IMF: Global Growth is Slowing; Warns of ‘Widespread Secular Stagflation’

Ah, the old negative feedback loop has finally made it back into the narrative. The IMF is out with a note today warming of ‘widespread secular stagflation’ as well as the negative feedback loop. You think the analyst who concocted this report reads Zerohedge much?

This is all part of my thesis. As the year wanes on and growth proves to be lackluster, confidence with whither, then flag, then capitulate.

Prices will sharply drop and bonds will rise.

The world economy will grow 3.2 percent this year, down from a projected 3.4 percent in January, the IMF said Tuesday in a quarterly update to its World Economic Outlook.
“Growth has been too slow for too long,” IMF chief economist Maurice Obstfeld said in remarks prepared for a press briefing. “There is no longer much room for error.”

“But by clearly recognizing the risks they jointly face and acting together to prepare for them, national policy makers can bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery,” he said.

The IMF cited among the biggest risks as a “return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop.”

“Another threat is that persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment,” the IMF said. “Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.”

In other words, the IMF is blaming confidence, of a lack thereof, for the systemic problems that are plaguing the global economy. Has it ever occurred to them that the lack of structural fiscal reform is at the root of these issues and the incessant papering over them with central bank over planning is only exasperating the core problems?

Maye these nuts should just prescribe heavy doses of psychotropics to everyone to make us feel happier again. That’ll fix everything and make all the debt, and the waste, and the corruption go away.

Back in January, following a very modest 3% move lower by the Yuan v the Dollar, all pandemonium broke loose. World markets plunged and the evil Chinese made a sundry of errors with their stock market that shook global markets to their core. Since then, the yuan has been firm v the dollar; but plunging lower, in a very suspicious manner v the yen.

Hmm, I wonder why?

Over the past 9 months, the yuan is down an astounding 15% v the yen. This move alone is likely to push the Japanese economy back into recession, yet no one is talking about it. The Chinese are still manipulating their currency. But instead of doing it against the dollar, they found an easier path to accomplish their needs v the yen.

The sages at WFC, the one with a chuck wagon as their company logo, proudly boasted about their growth initiatives in energy back in 2014, when oil was north of $100. It was the very worst time to load up on petrol-loans. But hindsight is 20/20 and bubbles are hard to predict. I do not fault them for miscalling the sector or even having too much exposure to it. A great man once said ‘no balls, no babies.’

My beef lies with the banking industries insistence to value these loans based on collateral, instead of what regulators want–the fucking cash flow.

Moody’s is projecting the banksters will need an additional $9 billion to cover losses. But that number is woefully fucked if the rules change. It’s also worth noting, the so called collateral is virtually worthless if the banks can’t sell it because there isn’t a profit to be had from it, with oil down at depressed levels.

Just yesterday, CHK pledged its entire company to keep their $4 billion credit line intact. Again, this is a Morton’s Fork moment for the banks. If they do not extend these lines of credit in their reevaluations, losses, big fucking losses, will need to be taken. If they kick the can down the road, like they did with CHK, God willing something good can come from it. If that $4 billion is drawn and the company goes belly up anyway, it could take years for WFC and others to recover the money through collateral.

“We’re all being as appropriately tough to make sure that we protect the interests of the bank,” John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.”

Bullshit.

Wells Fargo has been the top dealer of high-yield oil and gas debt, according to data compiled by Bloomberg, selling slices of junk-rated loans to regional banks throughout the U.S. as well as to financial institutions in Canada, Europe, Asia and the U.K.

One example: Breitburn Energy Partners LP. Wells Fargo devoted a page of its 2014 presentation to the Los Angeles-based oil and gas producer, which had a market value of almost $2.7 billion at the time. Now it’s worth less than $120 million. The company has drawn down $1.2 billion of a $1.4 billion credit line, filings show. Wells Fargo, the lead bank, sold participation to lenders including Credit Agricole SA, ING Groep NV and Mizuho Bank Ltd.

At the height of the boom in April 2014, after a rapid expansion of reserves-based lending, the U.S. Office of the Comptroller of the Currency, which oversees 1,600 banks and thrifts, published new underwriting guidelines. They were based largely on how such loans performed in previous downturns, and the regulator almost immediately began updating the guidelines, according to a person familiar with the matter.

Last year, after bank examiners marked many energy loans with tougher ratings than lenders thought necessary, the OCC was flooded with appeals, the person said. In September, regulators from the OCC, the Federal Reserve and the Federal Deposit Insurance Corp. met with dozens of energy bankers at Wells Fargo’s office in Houston.

How can you both be ‘tough’ on protecting the bank and at the same time argue with regulators to soften their stance on rating the loans? You simply cannot have it both ways.

By the way, I’d love to see who is assessing the worth of said collateral. This is very reminiscent of the games that were played during the housing bust.

The disagreement centered on how to rate the risk of reserves-based loans. Banks insisted that, in a worst-case scenario, they’d be made whole by liquidating the properties. Regulators pushed lenders to focus instead on a borrower’s ability to make enough money to repay the loan, according to the person familiar with the discussions. The agency reinforced its position with new guidelines published last month that instructed banks to consider a company’s total debt and its ability to pay it back when gauging a loan’s risk. Bill Grassano, an OCC spokesman, declined to comment.

