Month: February 2017

Via Kevin Muir of The Macro Tourist blog,

I must admit, I had been expecting the Fed to be a little more hawkish over the past couple of months. Given how tone deaf they seemed during previous tightening periods when the US dollar was screaming higher and oil plunging to levels that would have resulted in entire states going bankrupt, today’s climate of rocketing risk assets and rising inflation seemed like a no brainer to err on the hawkish side. And I am not alone in this analysis. Recently Peter Broockvar, the Chief Market Analyst for the Lindsey Group published a great list titled “Why March Must be on the Table.” Broockvar went through a variety of economic metrics to demonstrate how economic conditions have heated up over the past couple of months. (the note was from last week, so some of the data is a touch stale)

On inflation:

• 5 yr inflation breakeven: 12/14 was 1.83% vs 1.97% today
• 10 yr inflation breakeven: 12/14 was 1.97% vs 2.02% today
• Headline CPI: November CPI (the one they saw at December meeting) 1.7% vs 2.4% expected tomorrow for January
• Core CPI: November CPI 2.1% vs 2.1% expected tomorrow January
• Headline PCE: November 1.4% vs 1.6% for December
• Core PCE: November 1.7% vs 1.7% for December
• NY Fed survey of inflation expectations: November 2.5% vs 3% in January
• UoM one yr inflation expectations: November 2.4% vs 2.8% in February
• CRB index: 12/14 192 vs 192 today
• Journal of Commerce index: 12/14 104.5 vs 108.7 today

On Jobs:

• December/January monthly private sector job gains averaged 201k vs the previous 12 months average 176k
• Jobless claims 4 week average: mid December 264k vs 244k last week
• Average hourly earnings: November 2.7% y/o/y vs 2.5% in January
• Atlanta Fed wage tracker: November 3.8% vs 3.5% in December
• U6 unemployment rate: November 9.3% vs 9.4% in January
• NFIB Net compensation: November 21% vs 30% in January
• NFIB Net compensation future plans: November 15% vs 18% in January

Markets:

• Since 12/13 (day before FOMC) S&P 500 up 2.5% to record high and up 9% since election (No uncertainty here)
• 10 yr yield on 12/13 2.47% vs 2.44% today and vs 1.85% on day of election
• 2 yr yield on 12/13 1.17% vs 1.21% today and vs .85% on day of election

It is tough to argue with Broockvar’s logic. Risk assets are screaming higher, inflation is rising, and the US dollar is not accelerating uncontrollably. Over the past couple of years, if there ever was a case to be made for a rate hike, it’s now. Yet over the past month, every time a Fed official gets a chance to talk up rates, they falter. Sure, they make some conciliatory noises about “every meeting being live,” but that’s BS and the market knows it.

Have a look at Fed President Neel Kashkari’s comments from a couple of days ago (from CNBC):

Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday said the U.S. labor market has “more room to run,” suggesting he does not believe the central bank should raise rates quickly to head off inflation.

 

Kashkari said in an appearance broadcast on the bank’s website that it has been a “big surprise” that so many workers have returned to the workforce over the past year and a half, and he is “cautiously optimistic” that the pattern will continue.

 

“I think that process has more room to run,” he said.

 

The Fed has raised its short-term interest-rate target only twice since the Great Recession, and last month decided to keep rates unchanged so as to allow the labor market to strengthen further.

 

Kashkari, a voting member of the Fed’s policy-setting panel this year, declined to say when he thinks the Fed should next raise rates. His remarks, though, left little doubt that he is not among the policymakers who are chomping at the bit to do so.

 

Wages are rising, he said, but they have not reached alarming levels, and he hopes they will climb further. The Fed, he said, aims to allow the economy to grow as fast as it can as long as inflation stays low.

 

“We don’t want to be the ones holding that back,” he said.

 

Kashkari said he has not factored any new fiscal policies into his forecasts because it is not clear what tax or other reforms will be enacted under President Donald Trump.

“More room to run?” That’s not raise rates next month talk. In fact, you could argue that’s “let’s not even bother with June” talk.

