Saturday, 1 July 2017

Weekend Update 01/07/17 A Half Year Reflection. 1987=2017.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig von Mises.

We have reached the half year pause of 2017. Time to reflect on where we are in the markets, how we got here, and where we are likely headed. Of course, no one can foretell the future, and markets are mostly driven by greed and fear. But in large measure they are also driven by the cartel of central banksters. In central bankster speak, easy money or dear. Easy money takes from the thrifty and prudent and gives to the feckless, gambling, one percenters.

We’ve been on easy money effectively, since Greenspan suffered his breakdown after Black Monday October 19, 1987. More specifically, the emergency measures of ZIRP and NIRP, following the near crash of the whole Great Nixonian Error of fiat money system, in 2008. Now the central banksters are trying to normalise interest rates. The artificial “recovery” since 2008, is long in the tooth, thriving or faltering, depending on spin. Depending on who’s counting, July 2017, is the 95th, 97th, or 98th month of recovery. (LIR, Hoisington, Stockman.)

Are the central banksters about to take from the feckless, gambling, one percenters, and start rewarding the thrifty and prudent once again? And if they do, what does that mean for our house of cards built on mountains of unrepayable debt. Am I alone in seeing an unhappy reflection of that summer of 1987? While history never quite repeats, it often gets close. The difference this time around, our political world is far more unstable, yet more intertwined. The multiple bubbles in 2017, dwarf into insignificance, 1987.

Below, place your bets. Bet with the one percenters or against. The central bankster have run out of road and talent, says the central banksters central bank, the BIS in Basel, Swizzerland. If you don’t normalise rates now, the whole system’s going down with the next Lehman. Oddly, from what I see in summery London, only a few central bankster are listening. Even fewer in one percenter-land are listening. The next crash, when it comes, it seems to me, will be as unexpected as World War One.

True, governments can reduce the rate of interest in the short run, issue additional paper currency, open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression. 

Ludwig von Mises.

Sat Jul 1, 2017 | 2:28am BST

All well for world economy at mid-year? Up to a point

So strong is the belief in the growth momentum of the global economy as it enters the second half of 2017, the point has been reached in the economic cycle where data not meeting expectations is dismissed as an aberration.

Flash purchasing managers' indexes for services in Europe in June, for example, were weaker than anyone in a Reuters poll had predicted, but the market paid scant attention. "Way below expectations, but let's not worry," was the mantra.

Such economic Panglossianism - all for the best in the best of all worlds - is based on what seems to be a majority view among policymakers and economists that the world is enjoying a broad expansion.

"Faster growth this year reflects a synchronized improvement across both advanced and emerging market economies," Brian Coulton, Fitch Ratings' chief economist, wrote in an outlook projecting 2017 would have the fastest world growth - 2.9 percent - since 2010.

Backing up this view, central banks in the United States, euro zone and Britain are leaning toward tightening, albeit with a cacophony of mixed signals about when.

Financial markets are now pricing in a 90 percent chance of a euro zone rate hike by July next year, for example, to go with the Federal Reserve's ongoing upward tweaks.

There are, however, some inconvenient trends out there that will need consideration in the second half.

First, there have been some signs of a dip in economic activity, while inflation remains, in most places, stubbornly nonchalant toward the huge monetary stimulus thrown at it.

The Citi Economic Surprise Index, which moves in tandem with data beating or underclubbing expectations, has plunged for the main industrial nations this year and is at negative levels not seen since 2011.

Real U.S. gross domestic product has been increasing, but the pace has been slower in each of the past two quarters up to the fairly slow annualized 1.4 percent in January-March.

A report by the Atlanta Fed suggests second quarter growth will bounce back - but as a result of stronger home sales, a reflection of cheap money, offsetting sluggish equipment and inventory investment.

Durable goods orders declined sharply and jobs growth slowed at their last readings.

In the euro zone, the overall picture is relatively positive with a current 1.9 percent year-on-year growth rate - but there are centers of trouble, such as in Italy, the bloc's third largest economy. And while deflation may have gone, inflation is still below target.

The jobless rate is lower, but still above 9 percent (twice that for the young), consumer spending has been easing and wage growth is stubbornly slow.

China, meanwhile, has avoided the slowdown some feared. Indeed, factories grew at their quickest pace in three month in June.

But an official crackdown on excessive debt and shadow banking has been enough of a risk to economic stability to make the central bank cautious about taking further action, particularly ahead of this year's Communist Party Congress.

In Japan, the government has raised its overall view of the economy because of growth in private consumption. But the latest data showed retail sales rising less than expected with slowing sales of durable goods and clothes.

German bonds may offer the clearest warning that the stock market’s bull run is sputtering

Published: June 30, 2017 11:48 p.m. ET
German bunds are trying to deliver a message to stock-market investors: Achtung!

According to market technician Tom McClellan, a narrowing yield spread between German 10-year bonds, known as bunds TMBMKDE-10Y, +3.58% and their U.S. counterpart TMUBMUSD10Y, +1.44%  has historically been a bad omen for equity markets.

