unions.

This year’s negotiations have been preceded by months of feverish lobbying from prime minister Shinzo Abe who has urged the country’s business groups to raise wages and help smash Japan’s deflationary mindset once and for all.
The issue has become the latest lightning rod in the country’s two decade struggle to ensure long-term economic prosperity. 
Higher salaries encourage consumption and are vital in raising inflation. This in turn would help erode some part of Japan’s record 250pc of GDP debt pile. 
Abe's calls have been echoed by some of the world’s most renowned economists.
Olivier Blanchard, the former chief economist at the International Monetary Fund and Adam Posen, a former Bank of England policymaker, have called for an unprecedented 10pc increase in nominal wages in 2016. In the last two years, average wages have risen by just 1pc.
“What is needed is a jump-start to a wage-price spiral of the sort feared from the 1970s”, say Posen and Blanchard, who call for a “virtuous cycle” of wage growth, inflation, and lower debt to release Japan from economic stagnancy.
But like so many of Tokyo’s radical attempts to extricate itself out of low growth and low inflation, the early signs show that Shunto has already fallen flat.
Car-making giant Toyota is reported to have agreed on a wage settlement which will boost its employees’ basic wages by just  ¥1500 ($13) a month, despite recording bumper profits of ¥2.17 trillion ($19bn) last year.
Overall, the fruits of 2016’s Shunto are set to be more meagre than those of last year. The March round of talks indicate wages hike demands from unions to be around 3.27pc this year, lower than the 3.74pc of 2015, according to analysts at UBS.
This indicates the average eventual wage hike will be around 0.3pc in 2016 for the country's 63.5m workers, down from 0.69pc agreed in 2015, calculate economists at JP Morgan.

In other news, Uncle Scam orders US families to run from Turkey.

Families of U.S. personnel ordered to leave parts of Turkey amid security concerns

Tue Mar 29, 2016 4:20pm EDT
The Obama administration ordered the families of U.S. military and diplomatic personnel to leave parts of southern Turkey on Tuesday and warned U.S. citizens against travel to the region amid mounting security concerns.

The Pentagon said 670 dependents of U.S. military personnel would be affected by the order to depart areas of southern Turkey, including Incirlik air base, which is used heavily in the fight against Islamic State militants.

The U.S. State Department said a small number of diplomatic families would be affected but did not give numbers. The Pentagon said 100 military dependents in Ankara and Istanbul were not affected by the departure orders because of security measures in place there.

State Department spokesman John Kirby said the move had been under consideration for several weeks, and was not the result of any specific threat and had nothing to do with the visit to Washington this week by top Turkish officials.

Secretary of State John Kerry met Turkish Foreign Minister Mevlut Cavusoglu on Monday, and Turkish President Tayyip Erdogan is due to attend a Nuclear Security Summit with other world leaders later in the week. Kirby said Kerry had discussed the security announcement with Cavusoglu at their meeting on Monday.

"The decision to do this wasn’t taken lightly. It was done after careful thought and consideration, and inter-agency coordination," Kirby told a daily briefing at the State Department.

"Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium."

Murray N. Rothbard
At the Comex silver depositories Tuesday final figures were: Registered 32.32 Moz, Eligible 123.24 Moz, Total 155.56 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
Today, did the EV manufacturers just make a gigantic production error? The ever excellent Investorintel website, always worth a visit and signing up to, posits that they did.  But bad news usually has a silver lining, and if John Petersen’s even halfway right, that silver lining lies with America’s class action Tort lawyers.

EV Batteries and the Cobalt Cliff: The biggest “oops” in the history of supply chain management

In early March, I described cobalt supply and demand dynamics as a giga-risk for lithium-ion battery manufacturers. I subsequently took my analysis a step further and suggested that electric vehicle (EV) manufacturers including Tesla (TSLA), General Motors (GM), Nissan (NSANY) and Porsche (POAHY) might soon find themselves coping with the biggest “oops” in the history of supply chain management.

While the statistical data was unassailable, I had a hard time answering the most common question readers asked; “how could so many major companies make the same supply chain blunder and bet their futures on plentiful supplies of a by-product?” Since I wasn’t satisfied with my own responses, I’ve spent the last two weeks searching for hidden flaws in my hypothesis and contemplating the likely short- to medium-term impacts of the Cobalt Cliff.

