Thursday, August 22, 2019

Bridgewater Bets Big against Largest Banks in Spain & Italy

by Don Quijones, Wolf Street:

World’s largest hedge fund puts down $13 billion to profit from trouble in Europe. 

A lot of people have lost a lot of money in the recent financial market convulsions, but there’s still plenty of money to be made by betting against the companies, as the world’s largest hedge fund, Bridgewater Associates, showed this week. It bet heavily against four of Spain’s biggest corporate hitters. The fund took up short positions worth €1.2 billion, or 0.5% of total shares at Banco Santander, BBVA, Telefónica and Iberdrola.

The gamble has already reaped dividends. Shares of Iberdrola, Spain’s biggest utilities company, Telefonica, Spain’s struggling telecoms giant, and Santander, Spain’s biggest bank ended the week around 5% lower, while BBVA tumbled 4%. Bridgewater placed its best against the two large Spanish banks last week, just as they presented annual results that largely disappointed the market. Since then, both banks have lost close to 10% of their market cap.

These short bets are part of the firm’s $13.1 billion in shorts against 44 European companies, according to EU regulatory filings, reported by Bloomberg. Among the notable short positions, in addition to the Spanish banks, are Total, Airbus, BNP Paribas, ING, Intesa Sanpaolo, Eni, Sanofi, and Axa.

At the beginning of the week, Ray Dalio, founder of Bridgewater Associates, made light of the recent rout in global stock markets saying in a blog post on LinkedIn that “this is classic late-cycle behavior,” adding: “These big declines are just minor corrections in the scope of things . . . There is a lot of cash on the side to buy on the break, and what comes next will be most important.”

Investors will nonetheless be wondering why the world’s biggest hedge fund is shorting Spain’s two biggest banks, whose shares had been on an 18-month roll. Until last week that is. As we warned in December, 2018 could prove to be a stressful year for Spanish banks, for three reasons:

Painful new rules. The introduction in January of a new accounting rule, known as IFRS 9, will force banks in Europe to provision for souring loans much sooner than at present. One direct result will be that banks will have to hold more capital on their books, and that will have a detrimental impact on their profits. BBVA calculated that as a result Spanish banks will have to increase their provisions by 21% — around €5.2 billion — to comply with the new requirements. This amount may be manageable for the industry as a whole, though some lenders, in particular the smaller banks, will suffer more stress than others.

Potential indigestion from Popular take-over. The decline and fall last year of Spain’s sixth biggest bank, Banco Popular, served as a reminder (a painful one for the bank’s 300,000 shareholders) that Spain’s banking system is far from fixed, despite the tens of billions of euros thrown at it. Now, the attention shifts to just how well Santander will be able to digest the collapsed bank it bought for €1

Exposure to high-risk markets. As the IMF warned in a report last year, BBVA’s largest international exposures by financial assets are concentrated in the UK, the US, Brazil, Mexico, Turkey and Chile. At least four of those six markets — Brazil, Mexico, Turkey and the UK — are likely to face headwinds in 2018. In the US, Santander’s subsidiary, Santander Consumer USA, is dangerously exposed to the subprime auto-loan sector, which is already taking a toll on global profits. So great is both banks’ exposure to Latin America’s two largest economies — Mexico (which accounted for 40% of BBVA’s global profits) and Brazil (which provides 26% of Santander’s) — that if things deteriorate in either or both of these key emerging markets, the spillover effects will be felt almost immediately in Spain’s banking system.

There could also be another reason for Bridgewater’s bet: the continued systemic weakness of the Eurozone’s periphery.

After all, Spain is not the only Eurozone economy that Dalio has massively shorted. In the last three months his fund has tripled its short bets against Italy, the Eurozone’s third largest economy and arguably weakest link, to €2.45 billion, up from €900 million in October. A total of 18 firms have been targeted including Italy’s main utility, Enel, the national oil and gas company Eni and the pan-European insurer Generali. Like Telefonica and Iberdrola, Enel and Eni are among the largest beneficiaries of the ECB’s massive corporate bond purchase program which could come to an end as early as September this year. The firm’s funding costs could rise sharply thereafter.

