Month: November 2017

Having passed the first hurdle this morning (PCE did not drop further), The Fed's December hike is now locked and loaded, but, as former fund manager Richard Breslow notes, at the end of the day, the real elephant in the room is if, when and how fast the big central banks shift toward policy normalization. Everything else is derivative. Get this one right and quibbling over some sector rotation or the relative prospects of the Australian versus New Zealand dollars pale in comparison.  

The answer to this question will drive just about every other market.

Via Bloomberg,

It’s an interesting issue to contemplate as we wind down a year when sovereign yields, with the exception of China, have been moribund, at best.

All eyes have correctly been on the yield curves but it could very well be that the focus needs to change.

And if it does, it could happen quickly because, unlike previous episodes it’s likely to be a generalized phenomenon rather than country specific. It’s hard to discount one central bank’s normalizing steps should it come to pass that everyone is looking to join in.

We know that the Fed wants to get official rates up. Nothing in the latest communications should have disabused anyone of that notion, even as the market continues to discount the trajectory. Pooh-poohing the trajectory is only a viable course of action if the ECB and BOJ continue to soften the FOMC’s actions.

But what happens if traders begin to realize that these central banks are far less dovish and scared than their official communiques suggest? I’ve got news for you, their speeches don’t line up with the post-meeting press conferences. Especially as they introduce alternative theories on the externalities of negative rates. And they’ll have a pretty good case to argue that they warned us.

We talk a lot about trades for the new year. The risk reward of taking a bearish view on rates is tempting from a technical point of view quite aside from the fundamental fact that global growth rates keep being revised up. And let’s face it, the consensus love-fest with emerging markets is predicated on a long global-growth outlook.

Ten-year U.S. Treasury yields are pathetically low, having failed to even sustain above 2.4%, let alone take a run at 3%. That’s the glass half-empty scenario.

On the flip-side, from a purely technical standpoint, resistance at 2.3% looks unquestionably impressive.

It seems almost laughable to talk about Bund and JGB yield upside but the charts argue that 30 and zero basis points, respectively, look like much more formidable lines in the sand than comparable support.

And since we all love a good conspiracy story, check out today’s Eonia fixing which jumped 6 basis points. (implying rate-hikes)

 

 

Aberration? Probably. Canary? Unlikely. But how cool would that be? All we do know is it was verified by the EMMI and we need to wait for further data.

 

But one thing we do know is the fixing was followed by some heavy volume block selling of the December Euribor contract (rate-hike bets).

 

 

An inexpensive trade, to be sure, but someone big wants to see what’s up.

The U.S. isn’t the only place where unemployment continues to improve and, at some point, fixed-income prices just might try to match up better with the economic story we are buying into for the new year.

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Virginia governor, and long-time Clinton confidant, Terry McAuliffe is apparently “seriously” considering a bid for the White House in 2020. Per The Hill:

Virginia Gov. Terry McAuliffe (D) is “seriously” considering the 2020 presidential race, according to confidants.

 

“He’s given me every indication that he’s taking it seriously,” said one McAuliffe friend who has spoken to him about his 2020 prospects. “I don’t think he’s 100 percent decided that this is something he’s planning to do but it is something he’s seriously considering.”

 

“Whether he pulls the trigger or not, that remains to be seen,” the friend added.

 

McAuliffe could successfully talk about his track record as governor of Virginia, a purple state, former aides and associates say.

Of course, our readers will undoubtedly recall that McAuliffe is the same Clinton confidant who funneled roughly $700,000 in political contributions to the Senate campaign of FBI Deputy Director Andrew McCabe’s wife at the same time that McCabe was conveniently overseeing an investigation of Hillary Clinton. 

Not surprisingly, it’s precisely that little nuance about his background that has Democratic strategists worried that he has “too much Clinton in him” to be a successful 2020 candidate.

But should he decide to run, the governor would face some obstacles.

 

For starters — his close ties to Bill and Hillary Clinton.

 

On the heels of a disappointing loss in 2016, political observers say Democrats might want someone from outside of  Clinton World in 2020.

