5 Things To Focus On

by Tyler Durden

Aug 3, 2016 2:51 PM

http://www.zerohedge.com/news/2016-08-03/5-things-focus 

Via Fasanara Capital's Francesco Filia,
Oil failed to conquer and retain 50$ and is now falling off visibly again: both Brent and WTI lost ~20% since mid-June highs. This is in stark contrast to the price action in Base Metals, as they push through new ytd highs despite weakness in the global economy. We also keep a close look to the USD, which has historically been well correlated to Oil prices. We continue to expect Oil to move erratically, alongside a downward trend, which will eventually take it into new lows. We also expect Base Metals to eventually give in too and remain at levels in line with a depressed economy entangled in structural deflationary trends.

BRENT is currently playing with 200days moving average
During the last 5 years, at times Brent prices cut through 50d, 100d and 200d MAs, a sudden drop followed.


OIL and BASE METALS decoupling, again, while moving in opposite directions
Base metals have closed their underperformance gap vs Oil, which opened up in May, as they moved higher in absolute terms while Oil fell. All this happened despite red-flashing signs of slowdown in the global economy.


Brent (inverted) vs USD Index
Historically, the USD has been nicely correlated to Oil prices. Lower levels for Oil normally coincided with higher level of USD (alongside various fundamental drivers). This is not the case at present, as markets assess the case for Oil to drop more violently from here. The dollar may experience a leg up if Brent prices keep falling.

US Earnings and US Sales confirm their downward trend: behind the smoke and mirrors of headlines beats on skilfully lowered guidance - a trend we got accustomed to in recent past, US earnings’ and Sales keep deteriorating, having been in a downward trend for the last 5 quarters. Valuations are over-stretched as a consequence of (i) lower bond yields distorting equity vs bonds valuations, and (ii) generous 2017 earnings’ upgrade expectations. Equity markets' consensus for 2017 seems then to entail that (i) bonds are wrong in factoring in a depressed economy (although that is the reason for the permanent Central Bank monetary expansion itself), and(ii) escape velocity of GDP is just around the corner. We expect such expectations to be misplaced (see May 2016 Investment Outlook), complacency to gradually fade (see Article: S&P the last castle to fall). We expect extreme valuations to give in, and cheaper US equities. To us, it is more a question of 'when', rather than 'if'.

US Earnings and avg. Sales are trending lower
Earnings/Sales moving lower but the market simply postpones the robust recovery to come, by expanding multiples to historically-silly levels. Just minor delays on the loose schedule of a strong US economy, or markets in denial?

S&P implied volatility moved to new historical lows in recent past: lower implied volatility can only exacerbate the virulence of any downside movements, as and when they occur, for it seduces weak-hands bond-type investors into equity markets, whose mandate is not drafted for stomaching equity-type volatility bouts, resulting in hot money flows at such inflection points when the market heads lower. Low historical volatility also entices Risk Parity strategies, algorithms / CTAs, and more leverage, ready to evaporate quickly once that low volatility gives in. Low volatility is a value trap: it is not so much a reason for an equity sell-off, but rather it may affect its shape and tempo, should a sell-off occur, as we expect.

US Banks have decoupled from US rates: while EU and Japanese banks have closely followed the path of interest rates / the slope of the yield curve, US Banks have decoupled markedly from them. We expect this divergence to correct in the following weeks, as US Banks move lower more than rates, or move higher less than rates. Our case for the EU Banking sector to hit new lows in the near future (see Article) - on grounds of profitability more than solvency - can be extended to US banks too. We look at this as a top value opportunity for the months to come.