Most of Dalio’s short bets in Italy are targeting its still fragile financial sector. His biggest short is against Italy’s second largest bank by assets, Intesa Sanpaolo, which is widely viewed as Italy’s most stable bank. In fact, it was the only bank in the country that was big enough and in sound enough health to absorb the two ailing mid-size Veneto based banks Banca Popolare di Vicenza and Veneto Banca in June 2017.

The bank will win the battle, CEO Carlo Messina confidently predicted in a Bloomberg Television interview on Thursday. The bank has seen its shares slump 4% over the last three days but they are still 45% higher than they were this time last year.

“When [Dalio and I] had a conversation in October, he was short Intesa Sanpaolo and Italy,” Messina, who leads Italy’s biggest bank by market value, said in the interview. “I told him he could lose money on our position and in the end I think he lost money. Again, increasing the position, I think he’s losing money again.”

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WATCH OUT BELOW: Dow Jones Index Next Stop… 19,000


by Steve St. Angelo, SRSRocco Report:

As investors continue to believe the stock market correction is over, the next big stop for the Dow Jones Index is 19,000. When the Dow falls below 19,000, all doubt will be removed as the best investment strategy would be to sell the rallies, rather than buy the dip. However, most investors buy at the top and sell at the bottom. So, it looks like investor carnage will continue for the foreseeable future.

I am quite surprised that investors don’t see the writing on the wall as it pertains to the most overvalued stock market in human history. While the PE Ratio of the S&P 500 isn’t as severe as it was in 1999, the debt, leverage, and margin are orders of magnitude higher. For example, in 1999 the U.S. Govt. debt was only $5.6 trillion compared to the $21 trillion today. Also, with higher debt levels comes higher interest payments.

The Rise of Cashless Banks (And What To Do About It)

by J.P. Koning, Activist Post:

For centuries bank deposits have come with a comforting guarantee. Depositors have always been able to quickly convert them at par into cash.

But this guarantee is slowly being eroded. Banks in Canada, Ireland, Australia, Denmark, andSweden are closing full-service branches and adopting a less-staffed “cashless bank” model. In a cashless branch, customers can no longer deposit or withdraw cash over the counter.

The next step will be when banks remove their external ATM machines too. Once this happens, we’ll have entered a strange new world where bank deposits are permanently inconvertible.

Looking Ahead with The Jackass

by Turd Ferguson, TF Metals Report:

It’s another three-day US market holiday weekend so The Golden Jackass, Jim Willie, stopped by on Friday to discuss the present situation and look forward to what promises to be a volatile and unpredictable summer.

The primary topic that I asked Jim to address was the US dollar. However and as you might imagine, this took us down several different paths and it led to an interesting discussion. Among the topics covered:

the declining use of the US$ in global trade
the foundations being laid for a dollar alternative system
Turkish gold repatriation
the Italian Banks and the EU banking sector
and quite a bit more

Click HERE to listen

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Precious Metals Soar on Falling Yields, Global Currency Turmoil

by Mike Gleason, Money Metals:

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up David Morgan of The Morgan Report joins me to break down the recent move in the metals, explains why he believes the move is a result of something no one is talking about – and he also gives us some key levels for silver, as it looks to gather strength from here. So don’t miss another must-hear conversation with David Morgan, coming up after this week’s market update.

The Fed’s Vicious, Self-Created Catch 22-All Roads Lead To “Scarcity Assets”

by Andy Hoffman,  Miles Franklin

It’s Friday morning, just before the B(F)LS, or Bureau of (Fraudulent) Labor Statistics publishes the second quarter GDP report. Incredibly, despite hard economic data consistently worse than the previous two quarters – which, at 1.7{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} (doubly seasonally adjusted and all), sported the lowest two quarter rate since the 2008-09 Financial crisis – “expectations” are for a 2.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} increase.  I mean, how do all those zero and negative retail sales, industrial production, construction activity, factory orders, and durable goods orders translate into “2.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}” growth?

