So, what next?

Yesterday we had a bit of a dip, but nothing tragic and this morning Europe is down half a point (China closed all week and Japan is just silly) on TERRIBLE PMI reports across the board and the PMI for the EuroZone hit 20-month lows  indicating growth has slowed to its weakest levels since before the ECB unleashed its stimulus program in March of last year.

Now we know how long massive stimulus can prop up the markets – 20 months – then the clear failure resumes. Once again it is obvious that the UK's Brexit was merely the first rat with the good sense to get off a sinking ship.    

We all know about Deutsche Bank's (DB) horrific troubles but Credit Suisse (CS) are down from $27.50 a share last summer to $13.39 at yesterday's close and while we may have some faith that Germany will ride in and save the day for DB, who is going to bail out CS if they run into trouble? The entire GDP of Switzerland is $685Bn, not even enough to cover CS's derivative exposure – even if the Swiss were inclined to bail out what is essentially a European Bank that grew out of their small country (8M people). 

Europe is actually in a great deal of turmoil with Germany, France and Spain all with pending elections while Italy is voting on a constitutional referendum in December, which would radically alter their Government and pave their own path to exit the EU. That's why we've seen the ECB capitulating a bit this week and saying perhaps it is time to "normalize" rates as EU savers, unlike US savers, are good at math and understand the damage that ZIRP is doing to their retirement accounts.  

Spain doesn't even have a Government at the moment and hasn't had one all year, since the PM Rajoy miscalculated and called for an election, in which his party failed to gain a large enough majority to re-elect him. After two grueling national elections in six months, and with a third vote possible in December, no party has won enough seats or forged the coalition needed to form a government. But, after trudging to the polls twice already in the last year, weary voters are in no mood to vote again.   

“No government, no thieves,” said Félix Pastor, a language teacher who, like many voters, is fed up with the corruption and scandals that tarnished the two previous governing parties. After watching last night's VP debate – I may have to agree with him! “A lot of people said we would go to hell if we didn’t form a government,” said Ignacio Escolar, the editor of the news website eldiario.es. “But we’re still here.”  

Meanwhile, Retail Sales in Europe are falling off a cliff, down 0.1% in August which is the month everyone is on vacation and is supposed to shop and spend money. From last August, sales were down a whopping 0.6% and even mighty Germany saw a 0.4% decline from July but up from last year's weak numbers there.   

China may be closed for the holidays but August Retail Sales in Hong Kong were off 10.5% y/y and, funny thing, they are revising July's sales numbers down 7.7%, so the good numbers they reported last month were fake, Fake, FAKE!!! That means, for the first eight months of 2016 taken together, the provisional estimate of the total retail sales decreased by 10.2% compared with the same period in 2015. The Chinese Government, meanwhile, is sticking to their forecast of 10% growth in Retail Sales – because it's in their plan – and they don't change their plan (it's easier to change the numbers).  

There's a crisis going on somewhere, folks. Just because we ignore it and pretend it isn't happening, doesn't make it any less of a crisis (makes it worse actually). TRILLLIONS of Dollars are being pumped into the Global Economy and these are the results? Perhaps, just maybe, the Central Banksters are doing something wrong?  Maybe?  

If a fire is raging and the firemen have a hose on for 8 years and the fire never goes out, maybe they are aiming at the wrong house or maybe there is no water in the hose or maybe what's coming out isn't water – even if you don't know exactly what's wrong in the very least it makes sense to TRY something else – because you can't really be any LESS effective than CB policies have been to date.  

Speaking of changing Chinese numbers, according to Reuters, one-quarter of ALL Chinese companies do not have sufficient profits to pay even the interest on their debt ($18,000,000,000,000, which is 169% of the country's GDP). Lenders (generally quasi-government entities) are rolling over company debt or granting repayment waivers, sometimes for years. International institutions have warned China to stop financing weak firms, especially inefficient state-owned enterprises (SOEs), which tend to crowd out the private sector. More defaults are needed, they say, to improve credit allocation and stop wasteful spending in the economy.

Of course, onshore defaults could and will still rise – rating agency S&P Global says the credit quality of about 240 Chinese companies it rates is deteriorating more quickly than at any time since 2009. The muted default situation "is an aberration given the sharp deterioration in credit risks," it said in a research note. Overall debt levels are at record highs as well and China's Beige Book reported the highest number of firms in three years took loans in the third quarter. 

For 527 mainland listed companies, the median Return on Equity (ROE) stands at 5.07%, also the lowest in at least five years. Analysts generally consider a healthy ROE to be 15-20% so this is kind of a disaster but, as noted by one company official:

"There's a lot of liquidity in the market and the interest rate is low – even for perpetual securities the interest rate is low if you repay within five years. Borrowing from banks has not been a problem.  Being an SOE also helps."

Perpetual securities are, of course, balloon loans where little or no payments are required for 5 years, after which companies that cannot repay the loans are forced to refinance or face bankruptcy. This is what's been floating China's economy since the crash last summer.  

And, worse of all – Japan. I'm not even going there as it's too depressing.  

We'll discuss this further at today's Live Trading Webinar (1pm, EST).  

Also, Coffee (/KC) Futures are blasting up over $1.50 this morning for a wonderful $1,000 per contract gain over yesterday's morning's free pick (you are welcome) and Natural Gas (/NG) also jumped 10 cents for another$1,000 per contract gain on the day (you are very welcome) while our call to short the indexes yielded thousands more in additional profits (you can sign up for our newsletter here).

The only bet that's off track (so far) is our oil short and we are certainly pressing that bet near $50 – as planned!