Over the weekend I read Danielle DiMartino’s book Fed Up. The book is unusual in that it gives an insider’s view of the Federal Reserve, and it’s not flattering. The biggest surprise for me was the extent to which Federal Reserve officials are out of touch. I don’t expect them to follow every tick in the Blue Eurodollar pack, but I was shocked at how little they followed markets.

Yet this explains a lot. During the 2008 credit crisis, the Fed refused to acknowledge the true extent of the damage in the housing market until it bled through to their economic indicators. But all they had to do was dial the ABX Markit Subprime Index to understand the carnage.

And it also explains why at the end of 2015 when oil was plunging to $26 they didn’t understand the damage their hawkish rhetoric was having on the global economy.

It’s like the Federal Reserve is Wayne Gretzky’s poorly coordinated older brother. Instead of skating to where the puck is going, the Fed can’t even skate to where the puck is, and is instead busy skating to where it has been.

I can’t remember who said it, but the metaphor of the Fed conducting monetary policy looking through the rearview mirror is bang on. Which means, until the very end of the economic cycle, the Federal Reserve will always be behind the curve.

It is ironic because a year ago the Federal Reserve was desperately trying to drag the front end of the curve higher, but the market realized the economy was not strong enough. The Fed kept trying to talk up rates, but market participants understood the Fed did not have the gumption to push through rate hikes in the weak global economic environment. Embarrassingly the Federal Reserve had to settle for one hike when they were predicting four. And in the process, they lost a ton of credibility.

Contrast that to today. Scared of once again having to backtrack, the Federal Reserve refuses to keep the March meeting “live.”

Don’t believe me? Even though the WSJ interpreted yesterday’s Fed minutes as hawkish, the Fed funds futures market for April did not even budge due to Kashkari’s and all the other Fed talk.

The WSJ is correct in that the Federal Reserve’s comments of “fairly soon” should mean March, but the market knows the Fed, absent a huge outlier economic release, has written off March.

The Federal Reserve should be setting up the market for a March rate hike, but they aren’t. So be it. No sense complaining about what should be. Our job is to figure out what will be and position accordingly.

And do you know who has figured out that the Fed is behind the curve? Our favourite little yellow friend…

A Federal Reserve slow to raise rates is the greatest thing for gold. During January gold was rallying with the US dollar sell off, but over the past month, even as the US dollar has rallied, gold has continued to perform well.

Who knows if the Fed will once again flip flop and surprise markets. But right now, it is tough to argue the Fed is out in front of the curve like last year. And if they stay behind the curve, reluctantly following the market higher, then gold should continue to rally, even in the face of higher rates.

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The scramble for America’s bottom dollar is on, and according to a troubling report by Reuters it has prompted America’s largest low-cost retailer Wal-Mart to not only cut prices, but to squeeze suppliers in a stealthy war for market share and maximizing profits, a scramble for market share which is oddly reminiscent of the OPEC 2014 price fiasco and is certain to unleash a deflationary shock across wide portions of the US economy.

In its contested analysis (because JPMorgan has already come out to deny that anything contained in the report is credible), Wal-Mart has been running a “price-comparison” test in at least 1,200 U.S. stores and squeezing packaged goods suppliers in a bid to close a pricing gap with German-based discount grocery chain Aldi and domestic rivals like Kroger. Citing vendor sources, Reuters adds that Wal-Mart launched the price test across 11 Midwest and Southeastern states such as Iowa, Illinois and Florida, focusing on price competition in the grocery business that accounts for 56% of the company’s revenue.

The legic behind the “price test”, which is a more respectable way of saying “price cut”, is simple: get shoppers to spend more.

Wal-Mart’s tests are aimed at finding the right price point across a range of products that will attract more shoppers, and then adjusting prices as needed. Spot checks by Reuters on a basket of grocery items sold by competing Aldi and Wal-Mart stores in five Iowa and Illinois cities showed Wal-Mart’s bid to lower prices is already taking hold. Wal-Mart consistently offered lower prices versus Aldi, an improvement over recent analyst estimates that Wal-Mart’s prices have been as much as 20 percent higher than Aldi on many grocery staples. 

