Month: March 2017

Seriously, this is too easy…

 

Dow and Trannies were lower on the day as the Nasdaq just kept chugging higher (Nasdaq Composite up 14 of the last 17 days)

 

On the week The Dow is the laggard (but still green)

 

For the 6th day in a row, stocks opened weak and ramped non-stop all day…BTFD Much?

 

NOTE VIX was not paying along today…

 

Banks closed lower (except JPM)…

 

Post healthcare vote – Dollar's down; but Bonds, Stocks, and Gold are up…

 

Bonds erased most of yesterday's losses – and are now back lower post-healthcare vote (except for 2Y)

 

With 30Y back below 3.00%…

 

The Dollar index traded in an extremely narrow range for most of the day but ironically, after good housing data and very hawkish FedSpeak, the dollar began to sink! Back below post-healthcare-vote close…

 

On the week, EUR and Cable are weakest offset by a stronger AUD…

 

WTI and RBOB jumped on inventory data (despite a new cycle high in production) but copper and PMs flatlined…

 

Finally – this is not how it ius supposed to work… not at all…

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Authored by Mike Shedlock via MishTalk.com,

Polls show close to 40% of French voters are still undecided. That’s a record total this late in the game.

In the “what if” category, two candidates proposed counting blank votes (a vote for none of the party candidates).

It’s quite possible, if not probable, that “nobody” would win in such a match-up.

Via email, Eurointelligence provides some interesting commentary.

The outcome of the French presidential elections is still quite unpredictable. And this is not due to the candidates’ relative performance. The main factor is the undecided voters.

 

A new poll shows that 40% of the French do not know who to vote for. With just one month to go, this is an absolute record: in 2012 there were 26% at this stage. Undecided, angry, and disgusted, these voters do not even know whether they should bother and go to vote. And of those, 86% would prefer if their lack of preference could be expressed as an explicit blank vote.

 

With such high numbers the question, then, is whether their blank vote should be a valid one that counts, writes l’Opinion in its lead story. This vote would then be an expression of their preferences, political disengagement, and rejection of all candidates. At the moment these blank votes are counted but do not play a role later when the candidates’ support percentages are calculated. If they were accounted for, certain candidates would drop out in the first round as they would fail to qualify under the threshold, and the winners’ percentage would look much less impressive. It would also have meant that neither Jacques Chirac nor François Hollande would have had a majority of over 50% in the second round. The advantage of such a blank vote is that it might get people to bother to vote, and reduce the number of those who abstain or protest. It also might reduce protest votes which often turn to extremist parties to find expression.

 

This blank vote idea has been taken up by Jean-Luc Mélenchon and Benoît Hamon, who both advocate a recognition of the blank vote in the counting. But there are considerable hurdles for this. It would require a rewrite of Article 7 in the constitution. This is not about to happen anytime soon. It would also imply that the winner of the second wound could win with only a relative majority. Imagine what the duel between Jacques Chirac and Jean-Marie Le Pen in 2002 would have looked like. Maybe the second round would have been different altogether? Who knows. But with a rising number of politically disengaged people, the blank vote discussion is here to stay. And there are also clear differences among the current candidates on this.

 

The latest poll shows that, if the blank vote were effective, it would be employed most strongly by the electorate of Jean-Luc Mélenchon or Marine Le Pen, with 44% and 35% respectively. This is followed by Benoit Hamon (33%) and Emmanuel Macron (30%). It would be least used among the voters of Francçis Fillon (22%). The most enthusiastic about a blank vote are the supporters for Mélenchon, Hamon and Macron.

 

For the last five months of primaries and polling French voters defied predictable outcomes. And now they ponder the question whether to vote in the first round, and for whom. Don’t think you know already who the next president will be.

 

One further caveat is that if you allow the blank vote to count, you will eventually have to allow it to win. And, in this case, you could end up with a second round run-off between Le Pen and a blank, leaving the electorate with a choice between fascism and anarchy. Have they thought this through?

French Election Polls

In the US, would “Neither” have beaten Donald Trump and Hillary Clinton?

Even if “Nobody” won just a handful of states, it would have denied a majority to one of the others.

A vote for none of the above is a theoretical question, but 40% undecided (38% by Wikipedia) is not.

We have already seen two major election surprises, and there could easily be another one.

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In an otherwise quiet day on the political front, moments ago Bloomberg dropped the surprising news of the day with a report that House Republicans are considering another try next week at passing the health-care bill they abruptly pulled last Friday in an embarrassing setback to their efforts to repeal Obamacare.

