Month: August 2020

The last few weeks have seen something ‘odd’ happening.

VIX has been ‘rising’ as stocks soared to record highs.

Source: Bloomberg

Normally, this is a warning sign since it typically suggests that professionals are buying macro overlays (protection) to lock-in gains or protect against downside for an over-valued stock market.

However, in this case, there’s another reason for the surge (which might be even more concerning) – call-buyers have gone crazy. Not satisfied with simply buying stocks, retail traders are now getting levered long in a hurry and that demand for calls has bid up volatility and lifted VIX…

Source: Bloomberg

Breaking with its typical trading pattern, the last two weeks have seen stocks and VIX rising almost in lockstep as retail specs move the risk dial to ’11’…

Source: Bloomberg

We have seen this pattern before… in March of 2000…

Source: Bloomberg

In fact as the S&P hits all-time-highs, this is a level of VIX that has not been seen since those heady days of extreme speculation and retail day-trading muppetry. This is a very different regime of ‘walls of worry’ that we saw during the 2017/2018 all-time-highs…

Source: Bloomberg

This level of co-movement between VIX and stocks is highly unusual – and has typically not ended well for stocks. Except this time is even more extreme, as the correlation between stocks and vol is at its highest since the collapse of XIV and Volmageddon 2018…

Source: Bloomberg

Oh and one more thing, valuations – no matter how you desperately adjust for hockey-sticks in the future – have never been so high…

Source: Bloomberg

Or against the country’s earnings…

Source: Bloomberg

So, to sum up:

1) Valuations have never been this extreme… ever,

2) VIX Correlation to stocks is at its highest since Volmageddon 2018, and

3) VIX and Stocks are showing similar patterns of extreme speculation as occurred right at the peak of the dotcom bubble.

Trade accordingly.

Food banks were already under stress before Hurricane Laura devastated parts of southern Louisiana last week. Many of these charities, were providing meal assistance to hungry families affected by the virus-induced downturn in the economy. Now they must provide meals for people who have lost their homes because of the natural disaster. 

“It’s literally one crisis on top of another,” Jay Vise, the director of communications and marketing of Second Harvest Food Bank, told 4WWL New Orleans, who referred to the increasing demand seen at his food bank.

“It’s impossible for us to help everybody and that’s what hurts the most, you meet someone that’s been blown out of their home and living in a tent and they’re so grateful and thankful for something that’s been donated to us to give them a meal,” Vise said.

Second Harvest has been preparing thousands of more meals than usual. The food bank’s kitchens, located in Lafayette and Harahan, have worked overtime to meet the surging demand, of not just feeding families in need because they’re broke in the economic downturn, but also the new wave of hungry folks who lost their homes because of the storm. 

South Louisiana could take months to recovery as businesses and homes were torn apart after the Category 4 hurricane barreled through the Lake Charles region, producing winds in excess 130 mph.

The combination of depressionary unemployment and a natural disaster in the state could result in further food bank stress as they might have to choose between who gets fed and who doesn’t.

Authored by Wolf Richter via Wolf Street,

Incomes from wages, interest, and dividends sagged from pre-Pandemic era. But stuffed with stimulus, Americans broke records splurging on Goods, as spending on Services, the biggie, lagged far behind.

Consumers – lacking income from wages, interest, and dividends, but stuffed with stimulus money, the extra $600 a week in unemployment benefits, the amounts not-spent on mortgages in forbearance or default, the amounts not-spent on rents under eviction bans, and too the amounts from the stock-market gains – splurged on goods. They spent record amounts on durable goods, such as appliances, laptops, and bicycles. And they spent near-record amounts on nondurable goods such as cleaning products or food.

And some of those goods are made in the US, but a lot of those goods are made in China, Mexico, Germany, Bangladesh, etc., and thereby much of that stimulus was a stimulus for those countries, and for the container shipping lines, and also finally in the US for trucking companies, railroads, and mostly online retailers.

But the biggie in the US is services such as rent, health care, or food services. Before the Pandemic, 66.7% of what consumers spent went to services. But consumer spending on services was down 9.2% in July from pre-Pandemic February.

That’s the type of twisted picture that the Bureau of Economic Analysis reported today, of a consumer economy that runs on the fumes of stimulus.

Stimulus pumps up personal income.

