Month: May 2018

Liquidity Crisis Looms: Here, There, Everywhere

Authored by Mike Shedlock via MishTalk,

Jim Puplava thinks a liquidity crisis is on the horizon. I agree, adding that the problem is global…

Please pay attention to Jim Puplava at Financial Sense. He says a Liquidity Crisis Looming.

In total, index funds represent $7 trillion of U.S. stock funds that have no active manager. All buying and selling are done automatically. Active management has gone out of fashion, Puplava noted, and as this sea change occurs, the market’s ability to price companies diminishes.

Ownership of stocks in the S&P 500 is concentrated with three companies; Vanguard, BlackRock, and State Street. They represent about 88 percent of the S&P 500, and if we include Schwab and Fidelity, over 90 percent of the S&P 500 is basically now in the hands of five companies.

“It’s really mindless investing,” Puplava said. “The crux of the problem is that mutual funds own more bonds that seldom trade than ever before, but they’re still promising to pay out investors within seven days of redemption, a promise they may not be able to fulfill in the next downturn or crisis.”

Global Problem

The problem is global.

Central bank actions explain most of what you need to know. Italian bonds provide a good example.

Despite the recent, massive selloff in Italian bonds, 10-year Italian bonds still trade at roughly the same yield as US 10-year bonds.

Is there no default risk? No eurozone exit risk?

Of course there is. But those bonds trade where they do because the ECB is engaged in QE to a far greater extent than the the Fed ever did. How nuts is that?

88% of the S&P is with Vanguard, BlackRock, and State Street. How nuts is that?

Close to $7 trillion in bonds trade with a negative yield. The figure was close to $10 trillion at one point. How nuts is that?

According to LCD, covenant-lite loans now account for a record 75% of the roughly $970 billion in outstanding U.S leveraged loans.

Covenant-lite agreements vary, but they allow things like paying interest with more debt rather than cash or skipping repayments entirely for periods of time. How nuts is that?

Totally Nuts

This is totally nuts, across the board.

Puplava calls it “mindless”. I suspect he would be the first to admit that he seriously understated the concern.

My “totally nuts” position is also too mild, but I also struggle for the precise words.

Crisis Looms

A global liquidity crisis looms. It is entirely central-bank sponsored.

Just don’t expect me, Puplava, or anyone else to tell you precisely when the crisis will hit. But it will. And when it does, don’t fool yourself into believing that you can necessarily escape in time.

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“Hotter And Faster” Lava Spreading Across Hawaii, Dramatic Footage Shows Evacuation, Devastation

Kilauea’s volcano is now spewing the hottest and fastest-moving lava yet as Hawaii officials on the Big Island were forced to issue new evacuation orders in two coastal neighborhoods over fears that the rapidly advancing flows might trap residents.

The lava has been moving fast enough to cover approximately six football fields an hour, according to U.S. Geological Survey (USGS) scientist Wendy Stovall. 

“Hawaii County Civil Defense decided to evacuate all of lower Puna to ensure that people would be able to get out,” Stovall said.

Hawaii County Mayor Harry Kim said on late Tuesday that anyone who failed to evacuate would be on their own. As of Wednesday, 71 homes had been destroyed, a number officials expect to rise, along with 400 utility poles. 

Meanwhile, dramatic drone footage shows the moment that an emergency flight crew evacuated a man from his Leilani Estates home, right before it was overcome by fast moving lava. Police say he fired a gun and assaulted another man after demanding that the man and his friends evacuate the area Tuesday. 

Approximately two dozen recent fissures in the area have resulted in ominous lava fountains spewing the hottest and most fluid magma to date up to 200 feet in the air. 

“This is the hottest lava that we’ve seen in this eruption, even just a matter of 50 degrees centigrade makes a big difference in how quickly lava flows can move and how they behave once the magma exits the vent,” Stovall said.

“It can’t get hotter than where we are,” Stovall added. “We are pretty much tapping mantle temperatures right now.”

Hawaii County officials say that lava has destroyed electrical equipment on the highway, knocking out power to Vacationland and Kapoho Beach Lots. 

“It took the road,” Civil Defense Administrator Talmadge Magno told Hawaii News Now. “We lost 132 and there’s no power down to that area and, as explained to me, it’s gonna be an extended outage.”

“You are at risk of being isolated due to possible lava inundation,” the Hawaii County Civil Defense agency advised the public.

Several small earthquakes also shook Kilauea’s summit Wednesday, as the volcano’s vent inside the Halemaumau Crater has increased in size while experiencing a series of explosive eruptions sending rock and ash thousands of feet into the sky. 

Meanwhile, Bloomberg reports that Hawaii Volcanoes National Park will remain closed, and that dangerous glass particles accumulating on the ground in Leilani Estates pose a health risk. 

Hawaii Volcanoes National Park remains closed because of the volcanic activity at the summit and the ongoing eruptions on Kilauea’s eastern flanks. Park officials said that crews are working on clearing another roadway on the south side of the park that was covered by lava from previous eruptions. They hope the roadway will provide an alternative escape route if lava cuts off more roads to the north.