US Banks have decoupled from US yields
The three following charts shows US, EU and Japanese Banks against their respective government bond yields. Comparing bank equities to the slope of the yield curve leads into similar conclusions.
While EU and JPN banks have closely followed the rates, US banks diverged from the level of interest rates. We may expect this to correct in the following weeks

Japanese yields experienced their largest 4-days sell-off since 2003: the 10yr JBG yield rose ~23 bps since the BoJ meeting’s disappointment of last Thursday, where Kuroda ruled out the possibility of additional rate cuts. We follow closely the moves on JGBs, to see if they may lead to a 2015-type Bunds riot or 2013 l-type Taper Tantrum moment, while only temporarily so.

10yr JGB’s yield experience its largest 4 days rise since 2003
This is a trend to be closely followed, since it may lead to a larger sell-offs in US Treasuries and EU Bonds, although temporarily, as it was the case in April/May 2015.

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Japanese Government Shifts Further Toward Authoritarianism And Militarism

by Tyler Durden

Aug 3, 2016 3:20 PM

http://www.zerohedge.com/news/2016-08-03/japanese-government-shifts-further-toward-authoritarianism-and-militarism 

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

We’re going to war — either hybrid in nature to break the Russian state back to its 1990s subordination, or a hot war (which will destroy our country). Our citizens should know this, but they don’t because our media is dumbed down in its “Pravda”-like support for our “respectable,” highly aggressive government. We are being led, as C. Wright Mills said in the 1950s, by a government full of “crackpot realists: in the name of realism they’ve constructed a paranoid reality all their own.” Our media has credited Hillary Clinton with wonderful foreign policy experience, unlike Trump, without really noting the results of her power-mongering. She’s comparable to Bill Clinton’s choice of Cold War crackpot Madeleine Albright as one of the worst Secretary of States we’ve had since … Condi Rice? Albright boasted, “If we have to use force it is because we are America; we are the indispensable nation. We stand tall and we see further than other countries into the future.”

Hillary’s record includes supporting the barbaric “contras” against the Nicaraguan people in the 1980s, supporting the NATO bombing of the former Yugoslavia, supporting the ongoing Bush-Iraq War, the ongoing Afghan mess, and as Secretary of State the destruction of the secular state of Libya, the military coup in Honduras, and the present attempt at “regime change” in Syria. Every one of these situations has resulted in more extremism, more chaos in the world, and more danger to our country. Next will be the borders of Russia, China, and Iran. Look at the viciousness of her recent AIPAC speech (don’t say you haven’t been warned). Can we really bear to watch as Clinton “takes our alliance [with Israel] to the next level”? Where is our sense of proportion? Cannot the media, at the least, call her out on this extremism? The problem, I think, is this political miasma of “correctness” that dominates American thinking (i.e. Trump is extreme, therefore Hillary is not).

– From the post: “We’re Going to War” – Oliver Stone Opines on the Dangerous Extremism of Neocon Hillary Clinton

One of the most discomforting aspects of Neil Howe and William Strauss’ seminal work on generational cycles, The Fourth Turning (1997), is the fact that as far as American history is concerned, they all climax and end with massive wars.
To be more specific, the first “fourth turning” in American history culminated with the Revolutionary War (1775-1783), the second culminated with the Civil War (1861-1865), while the third ended with the bloodiest war in world history, World War II (1939-1945). The number of years between the end of the Revolutionary War and the start of the Civil War was 78 years, and the number of years between the end of the Civil War and the start of World War II was 74 years (76 years if you use America’s entry into the war as your starting date). Therefore, if Howe & Strauss’ theory holds any water, and I think it does, we’re due for a major conflict somewhere around 75 years from the end of World War II. That brings us to 2020.

The more I look around, the more signs appear everywhere that the world is headed into another major conflict. From an unnecessary resurgence of a Cold War with Russia, to increased tensions in the South China Sea and complete chaos and destruction in the Middle East, the world is a gigantic tinderbox. All it will take to transform these already existing conflict zones into a major conflagration is another severe global economic downturn, something I fully expect to happen within the next 1-2 years. Frighteningly, this puts on a perfect collision course with the 2020 area.