Personal income from all sources in July, including stimulus and the extra $600 a week in unemployment benefits, but also rental income, dividend income, etc. – but not stock market gains – ticked up 0.4% from June to a seasonally adjusted annual rate of $20.04 trillion. This was down from the spike in April caused by the stimulus checks, but was still up by 4.8% from February and by 8.2% from July last year.

How did unemployment benefits impact personal income? Unemployment insurance exploded by $1.336 trillion (all annual rate figures), from $27.8 billion in pre-Pandemic February to $1.364 trillion in July.

Personal income, including unemployment benefits rose by $920 billion from February (19.12 trillion) to $20.04 trillion in July.

Personal income without unemployment insurance dropped by 6.7% from February, or by $1.34 trillion (all annual rates), to $18.7 trillion in July. This $1.34 billion decline was driven mostly by declines in:

• Wages and salaries (-5.0%)

• Contributions by employers to pension plans and social insurance (-2.7%)

• Interest and dividend income (-4.3%)

Personal income from wages and salaries alone, while ticking up from June to $9.2 trillion (annual rate), was still down 5.0% from pre-Pandemic February:

Consumers splurged on Goods, but scrimped on services.

Total consumer spending in July, at $14.2 trillion (annual rate), slowed its recovery, ticking up by 1.9% from June, and was still down, despite all this stimulus money, by 4.6% from February:

Consumers forked over a record amount for durable goods, $1.74 trillion (annual rate) in July, up by 12.2% from February and by 12.6% from July 2019. This includes a surge in spending on laptops and other electronic equipment needed for working, teaching, and studying at home:

Consumers splurged at near-record pace on nondurable goods, $3.10 trillion (annual rate), up 3% from February but down a tad from the record set in March, when they cleaned out supermarkets down to bare shelves, ranging from pasta to toilet paper. This was followed by a plunge, and now back to Pandemic normal, where people eat at home, work at home, study at home, and teach their kids at home, which shifts purchases from businesses and schools to households, and therefore to consumer spending:

But consumers scrimped on services. At $9.35 trillion (annual rate), spending on services was down 9.3% from February. Even during the Financial Crisis, spending on services barely dipped. But this time it plunged, and it has recovered only to a level where it had first been in late 2017.

Services include the biggies, such as rent, health care, insurance, travel and lodging, cellphone services, cable TV and broadband subscriptions, electricity, water, sewer, but also haircuts, food services such as in restaurants, auto and home repairs, and the like. Normally, around 67% of total consumer spending is for services.

So this Pandemic-economy picture emerges:

Consumers are spending the stimulus money on goods, and particularly on durable goods.

By working, eating, teaching, and studying at home, they’re spending money that businesses and schools would have spent otherwise – and this part of their spending is just a shift, a zero-sum game in the overall economy.

By spending record amounts on goods, they’re channeling some of this stimulus money into imports, which is a stimulus for manufacturing sectors in other countries but gets deducted as a negative from the US GDP calculations.

And Consumers are not spending this stimulus money on services, which would mostly go to service providers in the US.

Now folks are sitting on the edge of the national chair, waiting for the next stimulus check and the extra unemployment money – because without them, many folks won’t have enough money to keep splurging on goods like this.

*  *  *

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Much has been said in recent days about the death of the Phillips Curve, which was officially cast into the funeral pyre last week when the Fed unveiled its new approach to monetary policy, which puts more emphasis on shortfalls in employment and less weight on the fear that low unemployment could spark higher inflation.

Of course, to our readers the demise of the long-held convention that inflation tends to rise when the unemployment rate falls, and vice versa, as the Phillips Curve posits is hardly new as we discussed in recent years:

• Demise Of Phillips Curve Shifts Focus To Asset Cycles And Financial Stability
• Fed Study Confirms Phillips Curve Is Useless: Admitting The Bloody Obvious
• Yet Another Fed Study Concludes Phillip’s Curve Is Nonsense

However, for the Fed to admit that one of its core tenets has been monumentally wrong was a stunning development for academic technocrats who – like all central planners – have perpetually relished in their omnipotence and infallibility. After all, the mere possibility the Fed has been wrong, threatens to insert doubt that the core pillar of today’s crony capitalism may crack and undo decades of capital misallocation. It’s also why the ECB never ever once admitted to considering a Plan B in which it saw Greece exiting the euro (even though it did): such an outcome would after all obviate the central bank’s presence, and for it to even contemplate it would trigger a chain of events that would result in its own demise.

