Citi: World economy trapped in ‘death spiral’

NBC | Katy Barnato | February 5, 2016

Ivan Bliznetsov | Getty Images

The global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.

"The world appears to be trapped in a circular reference death spiral," Citi strategists led by Jonathan Stubbs said in a report on Thursday.

"Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)... and repeat. Ad infinitum, this would lead to Oilmageddon, a 'significant and synchronized' global recession and a proper modern-day equity bear market."

Stubbs said that macro strategists at Citi forecast that the dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel.

"The death spiral is in nobody's interest. Rational behavior, most likely, will prevail," he said in the report.

Crude oil prices have tumbled by around 70 percent since the middle of 2014, during which time the U.S. dollar has risen by around 20 percent against a basket of currencies.

The world economy grew by 3.1 percent in 2015 and is projected to accelerate to expand by 3.4 percent in 2016 and 3.6 percent in 2017, according to the International Monetary Fund. The forecast reflects expectations of gradual improvement in countries currently in economic distress, notably Brazil, Russia and some in the Middle East.

By contrast, Citi forecasts the world economy will grow by only 2.7 percent in 2016 having cut its outlook last month.

Overall, advanced economies are mostly making a modest recovery, while many emerging market and developing economies are under strain from the rebalancing of the Chinese economy, lower commodity prices and capital outflows.

Stubbs added that policymakers would likely attempt to "regain credibility" in the coming weeks and months.

"This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets. The stakes are high, perhaps higher than they have ever been in the post-World War II era," he said.

Just 151,000 new jobs were created in January in the U.S., in the latest sign that the world's biggest economy is slowing. Economists are concerned about an industrial or manufacturing recession in the country, following some warnings from companies in earnings seasons and recent weak manufacturing activity and durable goods orders data.

However, some analysts say markets are overegging the prospect of a global slump.

"Many markets are now pricing in a significant probability of recession and when we talk about recession, we're talking particularly about a U.S. recession. Do you think that is likely or not? To me, the odds are too high; the market is pricing too high a probability," Myles Bradshaw, the head of global aggregate fixed income at Amundi, told CNBC this week.

Wells Fargo Insider Says Bank Is Preparing For Emergency Scenario

Investment Watch | by Sean Adl-Tabatabai | February 4, 2016

A Wells Fargo bank insider, who claims to be a teller, has said that the bank are training their staff to deal with an imminent “emergency scenario”.

The insider reports:

I am a teller at Wells Fargo here in the US this is also my first time using this proxy.

They started training us today for a bank holiday. They didnt mention the word bank holiday, but they did train us for an “emergency scenario”. They told us it’s just a drill. Ive been working here for 3 years, and we never had a drill before..

They said that during an emergency, they would close the doors and only allow 3 people at a time inside of the branch. Also, my branch manager said that we would have armed guards during the emergency.

The last thing they mentioned is that they wont store alot of cash in the vault, since it will be a safety issue….

just wanted to share this with you guys.

Superstation95.com reports:

A call by SuperStation95 to Wells Fargo Corporate Headquarters in San Francisco to verify these claims was met with a terse “no comment.”

Interpretation

If taken at face value and believed, why would Wells Fargo be doing this? What “emergency” could take place that might cause people to swarm to a bank in such numbers that they would have to lock the bank and only allow three customers in at a time?

A bank collapse? An economic collapse? a Currency collapse?

None of these things would be good and if the claims above are true, it is a dangerous signal to the rest of us to get some money out to tie-us-over for a month or so in the event everything shuts down.

In a banking emergency, CREDIT AND DEBIT CARDS WILL NOT WORK. ATM’s will not work. Banks will be closed so that you cannot even enter your own safe deposit box.

Do you have enough cash money on-hand to get through for a couple weeks operating solely on cash? If not, you’d better get that taken care of — fast.

We’re not even talking about making payments on your debts during that time, but rather only using the cash to get food, fuel and such to live! Could you make-it for a month without access to any financial tools or bank cash?

Do you have spare food in the house if stores stop taking credit cards- or the cards don’t work? How will you eat if everything remains cash-only for a month?

