Month: September 2021

By Michael Every of Rabobank

Tuesday was ugly in markets. US equities tumbled around 2% to a two-month low and through key moving averages, with even the biggest names falling. US Treasury yields also continued to rise, with 2s little changed, 5s up 3bp, and 10s up 6bp, marking further curve steepening. The US dollar got another lift as gold and crypto saw another dip. Reflation? Stagflation? Devastation?

In Europe, gas prices went vertical (up 12%), then fell, and ended slightly higher. This underlines the precariousness of the global energy complex, with all the knock-ons that entails. The only “reassurance” came from the Kremlin, which stated that despite a further drop in gas shipments to the EU, this was temporary, and Russia “would never use gas as a weapon. Really. Honest. Pinky swear. Now when does Nord Stream 2 get signed off on by Europe?”

In keeping with Bond themes, and it was also finally time for ‘No Time To Die’, other bangs were heard in DC. Treasury Secretary Yellen emphasized the cash runs out on 18 October, the US government will shut down, and could default on its debts, which would be “catastrophic”. Of course, that can be avoided if the Democrats raise the debt ceiling, which they have the votes to do, even over a Republican filibuster, by using ‘reconciliation’. However, they don’t want to: it takes weeks of painful committees at best. The debt ceiling could be linked to other bills – but the Democrats don’t have the votes for them. Progressives oppose the bipartisan $1.2trn infrastructure bill alone, including AOC. (Who, without being partisan, just someone who enjoys play on words, I just heard intellectual honey badger Gad Saad call “Occasional Cortex” – few of which are being displayed by either party.) Moderates won’t vote for the $3.5trn Build Back Better Bill. This is all boring and explosive in equal measure – probably like ‘No Time To Die’(?)

So was testimony from the Fed’s Powell, who came closer to admitting he doesn’t understand what is going on with global supply chains. That was underlined by him saying the logistical snarls behind the surge in inflation have actually worsened (No!); that this is all broader and more structural than earlier this year (Never!); but it is only seen in a very limited number of items (Does he base this on looking at CPI and used cars?!); and it will wane in the foreseeable future (“because DSGE models”?). If you read supply-chain news, they think differently – and more so if US stimulus bills are eventually passed: Maersk says “demand must ease” to resolve matters.

Other shooting saw a Senator suggest a bill to ban Fed stock trading –what about for members of Congress?– and then Senator Warren oppose Powell’s renomination for a second term as Fed Chair, calling him a “dangerous man”. Well, I did ask yesterday if it would be a clean sweep of Rosengren, Kaplan, and Powell…. Looking at the Fed Chair, I see Jerry English rather than any Bond. But bumbling fools blow things up too. Indeed, the danger lies in bonds; and loans; and derivatives; and crypto; and QE – though it was specifically Powell’s watering down of post-financial crisis bank regulations that triggered Warren to pull her trigger.

Let’s presume the debt ceiling will be raised and catastrophe avoided. Yet what are the odds of fiscal stimulus, and what supply-chain chaos will it unleash if so? The Fed has seen two members depart under a cloud, and the FOMC Chair will have one hanging over him even if he is reappointed. Said Fed Chair is not close enough to admitting supply chains are structural, not cyclical, and won’t be resolved in days, weeks, or months, but years. And we still might get a new Fed Chair who is more open to regulation –and more QE/MMT– than the one we have now.

It needs to be underlined yet again that without wage growth, current inflation — as US house price growth hits 20% y/y! — is destructive of demand. As our rates strategy team points out, that argues for yield-curve flattening, not steepening. Indeed, that demand destruction is going to blow up a lot more than just GDP growth given the current socioeconomic backdrop. Have you felt the ugly vibe on the street? Want to throw a 1970’s style energy supply-shock recession into the mix and see what happens? As such, this demand destruction may be delayed by governments subsidizing energy prices and/or by consumer credit, even in debt-addled economies. And how about if we add more QE (or MMT with yield curve control) into the cauldron and stir?