Strands of volcanic glass called as Pele’s hair was accumulating on the ground in Leilani Estates and surrounding neighborhoods, and winds may blow lighter particles farther away, scientists said. The strands can cause irritation and respiratory problems when it comes in contact with people. –Bloomberg

Wind has been spreading clouds of volcanic gas emissions – or vog (volcanic smog) over the Big Island. 

We wonder how many lives this little kitty has gone through over the past couple of weeks?

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DataTrek: “The Question We Get Most Often Is When Are ETFs Going To Blow Up & Wreck Global Markets”

“When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now.” – FPA Capital

With increasingly more financial professionals convinced that ETFs are the scourge and real weapons of mass destruction of modern markets, serving as a indiscriminate “communist” buyers of all stocks on the way up, and a just as aggressive “baby-with-bathwater” liquidator on the way down (assuming they even work, which as August 2015 showed can be a generous assumption), here is one contrarian, and optimistic, take from DataTrek’s Nicholas Colas.

* * *

Whither ETFs?

Aren’t ETFs going to blow up one day and wreck global markets? We get that question more than any other, even from heavy users of these products. The short answer is “No”. There are some badly designed products, to be sure. But the vast majority of US listed ETFs have natural shock absorbers that limit their potential for spreading market mayhem.

The most common structural bear case we hear has nothing to do with demographics, central banks or politics; it centers on US listed exchange traded funds. Here are the basics of the argument:

  • While ETFs offer near-instant liquidity during trading hours, the instruments in which they invest can be much less liquid. Think high yield or emerging market bonds here…
  • During periods of market stress, the sale of large blocks of ETFs could force simultaneous sales of those less-liquid underlying investments since the fund will be forced to redeem existing shares.
  • This feedback loop will destabilize markets that are already under duress from some exogenous shock, potentially wrecking not just US equities but other global capital markets as well.

The closest we’ve seen to this playing out is February’s volatility shock, caused by a poorly designed inverse volatility product. We lump that into a “Design flaw” category rather than proof the macro bear case about ETFs is valid. In fact, aside from 3 hours on August 24th 2015, exchange traded funds have been remarkably invisible from most market narratives even on the choppiest days.

There is a reason why we haven’t yet seen an ETF-related market rout (that volatility product was an exchange trade note, or ETN): this structure has a built-in relief valve. Explaining it is a bit grimy, since it involves understanding some arcane market structure issues, but it is important. Three things to understand here:

#1. The vast majority of ETF trades never result in the purchase/sale of underlying assets. Want to buy 1,000 SPY or QQQ? There’s a natural seller in the crowd, and you can buy those shares. ETFs are not like mutual funds in this respect, where buys/sells net out just once a day at 4pm.

#2. Trades in ETF shares do not have to happen at net asset value. Yes, there are plenty of arbitrageurs that play the spread between NAV and the ETF’s market price to keep the two in sync. But unlike mutual funds, ETF prices are set by market forces, not strictly by the value of the portfolio.

#3. A very large sale in an ETF holding illiquid assets during periods of market duress (the nightmare scenario from our first paragraph) can run down one of two channels on its way to execution.

  • Option #1: a broker authorized by the ETF sponsor can put together a sale of the underlying assets and redeem the shares.
  • Option #2: the seller can mark down their asking price until it hits a natural bid.
  • Option #1 can certainly pressure that illiquid underlying market. Option #2 bypasses it entirely.

That’s the theory – how well does it line up with actual US listed ETF market pricing? We pulled the discount/premium data from our friends at www.xtf.com to get the answer.

We would expect to see ETFs that track liquid assets trade closer to NAV than those with more exotic holdings in the portfolio; here is the data as of last Friday’s close:

US Treasury ETFs (44 ETFs)
Spread of discounts/premiums across these ETFs: -0.27% to +0.05%
Range of spreads: 32 basis points

US High Yield Corporate Debt (18 ETFs)
Spread of (-1.28%) to +0.42%
Range of spreads: 170 bp

Emerging Market Bonds (20 ETFs)
Spread of (1.53%) to +1.67%
Net difference: 320 bp

US Equity (605 ETFs)
Spread of (3.21%) to +3.98%
Net difference: 719 bp

Note: 95% trade between a (0.59%) discount and a +1.52% premium, making the “real” spread more like 211 basis points.

International Equities (109 ETFs)
Spread of (1.34%) to +3.45%
Net difference: 479 bp

Emerging Market Equities (69 ETFs)
Spread of (1.64%) to +1.56%
Net difference: 320 basis points

Our takeaways from this:

#1. ETFs naturally trade with an imbedded liquidity/price adjustment based on the assets they hold. The data we pulled was as of Friday’s close, so it does not include Tuesday’s volatility and is largely representative of current “normal” market conditions.

Looking at that data: US Treasury ETFs trade 90% tighter to NAV than Emerging Market Bond ETFs. EM Equity ETFs trade 50% wider than most US equity ETFs. This is exactly what you would expect to see.