Now I’m not trying to fear-monger here, I’m just calling it like I see it. What the rise to prominence of a deplorable figure like Trump (as opposed to a Ron Paul or a Bernie Sanders )in reaction to what ails America tells me, is that we can scream from the rooftops to try to change things and wake people up, but history will do what history will do. When I look around the world I see how the stage is so clearly set for global conflict. When I couple that with the admission that neither Hillary Clinton nor Donald Trump have the wisdom to prevent it, I become increasingly concerned.
So what got me so bent out of shape that I decided to write about this today? One word: Japan.

An increasingly militaristic Japan is something I’ve been warning about for a while. Here’s an excerpt from my 2015 post, Unusually Massive Protests Erupt in Japan Against Forthcoming “War Legislation”:

In case you aren’t up to speed on your Japanese history, the nation’s post WWII Constitution prohibits military action unless it’s in self-defense. Clearly a sensible approach, which is why the current Japanese government, led by the demonstrably insane and incompetent Prime Minister Shinzo Abe, wants to get rid of it.

This story is very important. Not only will this action increase the likelihood of World War III in the Far East, but it’s another important example of a government acting against the will of the people.

Polling has indicated the Japanese public is against a pivot toward militarization and war, but Prime Minister Shinzo Abe  is pushing forward nonetheless. In fact, the current legislation to allow overseas military intervention has already passed the lower house of government. This prompted many Japanese to emerge from their decades long political apathy and get out into the streets. It’s estimated these protests were the largest in recent memory.

Fast forward a year, and here’s what Abe is up to now.
From the AP article, Japan Picks Defense Chief Who Downplays Wartime Past:

TOKYO (AP) — A woman who has downplayed Japan’s wartime actions and is known to have far-right views was named defense minister in a Cabinet reshuffle on Wednesday, a move that could unsettle relations with Asian neighbors with bitter memories of World War II-era atrocities.

Prime Minister Shinzo Abe changed more than half of the 19-member Cabinet in a bid to support his economic and security policies, as well as push for revising Japan’s postwar constitution.

While keeping the economy as the top priority, Abe said he would do his “utmost to achieve a (constitutional) revision during my term,” which ends in September 2018.

A lawyer-turned-lawmaker with little experience in defense, Inada is one of Abe’s favorites. She regularly visits the Yasukuni Shrine, which honors war dead including convicted war criminals, a gesture seen as an endorsement of Japan’s militaristic past.

She also has defended Japan’s wartime atrocities, including forcing many Asian women into sexual servitude in military-run brothels, and has led a party committee to re-evaluate the judgment of war tribunals by the Allies.

Her link to a notorious anti-Korea group was acknowledged by a court this year in a defamation case she lost. Inada also was seen posing with the leader of a neo-Nazi group in a 2011 photo that surfaced in the media in 2014.

Finance Minister Taro Aso, Foreign Minister Fumio Kishida and Chief Cabinet Secretary Yoshihide Suga were among key Cabinet members who retained their portfolios, while 10 ministers were replaced in the reshuffle. Many are not necessarily experts in their assigned portfolio, prompting opposition lawmakers to criticize Abe for dominating the Cabinet with like-minded supporters of his political views.
While campaigning for last month’s upper house elections, Abe promised to focus on economic revitalization in the short term, and to later seek to revise Japan’s pacifist constitution.

Since he took office in late 2012, Abe has sought to boost growth by pumping massive amounts of money into the world’s third-biggest economy. But lavish monetary easing and public works spending so far have failed to reignite growth as much as hoped.

As is typically the case, when all else fails on the domestic front, politicians look to get a war started.

The question is, what sort of war will this be? If it happens, it’ll be the first fourth turning level war since the nuclear age began. In a best case scenario, world leaders would be at least sane enough not to deploy nuclear weapons. If that’s the case, the conflict would likely focus on financial and cyber warfare. Things that can be extraordinarily destructive in their own right, but would at least avoid a destruction of the human race. Such topics will be explored further in the years ahead.

