Month: May 2017

Authored by Wolf Richter via WolfStreet.com, 

The economy depends on them, but they’re cracking.

American consumers are holding $1 trillion in revolving credit, mostly in credit card debt. So how well is this segment of consumer debt holding up?

Synchrony Financial – GE’s spin-off that issues credit cards for Walmart and Amazon – disclosed on Friday that, despite assurances to the contrary just three months ago, net charge-off would rise to at least 5% this year. Its shares plunged 16% and are down 27% year-to-date.

Credit-card specialist Capital One disclosed in its Q1 earnings report last week that provisions for credit losses rose to $2 billion, with net charge-offs jumping 28% year-over-year to $1.5 billion.

Synchrony, Capital One, and Discover – a gauge of how well over-indebted consumers are managing to hang on – have together increased their Q1 provisions for bad loans by 36% year-over-year. So this is happening.

Other worries about consumer debt in the US are piling up. The $1.4 trillion in student loans are already in crisis, though the government backs them, and they cannot be charged off in bankruptcy. Mortgage debt is still hanging in there, given the surge in home prices that make defaults unlikely. But of the $1.1 trillion in auto loans, subprime loans packaged into asset backed securities are getting crushed by net charge-off rates that are worse than during the Financial Crisis.

The US economy is fueled by credit. Americans turning themselves into debt slaves makes it tick. Take it away, and what little growth there is – nearly zero in the first quarter – will dissipate into ambient air altogether. So it’s time to take the pulse of our American debt slaves

In a new study, life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend “up to half of their monthly income on debt repayment.” Those are the true debt slaves.

Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt.

Most of them expect to get out of debt before they die, but 14% expect to be in debt “for the rest of their lives.”

This debt adds stress. About 40% said that debt has a “substantial” or “moderate” impact on their financial security; and about as many consider debt a “high” or “moderate” source of anxiety. Given the rising defaults, this is likely to get worse.

And what changes would most positively affect their financial situations? The top two: earning more money (29%) and getting rid of debt (26%). Alas, those two, for many people, are precisely the most elusive factors in the current economy.

But there is a lot of irony in how Americans look at debt. The study asked them what they would do with a $2,000 windfall: 40% said they’d pay down debt. And this is the irony: they’d pay down their maxed out credit cards, but a few months later, their credit cards would be maxed out again, and thus that $2,000 would be consumed. Because the money always has to get spent.

It’s not like consumers don’t know this. According to the study, one quarter of Americans flagged “excessive/frivolous” spending as the financial pitfall they are prone to. And how are these debt slaves keeping the plates spinning? According to the study:

• 35% said they pay as much as they can on each of their debts each month.
• 19% said they pay off debts with the highest interest first and make minimum payments to others.”
• 18% (and 25% of Millennials) said they pay what I can when they can.
• 17% make minimum monthly payments to each creditor.

The study didn’t say how many of them are beginning to fall behind on their debts. But that number is growing, as the soaring net charge-offs at Capital One, Synchrony, and Discover show.

“One of the hardest challenges is resisting the urge to splurge on items that are beyond our budget,” explained Rebekah Barsch, VP of planning, Northwestern Mutual. “While giving into temptation can feel good in the short-term, it often contributes to an ongoing cycle of buy and borrow that can become hard to escape.”

All the more so because buy-and-borrow has become the replacement American dream for a large number of people – with the corollary: if you can borrow more, you can buy more. But these debt slaves are a crucial driver of the economy. Spending money they don’t have on goods and services they cannot afford and may not need keeps the economy from sinking. If they ever started living within their means and paying off debt as they go, the economy would quickly reveal its true colors.