Which is why we were shocked to see none other than the Fed’s Vice Chair make a pointed, on the record admission that the Fed was indeed wrong, and worse, the models it has been using to pursue its two mandates (really three, including elevated stock prices) were incorrect.

In a speech titled “The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution” delivered before the Peterson Instite, Clarida  discussed the Fed’s “new” framework – which is not really new as the Fed had for years struggled to reach a 2% inflation and failed – and highlighted various policy implications that flow from the revised statement and our new strategy. Readers can read the whole thing here.

What caught our eye was Clarida’s discussion of the maximum-employment mandate, i.e., the demise of the Phillips Curve, in which the former PIMCO employee said that “the new statement now acknowledges that maximum employment is a “broad-based and inclusive goal” and continues to state that the FOMC considers a wide range of indicators to assess the level of maximum employment consistent with this broad-based goal. However, under our new framework, policy decisions going forward will be based on the FOMC’s estimates of “shortfalls of employment from its maximum level”—not “deviations.” This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action.”

This, Clarida concludes, “is a robust evolution in the Federal Reserve’s policy framework and, to me, reflects the reality that econometric models of maximum employment, while essential inputs to monetary policy, can be and have been wrong.”

But wait there’s more: Clarida also says that “a decision to tighten monetary policy based solely on a model without any other evidence of excessive cost-push pressure that puts the price-stability mandate at risk” – such as what happened the last time the Fed tightened “is difficult to justify, given the significant cost to the economy if the model turns out to be wrong and given the ability of monetary policy to respond if the model were eventually to turn out to be right.“

Translation: when we warned in 2015 that the Fed’s catastrophic hiking cycle was the second coming of the “Ghost of 1937” we were spot on. And, incidentally, so was Trump when he criticized the Fed for its rate hikes, something Clarida just tacitly admitted.

What does all of this mean? As the latest Bear Traps report noted, Powell – and now Clarida – basically told the market that under this framework, they never would have done the last hiking cycle. An apology tour for 2015-2019 rate hikes (which the Fed started talking up years earlier in 2014) with Trump smiling somewhere.

And here is the real punchline: “The Fed’s last hiking cycle cost Hillary the election, strong USD, rust belt. The “not for a really long time” on overshoot line.”

As the Bear Traps continues “You can make a strong case the Yellen Fed had a LARGE impact” because ahead of the 2016 election “the US lost 50k manufacturing jobs, many of which were in key rustbelt states. Trump and Mnuchin know this and have been begging for a weaker dollar.” In short, the Fed admitted not only a massive policy error, but also costing Hillary the election. No wonder Bill Dudley last year published a scandalous op-ed urging the Fed to crash the economy and cost Trump his 2nd term.

In the end, Yellen tried to tie a bow for Hillary (in the 2016 election), but had to put out a large inferno caused by the earlier rate hike policy and the very deflationary USD surge 2014-2016, so in Feb 2016 she and Dudley and co reversed course (the Shanghai Accord fire hose) as 12 rate hikes became 2, but they were too late, the damage was done and it helped Trump in 2016 November.

One final thought: just over a year ago we asked the most obvious question – perhaps it was not the Phillips curve that was dead but “the way the government measures inflation is (purposefully) wrong.”

What if maybe, just maybe, the Phillips curve is alive and well but the way the government measures inflation is (purposefully) wrong

— zerohedge (@zerohedge) July 12, 2019

Unfortunately, with both parties standing to gain from perpetuating the myth that inflation remains stubbornly low – even though to most people it is anything but – we don’t expect to ever get an answer.

Fresh clashes between Indian and Chinese troops were reported along the heavily contested Himalayan border this past weekend. 

India’s Defense Ministry accused Chinese troops of “provocative military movements” late on Saturday night. Here’s the Indian Army’s full statement of their account of what happened: 

“On the Night of 29/30 August 2020, PLA troops violated the previous consensus arrived at during military and diplomatic engagements during the ongoing standoff in Eastern Ladakh and carried out provocative military movements to change the status quo.

“Indian troops pre-empted this PLA activity on the Southern Bank of Pangong Tso Lake, undertook measures to strengthen our positions and thwart Chinese intentions to unilaterally change facts on the ground. The Indian Army is committed to maintaining peace and tranquility through dialogue but is also equally determined to protect its territorial integrity. A Brigade Commander level Flag Meeting is in progress at Chushul to resolve the issues.” 