#2. The bottom line here is that ETFs are more dynamic than many market watchers understand. Their pricing incorporates underlying liquidity even in calm conditions. When the next bout of volatility hits, the spreads we have cited here will certainly widen. But that, in tech-world terms, is a feature, not a bug.

If there is little/no liquidity in an underlying asset, the ETF can and will still trade, albeit at a sizable discount to notional NAV. But at this point it will be the ETF that gives the underlying market price discovery, and that’s actually a positive in a volatile market.

#3. And one caveat: the work here only included true exchange traded funds, not more exotic instruments like exchange traded notes. Those, as we saw in February, are only as good as their design. The point here was to explain the structure of ETFs and how they trade.

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The Great Populist Revolt Will Outlive Donald Trump: Podcast

The 2016 presidential election was among the closest in U.S. history. If Hillary Clinton had won just 78,000 more votes in Pennsylvania, Wisconsin, and Michigan, she would be president right now. How did Donald Trump squeak out his victory, and what does it mean for the future of politics in America?

Salena Zito, co-author with Brad Todd of The Great Revolt: Inside the Populist Coalition Reshaping America Politics, has strong opinions on the matter. The Great Revolt is based on a poll of Trump backers in Midwestern swing states and hundreds of interviews with voters in the Rust Belt. Zito, a veteran, Pittsburgh-based journalist who writes for The New York Post and is a contributor at CNN, believes that Trump benefited from a rising tide of anger at elites and “bigness” in politics and business. The people who voted for Trump in 2016 (and, in many cases, for Barack Obama in 2008 and 2012) aren’t going anywhere, Zito says, and they have the potential to shape national politics for years to come. In a conversation with Nick Gillespie, Zito talks about the different sorts of Trump voters and their core values.

Subscribe, rate, and review our podcast at iTunes. Listen at SoundCloud below:

Audio production by Ian Keyser.

Photo credit: Brian Cahn/ZUMA Press/Newscom

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Is Roseanne Barr’s Firing a Sign of Persistent Racism or Racial Progress?

Is the firing of Roseanne Barr by ABC over an offensive tweet evidence of racism’s persistence or a sign of racial progress?

The star was enjoying massive popularity with the reboot of her eponymous 1990s sitcom until she tweeted that Barack Obama’s former adviser Valerie Jarrett was the offspring of “Muslim brotherhood & planet of the apes.” Her show, a ratings champ, was almost immediately canceled by ABC, and she was disowned by most of her costars and collaborators.

Writing in The New York Times, author Roxanne Gay, who is black and lesbian, argues that the new version of Roseanne shows how little America has progressed when it comes to race, class, and gender equity:

For once, a major network did the right thing. But before it did the right thing, it did the wrong thing. It is not new information that Roseanne Barr makes racist, Islamophobic and misogynistic statements and is happy to peddle all manner of dangerous conspiracy theories. ABC knew this when it greenlighted the “Roseanne” reboot. ABC knew this when it quickly renewed the reboot for a second season, buoyed, no doubt, by the show’s strong ratings.

Gay gives no quarter to Barr’s colleagues and costars, noting, “It was only when Ms. Barr became an immediate liability that everyone involved finally looked at her racism and dealt with it directly.” Gay recounts a series of recent stories that show how blacks are often presumptively treated as criminals by white Americans and law enforcement. She acidly observes that Roseanne’s tweet was published the same day that Starbucks was holding a nationwide day of diversity training after a racially charged incident at one of its outlets in Philadelphia.

Gay says public gestures toward racial justice by corporate America and Roseanne actress Sara Gilbert are simply “part of an elaborate and lucrative illusion” that papers over the daily indignities faced by African Americans. “ABC,” she notes, “is the same network that shelved an episode of ‘Blackish’ because it addressed the N.F.L. anthem protests.” Denunciations of racism and prejudice, in Gay’s view, are always done cynically and only as a last resort.

It’s a powerful argument. But is that all there is to say? Over at CNBC, John Harwood, who is white, takes a different view in a piece titled “In America’s Racial Din, ABC’s Decision on ‘Roseanne’ Reflects a Turn Toward Tolerance.” Where Gay focuses on examples of racism, Harwood looks at unmistakable signs of progress:

Though halting and fitful, the path leads in only one direction over time….

Polling amassed by the University of Illinois’ Institute of Government and Public Affairs showed that by 1972, 97 percent of whites agreed blacks should have equal job opportunities; by 1997, 95 percent said they would vote for a black presidential candidate; by 2011, 86 percent approved of interracial marriage….

Obama’s election—not once, but twice—demonstrated those shifts.

Harwood doesn’t scant the persistence of racism, from Donald Trump’s equivocating after last year’s white supremacist rally in Charlottesville to, well, Roseanne Barr’s tweet. He also notes that America is becoming less white. Only 28 percent of baby boomers are nonwhite, he says, compared to 44 percent of Millennials, and that shift will limit racism. He quotes Martin Luther King Jr. on “the moral arc of the universe” bending “toward justice” before concluding that “it bends toward tolerance, too.”