 

And McAuliffe, who served as co-chairman of Bill Clinton’s 1996 reelection campaign and chairman of Hillary Clinton’s 2008 campaign, would be labeled by rivals as a major part of the Clinton inner circle.

 

“I think that’s his biggest problem,” the friend said. “It will be so hard for him to thread the needle. Bill Clinton is his best friend and anyone who knows Terry knows he is a very, very loyal person. He would walk over coals for Bill Clinton, so I don’t think it’s a politically tenable position.”

 

Julian Zelizer, a professor of history and public affairs at Princeton University, agreed that his Clinton ties are problematic.

 

“I don’t think he is the way to go for the Democrats,” Zelizer said. “There is too much Clinton in him, and he doesn’t have the kind of fire power on the campaign trail people will need to really rally the base.”

Meanwhile, even if he does decide to run, the bookies don’t seem to think he has a chance.  According to PaddyPower, California Senator Kamala Harris is the front-runner for Dems with Elizabeth Warren and Joe Biden not far behind and Terry McAuliffe an extreme long shot at 80/1.

Shockingly, Kanye West didn’t even make the list…

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In somewhat of a worst-case scenario, Turkish-Iranian gold trader Reza Zarrab just confirmed that Turkish President Erdogan approved the "secret Iran gold" trade that enabled Iran to evade US sanctions.

Full Zarrab quote:

"What I’m saying is that the prime minister at that time period Recep Tayyip Erdogan and minister of the treasury … had given orders to start doing this trade."

The immediate reaction is clear.

Citi's FX desk explains why Turkish markets are watching the US trial of a banker so closely.

The basics: The US government has accused Turkish banker Mehmet Hakan Atilla of helping Iran evade US sanctions.

 

Turkey’s former economy minister, Zafer Caglayan, and two other banking executives, have been charged in absentia but Atilla is the only one on trial.

 

Why it matters: It's about the implications this has for US/Turkey diplomatic relations. Bloomberg has a good explainer here: ‘The focus will be on whether [Zarrab] implicates Turkey’s banking system or the highest levels of its government.’ The worst case scenario would hypothetically be where the trial results in diplomatic penalties to Turkey and its banks.

 

An October 30 document submitted to the court by federal prosecutors in New York said that the US “anticipates that the evidence introduced at trial will show that Turkish government and banking officials were integral to the sanctions evasion scheme.” Still, it’s too early to tell, and we watch the wires closely for the latest developments.

And throwing Erdogan under the bus is likely as serious as it gets.

*  *  *

By way of background, we previously detailed… While long forgotten for some, in the summer of 2014, we reported in detail on what appeared to be the biggest, most bizarre money-laundering scheme ever, involving Turkey trading "200 tons of secret gold" with Iran…

The topic of Turkey's Oil-for-Gold 'deals' has not been far from our thoughts over the last few years (here, here, and here) but as Bloomberg reports, after accessing a report leaked on March 14 of a network that spanned Turkey, China, Dubai and Iran, the plot reveals "one of the most complex illicit finance schemes [prosecutors] have seen." It included the classic money-laundering techniques of over-invoicing and false invoicing (exactly as in the case of the Chinese commodity financing scandal underway) but the secret government plan to juice Turkey's exports goes much deeper; and if you think that the exposure of this scheme is slowing Turkey's manipulation, think again. Turkey’s trade balance continues to fluctuate unpredictably as gold stocks flow out of the country in bursts.  “Turkey’s going to continue it,” the Turkish economy minister said. “If those casting aspersions on the gold trade are searching for immorality, they should take a look in the mirror.”

 

We first started noticing major 'odd' exports of gold from Turkey to Iran in May 2012. But in 2013, with a plunging currency, surging inflation, slowing growth, and specter of rapid QE-driven hot money outflows leaving his nation desperate; Zafer Caglayan, the minister in charge of Turkey's $800 billion economy decided that the only way to ensure success in the looming election… was to cheat…

 

Read more here…

A farcical domestic investigation was undertaken and while the judges and officials who probed the money laundering scheme were either fired or reassigned, the findings in their report were leaked.

