Jefferies: China is Conducting ‘Back-Door QE’ Operations to Juice the Economy

Why would China sit back and watch Europe, Japan and the U.S. enjoy all of the fun, without partaking in some hijinx themselves?

Jefferies is out with a report that says recent actions by the PBOC to expand lending facilities to state owned banks is QE, in a backdoor, secretive fashion.

Essentially, China is increasing the amount of money they’re lending to state owned banks, who in turn take the money to buy Chinese gov’t bonds. China takes the money, says ‘thank you very much’, and then spends it on making fucking islands in the middle of the China Sea.

The analysts say the PBOC has increased lending to state-owned banks, with the latter subsequently snapping up Chinese government bonds aided, in part, by the central bank’s liquidity infusions.

In order to offset the contraction of the PBOC’s balance sheet due to capital outflows and dollar repayments, the central bank engaged in a form of ‘backdoor QE’ in our view. Alongside the introduction of short-term monetary instruments such as Medium-term Lending Facility (MLF) and Standing Lending Facility (SLF), the PBOC has moved away from using conventional interest rate and RRR cuts.

Wei Yao, China economist at Societe Generale SA, adds: “You might not want to call this QE as it’s not a textbook definition, especially since reliance on these new and short-dated instruments, relative to the average-weighted maturity of Chinese government bonds, would expose banks to duration mis-matches.” But she adds that the introduction of new lending instruments should be seen in a bigger context: “The PBOC is transforming its balance sheet to that of a Western central bank by increasing the weight allocated to domestic assets.”

How wonderful.

QE for life. Get in the matrix.

Central banks will continue to conduct QE operations, indefinitely, because they’ve proven to keep yields low, markets high, and the people docile.

My favorite part of today’s commentary was when the Prince of the Marinated Iced Cube said Saudi Arabia needed to pull oil out of the ground and sell it at whatever price, because in 10-20 years it might not have much value at all.

The catamites in Italy are taking bold steps to fight terrorist threats in the country, foisted upon them by unchecked migration of people from war stricken areas in the middled east.

Starting mid-September, over 500,000 18 year olds in Italy (EU citizens only, thanks) will be eligible to receive vouchers of $500, redeemable at museums, concerts, and cinema.

The fuckery is strong in Italy.

“It sends a clear message — a welcome for those who reach the age of 18 and a reminder of how crucial culture is, both for personal enrichment and for strengthening the social fabric of the country,” Tommaso Nannicini, the official in charge of the program, was quoted as saying last week.

According to the Italian government, the program is also intended to send a message to militant groups. When the scheme was announced last year, Prime Minister Matteo Renzi implied that extremists should be countered not only militarily, but also ideologically. The announcement came days after militant attacks in Paris killed at least 130 people. “They imagine terror, we answer with culture. They destroy statues, we love art. They destroy books, we are the country of libraries,” Renzi reportedly said, referring to a “cultural battle.”

But Italy’s approach is viewed as unprecedented: The government expects to spend about $300 million on the program, depending on how many eligible recipients claim the money. Theoretically, all 18-year-old European Union citizens living in Italy are allowed to apply. The program runs out at the end of next year.

Opposition parties have criticized the scheme as populist, but counterterrorism experts and international observers say it could be more effective than some other past efforts to counter youth radicalization.

Although the program was launched with the declared intent to counter radicalization efforts, the government has since been careful to label it a “culture bonus.”

“It is hard to say what is the best approach. But what we can say is what is the wrong one: a spying system that stigmatizes and excludes people,” Maina Kiai, the U.N. special rapporteur on the rights to freedom of peaceful assembly and of association, said in a recent interview that focused on counter-radicalization schemes in Europe.

So, in summary, instead of spying on citizens of Europe, trying to find criminal elements in the country who are intent on blowing up people in cafes, they’re going to hug them, toss flowers at their AK-47s, and send them to the movies–gratis. I am certain that this ‘culture bonus’ is a secret way of tossing money out of helicopters, without actually saying they’re doing it. This is a trial run for a much larger programme.