"A Total Game Changer" - From Over-Population To De-Population

Submitted by Tyler Durden on 04/25/2016 23:55 -0400

Submitted by Chris Hamilton via Hambone's Stuff blog,
Strangely, the world is suffering from two seemingly opposite trends...overpopulation and depopulation in concert.  The overpopulation is due to the increased longevity of elderly lifespans vs. depopulation of young populations due to collapsing birthrates.  The depopulation is among most under 25yr old populations (except Africa) and among many under 45yr old populations.
So, the old are living decades longer than a generation ago but their adult children are having far fewer children.  The economics of this is a complete game changer and is unlike any time previously in the history of mankind.  None of the models ever accounted for a shrinking young population absent income, savings, or job opportunity vs. massive growth in the old with a vast majority reliant on government programs in their generally underfunded retirements (apart from a minority of retirees who are wildly "overfunded").  There are literally hundreds of reasons for the longer lifespans and lower birthrates...but that's for another day.  This is simply a look at what is and what is likely to be absent a goal-seeked happy ending.
In a short yet economically valid manner, every person is a unit of consumption.  The greater the number of people and the greater the purchasing power, the greater the growth in consumption.  So, if one wanted to gauge economic growth, (growth in consumption driving economic growth), multiply the annual change in population by purchasing power (wages, savings) per capita.  Regarding wage growth, I hold wages flat as from a consumption standpoint, wage growth is basically offset by inflation.  Of course, there is another lever beyond this which central banks are feverishly torqueing; substituting the lower interest rates of ZIRP and NIRP to boost consumption from a flagging base of population growth.  (There is one more boost to consumption, huge increases in social transfer payments primarily among the advanced economies...but while noted, these are a story for another day.)

THE DETAILS

The chart below is total annual population growth broken down by OECD nations (33 wealthiest nations...representing 1.3 billion people, OECD members), BRIICS (Brazil, Russia, India, Indonesia, China, S. Africa...representing 3.4 billion people), and the RoW (Rest of the World...representing about 3 billion people).  Takeaways - 1) total annual population growth peaked in 1988 and has been decelerating since falling 13% & now down 12m/yr from peak.  2) Growth has been shifting away from the BRIICS to the RoW.

 

Below, global annual total population change vs. under 45 annual population change broken down by OECD, BRIICS, and the Rest of World.  What should be clear...1) under 45 population growth has fallen by nearly 60% & is down 44m/yr from peak growth.  2) All under 45 population growth (net) is among the poorer nations of the Rest of the World.  Growth has shifted from rich to middle to poor nations and from young to old.  Those with little income, savings, and/or access to credit can't consume much.  Elderly on fixed incomes, declining vitality, and credit averse won't consume much.  Clearly, the impact of the slowing and shifting population growth on slowing growth of consumption should be easily understood.

 

Global annual population growth by GDP per capita.  OECD nations given an average of $40k per capita, BRIICS $15k per capita, and the RoW $8k per capita (below).  Annual growth in consumption peaked in 1989 and has been falling since...of course this is unadjusted for the big impact that credit has to increase real consumption.

 

 

Global annual under 45 population growth by GDP per capita further broken down by growth among OECD, BRIICS, & RoW (below).  The deceleration of global GDP per capita is entirely among the under 45 OECD and BRIICS which have nearly entirely ceased.  The only under 45 growth in consumption is among the decelerating RoW.

 

Below, 0-64yr/old annual global population growth vs. 0-64yr/old population growth among combined OECD, China, Brazil, and Russia vs global debt growth.  The surge in debt since 1988 coinciding with the collapse of growth among the wealth OECD and aspiring BRIICS (growth has fallen from 30m/yr to 3m/yr (90% decline) and growth among the RoW has entirely stalled since '88 at +55m/yr.  The central bank response to take interest rates to ZIRP (and now NIRP) has been an attempt to maintain consumption growth against declining population growth.  Only central bankers know what they'll do as under 65yr/old populations begin outright shrinking nearly everywhere but Africa?!?