“The regulators are taking a stronger stance on cash-flow protection rather than collateral coverage,” said Julie Solar, a senior director of financial institution ratings at Fitch Ratings Ltd. “There were a lot of disagreements and a lot of appeals. There’s a difference between the banks’ view of the ultimate risk of loss and the regulators’ view.”

Who in their right mind would want collateral to be the determining factor in rating loans, when the underlying commodity by which the collateral is valued has plummeted by 60%? It makes no sense, unless of course you have something to hide.

The new guidelines mean banks will have to downgrade loans and set aside more cash to cover losses. Oil and gas producers owed Wells Fargo $9.6 billion at the end of 2015, about 55 percent of the bank’s outstanding energy loans, company filings show. Most of that debt is backed by reserves, the bank has said. “The tougher standard makes it more expensive for the banks to make loans to the energy business,” said Buddy Clark, a partner with law firm Haynes & Boone in Houston. “But if the banks foreclosed now and tried to sell the properties, they’d have to take a loss. If it happens all at once, it’ll be a disaster where all of these properties come on the market at the same time.”

Bingo and presto!

Wells Fargo will need to wipe the egg from their collective faces and simply take the hits. All of those offices, designated for new energy loans, will be closed and eventually they will be forced to write down the loans to reflect the current market environment.

The greater threat here is the long term effects the economy will face, after these banks get burned from yet another central bank overplanned induced bubble. After the financial crisis had ended, banks opted to go with energy, seeing it was hot and backed by real cash flow. Little did they know, they were being duped into being bagholders, once again. The next time America has a great idea, Well Fargo and friends will be less eager to finance it.

Argue the message, not the messenger.

MOAR

There are so many ways to rip Gartman to shreds with this clip. I almost feel like a werewolf biting away at his shirt sleeves. He’s talking bull markets and silver-gold ratios–something that hasn’t been relevant since the Victorian Ages.

‘Gentlemen don’t trade oats or silver,’ says D. Gartman. You’ve got to be fucking kidding me, mate.

Moreover, Gartman declares he’s too old to trade silver and can only play this on the long side of gold. After all, we’re in a long term bull market in the metals and he’s long of them, in bullshit terms, until something deleterious falls upon his foot and shatters it in twelve places.

Note how Gartman holds his hands up in that funny manner. He may very well be a demon. By the way, I absolutely love the fake books in the background. Nothing says ‘I’m smart as shit’ as a background filled with fake books. Riveting stuff.

Reverse Cramer, Rich Ross from some meaningless firm, is out with a significant note of caution this evening, particularly those playing in the tar pits of oil. He points to a trend in the market that has failed before, namely running up stocks in brainless fashion up until earnings–only to fail miserably after said earnings disappointed. There is a notable risk inherent in the chasing up of oil stocks.

He did cite the XLE as a prime example of doom portending.

I happen to agree with this Rich ‘Boss’ Ross fellow.

In this clip, Cramer dismisses the ‘protest’ candidacy of B. Sanders, likening it to a joke compared to the business friendly Hillary campaign. Moreover, he doesn’t think Sanders stands a chance, especially since the superdelegates will hand Hillary the win, in what Cramer calls a ‘coronation’, as opposed to the advertised ‘nomination.’

Taking a contrarian viewpoint to what has been hitherto a castigation of earnings expectations for the first quarter of 2016, James Cramer cites a marked improvement in the Chinese indices, as well as the dry fucking bulk index, as evidence that doom might not be the prescribed analysis needed heading into earnings.

He sees upside, when everyone else is expecting black flags and carcasses strewn out across the investment landscape.

I’ve gotten over these elections. I’ve come to grips with the indelible facts, for the millionth time during my life, that my opinion means nothing, as well as my vote. All that I can do to allay the brutishness of it all is to express scorn and deride the mockery that we call democracy. These trolls keep citing so called laws that were put in place, which negate common sense and decency. Last I checked, the democratic process should count the votes of all men, as a right, not just a select few ham and eggers who are bought and sold by the establishment elite.

These elections are a great success for one reason only: it is laying bare the corruptness and illegitimacy of a system that praises itself as being fair and equitable. I believe the Sanders-Trump candidacies, if anything, have awoken the masses to these grave injustices.

This is the very worst case scenario for feverish bulls, but the best for me. At the open of trade, I led a faction of top hatted gentlemen into another tranche of short XLE, close to $63.

For the second time in as many days, the market was robbed and beaten for an otherwise genteel 150 point advance.

Oil stocks reversed under the weight of their own hubris.

The ark, gentlemen. It floats.

Any questions?

Median returns for both sectors are higher by 7%–based on a mere 1.1% return in the physical metal. Wholly and without question, these moves are of the nonsensical varietal.

Markets are flagging here, giving up a 150 point gain, reminiscent to what occurred on Friday. This is, without question, a very ominous development for the morale of this market. The buyers of this late stage rally are of the cheapest cloth. Their loyalties lie only with their account balances.

Offer them a hard tape, and subsequent losses, and watch them flee the field of battle, en masse, paving the way for a Kool-Aid guy breaking through to the downside.

The rally in gold is more likely due to these mercenarial traders, floundering to find new opportunities, rather than a solid fundamental reason backed by strong asset reallocation.

A storm is coming.