That’s an argument for a pre-Covid ‘new normal’ curve flattener. Except this time inflation would be structurally high, not low until new supply chains that can cope with current, or future, demand are in place – which is years away; if we knew where to start; which politicians don’t, or won’t act on.

Even then one can argue in favor of lower bond yields because ultimately there is no way governments or central banks will allow markets to point out just how wrong they have been: think of those looming energy subsidies as we head into a ‘green transition’; or of Euro peripheral yields, and the obvious politics over fundamentals at play there (“The woman from the ECB – she says yes!”). What this implies for FX rates over time is a different matter. It depends who has the supply chains and who doesn’t.

We are not living in a DSGE model, but a complex system. If supply chains are as in much trouble as some supply-chain experts say they are, with the risk of a cascading failure that ends up with the army delivering fuel, etc., things can get ugly fast: who saw gas prices doing what they are nine months ago? Prices will not rise a little, and demand adjust down a little, and all be well again in a few quarters mechanistically, as central banks think. If we pass the logistical equivalent of the ecological 3- or 4-degrees Celsius temperature increase we worry about, goods will get more expensive, and people poorer/in debt. Yes, we can repress market pricing for bonds if we want against that backdrop – in fact I am sure we will. We can also repress pricing in FX if we want – some already do. There just won’t be any real markets left in the end. History is replete with examples of this: go live in an emerging market, or talk to people who have lived in them.

For just one example, I recall back Russia in 1994, the Moscow wanted to increase the price of the plastic zhetons then used to ride the metro system (copies of an old Soviet coin). As soon as the rumour hit, hoarders bought all the zhetons. Nobody else could then ride the metro, as none were for sale. The Moscow municipality had to order new zhetons from abroad, given no local supply, and at a high cost given a weak Ruble. What was supposed to be a revenue-raising exercise ended up losing money and pushing up travel costs, with a knock-on effect on other prices in Moscow. This kind of ‘let’s assume supply’ idiocy is already at work in an economy near you.

So, yes, Warren is right. Powell is dangerous. So is the whole Fed; and other central banks; and the whole of Congress; and our global neoliberal obsession with free-market economies of scale, near-term cost-saving, and de facto monopoly/oligopoly centralisation over fail-safes and resiliency; and people trading and hoarding digital farts like zhetons. They are ALL dangerous.

And things can get much more dangerous ahead for all of us if appropriate policy responses are not made – which are not the ones the market is endlessly talking about

Pending Home Sales will be the tie-breaker for housing market sentiment in August (new-home sales ticked up while existing-home sales dropped) and is expected to rebound 1.4% MoM after two straight monthly declines. In fact, pending home sales surged a shocking 8.1% MoM in August (6 times expectations)…

Source: Bloomberg

That is the biggest MoM jump since June 2020, but YoY sales remain down 6.27%. This is the highest pending home sales index since January

Source: Bloomberg

Contract signings increased across all four regions, led by gains in the Midwest and South that were the biggest since June 2020.

“Rising inventory and moderating price conditions are bringing buyers back to the market,” Lawrence Yun, NAR’s chief economist, said in a statement.

“Affordability, however, remains challenging as home price gains are roughly three times wage growth.”

Finally, we remind readers that homebuyer sentiment and homebuilder sentiment could not possibly be more divergent…

Source: Bloomberg

Can Jay Powell afford to upset those homebuilders? What do homeowners know?

Authored by Katabella Roberts via The Epoch Times,

Democratic lawmakers have said they plan to raise the threshold of President Joe Biden’s radical proposal that all bank transactions of more than $600 be reported to the Internal Revenue Service (IRS).

The initial proposal (pdf)—which Biden says is aimed at curbing tax evasion—would require banks and other financial institutions to report to the IRS any deposits or withdrawals totaling more than $600 annually to or from all business and personal accounts.

The new reporting requirement would take effect in 2022 and would apply to both private individual and commercial business accounts owned by a taxpayer.