Speaking to Bloomberg, two Republicans said that leaders are discussing holding a vote, even staying into the weekend if necessary, although it was unclear what changes would be made to the GOP’s health bill. The ray of hope for Trump and Ryan is that members of the Freedom Caucus, which was instrumental in derailing the bill, have been talking with some Republican moderate holdouts in an effort to identify changes that could bring them on board with the measure. 

A renewed attempt to pass Obamacare repeal would come after President Trump and Republican leaders in Congress said they would move on to issues like a tax overhaul in the wake of last week’s drama, when the long-awaited bill was pulled 30 minutes ahead of a scheduled floor vote. Asked if the GOP health bill will come up again, House Majority Leader Kevin McCarthy said, “Yes. As soon as we figure it out and get the votes.”

Quoted by Bloomberg, Kevin McCarthy said nothing is currently scheduled and didn’t indicate how leadership would resolve divisions between the Freedom Caucus and moderates in the so-called Tuesday Group. “Lot of people are talking,” he said. “Lot of people are working.”

Meanwhile, Paul Ryan is encouraging members to continue talking to each other about health care to “get to a place of yes” on a plan to repeal and replace Obamacare, according to his spokeswoman AshLee Strong. She didn’t have any updates on the timing on a future vote. House Freedom Caucus Chairman Mark Meadows, a North Carolina Republican, has been negotiating with colleagues on a compromise.

“There’s a real commitment among members he’s been speaking with to not give up and move expeditiously toward a path forward,” his spokeswoman, Alyssa Farah, said. “But he doesn’t want to constrain himself to artificial deadlines like ‘before recess.’”

 

The discussion of a new vote comes with House Republican leaders and other key lawmakers leery of playing up talk of a redo. To set such expectations — only to again not have a vote occur — could be even more awkward for members when they leave Washington next week for a two-week recess.

That said, republicans appear to be making the same mistake again, and withholding information from the rank and file: “other Republicans said they’re unaware of any plans to act on health care, and the remaining disagreements on the measure could be very difficult to resolve.”

“I haven’t heard anything as to what leadership is doing,” said RepresentativeWalter Jones of North Carolina. “The issue is very complex.”

 

Multiple House Republicans said they’ve heard from constituents who want to still repeal the Affordable Care Act and hope the issue isn’t dead.

 

“I’m very optimistic we can get something done in the real near future. And when I say in the near future, it may be two weeks, it may be a month,” said Representative Robert Aderholt of Alabama. “I do think it will come up again, the question is when. The form will have to change some,” said Representative Morgan Griffith of Virginia, adding that there remains a strong desire among conservative activists to undo the law. “If both the Freedom Caucus and the Tuesday Group can agree on some things, then we’re in good shape,” he said.

 

He said failing to achieve meaningful change would hurt Republicans in 2018. “If we just sit up here and play tiddlywinks, it’ll hurt us,” he said.

If Republicans are serious about a second attempt, they have to hurry: the House is scheduled to begin a two-week recess starting April 7, and Republicans would like to return home having passed their health-care measure. Even so, it would mark quite a turnaround for a measure that had been declared dead.

Greg Walden, a Republican from Oregon and former Energy and Commerce Committee chairman, went downright religious on Tuesday.  

“We’re approaching the Easter season,” he said. “Some things rise from the dead.”

While we applaud Walden’s optimism, which has also led to a record outpouring of animal spirits and a historic split between “hard” and “soft” economic data, it is time for the GOP to bring some tangible results, and reincarnating Obamacare repeal from the dead would be a good place to start.

Finally, it is unclear how fast the market narrative would have to change again: recall that after last Friday, it was suddenly spun as “bullish” that the GOP failed to pass its healthcare law, instead  allowing “Trump to focus” only on tax reform. However, we are confident that the power of the narrative will shine through again, and no matter the outcome, it will once again lead to a new all time highs for stocks even as the Fed itself is now warning that stocks appear just a little “frothy.”

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In what was the clearest sign to date that the Fed is targeting the stock market bubble with its rate hikes (recall two weeks ago Goldman caused a stir when it suggested that the Fed had made a policy error by being overly dovish with its rate hike, which instead of tightening financial conditions, had the effect of a 25bps rate cut), today not one but two Fed presidents warned that the market is getting “a little rich“, that “valuations may be a little frothy”, and that the record “wealth to income ratio is a reason to keep raising rates.”