There are other positive developments to consider. Across a wide variety of measures, racist attitudes and hate crimes have dropped over the past several decades. School choice, which gives lower-income and minority parents and students access to better education, is growing. The drug war, which disproportionately incarcerates blacks and Latinos, is breaking down. The closely related issue of criminal justice reform is proceeding apace.

Just yesterday, reality TV star Kim Kardashian met with President Trump to discuss prison reform. Kardashian is of course married to black rapper Kanye West, and the interracial nature of their union is so completely unremarkable that it is rarely if ever discussed; that is its own sort of progress. Occupational licensing, which often screws over blacks, is under attack. Black households have seen median income grow by 25 percent since 1998, substantially more than the increase for whites.

There’s no contradiction in celebrating progress toward a color-blind society while noting that racism still exists. Roseanne Barr’s Twitter feed may have been filled with racist, Islamophobic, and misogynist statements prior to her triumphant return to network TV, but who would have been looking carefully at it then? Surely it matters more that she was fired as soon as she made a patently racist remark in public, and that many of the policies that have long harmed blacks as a group are being reformed.

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Did You Sell In May?

May-hem: Small Caps Surge Most Since US Election As Crypto, Credit, & The Yield Curve Crash

It all started off quite calmly and then…

Or put another way…

May was quite a month. Here’s the high- (and low-) lights…

  • All major US Equity indices rose in May
  • Small Caps surged over 6% – best month since Nov 2016 (US election)
  • General Motors best month since Oct 2015 (thanks to Softbank)

  • All thanks to biggest short squeeze since Nov 2016 (US election)

  • S&P Financial stocks dropped for the 4th straight month – longest losing streak since Sept 2011
  • European Bank stocks worst month since June 2016 (Brexit) – lowest close since Nov 2016

  • Italian 2Y Yields biggest absolute monthly spike since Nov 2011
  • Italian 10Y Yields biggest absolute monthly spike in history

  • 2Y TSY Yield’s biggest monthly plunge since June 2016 (Brexit) – the first monthly yield compression since Aug 2017
  • 10Y TSY Yield’s biggest monthly drop since Aug 2017

  • US 2s10s Spread tumbled to flattest since Sept 2007
  • US 2s30s Spread tumbled to flattest since Aug 2007 (flatter for 15 of the last 18 months)

  • US HY Credit Risk biggest spread widening since Aug 2017

  • The Dollar Index surged to its best month since Nov 2016 (US election)

  • Euro and Cable were the worst performers…

  • Cryptocurrencies ugly for 3rd of last 5 months

  • WTI dropped for only the 2nd month in the last 9 months
  • Gold fell for 3rd of last 4 months – lowest since Nov 2017
  • Silver rose 0.75% in May – its first monthly gain since January

 

May saw the best combined stock and bond performance since Feb 2017…

Finally, May was an ugly month for US macro data and the Fed balance sheet…

*  *  *

The holiday-shortened week has been volatile in equity-land as Italy fears faded, replaced by Spanish panic and trade turmoil…

The S&P broke below its 100DMA…

 

European VIX remains above US VIX for now…

 

Italian banks managed some late gains with BMPS now green for the week…

 

But US banks continues to fade…

 

FANG stocks continues to rally…

 

Treasury yields continues to slide today – apart from the 2Y which ended modestly higher…

 

 

 

The Dollar Index rallied after Trump’s tariffs headlines pushing back to unchanged for the week…

 

Cryptocurrencies managed modest gains today back to unchanged on the week…

 

 

We leave you with the following…

And this…

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Conte Reveals New Italian Government

With the fate of the Italian finance ministry post resolved amicable earlier in the day, Giuseppe Conte, Italy’s new prime minister, accepted the offer to form the new Italian government and revealed the following key members of the his cabinet:

  • DI MAIO NAMED NEW ITALY ECON DEV MINISTER, DEPUTY PREMIER
  • SALVINI NAMED NEW ITALIAN INTERIOR MINISTER, DEPUTY PREMIER
  • DI MAIO, SALVINI TO BE MINISTERS IN NEW ITALY GOV
  • SAVONA NAMED NEW ITALY EUROPEAN AFFAIRS MINISTER
  • TONINELLI NAMED NEW ITALY TRANSPORT MINISTER
  • GIORGETTI NAMED NEW ITALY PREMIER’S UNDERSECRETARY

But the most important nomination was the following:

  • GIOVANNI TRIA NAMED NEW ITALIAN FINANCE MINISTER

Why most important? Because Tria is the supposed compromise finance minister, replacing Savona, who will instead be in charge of European Affairs. And, as we noted earlier, Tria was expected to be far more moderate (read: “not Euroskeptic”) than Savona; and the moment his nomination was announced earlier in the day it sparked a sharp rally in Italian bonds ad stocks.

Italy’s designated finance minister, Giovanni Tria
 

There is just one problem: as we reported earlier citing two of Tria’s recent articles, the 69-year-old economist is just as as vocal a Euroskeptic if not more, than Savona. This is what we wrote earlier:

what has spooked the establishmentarians in the early rounds of due diligence is the following article from December 2016 published in the Formiche, titled “Vi spiego la competizione truccata in Europa che favorisce la Germania” or translated “I’ll explain the rigged competition in Europe that favors Germany” in which Tria, like other run-off-the-mill euroskeptics, criticizes the European monetary union and its fixed exchange rate for allowing countries – such as Germany – to run high external surpluses and says fiscal policy should compensate for that lack of flexibility.