But House Ways and Means Committee Chairman Richard Neal (D-Mass.) said on Sept. 23 that he and other Democratic leaders are planning to scrap the $600 annual figure and set a higher threshold, of which the details are still being worked through.

“We’ve reached an agreement to not have the $600,” Neal told Bloomberg. 

A Democratic aide noted that they’re focusing on increasing the current threshold to $10,000 but said that figure could well change.

Under the Bank Secrecy Act, U.S. financial institutions are currently mandated to report to the government all wire transfers over $10,000, as well as suspicious cash transactions, to prevent criminal activities such as money laundering.

However, Biden and Democratic allies in Congress claim the threshold needs to be lowered to close the “tax gap,” which is the difference between what current federal law requires to be collected by the government and how much actually goes into the Treasury.

The president has maintained that the new reporting rule will mean “the wealthy can no longer hide what they’re making and they can finally begin to pay their fair share of what they owe.”

“That isn’t about raising their taxes. It’s about the super-wealthy finally beginning to pay what they owe—what the existing tax code calls for—just like hardworking Americans do all over this country every Tax Day,” Biden said at a press conference on Sept. 16.

At that same conference, the president noted that 55 of the biggest and most profitable corporations in America paid no federal income taxes in 2020, on what amounted to $40 billion in profit.

“That’s not right. And my economic plan will change that. Not punish anybody, just make them pay their fair share,” he said.

Sen. John Boozman (R-Ark.), joined by fellow Republican senators, speaks on a proposed Democratic tax plan, at the U.S. Capitol in Washington on Aug. 4, 2021. (Kevin Dietsch/Getty Images)

Despite his reassurances, Biden’s new proposal has faced stiff opposition from banks as well as Republicans and some Democrats who are concerned that the move could see the IRS having access to too much of taxpayers’ personal data.

Earlier this month, the American Bankers Association (ABA), along with more than 40 business and financial groups, sent a letter to House Speaker Nancy Pelosi (D-Calif.) and House Minority Leader Kevin McCarthy (R-Calif.) objecting to the “ill-advised” proposal, citing concerns over financial privacy.

“This proposal would create significant operational and reputational challenges for financial institutions, increase tax preparation costs for individuals and small businesses, and create serious financial privacy concerns,” the group wrote.

“We urge members to oppose any efforts to advance this ill-advised new reporting regime.”

Sen. John Boozman (R-Ark.) told The Epoch Times on Sept. 23 that the move would effectively “weaponize the IRS” and said he believes the Biden administration’s unprecedented rise in federal spending is the motivation behind expanding the IRS’s powers.

“What they’ve done is, they are weaponizing the IRS, they’re pushing many, many billions of dollars into that and they will be hiring tens of thousands of new agents,” Boozman said. 

“So this is all about looking at everybody’s transactions and then hoping that perhaps they find something that’s not getting reported so they can come after you and get that income.

“They want this new authority to look at transactions of $600 or more rather than $10,000 or more because they have a $3.5 trillion, or some say up to a $5 trillion bill, depending on how you score it, so they desperately need pay-fors. This shows how desperate they are.”

Boozman is co-sponsoring legislation with Sen. Mike Crapo (R-Idaho) known as the Tax Gap Reform and IRS Enforcement Act (pdf) that would establish “guardrails” to prevent abuse by IRS employees of tax records. Rep. Kevin Brady (R-Texas) has introduced the proposal in the House of Representatives.

As we’ve noted in a previous piece about ARK’s Cathie Wood selling $266 million worth of Tesla earlier this month, selling any shares at this point while maintaining a firm $3,000 price target on a $790 stock doesn’t seem to make much sense.

But what do we know? We’re hardly the visionaries Wood is, which is why she has $50 billion under management, right? Right?

Regardless, Wood was back to her old tricks again this week, smashing the bid on Tesla shares yesterday, selling nearly $270 million in her favorite name as her flagship ARKK fund dipped 4.18% on the day.