This time, lousy consumer spending and the “weather” were blamed for the hobbling economy, even as inflation rose to the Fed’s target. Read…  Economy “Surprises” to Downside, Growth Near Zero

via http://ift.tt/2pTW6ya Tyler Durden

Earlier this year a Trump draft executive order on foreign worker visas was leaked to the press and revealed the administration’s intention to craft legislation prioritizing “the interests of American workers and — to the maximum degree possible — the jobs, wages, and well-being of those workers.”  While that specific executive order was never issued, rule changes quietly implemented by the Department of Homeland Security in April effectively accomplished the same goal and took direct aim at tech companies and their excessive use of the H-1B program.  Per The Hill:

Without fanfare, the Department of Homeland Security’s U.S. Citizenship and Immigration Services on Friday issued a policy memo that would make it harder for companies to fill computer programmer positions with workers on H-1B visas. The memo stated that being a computer programmer is no longer sufficient to qualify as a “specialty occupation.”

 

The agency followed up Monday by announcing that it would begin to crack down on H-1B visa abuses by conducting targeted site visits to companies with a high proportion of high-skilled visas in their workforce.

 

“The H-1B visa program should help U.S. companies recruit highly-skilled foreign nationals when there is a shortage of qualified workers in the country,” the agency said. “Yet, too many American workers who are as qualified, willing, and deserving to work in these fields have been ignored or unfairly disadvantaged.”

 

In a separate release on Monday, the Department of Justice said that it “will not tolerate employers misusing the H-1B visa process to discriminate against U.S. workers.”

Now, Infosys CEO Vishal Sikka has announced plans to hire 10,000 U.S. workers because he suddenly “needs the ability to be local” and because it is “absolutely the right thing to do.”  And while we have no reason to doubt Sikka’s sincerity, it does seem convenient that he has just now realized his company’s need to “be local.”

“In the fast-changing world of today, we need the ability to be local. We need to be trusted by our customers as being local,” said Chief Executive Officer Vishal Sikka in an interview from Indiana. “To work with a mix of global and local talent is absolutely the right thing to do.”

 

“We are not only hiring computer science specialists but also engineers with software development aptitude and potential who we will train and prepare,” he said in the interview. “In the past two years, through the non-profit Infosys Foundation, we’ve trained 2,500 teachers and over 135,000 students and that has gone extremely well. The number of people we have trained is almost getting to the size of our delivery organization and we will be tapping these.”

 

“This is positive in one aspect and negative in another: Increasing local hiring is important for Indian IT firms to retain ongoing projects in the US, as well as secure new ones. The downside is that the costs will rise,” said Urmil Shah, Mumbai-based analyst at IDBI Capital Market Services Ltd.

Here is the now infamous Trump tweet from back in March that likely sparked Sikka’s sudden interest in an “ability to be local.”

MY POSITION ON VISAS#MakeAmericaGreatAgain #Trump2016https://t.co/JGmOd5gr5z http://pic.twitter.com/OLg6N3Ug9U

— Donald J. Trump (@realDonaldTrump) March 4, 2016

As we’ve pointed out before, Infosys is the largest user of the H-1B visa program with over 25,000 filings per the Department of labor.

Another victory for Trump.

via http://ift.tt/2p27HGm Tyler Durden

Following the recent trail of disastrously disappointing ‘hard’ and ‘soft’ macro data…

Today’s slew of narrative-crushing auto-sales misses has hit stocks and bonds, sending 30Y Yields back below the all-important 3.00%…

Still we are sure that NASDAQ offers investors a safe bet – or shorting VIX here?

via http://ift.tt/2pBRz0n Tyler Durden

Via TheAntiMedia.org,

Highlighting the difficulty both public and private establishments can have when it comes to adapting methods in the digital age, it was reported Monday that one government is now trying to tax search giant Google and social media companies.

From a report by Bloomberg:

“Austria is seeking ways to make digital services like Alphabet Inc.’s Google or Facebook Inc. pay taxes for transactions with the nation’s internet users, trying to plug gaps in a tax system still designed for brick-and-mortar business.”

Continuing, Bloomberg explains something most people don’t stop to consider: how social media actually functions, and at no monetary cost to users:

“The most ambitious part of the plan targets the business models of Twitter Inc., Google or Facebook: The tacit pact under which searching, liking, posting and tweeting remains free as long as users let the companies feed usage data into algorithms that help tailor advertising that can be aimed at the most likely buyers.”