Meanwhile, as Bloomberg’s Lorenzo Totaro and John Follain report, Tria publicly called for a debate on the euro in both Italy and in the rest of Europe, saying that “the biggest danger is implosion, not exit,” in an article co-written with Renato Brunetta, a senior lawmaker of ex-premier Silvio Berlusconi’s Forza Italia party.

In the article published in March 2017 in In Sole, looking at the outlook for the euro-region, Tria said that the “German economy’s growing surplus shows that monetary expansion, without a policy that aids economic convergence between the various countries, merely fuels an imbalance that puts us in conflict with the rest of the world.”

In other words, it appears that Salvini managed to replace one Euroskeptic with another, and instead of Savona, it will be Tria who will push for exploding the Italian budget, i.e.using fiscal stimulus, to offset Germany’s unfair advantage, i.e., back to the square one we were over the weekend.

We wonder how long before Brussels realizes that it has replaced one deficit addict with perhaps an even bigger one…

… and what the Italian president’s, and the market’s reaction, will be then.

 

 

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13 Of 19 Bear Market Indicators Have Now Been Triggered – BofA

At the end of January, just as the S&P hit all time high, Bank of America caused a stir when it announced that one of its proprietary “guaranteed bear market” indicators created by the Bank of America quants was just triggered.

As we said at the time, what was remarkable about this particular indicator is that it predicted not only the size of the upcoming drop (-12% on average) but also the timing (over the coming three months). Also notable: its uncanny accuracy: it was correct on 11 out of 11 previous occasions after it was triggered.

This is what BofA said then:

BofAML Bull & Bear indicator surges to 7.9, highest since last sell signal >8 triggered Mar’13;

BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; average equity peak-to-trough drop following 3 months = 12% (backtested, Table 1); note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016

And this was BofA’s conclusion: “a tactical S&P500 pullback to 2686 in Feb/Mar now very likely.“

In retrospect, BofA was absolutely spot on, with a 10% correction hitting the very next week, and another 10% correction hitting for a second time, just one month later.

We bring this up, because that particular “crash” indicator was triggered in the context of BofA also reporting shortly prior, that 11 of 19 of its broader “bear market”  signposts also being triggered.

So fast-forward to today, when the “bear market” is that much closer according to the strangely prophetic Bank of America, which reports that as of this month, another 2 indicators had been triggered, meaning that no less than 13 of 19 bear market signposts are now flashing red.

This was Bank of America’s take on this particular creeping “very late cycle” indicator:

we compiled a list of bear market signposts that generally have occurred ahead of bear markets. No single indicator is perfect, and in this cycle, several will undoubtedly lag or not occur at all. But while single indicators may not be useful for market timing, they can be viewed as conservative preconditions for a bear market. Today, 13 of 19 (68%) have been triggered.

In other words, we are more than two-third of the way to the next crash/recession/depression. There was a (somewhat forced) silver lining:

Sentiment remains positive but not euphoric, with our US team’s Sell Side Indicator still some way off its sell threshold and the Fund Manager Survey shows investors to be underweight. Most of the indicators that we judged to be frothy back in January have reset to neutral territory, with Michael Hartnett’s Bull & Bear, for example, back to 4.6 from a peak of 8.6.

That keeps our US team constructive and they see decent upside for the S&P500 into year-end. In terms of risks, its regime model indicates that we are more mid-cycle than late-cycle and no new bear market signposts have been triggered of late. While around 2/3 of them have triggered so far, 80% or more were triggered before previous market peaks

Which means that just two more indicators have to “trip” before Bank of America’s “guaranteed” recession trigger is activated. Here is the full breakdown:

Specifically, the following indicators have now been triggered, with the latest 2 bolded:

  • Bear markets have always been preceded by the Fed hiking rates by at least 75bp from the cycle trough
  • Minimum returns in the last 12m of a bull market have been 11%
  • Minimum returns in the last 24m of a bull market have been 30%
  • 9m price return (top decile) vs. S&P 500 equalweight index
  • Consensus projected long-term growth (top decile) vs. S&P 500 equalweight index
  • We have yet to see a bear market when the 100 level had not been breached in the prior 24m
  • Similarly, we have yet to see a bear market when the 20 level had not been breached in the prior 6m
  • Companies beating on both EPS & Sales outperformed the S&P 500 by less than 1ppt within the last three quarters
  • While not always a major change, aggregate growth expectations tend to rise within the last 18m of bull markets
  • Trailing PE + CPI y/y% >20 in the prior 12m
  • Based on 1- and 3-month estimate revision trends; see footnote for more detail
  • Trailing PE + CPI (y/y%) >20 within the last 12m
  • In the preceding 12m of all but one (1961) bull market peak, the market has pulled back by 5%+ at least once

And here are the 6 indicators that have yet to ring the proverbial bell.

