Will the US taper talk just " taper " off ?

http://www.zerohedge.com/news/2013-10-23/deutsche-bank-floats-why-bother-tapering-all-bubble

Deutsche Bank Floats The "Why Bother With Tapering At All" Bubble

Submitted by Tyler Durden on 10/23/2013 08:18 -0400

With the government reopened, and the debt-ceiling non-negotiation off the table, if only for another 3 months, Wall Street's experts have fallen back to what they do worst: attempting to predict when the Fed will Taper. And just as virtually all economists were convinced the September tapering is a done deal, so nobody sees a Taper in the next three months, and certainly not before March, or, in the case of Larry Fink, June 2014. One thing, however, that nobody in polite, statist company has brought up yet is not only the possibility, but the probability there may not be a taper. At all. Well, Deutsche Bank - the first of any major Wall Street institution - just floated "that" particular bubble. To wit: since "the Fed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all?"

From Deutsche's Jim Reid:

After yesterday's payroll number the opening paragraph writes itself this morning with the softness clearly further reducing the probability of tapering over the next 3-6 months. I suppose the only concern is that this is becoming consensus and perhaps too obvious. However if the employment data isn't improving its hard to imagine a Yellen-led Fed risking upsetting the recovery whatever their fears about the risks of ongoing QE. What else is there? Potentially cleansing defaults have been a policy no-no for years now and expansive fiscal policy which might be useful for jobs and growth is not going to happen with politics so divided. So QE remains the highly imperfect main policy tool.

If you're looking for a less consensus view, I was chatting with DB's US rate strategist Dominic Konstam yesterday and he is continuing to run with his recent theme that the labour market is exhibiting "late cycle" tendencies which lead him to believe that this cycle only has a 50/50 chance of extending much beyond 2015. Therefore he is considering the prospect that theFed possibly only has a narrow window to taper before it’s faced with economic headwinds again and if this is the case then why bother taper at all? If employment is indeed late cycle maybe the conditions don't quite get strong enough in 2014 to persuade the Fed to be too aggressive in pulling back liquidity. He also thinks 2.25% is a good near-term target for 10 year yields and like us feels that risk assets will be supported over the next few months by the Fed's taper delay but worries whether they can always resist gravity, especially when the cycle turns. An interesting chat and his thoughts are always worth listening to.

Expect many more to join this particular bandwagon, subsequent to which, we also expect that other uber-heretic thought, that instead of tapering, the Fed will instead proceed to monetize even more than $85 billion per month, crumbling collateral environment and shadow banking be damned. Heretic, because it will mean that the Fed not only can't limit its monthly flow, but will have to monetize ever more and more each month, until it ultimately, and logically, runs out of stuff to buy. Which is why, in retrospect, the appointment of Yellen may have been the best thing to happen to the Fed: if nothing else, she will at least bring on the grand reset of a broken monetary and economic system that much faster than someone who may have been at least superficially cautious.

China not playing the frozen state game it would appear....

http://www.zerohedge.com/news/2013-10-23/asian-markets-slide-china-braces-loan-defaults-telegraphs-another-liquidity-tapering

Asia Slides As China Overnight Repo Soars On Fears Of Another Domestic "Tapering" Episode, Preparations For Bank Loan Defaults

Submitted by Tyler Durden on 10/23/2013 05:48 -0400

Gross Domestic Product

Open Market Operations

People's Bank Of China

Following the past two days of reports in which we noted that both the broader Chinese housing market was overheating and reflating at an unprecedented pace as 69 of 70 cities posted Y/Y home price gains, while a separate report showed a blistering 12% price increase in Shanghai new homes in one week, it was only a matter of time before the PBOC resumed its tighter policy posturing, which infamously sent short-term repo rates to 25% briefly in June and nearly led to a collapse of the already fragile local banking system, in an attempt to pretend it is still in control of what is now the world's fastest growing credit bubble and of course, Chinese inflation which is now impacted not only by record domestic credit production but by hot money flows from both the Fed and the BOJ.