The yield differential between bunds, which were carrying a negative yield about a year ago and reached a record spread—2.38 percentage points—on Dec. 28 with U.S. 10-year paper, has been on a tightening trend lately, illustrated by one McClellan chart (see below):

How is a narrowing spread in German bond yields a problem for U.S. stocks?

As McClellan explains it, a rising yield premium between German and U.S. government paper tends to be a market condition that has historically been supportive to higher moves in the Dow Jones Industrial Average DJIA, +0.29% S&P 500 SPX, +0.15% and Nasdaq Composite Index COMP, -0.06%

Ever since June 2009, the yield on the US 10-year T-Note has been higher than its German counterpart. It turns out that this is a pretty bullish condition, at least for as long as the spread between the two is rising. 

 As a bull market ages, though, this spread shows the wearing out by displaying a divergence relative to prices. It can take many months for the divergence to finally matter, and bring a meaningful price decline. We are just now starting to see those first signs of such a divergence

McClellan’s chart shows that after a speak bund/Treasury spread, which has occurred in 1999, 2000, and 2010, equity markets unraveled. It isn’t’ clear why this pattern has played out, but the market technician says the relationship has only been an effective predictor, albeit with some delays, since the 1980s.

The ominous bond pattern should be taken with a grain of salt, but it comes as Wall Street has closed a tumultuous week for fixed-income investors, following comments from global central bankers, including European Central Bank boss Mario Draghi, that may have stoked fears that easy-money policies, which have underpinned stock and bond valuations during this eight year-old bull market, are nearing an end.

Central banks have set investors up for a long, hard road back to ‘normal’

Published: June 30, 2017 2:55 a.m. ET
Getting back to normal was never going to be easy.

Investors and policy makers got a reminder of that this week as European Central Bank President Mario Draghi and other central bankers sent signals that reiterated that the era of extraordinarily easy monetary policy will eventually run out.

Global bond yields are jumping and that’s sending ripples through global financial markets. Stocks SPX, -0.86%  are lower—except for the financial sector, which tends to benefit from higher long-term yields. Gold GCQ7, -0.21%  is lower despite the equity weakness and a softer dollar, with traders apparently paying more attention to the competition from those higher yields. As for the dollar, it’s suffering at the hands of the euro EURUSD, -0.1049% which is trading at 13-month high versus the U.S. unit.

It speaks to the idea that efforts by the ECB to exit its own quantitative-easing program and steer policy back toward a more normal state could be the biggest catalyst for market turmoil in coming months. That’s because compared at least with the Federal Reserve, which is well along in its own tightening cycle and is making plans to begin shrinking its balance sheet, and the Bank of England, the ECB faces the bigger task.
Here’s Neil Staines, head of trading and execution at The ECU Group, in a Thursday blog post:

It was the jump in the euro that likely spooked Draghi’s fellow policy makers, who, according to news reports, argued Wednesday that Draghi’s remarks had been misinterpreted by the market. After an initial pullback, however, the euro was back in rally mode.

Economists and traders say it’s no surprise the ECB is sensitive to sharp rises by the shared currency. A stronger euro tightens monetary conditions and tamps down inflation, undermining the ECB’s effort to get inflation back to its target of near but just below 2%.

And that’s also where the Fed comes in. Ideas the Fed is banking to heavily on a pickup in inflation is leading to doubts about whether Chairwoman Janet Yellen and fellow policy makers will push rates as high as they forecast.

That threatens to make life even harder for the ECB, and any other central banks looking to normalize policy, wrote Kit Juckes, global macro strategist at Société Générale, in a Thursday note. That’s because currency traders pay close attention to the expected differential between official interest rates. If expectations for future Fed rate rises are scaled back while expectations for ECB tightening remains intact, the euro could make an unwelcome surge (see chart below):

Goldman Commodity Analysts Ask: How Did We Get It So Wrong?

By Alex Longley and Mark Burton
29 June 2017, 18:28 GMT+1
Goldman Sachs Group Inc. analysts might not be the only ones to have incorrectly called commodity prices this year, but they are at least trying to figure out how they misjudged the market.

Commodities have tumbled 9 percent since their 2017 peak in mid-February, and Goldman acknowledges that some factors weren’t predictable, including rising oil supplies in Libya and Nigeria and the impact of weather on crops.

“But this still leaves the question of how did we (and the market) get it so wrong?” analysts from the bank said in a research note Thursday.

The report came less than 24 hours after Goldman joined other major banks including JPMorgan Chase & Co. and Morgan Stanley in cutting its forecast for West Texas Intermediate crude. Societe Generale SA has also slashed its crude forecasts.

Across the globe, traders have been wrong-footed by the commodities rout this year. They’ve watched as oil prices have slipped despite production cuts by the Organization of Petroleum Exporting Countries. They’ve seen copper prices drop as scrap dealers de-stocked heavily to take advantage of higher prices. They’ve witnessed policy changes in the Philippines that caused a sell-off in nickel.

“Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation”

Alan Greenspan

In other news at the half year of 2017, Xi gets pushy with Hong Kong. With America over a Chinese barrel over North Korea, how long before Xi gets pushy with the rest of the world?

Sat Jul 1, 2017 | 5:34am BST

China's Xi warns Hong Kong to toe the line as he swears in new leader

Chinese President Xi Jinping swore in Hong Kong's new leader on Saturday with a stark warning that Beijing will not tolerate any challenge to its authority in the divided city as it marked the 20th anniversary of its return from Britain to China.

A massive deployment of police blocked roads and prevented protesters from getting to the harbour-front venue close to where two decades earlier, the last colonial governor, Chris Patten, tearfully handed back Hong Kong to Beijing at a rain-soaked ceremony.

"Any attempt to endanger China's sovereignty and security, challenge the power of the central government ... or use Hong Kong to carry out infiltration and sabotage activities against the mainland is an act that crosses the red line and is absolutely impermissible," Xi said in a sweeping speech that touched upon the "humiliation and sorrow" China suffered during the first Opium War in the early 1840s that led to the ceding of Hong Kong to the British.

Hong Kong has been racked by demands for full democracy and, more recently, by calls by some pockets of protesters for independence, a subject that is anathema to Beijing.

Xi's words were his strongest yet to the city at a time of heightened social and political tensions and concerns over what some in Hong Kong perceive as increased meddling by Beijing in the city's affairs.

We close with a 2015 USA review of the fire safety of building cladding. Just what were the London Fire Brigade and building code writers thinking? Did nobody bother to read a copy? Was there no one in GB following global tower fire developments.

Building Exterior Wall Assembly Flammability:

Have we forgotten what we have learned over the past 40 years?

Author: John Valiulis, Valiulis Consulting LLC
On Behalf of Fire Safe North America™

This article addresses the disturbing movement in the USA towards trading off exterior wall assembly fire performance safety requirements in the building code when internal sprinklers are present in buildings. This has occurred in certain areas of the country and a similar code change was attempted in April 2015 during the 2018 International Building Code development hearings.

High-rise building exterior walls are at risk of fire events consuming entire faces of buildings. Such fires have occurred in countries situated in the developing world, the Middle East, Europe, and in Asia. Where have such fires not been a significant the United

What makes the US different than those countries where such exterior wall fires are occurring? The fire protection engineering community in the U.S. foresaw the increasing use of combustible components in exterior wall construction decades ago. Through industry-funded research, an appropriate test method was developed to determine if a given wall assembly could support a self-accelerating and self-spreading fire up the wall, either via the outside surface, through concealed spaces within the wall, or by spreading fire into interior floor areas on stories above. The test method, which today is titled NFPA 285,Standard Fire Test Method for Evaluation of Fire Propagation Characteristics of Exterior Non-Load-Bearing Wall Assemblies Containing Combustible Components, has been applied nationally via adoption in the model building codes, and has resulted in an existing building stock with exterior walls that are inherently resistant to self-propagating fires.

Now that building energy conservation initiatives are increasingly taking center stage in the U.S. and beyond, there is a desire by the design community to use an increasing amount of combustible components within high-rise exterior wall construction, for insulating materials, for cladding, and for water resistive barriers (WRBs). The well-proven, decades-old NFPA 285 fire safety requirement, which ensures that the resulting construction won’t allow vertical fire spread, is now said to be an inconvenience to areas of the building industry. The reaction to this “inconvenience” has been a handful of successful attempts convincing select jurisdictions to strike out the model code (IBC) requirements for exterior wall fire safety.

There have also been some unsuccessful attempts to modify the IBC to reduce its requirements for exterior wall fire safety, aiming to eliminate the NFPA 285 requirement completely for high-rise buildings.

Given the present push to try to eliminate fire safety requirements, with the goal of allowing unfettered latitude in the use of plastics in exterior walls, this seems to be a good time to review how and why exterior wall flammability limitations were codified in the U.S. in the first place, take a look at the rest of the world where such requirements don’t exist, and discuss the options for a future in which fire safety and building energy efficiency can be balanced.

Origin of NFPA 285
The first exterior wall assemblies to use a significant amount of combustible materials were EIFS (Exterior Insulation Finish System) walls. These used a layer of insulating material such as expanded polystyrene, polyurethane, orpolyisocyanurate. EIFS systems were first developed in Europe during the 1950's. As the name for the system indicates, it is an insulating system installed on the exterior of buildings. It can be fashioned to look like concrete, stucco, and even brick. Because of this, it can easily be mistaken for substantial non-combustible construction. In a widely publicized fire in the U.S. northeast during the late 1980's, the fire department that was battling a large building fire was shocked to see the neighboring building 20 ft. away catch fire. They thought it was a concrete building.

“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost…We conclude that under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Dr. Ben Bernanke. 2002

So what went wrong?

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