Heck, even in Europe, whose economic stagnation has become legendary, GDP growth rates have been stuck below 1{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for years on end, despite the publication of higher “soft” data PMI readings than the U.S.  In other words, just as the U.S. government leads the world in surreptitious financial market trading, derivatives creation, and paper Precious Metal suppression, they do so in economic data as well.  And yes, I know the Chinese continue to report 6.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}-7.0{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} GDP “growth” despite an obviously collapsing economy.  But heck, at least their numbers are so far from reality, they aren’t actually taken seriously.

Irrespective, in an America on the verge of political (see: death of Obamacare repeal), economic (see: upcoming debt ceiling debate), and geopolitical (see – new Russian sanctions) chaos, the BLS may well attempt to prolong the illusion of the soon-to-be-second-longest “expansion” of the 147 in America’s 241-year history.  Which, if one were ignoring the rigged stock markets, could easily be mistaken for the second coming of the Great Depression.  This, one week after Janet Yellen’s wildly dovish, “ding dong, the Fed – and with it, the Precious Metals ‘bear market’ – is dead” speech in front of Congress, and two days after the Fed’s follow-up, uber-dovish policy statement.  In which, they not only downgraded their expectations of “inflation,” but altered the timing of their mythical, never-to-happen balance sheet “exit strategy” from “sometime this year” to LOL, “relatively soon.”

In other words, to commence today’s “Catch-22” discussion, if GDP growth is “better than expected,” the Fed will look like fools – particularly because there’s no doubt they are privy to the GDP numbers before their release.  Heck the Fed’s own “GDP Now” forecast is for 2.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} growth.  Conversely, if “worse than expected,” the dollar will plunge further, causing the “inflation” they so badly want to explode.  Which, if truth be told, already occurred in the week since Whirlybird Janet’s speech, given how the dollar has since plunged to a 13-month low.  Which in turn, would force the Fed to re-start hints of rate hikes, just one week after rate hike odds for September plunged to ZERO – and just 42{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for December.  Talk about destroying what’s left of one’s credibility!  This, from the institution responsible for printing the world’s “reserve currency.”

And by the way, for anyone that still doesn’t’ get just how thin the line has gotten between the economic reality of said Depression, and the fraudulently fostered illusion of prosperity from rigged financial markets, I’m going to continue driving into your head that at some point soon, the world will be “on” to the most blatant rigging scheme in history – paperPrecious Metals.  To wit, here’s what I showed you last week, of the previous six days of silver trading…

…here’s what I showed you Wednesday, of Monday and Tuesday’s “trading”…

And here’s what occurred yesterday; when every imaginable manipulative tool was utilized – from DLITG, or “don’t let it turn green”; to “Cartel Rule #1 – i.e., “thou shalt not allow PMs to surge whilst stocks plunge”; to the 10:00 AM EST “key attack time #1.”   TRUST me, it won’t end well for the Cartel – now that physical supply is set to plunge for years to come, care of the mining industry destruction caused by two decades of price suppression.  Which is exactly why – amongst other things – I boldly stated yesterday, this is the “most PM-bullish I’ve ever been.”

An Insider’s View Of The Bitcoinization Of Venezuela

from ZeroHedge:

With Venezuela ‘almost’ defaulting on their government debt this week, Daniel Osorio, of Andean Capital Advisors, has had a front-row seat in the collapse of the socialist utopia, spending at least a week every month in the almost-failed state.

In a brief but fascinating interview on CNBC, Osorio discussed the fact that as Washington unleashes ever tougher sanctions on Maduro, China and Russia are all that’s left for the country with the largest proven oil reserves in the world.

Then exposed the realities of living under Maduro’s crazed policies:

“Venezuela was one of the richest per-capita nations in the world… but now, hyperinflation is a very difficult thing to understand until you have to buy lunch…


The country has not yet dollarized…  but there’s not enough dollars in Venezuela for that to have happened…”


“Venezuela is becoming a cashless society… we are starting to see in Venezuela, the first bitcoinization of a sovereign state.”

Watch the full interview below…

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How The Fed Enabled Corporate Kingpins To Scalp Billions

by David Stockman, Daily Reckoning:

Here’s a comparison that is surely vertigo inducing. On the one hand, the financial system is implicitly held to be so incredibly stable and healthy that volatility on the S&P 500 has been driven to 50-year lows.