Predictably enough, as reported overnight by the Global Times, the PBOC suspended its open market operations Tuesday without injecting money as usual, a move that analysts said was in response to a surge in foreign capital inflows in September. It was only the second time since July 30 that the People's Bank of China (PBOC), the central bank, has abstained from injecting liquidity into the market, and follows the last liquidity injection operation which took place last Thursday: since then the Chinese Central Bank has been strangely quiet.

The PBOC normally conducts reverse repurchase (or repo) operations Tuesday and Thursday, injecting liquidity into the market by partially offsetting maturing bills. It injected 10 billion yuan ($1.63 billion) worth of seven-day reverse repo contracts on October 15, and then withheld the 14-day reverse repo on Thursday (October 17), the first time it had done so since late July. This drained a net 44.5 billion yuan from the market last week, according to Reuters calculations.

The central bank's move was in response to a surge in foreign capital inflows last month, which resulted in increasing liquidity in the market, Hao Yijun, a Shanghai-based bond trader at China Guangfa Bank, told the Global Times. The PBOC purchased 126.4 billion yuan worth of dollars in September amid large dollar inflows, an increase of 99 billion yuan from August, the PBC's data showed Monday.

Withholding from open market operations and draining funds indicates a moderate tightening of monetary policy, Hao said.

And just like the last time the PBOC proceeded to "surprise" the market with its own tapering intentions, overnight funding rates soared, with the one-day repo rate surged 67 bps, most since June 20, to 3.7561%; while the seven-day repo rate rose 42 bps, most since July 29, to 4.0000%.

"Liquidity is tighter because there are some reverse repos maturing this week,” Shanghai-based Xu Hanfei, analyst at Guotai Junan Securities, says in interview; "PBOC’s decision to refrain from injecting funds via reverse repos suggests policy may be shifting to a tighter one to keep inflation in check amid capital inflows."

That, and of course to keep the domestic housing bubble - currently the world's largest and certainly bigger than that in London - in check.

However, all of the above is merely yet another exercise in futility, and prompted by manipulated inflation data which are hardly accurate and indicative of reality. As such, just like in the summer, all it would take for the PBOC to yield to the market is for repo and SHIBOR rates to soar into the double digits, and all shall return to normal. Which would mean a return to what China does best: injecting epic amounts of debt into the system.

Which brings us to the far more important story, one reported by Bloomberg overnight, and one which we predicted is inevitable over a year ago: namely that the Chinese banks, filled to the gills with bad and non-performing debt, are finally preparing for the inevitable default onslaught and as a result have suddenly tripled their debt write offs in what can be best described as preparing for an avalanche of defaults.

From Bloomberg:

China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan ($3.65 billion) of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring.

In other words, even China is now engaged in America's favorite pastime: covering up losses by releasing loss reserves at the same time... a somewhat paradoxical process as one indicates a rapid deterioration in current and future credit conditions, while the other merely takes advantage of generous accounting fudges and prior stability.

Erasing the worst of the bad debts may allow the banks to mitigate a surge in nonperforming-loan ratios amid rising defaults in the world’s second-largest economy. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.

“The banks and the regulators’ interests are aligned in speeding up write-offs,” said Ma Kunpeng, a Beijing-based analyst at Credit Suisse Founder Securities Ltd. “This prepares them for a rainy day."

The China Banking Regulatory Commission, led by Shang Fulin, urged banks in April to set aside more funds to cover defaults, write off some bad loans and curb dividend payments while earnings are ample to create a buffer in case of an economic downturn.

Worries about the slowdown have persisted even after expansion of China’s gross domestic product rebounded to 7.8 percent in the third quarter. Growth may slow to 7.6 percent this year, the weakest pace since 1999, according to the median estimate of economists in a Bloomberg survey.

Naturally, it is not rocket science that the only reason why China is growing at its current pace is because it is once again injecting record amount of liquidity into the system, and if the credit spigot is open, the country grows ! if it's shut - it stagnates, as we described in "China: No Leverage, No Growth."