The latest skirmish between both sides took place in the Southern bank of the Pangong Tso, a glacial lake at 14,000 feet elevation along the Line of Actual Control, a 2,162-mile Sino-Indian border. Both countries have moved troops, tanks, artillery guns, helicopters, fighter jets, and other reinforcements as hostilities continue into the fifth month this week.

#China has denied Indian allegations that its troops crossed the Line of Actual Control in #Ladakh region. #LadakhStandoff

Watch #IndusNews Live: https://t.co/JoxdJeL3fr pic.twitter.com/O3LVr3fGHa

— Indus News (@indusdotnews) August 31, 2020

Readers may recall tensions are rising along the Sino-Indian border:

• Indian Media Reports Up To 10,000 Chinese Soldiers Have ‘Invaded’ Border Territory
• India Sends Tanks Along Border To Prevent China “Redefining” Line Of Actual Control
• More Details Are Emerging About The India-China Border Clash

Pepe Escobar, a veteran Brazilian journalist, recently penned a piece titled “The India-China, Himalayan Puzzle,” which made sense of the complex situation developing between both countries.

As for the actual skirmish, Asian News International (ANI), an Indian news agency in New Delhi, reported that Indian sources said Chinese troops tried to ‘infringe’ on Indian land using a ‘sizeable number of troops’ but Indian forces were able to thwart the move. The number of casualties or captured troops has yet to be reported by either country. 

Indian forces told ANI that Chinese stealth aircraft (Chengdu J-20) have been patrolling the Sino-Indian border as tensions continue to increase. 

Indian Congress chief spokesperson Randeep Surjewala tweeted: “Our armed forces are standing fearlessly to protect Mother India. But, when will Modi ji show his red eyes.” 

In another tweet, Surjewala called the Narendra Modi government “nervous” as they fail to respond to “encroachment and fresh clashes by China” and an economy in turmoil. 

News of the fresh border disputes halted a six-day rally of Indian main market equity indexes. The S&P BSE Sensex slid 2.3% and the Nifty 50 Index ended 2.2% lower. 

The India VIX surged nearly 25% to 22.83 on geopolitical concerns. 

The Ruppe sinks amid the latest flare-up in border tensions. 

While world markets are overbought, geopolitical tensions are soaring between India and China, which investors, drunk on central bank liquidity, are ignoring the possibility a hot conflict could erupt between both countries at any given time.

In another huge shot across the bow in the ongoing tit-for-tat media and journalism ban between China and the West, a high-profile Australian television anchor has been detained by authorities in Beijing. 

Australian Foreign Minister Marise Payne confirmed Monday that Cheng Lei, who it turns out is a veteran news anchor for the Chinese government’s English news channel, CGTN, is being prevented from returning to her home country. She’s been detained and placed in secured isolation for an indeterminate amount of time.

“The Australian Government has been informed that an Australian citizen, Ms Cheng Lei, has been detained in China,” the Australian government statement said. “Formal notification was received on 14th of August from Chinese authorities of her detention,” it continued, though news of her detention is only now being reported via Australia’s ABC.

“Australian officials had an initial consular visit with Ms Cheng at a detention facility via video link on 27th of August and will continue to provide assistance and support to her and her family,” it continued.

It was friends and colleagues who first noticed she was “missing” as she didn’t return messages over a period of weeks. She also hadn’t appeared on her most recent show, CGTN’s Global Business, after long being one of its premier hosts.

Strongly suggesting that Lei could actually be under suspicion of spying or passing sensitive information to the Australian government, or other serious breach of her work for state-run CGTN, her employment profile page detailing eight years of accomplishments for CGTN has been taken down and all videos of her previous stories have been scrubbed.

Australian media says she hasn’t been charged, yet has been detained under a draconian Chinese law allowing security services to detain and question a suspect for up to six months with no access to a lawyer or outside communications. 

It comes as tensions between Canberra and Beijing escalate primarily over the recently enacted Hong Kong national security law, which resulted in Australia suspending its extradition treaty with Hong Kong, after which China vowed retaliation.

Sad news. Cheng lei well known and liked in Australian circles in Beijing. Her arrest has shocked Australians in the city https://t.co/4cwCb4iqqY

— Glenda Korporaal (@GlendaKorporaal) August 31, 2020

Chinese authorities have indicated she’s currently held in “residential surveillance at a designated location”, ABC notes.

Another Australian citizen and news correspondent, Yang Hengjun, had previously been detained January 2019, and has reportedly yet to be provided access to his lawyers.