 

 

A look at annual global populations; young vs. old (below).  The 0-5yr/old population has stalled but nowhere near so for the 75+yr/old population.  In 1950 there were ten "babes" for every 75+yr/old...by 2050, the two groups are estimated to be 1:1 but this estimate is likely to be far too optimistic if economic conditions continue deteriorating.

US 20-59yr/old annual population growth vs. the Federal Reserves FFR (%) and US total debt (below).  Federal Reserve actions have been and remain a simple (ultimately unwinnable) fight vs. the decelerating growth among the core US population since the early 1980's.  The great recession of 2008-'09 shouldn't be a shocker given the sharp 20-59yr/old population growth deceleration culminating in '07.

 

Below, Japan's 20-59yr/old annual population growth vs. BOJ interest rate and Japanese federal debt.  Japan's annual core population turned negative in '00 and interest rates hit ZIRP and debt creation took off.  Japan's plan to monetize likely well in excess of 100% and maybe ultimately 1,000% or 10,000% of GDP is a curious solution which may lead to an eventual hiccup which leaves Japanese society in absolute chaos (2nd chart below).  But if it were only Japan that had this plan...but alas, it is the same for all major central banks presently or eventually facing depopulation.  (Debt in chart below is denominated in Yen, not dollars).

 

 

Below, Germany's 20-59yr/old annual population change vs. debt to GDP.  Germany's 20-59yr/old population turned negative in '94 but the implementation of the Euro and Euro wide market (with the Maastrich treaty in 1992 and implementation Euro area wide in 1999) quintupled Germany's available export base under a now common currency (2nd chart below).  The impact was a stay of execution for Germany but a grinding, terminal cancer for the remainder of the Euro area.

 

 

Below, China's annual 20-59yr/old population change, Bank of China interest rates, and China total debt growth.  Annual Chinese core population growth has collapsed since '08 by 90% and will turn negative in 2018 and remain increasingly negative for decades thereafter.  The insane Chinese debt ramp to offset the declining population growth has no possible means to resolve in any manner but catastrophe. 

 

***Noteworthy, despite China's recent elimination of it's "one child policy", it should be noted that China's birthrates are higher than Japan, S. Korea, Taiwan, and many EU nations...none of whom have any policies restricting births and most with policies to encourage higher fertility.  The elimination of the "one child" policy in China is unlikely to have significant impact...family finances and struggling economies are far more likely to determine family formation in China and world-over.***

CONCLUSION

An economic and financial system premised on perpetual growth was bound to run into trouble (what do you do when you have taken a wrong turn?...apparently just keep going!).  The inevitable deceleration of population growth was the trigger that turned central bankers into pushers offering ever cheaper credit.  The lower rates drove unsustainable rates of consumption absent even further rate cuts and likewise drove overcapacity which likewise needed even lower rates.  But negative rates of NIRP are simply no longer under the heading of capitalism (a market that doesn't value capital likely isn't capitalism?!?).  When we've clearly changed "ism's"...we've crossed the Rubicon.
What happens as population growth turns to population decline is honestly and literally a complete and total game changer.  A flat to declining number of buyers and consumers opposite ramping elderly sellers plus their unfunded liabilities is a problem with no happy resolutions.  Currencies (what will constitute "money"), "free-markets", and perhaps the basis of civilization hang in the balance of the transition from high population growth to potential outright depopulation.
I believe this is the correct lens through which to view and understand why growth is perpetually weakening, why commodity overcapacity and slowing demand will only accelerate, why the Treasury market continues to see "buying" despite the near total absence of buyers (Treasury Mystery), why equities are a "buy" (but for all the wrong reasons), and why precious metal valuations are so extremely suspect in the face of a monetary onslaught.