But a far bigger problem is that while China's debt is already at record levels, it needs an increasingly greater "credit impulse" to generate the same or smaller amount of GDP "growth" as before, a phenomenon we described in April.

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.

But while banks are finally starting to catch up to the reality that their balance sheets are woefully unprepared for what may be an epic super bubble house of cards crashing on everyone's head, a key issue is that the price discovery process of insolvent entities in China is simply non-existant.

China’s courts have also been processing bankruptcies faster. The eastern province of Zhejiang, a region south of Shanghai that’s home to many of the country’s largest private companies, accepted 143 bankruptcy petitions last year, according to the most recent figures reported by its high court in May. That’s almost twice the number from a year earlier.

The rising bankruptcies may have helped Bank of Communications, the nation’s fifth-largest lender, become the most aggressive among the top five in expunging bad loans from its books so far: its write-offs surged sevenfold to 4.82 billion yuan in the first six months. A press officer for the Shanghai-based lender, known as BoCom, declined to comment.

Oh, so a "whopping" 143 bankruptcy petitions is considered "faster" and an improvement? And this is in a nation that has 4 times the population of the US? To be sure, the fact that China has a major denial problem about the true extent of its credit bubble has not escaped investors:

Third-quarter net income at the five banks may have risen 11 percent from a year earlier to a combined 226 billion yuan, according to Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Research. Nonperforming loans probably climbed by a “mild” 5 percent in the three months to Sept. 30 as lenders continued to write off or sell bad debt, he wrote in an Oct. 10 report.

Uncertainty about the quality of assets at Chinese banks has made global investors nervous, sending stock in the lenders to near record-low valuations this year. ICBC fell 2.2 percent to close at HK$5.28 in Hong Kong and the shares are trading at 0.98 times estimated book value for 2014, while Construction Bank lost 2.3 percent and changed hands at 0.94 times book, according to data compiled by Bloomberg.

In conclusion:

“The China bank stocks are under pressure due to bad debt write-offs,” Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong, wrote in an e-mail. “The new leadership in China is serious about the financial sector getting its house in order, and addressing any asset quality issues.”

Judging by the market's reaction, where the Shanghai Composite closed down 1.25% and the Nikkei was lower by 2% (with futures sliding even more on a renewed strength in the JPY), the market is finally starting to pay attention to the Chinese credit bubble, which unlike the US can afford only so much liquidity, either domestic or foreign, before the spillover sends far less anchored prices soaring.

and.....

http://www.zerohedge.com/news/2013-10-23/cat-slaughtered-epic-q3-revenue-earnings-miss-and-guidance-cut-sees-good-deal-uncert

( weak demand from mining customers... )

CAT Slaughtered With Epic Q3 Revenue, Earnings Miss And Guidance Cut: Sees "Good Deal Of Uncertainty Worldwide"

Submitted by Tyler Durden on 10/23/2013 07:44 -0400

With every passing quarter, Caterpillar, perhaps the last truly industrial company in the epically misnamed Dow Jones (non)-Industrial Average, provides an ever clearer answer to the question we posed this past July, namely "Is CAT Nothing But The Dow's Most Overpriced Dog?" The most recent affirmative response came moments ago when the company announced Q3 earnings which were for lack of a better word, disastrous: EPS came at $1.45 on expectations of $1.67, revenues missed by a whopping $1 billion, when the sales print $13.4 billion missed expectations of $14.47 billion - perhaps the biggest top-line miss in the company's history since the Lehman bankruptcy. But it was the guidance that is slaying the stock right now: "The company has revised its 2013 outlook and now expects sales and revenues to be about $55 billion, with profit per share of about $5.50. The previous outlook for 2013 sales and revenues was a range of $56 to $58 billion with profit per share of about $6.50 at the middle of that range." But don't worry: despite our continuous warnings about the sad state of this company the trend, it is only "transitory", and any minute now thing may get better. Unless they don't.