First, it was Boston Fed president Eric Rosengren who during an interview with Bloomberg, said some asset markets are “a little rich”, with an emphasis on commercial real-estate valuations, which he said are “pretty ebullient.” And while the Boston Fed president repeated what Neel Kashkari told Zero Hedge recently, when he said that “stock market values aren’t a driving force for monetary policy”, he made it quite clear that one of the reasons why the Fed is pushing with as many as 4 rate hikes in 2017 is precisely to push stocks lower, saying that “rich asset prices are another reason for the central bank to tighten faster.”

Achieving the gradual deflating of asset prices would likely require more rate hikes than the market is currently pricing in, and Rosengren hinted as much when he said that four hikes in 2017 may be needed to guard against economic overheating,

Then, it was San Fran Fed President John Williams’s turn, double down on the caution saying stock market valuations “may be a little frothy in that way, and come down” on fiscal policy disappointment.

Suggesting that the market is overvalued, Williams told reporters during a Q&A in New York that “I do think that the market’s perceptions of what’s going to happen … kind of got ahead of reality” on fiscal policy. Williams also echoed Rosengren saying he “would not rule out more than three increases total for this year.” The median estimate of Fed officials in their mid-March forecasts was for three quarter-point rate increases in 2017.

Williams also warned those who are confident that the Fed will not sell Treasuries saying that the Fed can begin shrinking balance sheet before knowing size it should ultimately be: “We could start a normalization of the balance sheet and then make a decision, do we stop at X or Y.”

“I think the floor system has been effective” for controlling short-term interest rates and it’s “not that critical” which one Fed uses in the future because it has shown it can control rates with both floor and corridor systems.

In effect what the Fed is hoping to do is to avoid a flattening or even inversion of the yield curve by pushing short rates higher while selling long-dated treasuries, in effect prompting an even more aggressive selling in the long-dated part of the curve, in effect undertaking a parallel curve shift, or even one where the curve steepens further. As a reminder, this is something the BOJ is currently attempting with its “Yield Curve Control” program.

That said, “we’re not at that point yet” where we can communicate what size we think it will be in the end.

But while Williams emphasized the it is the strong economy that gives him confidence that the US can sustain 3 or more rate hikes in 2017, which is surprising because as we have repeatedly shown, the bulk of the economic improvement has been only as a result of sentiment and confidence surveys…

… and not in terms of actual hard data, Williams let the real reason for the Fed’s sudden rush to hike rates slip when he said that the “growing wealth-to-income ratio is another reason to keep raising rates.”

Williams was referring to the following chart we showed three weeks ago:

 

… a chart which clearly shows that at least when looked at on a “wealth-to-income” ratio – which now is at an all time high – assets are above the peak-bubble levels that marked both the Greenspan and Bernanke peaks.

So is the Fed suddenly, finally, worried about the consequences of its bubble-reflating actions over the past 8 years? If so, good luck trying to put that particular genie back in the bottle, and “deflate” risk assets in a calm, cool and collected manner.

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The S&P 500 Index and CBOE Volatility Index have historically moved in opposite directions about 80 percent of the time, but that’s changed recently…

As Bloomberg reports, both gauges are heading for declines this month, after the two rose in tandem in February.

That’s weakened their inverse correlation, sending it to levels not seen since April 2005…

 

After March/April 2005, the S&P 500 dropped around 8% (breaking down as the correlation reverted to norm)

In May 2012, the S&P 500 dropped 11% after VIX and Stocks’ decoupled and correlation surged.

The smaller spikes in VIX-Stock correlation also saw notable equity market drawdowns (Feb/March 07 down 6.6%, Oct 09 down 6.5%, Dec 2012 down 3.5%)

So what will happen this time?

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Authored by Daniel Stelter via Think-BeyondTheObvious.com,

Today Mrs. May finally officially announced Brexit and kicked-off the process of divorce from the EU. A disaster for Britain, according to officials in Brussels, Berlin and Paris. Really?

Rarely there is such broad consensus: The British voters made a huge mistake in voting for Brexit. The country will suffer for decades to come and deeply regret the decision while the EU and the Eurozone will continue to generate prosperity and peace for the continent. This view is predominant in the media of continental Europe and it is the key massage of its politicians, who fear nothing more than that other countries might follow the British example. Therefore the costs for Brexit have to be high and punishing.