The sales of the more than 340,000 shares were to “spur outflows from her growth focused funds,” according to Bloomberg. Tesla remains about an 11% weighting in Wood’s ARK Innovation ETF, the report noted. Wood has a habit of trimming the stake when it rises above 10%, it said.

Overnight data showed that $297 million was withdrawn from the ARKK fund on Monday, marking its largest outflow since March of this year. 

Over the last four days, more than $660 million has been pulled from the fund. 

“Our estimate for Tesla’s success has gone up. The main reason for that is their market share. Instead of going down from year-end 2017 to today, it has actually gone up fairly dramatically,” Wood said just days ago to Yahoo Finance. 

$3,000 marked the target for her “base case” for Tesla, the Yahoo report said.

When asked about selling some Tesla last year, Wood told CNBC that it was “wise portfolio management” to trim some of your winners to invest in other companies.

Tesla is still Wood’s largest holding. 

Authored by Mimi Nguyen Ly via The Epoch Times,

United Airlines is set to terminate 593 of its employees who have chosen not to comply with the company’s vaccine mandate, the company confirmed to The Epoch Times early Wednesday.

The company was the first U.S. carrier to mandate vaccines for all domestic employees, having announced its mandate in August. Employees were required to be vaccinated by Sept. 27, otherwise they would be terminated by Oct. 2. Those who refused the vaccine would be terminated outright.

In a memo to employees on Tuesday, obtained by The Epoch Times, United Airlines Chief Executive Scott Kirby and President Brett Hart said the company would start the process of firing the employees who refused to be vaccinated against COVID-19, the disease caused by the CCP (Chinese Communist Party) virus.

The United executives told staff that more than 99 percent of domestic employees “chose to get vaccinated, excluding those who submitted for an accommodation.”

“For the less than 1% of people who decided to not get vaccinated, we’ll unfortunately begin the process of separation from the airline per our policy,” the memo reads.

“This was an incredibly difficult decision but keeping our team safe has always been our first priority. The pandemic is now killing more than 2,000 people per day—a 65% increase in just the past 30 days—and the most effective way to keep our people safe, is to make sure they’re vaccinated.”

The memo noted that those applying for a medical or religious exemption have had the “the deadline for implementing the accommodations” extended due to a pending court case.

United officials said that people who applied for religious and medical reasons account for less than 3 percent of the company’s workforce of 67,000 people. It was going to offer an “accommodation” of unpaid personal leave from Oct. 2. Doing so would mean the employees would also forfeit their benefits, including medical coverage.

Six United employees last week filed a class-action suit against the airline, with attorneys arguing that the company’s handling of its vaccine mandates violates the 1964 Civil Rights Act.

The attorneys announced Tuesday that United had agreed to pause its plan until Oct. 15 to apply so-called “accommodation” for about 2,000 of its employees who have applied for religious or medical exemptions.

They hailed the move as “a victory for employees seeking reasonable accommodations for personal medical decisions,” and condemned the “accommodation” that United initially offered as “termination by another name.”

Texas Judge Mark Pittman is set to hear evidence and arguments in the lawsuit on Oct. 8.

A United spokesperson told Reuters that the company plans to hire about 25,000 people over the next few years, and COVID-19 vaccination is a condition of employment. The spokesperson added that United will also require students at its pilot training school to get vaccinated.

Gas stations in English metro areas are running dry after six days of buying panic worsened shortages caused by insufficient truck drivers. For days, the UK government has contemplated the use of military truck drivers to replenish gas stations. Now there’s word the government’s reserve tanker fleet will be operational on Wednesday afternoon, and military truck drivers will be coming online in days.

On Wednesday, Business minister Kwasi Kwarteng said the government’s Reserve Tanker Fleet will be on the road by this afternoon to boost deliveries of fuel to gas stations. The force is comprised of civilians and will provide logistical capacity to the fuel industry. 

I can confirm the government’s Reserve Tanker Fleet will be on the road this afternoon to boost deliveries of fuel to forecourts across Britain.