Before you start celebrating the end of the bull market, just know that the government has one more trick up its sleeve: FRIDAY’S JOBS REPORT.

Please recall that it was the May jobs report that got the Fed off the hook of hiking rates. After that report, markets ripped higher on the prospect of a very easy and accommodative policy. Ever since the economy has been showing signs of strength, the fucking assholes who control this market like muppets have been keeping stocks in a very tight range, as if to say ‘go ahead, fuck with me.’

It’s worth noting that the Fed has never hiked rates without the market already pricing it in. It’s not a conspiracy theory to say the Fed is entirely beholden to equity markets and has no power to control policy, without first gaining permission from the stock Gods.

Right now, the market is pricing in a 35% chance of a September hike. El Erian thinks that number is more like 60% and says it will spike to 80%, if in fact the Friday’s jobs report comes in strong.

In short, let’s all pray, in unison, that jobs were lost in the month of August, and that men and women were tossed out onto the scorching hot concrete by employers and told to ‘fuck off’, as their jobs were shipped off to Mexico to lower wage workers. If our prayers are answered, retroactively (extra EU), we will all enjoy splendour and hedonistic ascension in the stocked market.

Cramer paints the EU has a low sort of unsophisticated rubes, desperate and craven from cash. David Faber brings up the U.S. Treasury interfering with the proposed PFE-AGN deal and posits the question if the EU was getting revenge on America for that display for retroactive fuckery.

The Dow isn’t even down 100, but there is panic in the streets. Market breadth stands at a paltry 24% and the VIX is spiking today. With markets down 5 out of the past 6 days, investors are starting to take journeys to the Joshua Tree, or the Burning Man, in order to find the definition of life.

Investing isn’t supposed to be filled with pauses and downfalls. It’s supposed to be gay giraffes driving iced cream trucks, while listening to Cold Play.

You little shits have had it too good for too long. It’s time for a little risk reversion.

The stupid VIX index is lifting, but nowhere near panic levels.

Here are today’s leading ETFs, all of which are bearish.

So who did it?

The media was sucking Obama’s dick yesterday for killing an ISIS leader. Today, Russia issues a statement, calling bullshit on US reports, suggesting it was their raids that killed him.

This appeared to contradict the US statement which said that Adnani was targeted by coalition forces conducting a ‘precision strike near Al Bab, Syria’, 16 miles from where the Russians said they had killed him.

The Pentagon said yesterday: ‘We are still assessing the results of the strike, but Al-Adnani’s removal from the battlefield would mark another significant blow to ISIL. Al-Adnani has served as principal architect of ISIL’s external operations and as ISIL’s chief spokesman. He has coordinated the movement of ISIL fighters, directly encouraged lone-wolf attacks on civilians and members of the military and actively recruited new ISIL members.’

Maybe Obama should press the reset button with Putin again.

There was nothing good about this report, because the world is awash in crude. During the decline in crude, thus far, only marginal players, pikers who are rarely invited to galas in Houston, have been wiped out. All of the majors are drilling more than fucking ever, including all of OPEC.

Crude oil inventories had a build of +2.276 mln (consensus called for a build of +0.921 mln barrels)

Keep buying crude, you stupid shits. By fall, you’re gonna get the skin from your face ripped off and your skull stomped out into clown dust.

The Saudi Prince owns a little more than 5% of Twitter. The platform is the single best and fastest conduit for news and information. It should come as no surprise to anyone that Twitter is a very valuable commodity, but not for the reasons you might think.

It isn’t a very good business and growth has been slowing for sometime now. So why the fuck would anyone want to buy this huge piece of money losing shit?

To control the narrative.

Buying Twitter ensures that you are able to control the political jargon,  understand the direction the winds are blowing and believe me there are gale force winds emanating from the east now.