  • Each of the last three bear markets has started when a net positive % of banks were tightening C&I lending standards
  • Companies with S&P Quality ratings of B or lower outperform stocks rated B+ or higher
  • Forward 12m earnings yield (top decile) vs. S&P 500 equalweight index
  • A contrarian measure of sell side equity optimism; sell signal trigged in the prior 6m
  • A contrarian measure of buy side optimism
  • Does not always lead or catch every peak and all but one inversion (1970) has coincided with a bear market within 24m

And while over two-thirds of BofA’s bear market checklists being triggered sound ominous, the following chart shows that on a historical basis, the minimum threshold for a bear market onset was no less than 80% of the signposts “flashing red.”

Which means that we are just 2 more triggers away from a “guaranteed” bear market.

How should one trade this clearly late cycle and very heavy market? As Bank of America’s Savita Subramanian recently conceded, we are in a stage when fundamentals no longer matter. What does? Momentum.

Our US Regime Model, a quantitative framework for stock-picking, suggests we are in the mid to late stages of the market cycle and in this stage, momentum is the best way to invest. As contrarian value investors, this is not an easy call to make. But if this bull market is closer to over, our analysis of factor returns indicates that late-stage bull markets have been dominated by stocks with strong price momentum and growth, while value, analyst neglect, and dividend yield have been the worst-performing factors.

In other words, buy whatever everyone else is buying… just be sure to sell before everyone else sells. Good luck.

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Trump Is Standing on the Precipice of a Real and Serious Trade War

With the announcement Thursday morning that the White House will press forward with a plan to impose tariffs on steel and aluminum from Europe, Canada, and Mexico, it seems that President Donald Trump has taken another step towards the precipice that turns threats and posturing into open conflict.

As the contemporary world’s great powers have edged closer to a major trade war, I’ve thought a lot about something historian Christopher Clark writes in The Sleepwalkers: How Europe Went To War in 1914, his excellent account of the run-up to the First World War.

The First World War, most Americans probably know, started because of the assassination of an Austrian archduke, Franz Ferdinand.

Like many historical facts, that’s only partially true. Ferdinand was gunned down in the streets of Sarajevo on June 28, 1914, but troops did not mobilize for battle until the final week of July and it was mid-August before the real shooting began. The intervening time was filled with a flurry of diplomacy as various factions encouraged or dissuaded the war. From the perspective of June 28, though, it’s not at all clear that a conflict was inevitable. Indeed, even a month later it could have been avoided, as officials from Germany and England—neither of which were directly connected to the war’s inciting assassination and had at least some reasons to avoid a bloody conflict—nearly reached an agreement in mid-July that likely would have prevented the outbreak of a continent-wide conflagration.

In other words, the assassination alone did not make war happen. But at some point in the six weeks following Ferdinand’s murder, the prospect of war tipped from possible to unavoidable.

“The outbreak of war was the culmination of chains of decisions made by political actors with conscious objectives,” notes Clark. “The war was in fact ‘improbable’—at least until it happened. From this it would follow that the conflict was not the consequence of long-run deterioration, but of short-term shocks to the international system.”

The analogy between World War I and the looming trade war only goes so far, of course. Thankfully, there are not millions of lives at stake in the decisions that will be made in Washington, Ottawa, Brussels, and Berlin over the next few weeks—though the stakes are still quite high in other ways. Like in 1914, a trade war between the major economic powers of the globe in 2018 would threaten to smash an international system that has, despite some obvious failings, worked well for the better part of half a century.

A trade war, if we’ll have one, is not the result solely of the Trump administration’s economic nationalism or its assassination of domestic businesses. Trump trade policies are another short-term shock to the system, and there is plenty of blame to be shared by China and others.

Still, the inciting incident for the coming trade war will be remembered as Trump’s announcement on March 5 of new tariffs on all steel and aluminum imported into the United States. That kicked off the period of diplomacy, with the White House agreeing to exempt several major U.S. trading partners from those tariffs until May 1, with the goal of reaching bilateral trade deals before then. In some cases, that worked. Deals are in the works with Argentina, Australia, Brazil, and South Korea.

But even an extension until June 1 did not bring Canada, Europe, and Mexico to the negotiating table. Instead, all three threatened to escalate the conflict by slapping retaliatory tariffs on American goods. Elsewhere, the Trump administration has so far fumbled its attempts to use tariffs to bully China into trade concessions.

“As has been the case every day for the past 16+ months, the U.S. and global economies remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty,” says Daniel Ikenson, director of the Center for Trade Policy Studies at the Cato Institute, a libertarian think tank, summing up the current state of affairs.

Now, the clock is really ticking. The exemptions for Canada, Europe, and Mexico will expire at midnight, Commerce Secretary Wilbur Ross announced.

The trade war that seemed improbable for weeks is now slipping closer to inevitable.