The leaked document that Erodgan tried so hard to hide, prepared by the Turkish National Police, shows that investigators probed the activities of a cast of characters that was both powerful and dependent upon each other for favors. There have been some arrests (but no politicians).

The first was Sarraf, the Iranian businessman, who changed his name from Reza Zarrab after he took Turkish citizenship in 2007.

 

He and Erdogan were photographed on stage together at one public function, and met at a wedding in Ankara.

 

After Sarraf was arrested in December, Erdogan told reporters that his gold-dealing had “contributed to the country.”

Then, three years later, Bloomberg reports that Zarrab – the gold trader accused of helping Iran evade sanctions – invoked the name of Turkey’s president, Recep Tayyip Erdogan, as part of a scheme that U.S. prosecutors say was supported by Turkey’s government, according to court documents.

U.S. prosecutors in New York have gathered taped conversations and other records that suggest the trader may have sought support from Erdogan.

 

The Turkish president hasn’t been accused of wrongdoing, and it’s possible that the trader falsely invoked Erdogan’s name to influence others.

 

The people charged in the case are captured in the recorded conversations, which were introduced in a filing in federal court in Manhattan.

 

The documents introduced in the sanctions and money-laundering case against the Turkish-Iranian gold trader, Reza Zarrab, could further complicate the relationship between the U.S. and Turkey, a majority-Muslim country long considered a crucial ally in the region.

And now, the day that Turkish President Erdogan has been most fearful of has arrived, despite his best efforts to block it. Erdogan tried to pressure U.S. officials during the Barack Obama and Donald Trump administrations to drop the prosecution of the trader and has complained in public comments that prosecutors were trying to extract a confession from Zarrab and turn him into an informant. He also claimed President Trump apologized for the prosecution in a phone call.

“Erdogan clearly has a strong personal interest in Zarrab’s case, as he has raised it at the highest levels of both the Obama and Trump administrations,” said Amanda Sloat, a senior fellow at the Brookings Institute and former State Department official overseeing U.S.-Turkey relations.

 

“U.S. judicial proceedings could also hurt the Turkish economy. Since much of Erdogan’s popularity resulted from his successful economic reforms, his domestic political support would be undermined by a downturn.”

AP reports that a U.S. prosecutor says Turkish gold trader Reza Zarrab has pleaded guilty to charges and will reveal at a New York trial how he helped Iran evade U.S. sanctions in an "economic jihad."

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In a report released today by DBRS titled “Consumer debt and debt burden”, the rating agency which is best known for keep Italian debt eligible for ECB monetization at the peak of the European banking crisis, looks at the latest Quarterly Report on Household Debt and Credit issued by the NY Fed (discussed here previously) which showed that consumer debt for the third quarter of 2017 was approximately $12.96 trillion, representing an increase of $116 billion over the second quarter of 2017. The debt level for the first three quarters of 2017 has continued to increase above the previous record debt level which was established in the third quarter of 2008 as shown in Exhibit 1 below.

DBRS also highlights that not only did total debt levels increase, but their composition changed as highlighted in Exhibit 2 below.

The good news: total mortgage debt has decreased since 2008, to $8.743 trillion from $9.29 trillion, but as of the third quarter of 2017, still accounts for 67.5% of overall consumer debt.

The bad news: since 2008, the growth in total debt has been attributable to the auto loan and student loan sectors. Auto loan debt has increased by 50% since 2008, to slightly over $1.2 trillion from approximately $800 billion. The most dramatic growth rate, as Zero Hedge readers know well, has been in student loan debt which has grown by 122% since 2008, to $1.357 trillion from $611 billion.

But a bigger concern flagged by DBRS is that the growth in consumer debt is raising concerns when viewed in the context of the existing wage stagnation hampering the current economic environment. The rating agency cites a paper published in October 2017 by the Harvard Business Review which stated that the inflation-adjusted hourly wage has grown by only 0.2% per year since the mid-1970s and labor’s share of income has decreased to its current level of 57% from 65%.