Since this arrangement is a form of bartering, the Austrian government argues, a value-added tax can be applied, just as in other sectors of the economy.

“The business transaction that’s going on here is that users are paying with their personal data,” the parliamentary head of the governing coalition, Andreas Schieder, told journalists in Vienna. “The business model of those internet companies is based on massive revenues that are generated with the help of those data.”

As Martin Armstrong rages, Andreas Schieder is a highly dangerous man. He only looks at what government can extract from people, never how government can reduce its size and cost to save money. It’s always just raise more and more taxes without end.

The government’s plan would include extending the general advertising tax to cover digital services, and it would also place a tax on purely digital services Austrians purchase from businesses with no physical location.

“We need a new approach to make sure that taxes are paid where revenue and profit is made,” Schieder said, adding that the government’s plan is comprised of “practical suggestions (on) how to define digital establishments for tax purposes.”

The proposals, according to Bloomberg, now need the approval of a single man, Finance Minister Hans Joerg Schelling.

via http://ift.tt/2qp4jdx Tyler Durden

Having gapped open in the last few days, TWTR is surging once again today helped by positive comments from billionaire Mark Cuban that the social media site is “getting smarter” and “hiring the right people.”

Cuban’s comments that he “bought shares recently” sent the stock to 3-month highs…

As a reminder, this is what drove Twitter higher…

• It reported a surge in “ad engagement.”
• They increased their monthly active users to 328 million, up 7 million beating expectations.
• And this resulted in a first ever 8% LOSS of advertising revenue.

The panic buying volume is very noteworthy.

via http://ift.tt/2psw2sx Tyler Durden

In his latest daily note, which does a fantastic job of exploring what the macro “big picture” looks like at this moment (more on that below), RBC’s head of cross-asset strat Charlie McElligott focuses on one of his favorite topics: random outlier moves in asset volatility and, specifically, the crowding of traders behind them. And with the VIX sliding below 10 yesterday for the first time since February 2007…

… and likely set to repeat that achievement today ahead of AAPL’s earnings, the RBC analyst does report some notable developments across the vol space, namely that once again everyone is piling into short inverse VIX ETFs, everyone perhaps also including pension funds.

Of particular note, McElligott writes (see below fore details) that:

“short vol’ isn’t just an institutional trade anymore, it’s massive with retail as evidenced by the shares outstanding in the various VIX ETNs.  FT highlighted over the weekend that ‘short interest’ in VXX has actually outpaced creation of new shares in VXX this years, which is indicative of this growing retail demand for the ‘strategy.’  Currently per my stock loan team, VXX short utilization spiked to an insane 95% yesterday (% of the ‘free shares’ being used to short).”

From the latest Big Picture by RBC’s Charlie McElligott

SPX VOL CRUSH CONTINUES: Yesterday we hit a ‘9’ handle in spot VIX, the lowest level in implied vol since ‘08.  The reasons are many.

 

1) The slow-and-grinding’ drag higher’ via options-market mechanics is a contributing factor.  2400 as a ‘gravitational pull’ in S&P index is a real phenomenon (both from ‘short gamma’ and ‘deltas’ perspective), especially with $42.5B of notional calls in weeklies across SPX, SPY and futures out through May expiration per our Andrew Ramsey.  

 

2) Clearly ‘earnings growth’ an ENORMOUS input right now.  The general equities-narrative has turned from one purely driven by the ‘direction of rates’ or ‘inflation-expectations’ experienced over the past 2 years into one where investors are focusing on analysts raising full-year EPS forecasts over the course of Q1, which is, by recent standards, unheard of.

 

The SPX long-term model in Quant-Insight now shows ‘1y forward earnings’ effectively as the largest ‘positive’ macro factor sensitivity to SPX price:

 

3) Sadly, I also think the VIX move continues to evidence the enormous crowding of ‘short vol’ strategies and trades in the market.  ‘short vol’ isn’t just an institutional trade anymore, it’s massive with retail as evidenced by the shares outstanding in the various VIX ETNs.  FT highlighted over the weekend that ‘short interest’ in VXX has actually outpaced creation of new shares in VXX this years, which is indicative of this growing retail demand for the ‘strategy.’  Currently per my stock loan team, VXX short utilization spiked to an insane 95% yesterday (% of the ‘free shares’ being used to short).  