These are legitimate questions you should be asking yourself right now. Time may be very short. An economic collapse would take place with lightning speed and by the time you realize what’s happening, people will already be storming the banks and supermarkets trying to stock-up. Waiting until it actually happens is waiting too long; you’ll be too late.

A word to the wise: Prepare.

The Fed Wants to Stress Test Rates Less Than Zero in 2016

Bloomberg | Rich Miller | February 2, 2016 — 11:21 AM EST


As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the central bank said in announcing the stress tests last week.

In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.

Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.

But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019.

Not a Forecast

"This scenario does not represent a forecast of the Federal Reserve," the central bank said. It also assumes "that the adjustment to negative short-term rates proceeds with no additional financial market disruptions."

Fed officials have made clear that they are a long way from contemplating a reduction in rates below zero in their benchmark overnight policy rate. Some, though, have suggested they’d be more open to such a move than in the past should the economy deteriorate significantly.

The central bank left its target range for the federal funds rate unchanged at 0.25 percent to 0.5 percent last week after raising it in December for the first time since 2006.

U.S. policy makers decided against pushing rates below zero during the financial crisis partly because of concern it could lead to dangerous dislocations in the money markets.

European Experience

Since then, the European Central Bank and the central banks of Switzerland, Sweden and Denmark have nudged some official lending rates negative without such repercussions, and Fed officials have publicly taken note.

The Bank of Japan became the latest monetary authority push rates into negative territory last week in an effort to spur lagging growth and increase too-low inflation.

Former Fed official Roberto Perli cautioned against drawing conclusions about future Fed actions from the inclusion of negative U.S. rates in the stress test scenario.

"It doesn’t signal anything" about future monetary policy, said Perli, a partner at Cornerstone Macro LLC in Washington.

Nevertheless, it is "another sign that the Fed would not be entirely adverse" to reducing its target rate below zero should economic conditions warrant, he said.

Bill Dudley

New York Fed President William Dudley said last month that policy makers were "not thinking at all seriously of moving to negative interest rates.

"But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.

Fed Vice Chairman Stanley Fischer said Monday that foreign central banks that had resorted to negative interest rates to stimulate their economies had been more successful than he anticipated.

“It’s working more than I can say I expected in 2012,” he told the Council on Foreign Relations in New York. "Everybody is looking at how this works," he added.

RETAIL APOCALYPSE: 2016 BRINGS EMPTY SHELVES AND STORE CLOSINGS ALL ACROSS AMERICA

Michael Snyder | End Of The American Dream - FEBRUARY 1, 2016

IMAGE CREDITS: TWITTER, EZLEEINFAMOUS.

Major retailers in the United States are shutting down hundreds of stores, and shoppers are reporting alarmingly bare shelves in many retail locations that are still open all over the country.

It appears that the retail apocalypse that made so many headlines in 2015 has gone to an entirely new level as we enter 2016. As economic activityslows down and Internet retailers capture more of the market, brick and mortar retailers are cutting their losses. This is especially true in areas that are on the lower portion of the income scale. In impoverished urban centers all over the nation, it is not uncommon to find entire malls that have now been completely abandoned. It has been estimated that there is about a billion square feet of retail space sitting empty in this country, and this crisis is only going to get worse as the retail apocalypse accelerates.

We always get a wave of store closings after the holiday shopping season, but this year has been particularly active. The following are just a few of the big retailers that have already made major announcements…

-Wal-Mart is closing 269 stores, including 154 inside the United States.

-K-Mart is closing down more than two dozen stores over the next several months.

-J.C. Penney will be permanently shutting down 47 more stores after closing a total of 40 stores in 2015.

-Macy’s has decided that it needs to shutter 36 stores and lay offapproximately 2,500 employees.

-The Gap is in the process of closing 175 stores in North America.

-Aeropostale is in the process of closing 84 stores all across America.

-Finish Line has announced that 150 stores will be shutting down over the next few years.

-Sears has shut down about 600 stores over the past year or so, but sales at the stores that remain open continue to fall precipitously.

But these store closings are only part of the story.

All over the country, shoppers are noticing bare shelves and alarmingly low inventory levels. This is happening even at the largest and most prominent retailers.

