After making new highs last week, stocks dropped a bit and got stuck. I continue to believe we're rapidly nearing some sort of correction.
There was a very large explosion in Yemen on March 20. To many, including a physicist Jeff Smith who was previously an IAEA inspector, it appears to have been a low-yield nuclear explosion, perhaps a neutron bomb. Was it? I find the evidence deeply concerning, but not yet compelling. The pixelation at about 0:15 seconds is typical of high energy protons hitting a digital sensor. We do not see this in even very large conventional explosions. Do the Saudis have a bomb they bought from Pakistan? Did they set one off in the face of Iran as a warning? It's unlikely that's what this is - a neutron bomb is a relatively high tech system, not something we would expect the Pakistanis could produce. Did Israel bomb Yemen for Saudi Arabia? Can you imagine that Israel wants to be the first to detonate a nuclear bomb since WW II? On a country, Yemen, that poses no threat to them? This makes no sense to me. It's said that Russia has lost 84 "suitcase" bombs. Was one of these in Yemen, and it got hit by a conventional attack? Generally these nukes are very delicate things and hitting them with other bombs does not set them off. This also makes no sense to me. Is this a false flag operation, something deliberately set off to justify using more nukes in the future? Honestly, I have very little certainty of what happened here, but I assure you it is deeply concerning. The obvious next step is to send in experts to measure radioactivity, to look at remaining isotopes which tell you exactly what reactor produced the bomb material, to see if there are signs in the population of radiation sickness and burns. It's extremely unlikely that any of that will happen on a large scale, and if a few Russian or American agents sneak in to get the info we'll never hear about it. This story has not been picked up by any reputable western news agency; the best I could find is Pravda.ru, which obviously has their own agenda.
First quarter numbers are in. Consumer purchases expanded slightly, but were more than offset by the drop in exports and government spending. Overall the economy contracted at a 0.9% rate in the 1st quarter. There are some signs the contraction is continuing into the 2nd quarter, which could make this a recession. Consumer confidence is also falling.
China's Shanghai stock market dropped a bit over 11% in under 24 hours. Then regained a small bit of that ground. Here's the amazing part: this is not a record. It does this every year or so. What does it mean? Apparently not a thing. Except that Chinese stock owners are being trained to ignore what we would consider frightening behavior from the markets.
Greece will default this month. They have IMF payments due of €300m+ on June 5th, 12th, 16th and 19th, and €3.9b of maturing t-bills on June 12th. Perhaps they will make the June 5th payment. I see no rational hope for making the June 12th payment. Meanwhile Greek banks continue to bleed cash, making the likelihood of currency controls all but certain. Currency controls - a limit on currency leaving Greece - would be followed closely by the government paying debts with IOUs, effectively a parallel currency. A fundamental axiom of economics is that bad money drives the good out of circulation - if you have a choice to pay a bill with a Greek IOU of unknown fundamental value or a rock-solid Euro, which one do you spend, which one do you keep? If we call the IOUs drachmas, then there will likely be a drachma economy in Greece by August. And then? I don't know, and especially I don't know how you put one foot over the abyss then step back. Meanwhile Greek banks have lost roughly half their total deposits. And what happens in the rest of Europe? Absolutely nothing if we're to believe the Germans. I'm less sanguine, I'm expecting some shake up in the bond market.
And how is that European bond market doing? Super Mario had been buying €60b every month, driving bond prices up and yields negative. Until April, when it all started to come apart. Hedge funds which had been front-running the ECB buying plans decided they had no stomach for negative yields and started dumping bonds, setting off a rout which lost €344b before Super Mario stepped in. German 10-year bonds went from 0.05% to 0.77% almost overnight. He announced that the ECB would front-load their QE purchases and single handedly brought the German bonds back down to 0.5%. Here's what's interesting: this all happened during a time of QE and relative stability. Now imaging Greece defaulting into this atmosphere and tell yourself that absolutely nothing will happen. I don't believe it. Something will happen. Mario will manage to handle it, this time. But the writing is on the wall: the ECB is no longer the buyer of last resort of European bonds; right now they're pretty much the only buyer.
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