 

The competition at these stores is intense, with both competitors selling a dozen large eggs for less than a dollar. A gallon of milk at some stores was priced at around $1.

While Wal-Mart is considering cutting prices to match its competition, the near-monopoly retailer it is also seeking offseting cost cuts from its own vendors, in what – if implemented – could lead to a deflationary shock across the entire US retailer supply chain, with dropping prices leading to margin collapse within the entire industry. 

WalMart also held meetings last week in Bentonville, Arkansas, Reuters reports, with food and consumer products vendors, including Procter & Gamble, Unilever PLC, Conagra Brands Inc, and demanded they reduce the cost they charge the retailer by 15 percent, sources said.

Wal-Mart also said it expects suppliers to help the company beat rivals on head-to-head pricing 80 percent of the time, these vendor sources said. The wide-ranging meeting with suppliers – where Wal-Mart discussed other topics – was also attended by Johnson & Johnson and Kraft Heinz Co, among others, sources told Reuters. The consumer goods companies did not respond to Reuters requests seeking comment.

These Wal-Mart moves signal a new front in the price war for U.S. shoppers, as the pioneer of everyday low pricing seeks to regain its competitive pricing advantage in traditional retailing.

For more than a year, Wal-Mart said it is investing in price while not sharing specifics. When asked by Reuters about the test and demands on grocery suppliers, Wal-Mart spokesman Lorenzo Lopez said the company is “not in a position to share our strategy for competitive reasons.”

This relentless competition assures that whether or not Wal-Mart is implementing price cuts now, it will have no choice but to do so in the future. Germany-based discount grocer Aldi is one of the relatively new rivals quickly gaining market share in the hotly competitive grocery sector, which already boasts Kroger, Albertsons Cos Inc and Publix Super Markets as stiff competitors on price. A second Germany-based discount grocer, Lidl, is planning to enter the U.S. market this year, and together the German discounters pose a serious threat to Wal-Mart’s U.S. grocery business.

The potential market share stakes for Wal-Mart, and other big box retailers, are huge. According to Scott Mushkin, managing director of Wolfe Research and a leading pricing analyst, the retailer would need to spend about $6 billion to regain market share from all of its grocery rivals. Reuters adds that Wal-Mart would also needs to find ways to cut prices without further damaging its bottom line. In its latest quarter, gross margins slipped 8 basis points, while net income dropped 18 percent compared to the year-ago quarter. The company attributed the decline to factors such as price investments, which is essentially the cost of cutting prices.Vendors said Wal-Mart has told them it intends to maintain margins on average and lose money on some goods as part of its pricing plan. Wal-Mart told vendors it will absorb some of the losses so suppliers can adjust to the new pricing demand.

What is the extent of the cuts? A supplier of consumer goods said Wal-Mart cut prices on some of his company’s products by as much as 30 percent in some stores over the past few months.  “It helped them figure out the sweet spot that drives traffic,” the person said. The person did not elaborate how he would offset this collapse in revenue, absent lowering wages and laying off workers.

Wal-Mart also said it wants vendors to make logistics improvements that would help vendors get $1 billion more in sales, though it did not specify the time period. The retailer asked vendors to work harder on shipping orders in full and on-time, which would trim delivery costs, reduce re-orders, and reduce out-of-stock problems that have vexed the retailer and hurt sales in recent years, vendor sources who attended the meeting told Reuters.

“Wal-Mart is trying to go back to where they were 10 years ago when they were absolutely the low price leader,” a large packaged food supplier told Reuters on condition of anonymity. “We understand they are willing to give up profits to a large extent in some cases, so they can invest in their own brand.”

Meanwhile, Reuters writes that its spot check in markets where Wal-Mart is running its new U.S. pricing program indicates the retailer has already taken the price battle to Aldi. The Reuters check of Wal-Mart and Aldi stores in five Midwestern cities where Wal-Mart is running its test found Wal-Mart’s prices for a basket of 15 staples averaged 8 percent less than Aldi’s products.