The bad news is I haven’t found any flaws in my hypothesis. The worse news is I’ve concluded the short- to medium-term impacts on EV manufacturers may be catastrophic:
  1. The world’s miners will not produce enough cobalt in 2016 to satisfy demand;
  2. There is no reason to believe cobalt production will ramp at a pace that’s adequate to satisfy expected incremental demand from EV manufacturers; and
  3. When it comes to free-market competition for limited cobalt supplies, battery and EV manufacturers will be the most cost-sensitive class of cobalt users.
Cobalt Resources and By-product Status
Cobalt is an unusual metal because the identified terrestrial resources are about 25 million tons and the identified sea-bottom resources are another 120 million tons. With rare exceptions, however, cobalt is produced as a minor by-product of nickel and copper mining. As a result, global cobalt production ramps up and down as nickel and copper miners respond to global demand for their primary products. Since less than 6% of global cobalt production comes from mines that produce cobalt as a primary product, cobalt supply cannot respond to normal market signals. After all, no rational nickel or copper miner will put additional pressure on prices for its primary products because it wants to sell a little more cobalt. Glencore and other international mining companies are suspending operations at marginal and unprofitable mines around the world. Therefore, cobalt production is expected to spike down in 2016 and remain at low levels until nickel and copper prices recover. While I don’t have enough data to accurately assess the magnitude of the downward spike, a 5% to 10% decline in global cobalt production seems all but certain and much larger production declines are a distinct possibility.
Over the last two weeks I’ve spoken with a wide variety of professionals including battery experts, miners, the USGS and the CDI. The battery experts invariably assumed that since cobalt trades on the LME, the world’s miners can and will quickly respond to increased demand by boosting supplies and reducing prices due to economies of scale. The miners, the USGS and the CDI agree that it simply can’t happen that way because cobalt is a by-product of copper and nickel mining and by-product availability is always constrained by demand for the primary products.
When I was a boy my mother taught me the “First Law of Cooking” – check your pantry and don’t start if you don’t have all the required ingredients. It was my first lesson in supply chain management; a lesson that’s served me well for over a half-century.
This is more than a supply chain management oops, it’s a due diligence debacle!
  • Governments should have understood the realities before adopting policies to promote or require the deployment of cobalt-intensive technologies;
  • Entrepreneurs should have understood the realities before spending billions on new factories to make cobalt-intensive products;
  • Financiers should have understood the realities before raising billions to finance cobalt-dependent projects; and
  • Sell-side analysts should have understood the realities before encouraging investors to bid the market values of cobalt-dependent companies to unreasonable levels.
Instead of doing their homework, everybody assumed that somebody else had done a complete due diligence investigation and there was no sense in duplicating the effort.

Related articles.

“Understanding Advanced Batteries and Energy Storage – Part I”

Brexit Quote of the week.

Damn your principles! Stick to your party.

D. Cameron, with apologies to Benjamin Disraeli.

Solar  & Related Update.

With events happening fast in the development of solar power and graphene, I’ve added this new section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

Graphene shows potential as biosensor

March 29, 2016
Graphene has been touted as a material highly suited for use as a biosensor, by Plymouth University researchers.

Results from a new study show electrical signals transmitted at high frequencies do not lose energy when travelling through graphene – as the material does not have a band gap, making it an excellent conductor. 
Due to this, graphene has been put forward for a range of uses in the engineering and health sectors. Researchers believe high-speed transistors and amplifiers for mobile and satellite communications and biological sensors may be possible uses for graphene.

Dr Shakil Awan, a lecturer from Plymouth University and principal investigator in the study, said: “Our results for the first time not only confirm the theoretical properties of graphene but also open up many new applications of the material in high-speed electronics and bio-sensing.

“An accurate understanding of the electromagnetic properties of graphene over a broad range of frequencies has been an important quest. Initial measurements gave conflicting results with theory because graphene’s intrinsic properties are often masked by much larger interfering signals from the supporting substrate, metallic contacts and measurement probes,” he added.

The results from this study will be used to develop high speed, low noise amplifiers, mixers, radiation detectors and novel-biosensors.

The biosensors are being researched as part of a one million pound project on developing early detection of dementia, funded by the Engineering and Physical Sciences Research Council. Graphene is also an ideal material for this because of its small thermal noise at room temperature.

Dr Alan Colli, from Nokia Technologies, who was involved in the study, said: “Our study has unlocked the fundamental behaviour of graphene at high frequencies, which will be essential in the design and evaluation of future graphene-based wireless devices.”

The research published in 2D Materials, was carried out by Plymouth and Tohoku University in conjunction with the Nokia Research Centre in Cambridge.

The monthly Coppock Indicators finished February

DJIA: 16517 -23 Down. NASDAQ:  4558 +45 Down. SP500: 1932 -17 Down. 

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