Meanwhile, in the second quarter of 2017, wages were only 5.7% higher than they were a decade earlier. In comparison, the Federal Reserve Bank of New York/Equifax data shows that consumer debt growth over the same period was 9.3%.

In other words, the purchasing power of US households has been largely a function of rapidly rising debt, which over the past decade has risen 60% faster than wages.

There is another concern: while overall delinquency rates have stabilized in recent years, the one stubborn outlier remains student debt, where 90+ day delinquencies have risen to more than 10%.

This is a problem because as Bloomberg’s Lisa Abramowicz writes, considering that GOP tax overhaul may eliminate tax deductions on interest on student loans, this debt load could become even more onerous.

It’s not all bad news, however: as DBRS concedes, stabilizing delinquency trends imply that a tipping point has not yet been reached. There is also the suggestion that since there have been significant economic booms since the 1970s, during periods of persistent wage stagnation, the tolerance level for gaps in debt and earning power is quite large.

On the other hand, the rating agency also concedes that with consumer debt at all-time highs, and rising, as the debt/wage relationship seems to be entering a previously unobserved phase, “it seems prudent to closely monitor both components.”  This is a “red flag” for the economy because as Abramowicz concludes, “should unemployment rates rise at some point, this balance could fall out of whack, exacerbating any economic downturn.”

Of course, a variant perception on this threat is that once the economic fundamentals catch up with reality, and the US consumer is tapped out in a rising rate environment and crushed by the weight of $1.4 trillion in student loans, the Fed will promptly halt the current monetary tightening regime, and revert back to preserving the “wealth effect” with more ZIRP, QE and eventually NIRP. One look at the S&P confirms just how “worried” the market is about the current state of the economy…

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PredictIt has the odds of a Tax Deal at 65% and rising and it seems the market is finally starting to buy it too…

And all the major indices are melting up…

Bonds are not so excited though…

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Arizona Republican Senator John McCain will not make us all wait this time.

In a statement just released, he confirms he will vote 'yes' for the GOP Tax Reform Billl…

 U.S. Senator John McCain (R-AZ) released the following statement today in support of the Senate tax reform bill:

 

“After careful thought and consideration, I have decided to support the Senate tax reform bill. I believe this legislation, though far from perfect, would enhance American competitiveness, boost the economy, and provide long overdue tax relief for middle class families.

 

“For too long, hardworking people in Arizona and around the country have not seen a raise in their paychecks. This bill would directly benefit all Americans, allowing them to keep a higher percentage of what they earn. According to the non-partisan Joint Committee on Taxation, every income bracket would see tax relief under this bill. The child tax credit would be doubled to $2,000 per child and the tax code would be substantially simplified.

 

“By lowering our high corporate tax rate to 20 percent, the bill would make our markets far more attractive for investment. It would also encourage American companies to repatriate assets now held overseas. Small businesses, which are vitally important to the dynamism of our economy, would also receive essential tax relief. Combined, these commonsense steps would promote economic growth and stimulate job creation here at home. 

 

“For months, I have called for a return to regular order, and I am pleased that this important bill was considered through the normal legislative processes, with several hearings and a thorough mark-up in the Senate Finance Committee during which more than 350 amendments were filed and 69 received a vote. 

 

“I have also argued that health care reform, which is important both to the well-being of our citizens and to the vitality of our economy, should proceed by regular order. This bill does not change that. As a matter of principle, I’ve always supported individual liberty and believe the federal government should not penalize Americans who cannot afford to purchase expensive health insurance. By repealing the individual mandate, this bill would eliminate an onerous tax that especially harms those from low-income brackets. In my home state of Arizona, 80 percent of people who currently pay the individual mandate penalty earn less than $50,000 per year.

 

“Finally, I take seriously the concerns some of my Senate colleagues have raised about the impact of this bill on the deficit. However, it’s clear this bill’s net effect on our economy would be positive. This is not a perfect bill, but it is one that would deliver much-needed reform to our tax code, grow the economy, and help Americans keep more of their hard-earned money.”

1 down, 7 more 'questionables' to go…

Collins, Corker, McCain, Johnson, Lankford, Flake, Moran, Murkowski.

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