Indeed, that lovely condition is apparently expected to persist indefinitely as signaled by implied volatility. During the last 6,000 trading days (since the early 1990s), the VIX Index closed below 10 on 26 occasions or just 0.4{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of the time. No less than 16 out of those 26‘below-10’ closes occurred in the last three months!

Yet this insensible bullish calm is happening even as Wall Street is showing itself to be in the throes of unhinged leveraged speculation.

With respect to the unhinged part, consider an incisive post by Wolf Richter on the present carnage in the retail sector. His point was that virtually every one of the rash of companies filing bankruptcy in the sector during the recent past had been strip-mined by private equity operators:

Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it.

But Richter’s real point is that the private equity operators in the retail space brought down a double-whammy of leverage on the companies they ransacked. That is, they first loaded up the companies with buyout debt, and then came back for second and third helpings.

Accordingly, since 2010, retail chains controlled by private equity firms issued $91 billion in junk bonds and leveraged loans.

Needless to say, in drastically falsifying debt prices in order to stimulate housing and other investments, the Fed had no clue about the collateral effects of its massive and persistent intrusion in the delicate clockwork of capital markets pricing.

So when Janet Yellen & Co profess to see no bubbles they prove their own clueless incompetence. Do they actually think that this would happen in a free market with honest money and market-clearing interest rates?

The question answers itself.

In fact, the asset stripping pattern is every bit as irrational and toxic as were the slicing and dicing of subprime mortgage pools in the run-up to the 2008 financial crisis.

Needless to say, so-called “investors” piled into the flood of dodgy paper because they were desperate for yield. In the dollar fixed income markets, $3.5 trillion of the Fed’s U.S. Treasury and other securities purchases after September 2008 drove real interest rates so low that it virtually forced money managers to scramble out the risk curve in order to find minimally attractive yields.

So doing, they enabled strip-mining transactions that resulted in the eventual destruction of the debt issuers and vast windfall distributions to a few hundred corporate kingpins.

What possessed institutional investors such as state pension funds to invest in such shaky operations?

The answer to this seeming mystery is simply that institutional investors have been completely corrupted by the casino environment that has resulted from three decades of Bubble Finance. In clamoring for yield, institutions have been induced to embrace sweetheart deals for the kingpins that would be laughed out of court in an honest market.

For example, Payless Inc, which was a shoe retailer with 22,000 employees and 4,000 stores, filed for bankruptcy last April. That was less than five years after its original $670 million LBO in 2012. But it was not at all surprising since the company was heading for the wall from the get-go.

But the Payless bankruptcy was apparently dismissed as a victim of bad luck and timing.

I don’t think so. The two LBO firms that did the deal — Golden Gate Capital and Blum Capital Partners — are serial asset strippers and crony capitalist rip-off outfits.

The latter was founded in 1975 by one Richard Blum of San Francisco. He is a classic crony capitalist who parlayed his contacts in the world of California and national democratic politics — ranging from Jimmy Carter to his wife, Senator Diane Feinstein, into billions of funding from political controlled institutions.

Thus, upwards of $1 billion in capital was supplied to Blum’s fund by the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the Los Angeles County Employee Retirement System, among others. That Blum served as a long-time regent of the giant University of California System is surely not coincidental.

Nor is the fact that his fund was among a pack of hedge fund jackals that ran up the stock prices of for-profits education companies to absurd heights based on growth momentum that was totally unsustainable. In fact, these outfits harvested hundreds of billions of student loans from hapless enrollees — of which 33{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of the tuition proceeds went to selling bonuses and expenses, 33{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to operating profits and the left-overs to the purported cost of education.

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We Interrupt This Market Plunge To Bring You This Important Message…

by Adam Taggart, Peak Prosperity:

Time’s up. If you’re going to take action, do it NOW

What an ugly day for the markets. A sea of red everywhere (except for volatility):

The major indices lost 3% pretty much across the board.

We’ve been tracking the drivers underlying the market meltdown here on the site pretty much hourly. And you can be sure we’ll do so as long as things remain fluid.

But I want to deliver an important message, because time demands it.