I want to share with you an excerpt from a recent article by Jeremiah Johnson. The anecdotes that he shares definitely set off alarm bells with me. Read them for yourself and see what you think…

*****

I came across two excellent comments upon Steve Quayle’s website that bear reading, as these are two people with experience in retail marketing, inventory, ordering, and purchases. Take a look at these:

#1 (From DJ, January 24, 2016)

“Steve-
[Regarding the] alerts about the current state of the RR industry. This is in line with what I’ve been noticing as I visited our local/regional grocery store, Walmart, and Target this week in WI. I worked in big box retail for 20 years specializing in Inventory Management. These stores are all using computerized inventory management systems that monitor and automatically replenish inventory when levels/shelf stock get low. This prevents “out of stocks” and lost sales. These companies rely on the ability to replenish inventory quickly from regional warehouses.
As I shopped this week and looked at inventory levels I was shocked. There were numerous (above and beyond acceptable levels) out of stocks across category lines at all three retailers. And even where inventory was on the shelf, the overall levels were noticeably reduced. Based on my experience, working for two of these three organizations in store management, they have drastically/intentionally reduced their inventory levels. This is either due to financial stresses/poor sales effecting their ability to acquire new inventory, or it could be the result of what was mentioned earlier regarding the transporting of goods to these regional warehouses. Either way this doesn’t bode well for the what’s to come. Stock up now while you can!”

#2 (From a Commenter following up #1 who didn’t provide a name, January 26, 2016)

“I’d like to tailgate on the SQ Alert “based on my experience…” regarding stock levels in big box stores. This weekend we were in two such stores, each in fairly isolated communities which are easily the communities’ best source for acquiring grocery items in quantity.
I myself worked in retail (meat) for thirty years so I know exactly what a well-stocked store looks like, understand the key categories and category drivers, and how shelves are stocked and displays are built to drive sales and profits. I also understand supply chain and distribution methodologies quite well.
Each of the stores we were in were woefully under-stocked.This time of year-the few weeks following the holidays-is usually big business in groceries and low stock levels suggest either poor ordering at the store level, poor purchasing at the distribution level or a purposeful desire to be under-stocked.

Anyone familiar with the retail grocery industry is also familiar with how highly touted “the big box store’s” infrastructure is. They know exactly when demand is high and for what items and in what quantities. It is very unlikely that both stores somehow got “surprised” by unusually high demand. It is reasonable then to imagine that low stock levels in rural areas with few options is a purposed endeavor to assure that both the budget conscious and the folks in more remote areas are not fully able to load up their pantries.

Simply put I believe the major retailer in question is doing their part to limit the ability of rural America to be sufficiently prepared. Nevertheless, we are wise to do our best to keep ahead of the curve. God bless your efforts, Steve.”

*****

Yes, this is just anecdotal evidence, but it lines up perfectly with hard numbers that I have been discussing on The Economic Collapse Blog.

Exports are plummeting all over the globe, and the Baltic Dry Index just plunged to another new all-time record low. The amount of stuff being shipped around by air, truck and rail inside this country has been dropping significantly, and this tells us that real economic activity is really slowing down.

If you currently work in the retail industry, your job is not secure, and you may want to start evaluating your options.

We have entered the initial phases of a major economic downturn, and it is going to be especially cruel to those on the low end of the income spectrum. Do what you can to get prepared now, because the economy is not going to be getting better any time soon.

And The Biggest Contributor To U.S. Growth in 2015 Was...

Zero Hedge | By Tyler Durden | January 29, 2016

By now, not even CNBC's cheerleading permabulls can deny that the US is in a manufacturing recession: in fact, it is so bad that even the staunchest defenders of Keynesian dogma admit what we said in late 2014, namely that crashing oil is bad for the economy.

And yet, the "services" part of the US economy continues to hum right along, leading to such surprising outcomes as a stronger than expected print in Personal Consumption Expenditures. How can this be?

Simple: one look at the chart below should explain not only how the "services" half of the US economy continues to grow, but just which tax, because that is how the Supreme Court defined Obamacare, is responsible for healthcare "spending" amounting to a quarter of the growth in US personal consumption expenditures, almost 100% higher than the second highest spending category which was... Recreational goods and vehicles?

And that, ladies and gentlemen, is how you convert a tax into a source of economic progress.