The trucks are driven by civilians and will provide additional logistical capacity to the fuel industry (1/2)

— Kwasi Kwarteng (@KwasiKwarteng) September 29, 2021

On Tuesday afternoon, Sky News tweeted: 

“A senior defense source says troops are set to start driving fuel lorries to petrol stations later this week after the Ministry of Defence approved an official request for assistance.”

Kwarteng elaborated today on the plan to field upwards of 150 soldiers to deliver fuel.

“The last few days have been difficult; we’ve seen large queues. But I think the situation is stabilizing; we’re getting petrol into the forecourts. I think we’re going to see our way through this,” he said.

We are now seeing signs that the situation at the pumps has begun to improve with more stations getting more fuel.

The sooner we can all return to our normal buying habits, the sooner the situation will return to normal (2/2) https://t.co/KJaFgXRsnu

— Kwasi Kwarteng (@KwasiKwarteng) September 29, 2021

The Petrol Retailers Association, which oversees about 5,500 independent petrol stations, said 37% of its members’ stations were out of fuel on Tuesday.

A shortage of approximately 100,000 heavy goods vehicle (HGV) drivers caused supply chain stress through the petrol industry – there’s plenty of fuel at refiners. Still, the issue has been the lack of drivers to transport fuel to gas stations. 

Besides calling in the military, the world’s fifth-largest economy has begun to issue temporary visas to 5,000 foreign HGV drivers. 

The shortage of drivers has fractured supply chains as an energy crisis has also rippled through power markets and the food industry. The scenes playing out in the UK over the last six days are reminiscent of the chaos of the 1970s. 

Elon Musk let loose yesterday evening at the Code Conference in Beverly Hills. Speaking to the insufferable Kara Swisher, Musk touched on all the key topics: railing against the Biden administration, railing against unions, railing against crypto regulators, and railing against those who accused him of not paying enough taxes. 

Oh, and he even deflected questions about Full-Self Driving and mentioned Tesla, too.

First, when asked about Chinese regulators looking into crypto, Musk dryly said: “It would appear they do not love cryptocurrency.” He speculated that the crackdown could be because China might be having “significant electricity generation issues,” Barron’s reported. Musk also touched on the fact that crypto is set up to remove power from central governments, and that this also likely played a role in China’s decision. 

When asked about regulation of cryptos in the U.S., Musk said officials should do “nothing”. He then played down the impact of cryptos: “There is value in crypto, but I don’t think it’s the second coming of the Messiah. But it will hopefully reduce error and latency in the legacy money system.”

Musk was also critical of Jeff Bezos’ Blue Origin and Richard Branson’s Virgin Galactic, saying both space exploration companies should be spending more trying to reach orbit. However, Musk conceded it was  “cool that they are spending on the advancement of space.” 

“I will send myself up at some point,” Musk chided. SpaceX can generate $3 billion to $4 billion a year, he told Swisher. Musk also said he thought “substantial revenue” of up to $30 billion from Starlink would eventually be possible. 

Musk said that Starlink is up to about 1,500 satellites and that the company plans to increase its constellation to 30,000 satellites. 

“Musk said the company can then use proceeds from the Starlink business to fund the development of Starship,” Barron’s wrote – thereby continuing the Musk ponzi trifecta that has been running since the days of the “Master Plan” that included Solar City, SpaceX and Tesla. 

Musk defended himself against allegations of not paying enough taxes, stating that his top marginal tax rate is 53% and that he pays taxes when he exercises his stock options. 

He also made some bullish comments about nuclear power. Musk said he was “surprised by the public sentiment against nuclear” and that he didn’t “think we should shut down the ones that are operating safely,” a live stream of the event from The Verge reported. 

When asked about the accidents that have occurred due to Full Self Driving, Musk channeled his humanitarian side and matter-of-factly said: “The 10% that do die with autonomy are still going to sue you. The 90% that are still living aren’t even going to know it’s the reason they’re alive.” 