 

An expression of this same ‘short vol’ trade is evidenced by the growth in ‘vol writing’ funds’ AUM.  DB did some work here in a recent report and discovered upwards of $45B of AUM amongst this growing universe, up from $10B pre-crisis.  And you might recall me highlighting the AWESOMENESS of various pension funds crowding into ‘put-write’ overlays last Summer (see link below) on top of the consistent popularity of ‘call-write’ funds too, so this fits the story.  Consultants have an easy job selling the ‘earn premium plus mute your volatility’ pitch, even if that’s not how it actually ‘works out’ in real life.  This article last Fall from Pensions & Investments (“Funds Go Exotic with Put-Write Options to Stem Volatility”) is probably a good place to start driving yourself crazy http://bit.ly/2pPRAAz:

 

“Mr. Tirado said put-write options are becoming popular with pension funds at a time when their overall equity portfolio can be too risky and their bond portfolio isn’t providing enough income in a continuing low-rate environment.

 

“Pension funds are between a rock and a hard place,” Mr. Tirado said. “Low funding, risky assets, both have exposure to downside risk. In this, they’ve constructed a strategy to transfer risk.”

 

Russell”s Mr. Hellekson said the strategy gives investors “a way to get defensive equity, to reach for carry when the markets are going sideways. That’s attractive for some folks.” The carry comes from

the cash premium from the put option when sold. “If markets go sideways, they still get income; they can’t lose,” he said.”

 

And of course a discussion on ‘short vol’ can’t be had without discussing the scale of ‘negative convexity’ strategies in the market place—thus my consistent focus on ‘risk parity’ funds as an example of this universe. 

 

As per the post GFC-period where the intent of quantitative easing has been to artificially suppress financial asset volatility through ZIRP, NIRP and LSAP’s, the negative correlation of stocks and bonds has allowed for outsized returns in strategies which tactically allocate ‘risk’ based upon backward-looking volatility measures across assets, but all tied largely back into the ‘pinning’ of rates (yes, the construct changes as rates are again being allowed to move increasingly via market forces….but that’s an email for a different day!).  In the meantime, we are looking at a universe where between risk-parity, risk-control and vol-target funds, we’re likely talking upwards of $1.0 to $1.5 TRILLION of AUM…and that’S without including the opaque structured-product universe.

 

Everybody is profiting from the trade so its popularity continues to grow, until it inevitably ‘blows up’ on something.  The ‘sad’ thing is that it likely won’t even require a ‘left tail’ event with such asymmetry in the trade right now. 

Aside from vol, McElligott algo looks at the Macro Story, in “one big picture”, which as we have shown over the past year, is all about China:

THE MACRO STORY IN ONE ‘BIG PICTURE’: This scenario highlighted below is also part of my current ‘macro range trade’ thesis which believes you should sell ‘reflation at this 2.35 / 2.40 level in 10Y yields (and buy it again down at 2.05), as the fading Chinese liquidity- / credit- cram-down is contributing to a rollover in global inflation off its multi-year highs (which came via the ‘energy base-effect’ bounce through last year’s Chinese credit impulse, the ‘Yellen Pivot’ and OPEC deal).  This was a large part of the recent ‘reflation’ unwind and squeeze in ‘rates shorts,’ which have now capitulated to the largest net spec long in UST 10Y futures in 9 years, as US data ‘beats’ are now fading in conjunction.