Cracks in America's economy are growing

CNN Money | by Patrick Gillespie @CNNMoney | January 29, 2016: 5:12 AM ET

America's economy hit the brakes during the holidays.

Some recent economic data even raises fears that we might be heading towards a possible U.S. recession in 2016. Big banks like Morgan Stanley (MS) estimate there's a 20% chance of recession this year.

On Friday, the government will release data that show how the U.S. economy fared in the last three months of the year. Many experts forecast that the U.S. economy barely grew -- about 1% or less -- between October and December of 2015 compared to a year ago.

Even the Federal Reserve admitted Wednesday that the economy "slowed" at the end of last year.

On Thursday, the bad news continued. A key sign of confidence is orders for new products and equipment -- known as "durable goods" -- placed by companies to power their business. Orders for durable goods fell 5% between November and December, according to the Commerce Department. That was a lot below expectations that orders would be flat.

It shows that some companies are delaying or deciding not to purchase any new piece of equipment they need.

The news on durable goods caused Barclays (BCS) to lower its GDP forecast to 0.4% on Thursday. Capital Economics, a research firm, admitted the new data posed risks "firmly to the downside" for its estimate of 1%.

Related: Apple CEO: 'extreme conditions' in global slowdown

Here are 3 more warning signs that the U.S. economy is heading in the wrong direction:

1. Americans are not spending much

U.S. economic growth depends on shoppers. Consumer spending makes up two-thirds of the nation's economic engine. Yet they're sending mixed signals: U.S. retail sales declined a bit in December and they were negative or flat seven times last year.

Consumer confidence has wavered too. It peaked at 98% in January 2015 but has since drifted down in general. Consumer confidence is currently 93%. While it's a lot better than what it was just a few years ago, any downward movement is still a cause for concern.

2. U.S. manufacturing already in recession

American factories are suffering from the global economic slowdown. Manufacturing makes up 10% of the U.S. economy, according to Morgan Stanley.

The key ISM manufacturing index has declined for six straight months, and its been negative -- below 50% -- for the last two months.

The strong dollar is making products manufactured in the U.S. more expensive overseas, lowering demand for American made goods. The slowdown in emerging market economies isn't helping trade either.

Related: U.S. economy: recession fears are growing

3. Corporate America is hurting

Earnings season isn't over yet but one thing is clear: American companies are making less money than a year ago. Put together, when America's biggest companies -- and employers -- suffer, the economy follows suit.

The S&P 500 -- the benchmark for U.S. stocks -- is down 7% so far in January. Apple, the nation's biggest company by market size, just announced record profits with a gloomy outlook ahead. It believes iPhone sales will decline in the first quarter of this year for the first time in 13 years.

Apple CEO Tim Cook expressed serious caution about the global economy. When a major American CEO raises the warning flag that's not good for the U.S. economy.

"We're seeing extreme conditions unlike anything we have experienced before just about everywhere we look," Cook said Tuesday.

Fed’s December hike was a major mistake, former Bank of England official says

Greg Robb | MarketWatch - JANUARY 28, 2016

IMAGE CREDITS: IMF / FLICKR.

Weak data, such as Thursday’s durable-goods-orders report, signal that the Federal Reserve made “a major macro mistake” raising interest rates in December, said Danny Blanchflower, a Dartmouth College economist.

See: Durable-goods-orders decline could mean economy shrank in fourth quarter.

In December, not only did the Fed raise rates for the first time in nine years, but they signaled there would be four more hikes this year.


Now, “there’s a 50/50 chance the next move is a cut...as with all the other rate hikes since 2009 this one will have to be reversed,” Blanchflower, who leans dovish, said in an interview.

Traders who bet on rate hikes using fed funds futures contracts are now wagering that the Fed will next hike rates in September, according to CME FedWatch.

“The Fed has seriously lost credibility. No one believes them,” Blanchflower added.

The Fed’s ‘classic” mistake has been to underestimate the negative spillovers from the slowing of China, the worlds number-two economy, he said.

The Dartmouth economist, who was a former member of the Bank of England’s monetary policy committee, said the situation reminded him of 2008 when the U.K. thought it could avoid the subprime housing slowdown in the U.S. economy.