From the report:

"This year has proven to be difficult, with expected sales and revenues nearly $11 billion lower than last year. That is a 17 percent decline from 2012, with about 75 percent of the drop from Resource Industries, which is principally mining. We expect Resource Industries to be down close to 40 percent for the full year and Power Systems' and Construction Industries' sales to each be down about 5 percent," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

Not only is mining down from 2012, the demand for equipment has been difficult to forecast. Orders for new mining equipment began to drop significantly in mid-2012 and have continued at very low levels. As a result of weak orders and feedback from end users, the sales and revenues outlook provided in January of 2013 included a decline in mining sales. At that time, based on strong mine production for many commodities, the company's outlook expected that order rates would improve later in 2013.

"Unfortunately, order rates have not picked up much despite continuing strong commodity production. That has caused us to ratchet down our sales and revenues outlook as we have moved through 2013," Oberhelman said.

And the outlook:

From an economic standpoint, the company expects better world growth in 2014. However, significant risks and uncertainties remain that could temper global economic growth. The direction of U.S. fiscal and monetary policy remains uncertain; Eurozone economies are far from healthy and China continues to transition to a more consumer-demand led economy. In addition, despite higher mine production around the world, new orders for mining equipment remain very low. As a result, the company is holding its outlook for 2014 sales and revenues flat with 2013 in a plus or minus 5 percent range. The company expects sales growth in Construction Industries, relatively flat sales in Power Systems and a decline in Resource Industries' sales.

"There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead to 2014, and our preliminary outlook reflects that uncertainty. Despite prospects for improved economic growth and continued strong mine production around the world, we won't be increasing our expectations for Resource Industries until mining orders improve. We can't change the economy or industry demand, but we've taken many actions to align our costs with the environment we're in currently. While we've done much already, we're not finished and expect to take deeper actions to improve our cost structure and balance sheet. We're not seeing bright spots in mining yet, but the turnaround will happen at some point, and when it does, we'll be ready to respond," Oberhelman added.

Sure. "At some point" it will happen. Just not now and not for the foreseeable future. In fact, as long as the Fed is monetizing, kiss any recovery goodbye.

But that's ok: who needs revenues, and certainly earnings, when all Bernanke needs to do is crank up the P/E multiple expansion by one more notch. And all shall be well until next quarter.

COMMENTS: 2

Futures Slump As China Tapering Fears Trump Hope Of Extended Yellen Liquidityhose

Submitted by Tyler Durden on 10/23/2013 - 06:45

There was some hilarious news overnight: such that supposedly Spain's GDP rose 0.1% in Q3 thus ending a 2+ year recession. There is no point to even comment on this "recovery" - we will merely remind that starving your economy of imports for the sake of generating a GDP-boosting trade surplus, while consumption declines, solves nothing and point readers to charts of Spanish non-performing loans, housing prices, and unemployment, oh and the massive Bad Bank of course, and leave it at that. In terms of real news, futures are lower following a drubbing in Asia over the previously discussed concerns over tighter Chinese monetary policy. Amusingly, as Reuters notes, this has hit global shares still high on hopes of extended U.S. stimulus on Wednesday, when the dollar tentatively steadied at an eight-month low after its latest slide. The immediate casualty is the USDJPY, which continues to slide and is approaching the 200SMA. In short: fears that China may have resumed tapering have offset yesterday's hope that "horrible" job numbers mean no Fed tapering until mid-2014.... New Normal fundamentals.

Catharsis Ours

Wednesday, October 23, 2013

Deutsche Bank Floats The "Why Bother With Tapering At All" Bubble

Asia Slides As China Overnight Repo Soars On Fears Of Another Domestic "Tapering" Episode, Preparations For Bank Loan Defaults

CAT Slaughtered With Epic Q3 Revenue, Earnings Miss And Guidance Cut: Sees "Good Deal Of Uncertainty Worldwide"

Futures Slump As China Tapering Fears Trump Hope Of Extended Yellen Liquidityhose

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