Last night in a BBG interview, co founder of Twitter, Evan Williams said the company would do whatever it thought it should to maximize shareholder value, nothing too crazy. Ordinary shit.

Early this morning, people are buying calls and spreading scandalous rumors that TWTR is gonna catch a buyout bid.

If so, it’d be a mercy kill–because current management has no idea how to create value.

In his investment outlook letter to investors for the month of August, Bill Gross took direct aim at Yellen and the cabal of central bankers who’ve made it their duty to become the put for equity markets, instead of being true to their mantra, which has greatly favored income inequality due to low and negative rates.

On the topic of negative rates, Gross said $11 trillion in assets have become liabilities. He cited former Fed’s Warsh WSJ Oped piece, which took the Fed to task, and was generally grim in his assessment of what the Fed has been doing.

He likened himself and others who’ve been warning of disaster to a broken clock, but said that the high levels of debt and fucked up central bank policies are legitimate reasons for concern. Eventually, the gig will be up and central banks will lose control, essentially.

Speaking of practice, and mastering a game, Fed Chairwoman Janet Yellen has been at it a long time, as have her predecessors and contemporaries in other central banks. All have mastered the art of market manipulation and no — that’s not an unkind accusation — it’s one in fact that Ms. Yellen and other central bankers would plead guilty to over a cocktail at Jackson Hole or any other get together of Ph.D. economists who have lost their way. With Yellen, there is no right or left hand — no “on the one hand but then on the other” — there are only decades of old orthodoxy that follows the tarnished golden rule of lowering interest rates to elevate asset prices, which in turn could (should) trickle down to the real economy.

It was fascinating then to read a lone Fed wolf in wolf’s clothing a week ago on The Wall Street Journal’s op-ed page. Ex-Fed District President Kevin Warsh headlined a think piece titled, “The Federal Reserve Needs New Thinking”. Now despite recent peekaboo ideas advanced by San Francisco Fed President John Williams suggesting a 3% inflation target and a focus on nominal, instead of real GDP growth (using the same old monetary weapons however), Warsh took the Fed and (by proxy) other central banks to task, suggesting that a “numeric change in the inflation target isn’t real reform”. “It serves”, he wrote, “as subterfuge to distract from monetary, regulatory and fiscal errors”. Warsh questioned the Fed’s sincerity in speaking to income inequality while refusing to acknowledge that their polices have unfairly increased asset inequality.

He questioned its mantra of data-dependence and its refusal to acknowledge the Yellen/Bernanke/Greenspan “put” in financial markets. He questioned their ability to maintain that “put” while at the same time subordinating inflation targeting and output-gap modeling to it. All three cannot be done at once, he claims, and one day a Piper will be paid, “perhaps even the Fed’s independence” he cautions, as the public is growing increasingly suspicious of this unelected group of bankers — central as they are.

The primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models.

Warsh is a mensch. He’s not smokin’ a Volcker-like cigar I suppose, but he has spoken his mind and risked the calumny of his contemporaries — even those at The Stanford University’s Hoover Institute, where he is a visiting Fellow. What he thinks they should do differently was not well delineated though. I and others however, have for several years now, suggested that the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models — those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen into your asset price objective. You and your contemporaries have flipped $11 trillion from the left side to the right side of the global balance sheet. In the process, you have deferred long-term pain for the benefit of short-term gain and the hopes that your ancient model renormalizes the economy over the next few years. It likely will not. Japan is the petri dish example for the past 15 years. Other developed market economies since Lehman/2009 are experiencing a similar fungus.

Investors should know that they are treading on thin ice. The problem with Cassandras, such as Gross and Jim Grant and Stanley Druckenmiller, among a host of others, is that we/they can be compared to a broken watch that is right twice a day but wrong for the other 1,438 minutes. But believe me: This watch is ticking because of high global debt and out-of-date monetary/fiscal policies that hurt rather than heal real economies. Sooner rather than later, Yellen’s smooth shot from the fairway will find the deep rough.