Blanchflower cited new figures in a Bloomberg article pointing to a steep slowdown in global trade.

In addition, the U.S. central bank doesn’t yet grasp that the decline in oil prices is not a positive supply shock but a signal of weak global demand, he said.

In its dovish policy statement released Wednesday, the Fed took out any reference to the balance of risks facing the economy, after saying in December that the risks were balanced.

“That’s a big admission of a mistake,” Blanchflower said.

See: The Fed says sorry for its rate-hike forecast

In its statement, the Fed said it “is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

Economic indicators are now pointing in the direction of a recession, Blanchflower said.

IMF and World Bank move to forestall oil-led defaults

FT | Jack Farchy in Moscow and Shawn Donnan in Washington | January 27, 2016 6:47 pm

Secretary Kerry Holds Trilateral Meeting With Presidents of Azerbaijan and Armenia at NATO Summit in Wales | IMAGE SOURCE: WIKIPEDIA COMMONS

Officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4bn emergency loan package in what risks becoming the first of a series of bailouts stemming from the tumbling oil price.

The Baku visit, which follows a currency crisis triggered by the collapse in crude, comes amid concern at the two global institutions over emerging market producers from central Asia to Latin America.

The fund and the bank have also been monitoring developments in other oil-producing countries such as Brazil, which is now mired in its worst recession in more than a century, and Ecuador. The oil-driven crisis in Venezuela has even raised the possibility of repaired relations between the fund and Caracas, a city IMF staff last visited more than a decade ago.

Azerbaijan depends on oil and gas for 95 per cent of its exports and the fallout of its currency weakness has sparked a series of protests across the country rattling the government of President Ilham Aliyev.

Last week the former Soviet republic became one of the first countries in the world to resort to capital controls in response to the collapse in oil prices, imposing a 20 per cent tax on exporting foreign currency.

The Azerbaijani currency, the manat, has fallen 35 per cent since the central bank in late December abandoned a dollar peg after spending more than half its reserves in a year.

The IMF team would be in Baku from January 28 until February 4 for “a fact-finding staff visit at the authorities’ request”, an IMF spokesperson said. It would discuss possible “technical assistance” and “assess possible financing needs”. The financing package under discussion was worth about $4bn, people familiar with the discussions said.

A World Bank spokesman said the IMF and it were discussing with the government immediate and longer-term measures “in response to the pressure on the local currency and low oil prices”.

The World Bank predicted this week crude prices would average just $37 a barrel this year and warned of long-term consequences. It also issued a caution that both producers and commodity markets still faced the significant risk of a bigger than expected slowdown in major oil-consuming emerging economies like China.

“These are bad times for oil producers and their creditors,” Oxford Economics warned clients on Wednesday. “History provides reason for extreme pessimism on the likely fortunes of commodity producers; suggesting that [emerging markets] are prone to default and that commodity slumps are possibly the biggest cause of defaults.”

Christine Lagarde, the managing director of the IMF, began the year with a visit to Nigeria when she warned that Africa’s largest economy would have to confront “tough choices” and the reality of lower oil prices for some time.

Discussions with Baku are at an early stage and the Azerbaijani government may yet opt to go without support from the IMF, people familiar with the matter said.

While Azerbaijan’s central bank reserves have fallen dramatically in the past year, the country has little debt and a sovereign wealth fund with assets of $34.7bn at the start of October, more than 60 per cent of GDP.

However, the fall in oil prices has put the Azerbaijani economy under extreme stress. Elman Rustamov, the central bank governor, said last week that over the course of 2015 the country’s balance of payments had fallen from $17bn to “practically zero”. Moody’s, the credit rating agency, said last month it expected Azerbaijan to record a budget deficit of 5.5 per cent in 2016 after a 9.2 per cent deficit last year.

Representatives of the Baku government did not respond to requests for comment on Wednesday. Samir Sharifov, finance minister, said in an interview on Azerbaijani television broadcast over the weekend that government bonds issued on the domestic market would be “one of the sources” to cover the budget deficit.

Delegations from other international financial institutions, including the European Bank for Reconstruction and Development and the Asian Development Bank, are also due to arrive in Baku in the next few days.