Reuters conducted the price comparisons in Dubuque and Davenport, Iowa, and Moline, Dixon and Galesburg, Illinois. At each, Reuters collected prices for a basket of 15 similar-sized products including private-label packages of butter and milk, along with branded items like Crest toothpaste and 2 liter-bottle of Coca-Cola. Reuters conducted the price comparisons in Dubuque and Davenport, Iowa, and Moline, Dixon and Galesburg, Illinois. At each, Reuters collected prices for a basket of 15 similar-sized products including private-label packages of butter and milk, along with branded items like Crest toothpaste and 2 liter-bottle of Coca-Cola. Wal-Mart is also conducting the price comparisons in Georgia, Indiana, Kansas, Kentucky, Michigan, North Carolina, South Carolina and Virginia, according to sources.

Some statistics on the coming deflationary price war:

• In the United States, Aldi is starting from a small base and Lidl has not yet opened its first store. Aldi, with roughly 1,600 U.S. stores, accounts for only about 1.5 percent of the U.S. grocery market – but it is growing at 15 percent a year. Mushkin of Wolfe Research estimated Aldi and Lidl together could grab as much as seven percent of the U.S. market over five years.
• Wal-Mart currently controls about 22 percent of the U.S. grocery market, and its U.S. sales are estimated to grow about 2 percent this year, according to analysts.
• Over the past few years, Aldi’s prices have been about 20 percent lower than Wal-Mart’s, said Mushkin of Wolfe Research. When Mushkin in December compared Wal-Mart and Aldi prices in Connecticut for private label goods – the retailers’ own brands, typically the lowest-priced goods in each category – he found the German chain’s prices were 24 percent lower.

For now WMT’s vendors appear to be collaborating with the big box giant: after all, Wal-Mart is so big, it has virtually unlimited leverage. However, should the supply-chain organize (or perhaps “unionize”) and respond with a coordinated response, forcing WMT to seek price cuts elsewhere, the most likely place where the Bentonville giant will look for cost-cuts is its own workforce, which at 2.3 million has the potential of becoming substantially smaller should WMT shareholders demand a rebound in profitability.

And then there is the question of what happens to Amazon, the online retailer that has become the source of countless nightmares for America’s traditional brick and mortar retail outlets: should WMT and the rest of the US retail industry escalate what is rapidly becoming a life or death war, and lodge a grievance to Donald Trump against AMZN and its boss Jeff Bezos, who needless to say is not on Donald Trump’s holiday card list, then things could really get interesting.

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Not wanting to be bothered by such earthly matters as Goldman’s downgrade of Tesla to Sell which sank the stock 4% lower today, killing the recent euphoria-driven rally, Elon Musk has instead chosen to look skyward, and specifically toward the moon, where as his SpaceX company announced moments ago, it will send two private citizens – supposedly not PwC auditors – on a voluntary (and very expensive) trip around the moon in the second quarter of 2018. From the SpaceX press release:

SPACEX TO SEND PRIVATELY CREWED DRAGON SPACECRAFT BEYOND THE MOON NEXT YEAR

We are excited to announce that SpaceX has been approached to fly two private citizens on a trip around the moon late next year. They have already paid a significant deposit to do a moon mission. Like the Apollo astronauts before them, these individuals will travel into space carrying the hopes and dreams of all humankind, driven by the universal human spirit of exploration. We expect to conduct health and fitness tests, as well as begin initial training later this year. Other flight teams have also expressed strong interest and we expect more to follow. Additional information will be released about the flight teams, contingent upon their approval and confirmation of the health and fitness test results.

Most importantly, we would like to thank NASA, without whom this would not be possible. NASA’s Commercial Crew Program, which provided most of the funding for Dragon 2 development, is a key enabler for this mission. In addition, this will make use of the Falcon Heavy rocket, which was developed with internal SpaceX funding. Falcon Heavy is due to launch its first test flight this summer and, once successful, will be the most powerful vehicle to reach orbit after the Saturn V moon rocket. At 5 million pounds of liftoff thrust, Falcon Heavy is two-thirds the thrust of Saturn V and more than double the thrust of the next largest launch vehicle currently flying.