European Commission President Jean-Claude Juncker called the tariffs “unjustified” and said the EU will prepare countermeasures, CNBC reported. According to The Wall Street Journal, the European response will target some $3.3 billion in U.S. exports. American agricultural exports are likely to take the biggest hit, which is bad news for farmers who depend on export markets because America literally grows more food than it can consume.

Trump has preemptively responded to the expected European response by threatening additional tariffs on imported cars. That move prompted one German officials to wonder whether the United States is abandoning free trade.

Mexico plans to impose retaliatory tariffs on American steel, pork, apples, grapes, and cheese, among other things. The New York Times said the goods were chosen to have an impact on rural Republican congressional districts in the hopes of applying pressure to Trump’s political allies.

Investors and businesses will get hit too. The Dow Jones industrial average fell sharply Thursday after news reports that tariff exemptions for Canada and Europe would expire. Steel-using industries have reported significant price hikes since Trump first announced the tariffs in early March, and a projection released by the Trade Partnership, a Washington-based pro-trade think tank, tariffs are projected to cause 146,000 net job losses—five jobs lost for every job gained—even without accounting for possible retaliation from China, Europe, and other nations.

All sides are still talking to each other and there’s faint hope for a last second deal, but that looks increasingly unlikely. “Every country’s primary obligation is to protect its own citizens and their livelihoods,” Ross said in Paris after meeting with E.U. officials this week, according to the Journal. That doesn’t sound like a man who is backing down.

The tariffs on steel and aluminum, don’t forget, are being imposed on the administration’s vague and unfounded claims that foreign metal somehow undercuts America’s national security. The White House is already gearing up to make a similarly laughable argument for tariffs on cars. But how tariffs on European cars and Canadian steel will address the administration’s worries about a trade imbalance with China—something that isn’t even really a problem—remains completely unclear.

That lack of clarity—or, more accurately, honesty—between the Trump White House and America’s top trading partners is compounded by the administration’s decision earlier this week to pull the rug out from under a proposed deal with China. After first threatening to impose tariffs on $50 billion of Chinese imports, the administration said less than two weeks ago that those tariffs would be on hold, before reversing course again this week—apparently to the surprise of Beijing.

Negotiating for peace becomes incredibly difficult once trust is lost. A state of uncertainty makes improbable, unnecessary conflicts more likely. The First World War, concludes Clark, became inevitable not due to an assassin’s bullet but because “a profound sundering of ethical and political perspectives eroded consensus and sapped trust.”

Trump is walking the world to the precipice of another major conflict. It will be less bloody, but no less tragic for its pointlessness.

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Bitcoin For America: Cryptocurrencies In Campaign Finance

Authored by Kirill Bryanov via CoinTelegraph.com,

Last week, Secretary of State of Colorado Wayne Williams proposed a new set of rules for financing political campaigns, which now includes a section on cryptocurrencies. The original edition of the draft introduces the same caps for crypto donations as for fiat ones, while limiting anonymous contributions to $20. The move renders the overall picture of individual states’ handling political crypto contributions spottier than ever, as the last few months saw states adopting divergent approaches to the issue.

image courtesy of CoinTelegraph

Although a 2014 advisory opinion by the Federal Election Commission (FEC) remains a major reference point for anyone who seeks to boost their chances for election with digital money, this non-regulatory document is barely fit to serve as a definitive guide into the world of crypto campaign finance.

The FEC came up with a set of guidelines in May 2014, responding to an inquiry from a Super PAC named Make Your Laws. This entity, which advocates for replacing representative democracy with a more inclusive form of ‘liquid democracy,’ requested clarification on whether it could accept BTC donations to fund political action. At that time, Bitcoin was worth some $400, and altcoins were not even considered as a vehicle for campaign finance. The FEC ruled that Bitcoin could be received by campaigns as ‘in-kind donations’ – a form of contribution that provides goods and services needed for organizations’ operations rather than the money to purchase those goods and services.

Effectively, this means that campaigns cannot spend received Bitcoin directly, but rather have to ‘liquidate’ it and then deposit the money to their accounts. As far as donation caps are concerned, the commission was split across party lines, with Democrats advocating for a $100 limit, and Republicans standing for the standard federal $2,700 cap. Since the advisory opinion outlines recommendations rather than rules, GOP support for a larger cap had later inspired some politicians to allow themselves to go with the $2,700 limit.

Given somewhat inconclusive federal guidelines, many state authorities have been facing similar inquiries ever since the FEC ruling was issued. Building up to the 2018 wave of primaries and elections, these requests have intensified. Oftentimes it is state governments’ ethics bodies that are tasked with deciding whether crypto donations are appropriate and how they should be governed. So far this year, several state commissions have either ruled against cryptocurrency donations or wavered on the issue, so the Colorado initiative, if successful, might become a precedent for other undecided states to consider.

In October 2017, a Kansas candidate for office sought guidance on potential use of crypto contributions from the state’s Governmental Ethics Commission. Shortly after, the office had announced that Bitcoin is ‘too secretive and untraceable,’ and could be used by ‘totally unidentifiable lobbyists’ to influence local elections.