• The Chinese ‘liquidity- / credit- impulse’ contracts (key on the ‘rate-of-change’ in reduction of liquidity ‘pumping’ via ‘all-system financing’). 
• As such, Chinese ‘financial conditions’ tighten significantly for the first time in 3 years. 
• In turn, Chinese inflation—and global inflation via the supply-chain—begin turning pivoting lower. 
• From there we see proxies like ‘industrial metals’ in commodities and ‘cyclicals vs defensives’ equities-pairs fade from recent ‘reflation’ highs.
• This ‘big picture’ backdrop is part of what drove the ‘rates shorts’ into their capitulatory squeeze over the past two months—UST 10Y net spec positioning is now the most ‘net-long’ it’s been in 9 years, as US economic data trajectory fades harshly in unison.

via http://ift.tt/2p4Ht76 Tyler Durden

President Richard Nixon’s “Nixon Shock” heralded the end of the Bretton Woods system. Will President Trump usher in another global currency exchange standard? 

Post WWII, a handful of countries, notably the United States, Japan, Canada, Australia and Western Europe, established the world’s first negotiated monetary standard. Known as the Bretton Woods system, the standard essentially enforced a regimen of fixed exchange rates, in relation to the U.S. dollar, amongst trading partners. That rate was in turn pegged to the price of an ounce of gold.

Under the pressure of mounting inflation, on August 15th, 1971, President Nixon changed the fixed rate system by ending the convertibility of the dollar to gold for trade purposes. 

REPEAT PERFORMANCE?

With the incoming U.S Administration’s actions targeted on the role of NATO, it’s obsession with cheating trading partners, and a focus on immigration and border controls; it would seem as though they are least obsessed with the role of the dollar. Yet, the world’s attention continues to be riveted in that (the U.S. dollar’s) direction.

Today, global currency reserves stand at roughly $10 trillion, as opposed to the paltry $1 trillion they stood at during Bretton Woods. Because it is the reserve currency, much of those reserves are held in U.S dollars by foreign governments, making the role of the U.S dollar even more significant today.  

But could America be getting tired of its role as the owner of the world’s reserve currency? Could we see a Nixon-era repeat under President Trump, which could yet again define how foreign trade is negotiated, accounted for and settled?

A PAINFUL ‘PRIVILEGE’ 

America’s role as the ‘owner’ of the world’s reserve currency gives it enormous power over other nation’s economies. By fine-tuning its own monetary policy, the U.S can send shock waves throughout the world economic order, leaving other nations without the ability to intervene. And many nations are now starting to resent that loss of control.   

They see the U.S dollar as a ‘privileged’ child among sibling currencies. For instance, China has made a number of moves to (legitimately) undermine the prominence of the Greenback viz. its own currency. In fact, during the early days of the Bretton Woods era, many world leaders (including future French President Valéry Giscard d’Estaing (then Finance minister) bemoaned the unfair privilege that the reserve currency had over its competitors.

As the reserve currency of the world, the U.S dollar enables Americans to earn higher returns on their foreign assets, compared to what other nations earn on their U.S denominated reserves. This ‘privilege’ means that America is often able to run exorbitant current-account deficits with minor consequences.

However, where there’s gain there’s also pain. The painful results of this continued ‘privilege’ have started appearing in the form of lower exports, larger imports and dwindling export-related jobs that are impacted by the increased imports of foreign goods and services.  America seems to be in an economic crisis, partly as a result of its currency ‘privilege’!

DANGEROUS CHOICES

Talk of border taxes and import traffic by the Trump Administration and its lawyers will only strengthen the dollar, making it even less attractive as a reserve standard. So what other options are left?

Well, some might think that it’s time for the Chinese Yaun to step in. But given the nation’s authoritarian views, and the lack of transparency in its dealings (both economic and political, domestically and internationally); the world might be unwilling to accept the Yaun as their new world currency standard.

Others may look to the Euro. But the lack of Euro-denominated debt instruments, and the fragmented legal and political systems amongst member states, poses huge risks in crowning the Euro as the next world reserve currency.

Mr. Trump’s ‘Make America Great Again’ policies could lead to even bigger deficits, and may spur inflation faster than we saw in the 1970’s, when President Nixon delivered the world his ‘Nixon shock’ which unraveled Bretton Woods. The question is: Just as Nixon presided over the collapse of the gold standard, will a ‘Trump Shock’ preside over the collapse of the U.S dollar standard?

via http://ift.tt/2pBUCFA derailedcapitalism