Later this year, as part of NASA’s Commercial Crew Program, we will launch our Crew Dragon (Dragon Version 2) spacecraft to the International Space Station. This first demonstration mission will be in automatic mode, without people on board. A subsequent mission with crew is expected to fly in the second quarter of 2018. SpaceX is currently contracted to perform an average of four Dragon 2 missions to the ISS per year, three carrying cargo and one carrying crew. By also flying privately crewed missions, which NASA has encouraged, long-term costs to the government decline and more flight reliability history is gained, benefiting both government and private missions.

Once operational Crew Dragon missions are underway for NASA, SpaceX will launch the private mission on a journey to circumnavigate the moon and return to Earth. Lift-off will be from Kennedy Space Center’s historic Pad 39A near Cape Canaveral – the same launch pad used by the Apollo program for its lunar missions. This presents an opportunity for humans to return to deep space for the first time in 45 years and they will travel faster and further into the Solar System than any before them.

Designed from the beginning to carry humans, the Dragon spacecraft already has a long flight heritage. These missions will build upon that heritage, extending it to deep space mission operations, an important milestone as we work towards our ultimate goal of transporting humans to Mars.

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via Mike Krieger of Liberty Blitzkrieg blog,

The historical space available for Americans to engage in public protest has been declining for many years, and is a topic I covered on several occasions during the Obama administration. For instance in the post,  The War on Free Speech – U.S. Department of Justice Subpoenas Reason.com Over Comment Section, I noted:

Readers of Liberty Blitzkrieg will be well aware of the gradual erosion by the state of the civil liberties of the American public. Such attacks are typically sufficiently under the radar, so that the average citizen has no idea what is happening until it’s too late. I have written about such calculated assaults on many occasions, but the holy grail target of the status quo is the First Amendment of the Constitution, which enshrines a right to the freedom of religion, speech, the press, and the right to peaceably assemble and petition the Government for a redress of grievances.

 

Many aspects of the First Amendment have been neutered in practice. For example, the right to assemble peacefully and effectively is often prevented in practice by the need to secure permits and other hindrances (see “free speech cages” and “protest zones”) . Meanwhile, on college campuses, where activism is historically most vibrant, many schools have embraced the Orwellian concept of “free speech zones” in order to prevent free speech.

Unfortunately, it appears this trend is about to get a lot worse following the DAPL protests and increased activism we’ve seen since Trump’s election. As The Hill reports:

Republican state legislators across the country are advancing bills that would criminalize or penalize some public protests just a month after millions of Americans took to the streets in opposition to President Trump.

 

In North Dakota, where protesters occupied land around an unfinished section of the Dakota Access oil pipeline, Gov. Doug Burgum (R) on Thursday signed four laws that would stiffen penalties against protests. The measures increase sanctions for offenses related to riots and broaden the definition of trespassing, allowing law enforcement officers to issue citations and fines.

 

The new laws, passed under emergency provisions that allow them to take effect immediately, came just hours after a protest camp near the pipeline was evacuated.

 

Senators in neighboring South Dakota on Thursday passed a bill that would allow the governor to create a “safety zone” in emergency situations. Anyone who entered the zone would be fined.

 

Legislators who backed the measure specifically cited the Dakota Access project and possible protests against the Keystone XL oil pipeline, which will run through South Dakota. Gov. Dennis Daugaard (R), who sponsored the legislation, said it was needed to deter “professional agitators.”

 

The Minnesota legislation follows protests against the shooting deaths of several black men by police. Those protests blocked roads leading to the Minneapolis-St. Paul airport. Legislators in Indiana and Iowa have also considered bills to criminalize blocking streets during protests.

 

Arizona Republicans have introduced a measure to expand racketeering laws, which target organized crime groups, to include rioting. The bill would allow police officers to arrest and the seize the assets of those who organize protest events.

 

Civil libertarians say the measures are unconstitutional overreactions to a historic era of protests.

 

One measure in Tennessee goes so far as to give civil immunity to a driver who hits a protester blocking traffic. 