Whenever there is broad consensus it is worthwhile to challenge it. Could it be, that the British end up much better off, than we think? Here are ten reasons why:

1.     No recession: According to experts from IMF to Bank of England Great Britain should already be in a deep recession. In case of a Brexit vote they projected a crash in the real estate market, a drop in consumer spending and a collaps of economic activity. In reality the economy grew faster then before. If the experts cannot predict the short term consequences correctly, how should they be right in the medium- to long-term?

 

2.     Good shock: The steep fall in the pound contributed to this positive outcome. This has the welcome effect of supporting exports and hindering imports, therefore kicking-off a rebalancing of the British economy, which ran a trade deficit of five percent of GDP before. Such deficits are not sustainable as we can see in the crisis countries of the Eurozone. Moreover the Brexit vote has initiated a process of modernization of the British economy just at the right moment. Lower taxes, more investments and a re-industrialization of the country can lay the basis for more growth in the future.

 

3.     Positive demographics: Latest by 2050 Great Britain will have the biggest population in Europe. Meanwhile the population and especially the workforce in most European countries will shrink at an accelerating speed. As economic growth depends mainly on the growth rate of the workforce and its productivity this is good news for Britain.

 

4.     Attractive for qualified migrants: The population growth is linked to immigration and the Brexiteers campaigned mainly on the issue of immigration. But contrary to the popular belief there are not necessarily anti-immigration, rather they want to introduce a systems similar to Canada to attract qualified migrants. This will become a major competitive factor when compared with the EU which has no such system and encourages immigration into social welfare. Not only will Britain have less issues with integration but also be more attractive as it will have a lower level of taxation.

 

5.     Leading Universities: Besides the world famous private schools Britain commands eight of the 100 best universities in the world. The EU (without GB) has 17 universities on this list, four of which based in Germany. World class universities will continue to attract the most qualified students from all over the world and Britain could like the USA leverage this talent to foster economic growth.

 

6.     Free Market tradition: A study by JP Morgan already showed before the vote, that the British economy has not so much in common with those of France, Italy, Spain and Portugal. It is more in line with Germany, the Netherlands, Sweden and Ireland. Consequently the authors concluded, that Britain would be better off outside of the EU as it would not anymore need to subsidize weaker economy. In addition the British have a tradition of a pro-free-market attitude which will make Britain ever more attractive compared to a EU dominated by socialist, redistributive and anti-market forces.

 

7.     Leading financial center: Whatever the hopes in Frankfurt and Paris, London will remain the global financial center. The competence will not move away and besides a few representative offices to fulfill EU-regulation not much more should be expected. On the contrary, a financial center with long traditions, its own currency and freed from EU bureaucracy might evolve into the new Switzerland of the 21. Century. A flood of money fleeing from the Eurozone in the coming years cannot be ruled out.

 

8.     Renaissance of the Common Wealth: Critics of Brexit ridicule supporters who dream of a return to the order of the Common Wealth, and rightly so. On the other hand, also given the changed stance of US politics it is not out of this world to imagine an Anglo-Saxon trading area including besides the US and the UK, Australia, New Zealand and Canada. Even the Scandinavian countries might be tempted to join such a club, especially if the EU and Eurozone continue on the current trajectory.

 

9.     Continued downturn in the Eurozone: Europe seems to head for a solid 2017. Nevertheless the fundamental flaws  of the Eurozone, notably unsustainable debt levels, a bankrupt banking system and diverging competitiveness remain unsolved – after eight years into the crisis! Add to this the complete failure of the EU to address the migration issue it is easy to conceive a continental Europe on path to another lost decade with significant political pressure building up. This will make Britain all so more attractive for those with talent and entrepreneurial spirit.

Of course the British economy has issues, notably the huge trade deficit, its dependency on the financial sector and its poor performance in educating broad sets of its population. On the wall of  the Brexit war room of the European Council hangs a cartoon based on the Belgian cartoon character Tintin. It shows a small boat in rough water on which the captain is firing up the flames. Title: Tintin an the Brexit Plan. The message is clear: the British have just sunk their own boat.

Another cartoon might be a better fit: the big European cruise ship has a broken rudder and a crew fighting each other. A small boat with good sailors is escaping the scene while the Germans look after it from the engine room with sad eyes.

When, after all, have the British really made strategic mistakes in the past decades?

Given the choice of putting my money on the ability to solve the challenges by the European union or the British, I would rather go with the Brits.

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