Wisconsin Libertarian Party asked the State Ethics Commission in April to clarify whether it deems the use of cryptocurrency political contributions acceptable. The commission held public hearings and concluded that the issue should be decided by the state legislature. The time frame for the state House to rule on the issue is yet to be announced.

Emmanuel Wilder, a Republican candidate for North Carolina State House, has approached State Board of Elections and Ethics Enforcement with a similar request in April. In his letter, Wilder acknowledged that traceability concerns exist, but still advocated for giving voters a choice between fiat and crypto donation formats, as well as supporting the ‘new upcoming financial service.’ The request is still under review.

In South Carolina, the issue has been decided in a speedier manner, and not in favor of crypto enthusiasts. Britton Wolf, a 23-year-old Republican candidate for District 71 of the South Carolina House of Representatives in June primaries, asked the state House’s ethics committee whether he could use digital currency donations to support his campaign. The officials responded that he could not, since the definition of a campaign contribution, as provided by the state law, does not include cryptocurrency.

Heroes of Crypto-Funded Campaigns

Institutional politics is a field permeated by inertia and adherence to the status quo, so there is little wonder that cryptocurrency as a vehicle of political finance is still far from mainstream adoption. Politicians who use it are still vastly outnumbered, and for the majority of those who do, crypto donations constitute a minor share of overall funds.

However, certain brands of politicians, such as firebrand libertarians and technology advocates, are already naturally predisposed to be relying on digital currency donations – accepting digital currency contributions has become an integral part of manifesting their ideology. Increasing mass adoption and surging prices are also factors that nudge more establishment actors to be looking towards crypto. Here are some of the most high-profile U.S. politicians on both federal and state levels who are vocal about their embrace of crypto funding.

Andrew Hemingway

A Republican candidate for New Hampshire governor in 2014, Hemingway has been the first ever contender to the office to use cryptocurrency contributions in his campaign. Bitcoin donations amounted to about 20 percent of his overall funds. Hemingway never advanced to the general election, having lost to Walter Havenstein in the Republican primary.

Jared Polis

U.S. Representative Jared Polis, who is arguably the most outspoken supporter of cryptocurrencies and distributed ledger technology on the Capitol Hill, claims the credit of being the first acting Congressman to accept Bitcoin from his supporters. During his successful 2014 re-election campaign, he collected a modest $2,000 worth of crypto donations. In his 2018 bid for Colorado governor, Polis will surely exceed this figure by a significant margin.

Dan Elder

The libertarian’s 2016 bid for Missouri House of Representatives has the distinction of being the first campaign ever to be funded entirely in Bitcoin. The result of the experiment turned out to be somewhat lackluster, with Elder carrying just over 10 percent of the vote. In 2018, Elder is running for District 79 of the Missouri House of Representatives again.

Rand Paul

A feature of every list of Bitcoin-friendly politicians, Paul became the first presidential candidate to embrace cryptocurrency donations when he announced his bid for the 2016 election. Back in 2015, this caused quite a stir.

Greg Abbott

In an apparent move to attract younger and tech-savvy voters, then-Texas Attorney General Greg Abbott announced in April 2014 that he will accept Bitcoin contributions for his gubernatorial campaign. The strategy seems to have worked, as in January 2015 Abbott was sworn in as Governor of the state.

Austin Petersen

A Republican seeking election to the U.S. Senate from Missouri this year, Petersen’s embrace of cryptocurrency is grounded in his pro-market ideology. His campaign manager called the use of bitcoin a ‘no-brainer.’ Petersen’s campaign amassed just south of $10,000 and became renowned for having received the largest ever single cryptocurrency contribution of 0.284 Bitcoin ($4,500 at the time) in December 2017. This figure doesn’t quite add up with the FEC guidelines even for fiat contributions, but the donation page on Petersen’s website gives a hint to how this could be legitimized:

“The maximum amount an individual may contribute is $2,700 per election. Your contribution (up to $2,700) will be designated for the primary election. The next $2,700 will be designated for the general election.”

Patrick Nelson

Democratic candidate for Congress from New York, Nelson proclaimed that his is a ‘21st century campaign,’ which readily embraces ‘technology like #bitcoin.’ He later faced crypto fundraising issues when BitPay, a service that his campaign used for processing crypto donations, ran into licensing trouble with the state of New York.

Brian Forde

Forde is well situated to become a new political crypto star. A Democrat seeking election to the U.S. House to represent the 45th Congressional District of California this year, he had worked as both head of digital currency at MIT Media Lab and a tech adviser for the Obama administration. His embrace of the technology is explicit, and his electoral chances look solid. The crypto community has already acknowledged its unequivocal support of his candidacy by funneling a record-breaking $66,000 worth of crypto to his wallets in August and September of 2017 alone, while the biggest names in the industry pledged their support.

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Even though the weight of cryptocurrency contributions in campaign funds remains modest, the overall upward trend is consistent with the increasing degree of mass adoption. There is little doubt that we will soon see more campaigns funded exclusively by crypto, as well as more successful bids relying at least partly on digital currency contributions. As these processes unfold, the FEC will be compelled to chart clearer rules and grapple with the problem of crypto donations’ limited traceability.

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