 

The legislation, sponsored by state Rep. Matthew Hill (R), comes after a car hit volunteers helping protesters cross a street in Nashville as they demonstrated against the Trump administration’s orders blocking immigrants from seven Muslim-majority countries.

 

Hill’s measure passed its first test in a state Senate committee earlier his month. Hill did not respond to a request for comment on Friday.

 

A similar bill failed in the North Dakota legislature earlier this month.

 

Republican-led legislatures in Michigan and Virginia have already rejected their own measures increasing penalties on protests.

While disturbing, the above presents opportunities as well as challenges. For example, despite several very interesting protest movements since the financial crisis, none have been really effective in changing anything in a material way. We need to ask why that’s the case, and it seems to me that a change in tactic when it comes to much needed non-violent, protest and civil disobedience is in order. As I noted in the post, Why Increased Consciousness is the Only Path Forward:

At this stage, many of us are able to diagnose the problem, but that’s not going to be enough to truly change the world. I believe the determining factor as to whether we emerge from this dark period on the other side of a far more enlightened world, will be the way we respond to the situation. 

We’re going to have to be increasingly creative in the way we protest “the system” in order for it to have real impact. I think economic boycotts need to be a key tactic in this battle, particularly since the paradigm we live under is so singularly focused on the accumulation of more and more wealth and power in the hands of the few. We will need to identify those corporations involved in the most egregious practices against our best interests, and refuse to engage with them in any sort of economic relationship whenever and whenever possible.

Technology will also be increasingly important. The creation and distribution of the Bitcoin network to the world for free was not just a tremendous gift to humanity, but it also provided us with an alternative form of money that we can shift into as an expression of our disapproval of  the current criminal syndicate money system we operate under. My hope is that people who come up with groundbreaking discoveries in the health and energy realm, likewise will consider releasing their technologies to the world for free as a form of protest and gesture of good faith. I’m sure there are creative ways for such inventors to figure out a way to make considerable money from their inventions, while at the same time putting it out there for free like the creator of Bitcoin did.

The future of the world is at stake, and our best hope is that many of the groundbreaking new technologies to come are used to empower humanity to the next level, as opposed to enslaving the many for the benefit of the few (old way of thinking). We simply need the smartest minds to shift their world-views to a higher level of understanding and consciousness. A perspective of voluntary giving, as opposed to obsessive taking is in order. I’m not talking about the government redistributing stuff, I’m talking about genuine compassionate giving from those individuals who have the ability to change the world.

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Core Durables Goods and Shipments MISS, Pending Home Sales MISS, Dallas Fed 'Survey' BEAT…

 

"Never gonna let you down"… 12th Record Dow Close In A Row.

 

One streak was broken today – after 6 straight days of Dow and Long Bond price rises, bonds dropped as stocks rose today…

 

But another streak reached a record high… The Dow has never had a longer streak of record closes than this in its 100-plus year history…

After Friday's panic-bid melt-up, The Dow opened lower and VIX was immediately crushed back below 12.00

 

Small Caps were the big (squeeze) winner today…panic bid into the close as JPM noted more retail flows into ETFs sparks that manic lift.

 

Another big squeeze at the open…

 

Financials rallied on the day with BofA erasing Friday's losses… (but Morgan Stanley still lagging)

 

Tesla Tumbled on Goldman's downgrade…

 

Notably, it seems the Fed Funds futures market (rate hike odds) suddenly decided to catch up to stocks?

On very heavy volume.

 

Once again VIX was up and Stocks were up…

 

While bonds sold off on the day, yields remain lower (and the curve flatter) post-Fed Minutes…

 

Debt ceiling concerns rose…

 

After Kaplan spoke, the USD Index rallied back into the green – after weakness overnight…

 

As The USD rallied, so PMs dipped lower, oil ended unch, and copper slipped (but ended marginally green)…

 

And while the commodity was hit, Gold Miners were clubber like baby seals…

 

So to summarize – Hard real economic data notably disappointed and the odds of a March rate hike soared on extremely heavy volume in FF Futures, which seemed to be a positive thing for stocks but crushed PMs/Miners (but only nudged bond yields higher) – all very convenient.

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