Then, Musk called his cars “two ton death machines”, telling Swisher: “The transition period with new technology is always a little bumpy. The truth is that people are actually not great at driving these two-ton death machines.”

Musk was also asked about why people who drive Teslas with Full Self Driving are made to sign an NDA. Musk deflected: “I dunno. People don’t seem to listen to … I don’t know why there’s an NDA, we probably don’t need it.”

When Musk was asked about the SEC and whether or not they were involved in his Tweeting going forward, Musk responded: “Are you talking about the short-seller enrichment commission?”

He was also asked about a Tweet he made critical of President Biden. Musk made his disdain for Biden, and unions, clear in his answer: “Biden held this EV summit. Didn’t invite Tesla. Invited GM, Ford, Chrysler, and UAW. EV summit at the White House, didn’t mention Tesla once and praised GM and Ford for leading the EV revolution. Doesn’t it sound a little bias? It’s not the friendliest of administrations. Seems to be controlled by the unions.”

Finally, when Kara Swisher asked if Musk would like to die on Mars, Musk responded: “You have to die somewhere, so sure, Mars.”

China’s cash-strapped property giant Evergrande was on the verge of defaulting on a second bond on Wednesday despite agreeing to settle debt with a Chinese bank in a $1.5 billion stake divestment deal, a move which sent Evergrande’s worthless stock squeezing higher, now up 50% from a week ago.

Early on Wednesday, Evergrande said in an exchange filing that it would sell a 9.99 billion yuan ($1.5 billion) stake it owns in Shengjing Bank – its most valuable financial unit – to a state-owned asset management company. The bank, one of Evergrande’s main lenders, demanded all net proceeds from the sale go towards settling the developer’s debts with Shengjing.

“The company’s liquidity issue has adversely affected Shengjing Bank in a material way,” Evergrande said in the statement, adding that the introduction of the purchaser — state-owned Shenyang Shengjing Finance Investment Group Co. — will help to stabilize the bank’s operations.

As of the first half last year, the bank had 7 billion yuan in loans to Evergrande, according to a report by brokerage CCB International, citing news reports. Other creditors to Evergrande – listed in the table below – are not so lucky as to have equity investments they can use as leverage.

The transaction underscores the mounting pressure on billionaire Hui Ka Yan to spin off and sell assets to pay down a mountain of debt. Evergrande’s original 36% stake in Shengjing Bank was among its most valuable financial assets, worth about $2.8 billion. That holding has become less appealing as regulators toughen oversight on dealings such as preferential lending and bond purchases between banks and their largest shareholders.

The sale also underscores how Evergrande, which once was China’s top-selling developer and will soon be the country’s largest-ever restructuring, is prioritizing domestic creditors over offshore bondholders. It also highlights the role state-owned enterprises may play in Evergrande’s denouement, which as noted yesterday have been prodded by Beijing to facilitate the company’s asset sales.

Meanwhile, as of 5pm on Hong Kong, Evergrande had failed to make a $45.2 million in interest on a second offshore note, this one due 2024, according to Bloomberg. Similar to last week, there’s a 30-day grace period before an event of default could be declared. The developer’s also facing claims it’s a guarantor on a separate $260 million bond that matures Sunday.

As widely reported the company missed a payment deadline on a dollar bond last week, a day after its main property business in China said it had privately negotiated with onshore bondholders to settle a separate coupon payment on a yuan-denominated bond. Evergrande’s continued silence on its offshore payment obligations has left global investors wondering if they will have to swallow large losses when 30-day grace periods end for coupon payments due on Sept. 23 and Sept. 29.

“We are in the wait-and-see phase at the moment. The creditors are organising themselves and people are trying to figure out how this  falling knife might be caught,” said an advisor hired by one of the offshore Evergrande bondholders cited by Reuters. “They failed to pay last week, I think they will probably fail to pay this one. That doesn’t mean necessarily they’re not going to pay … they’ve got the 30-day grace period,” said the advisor declining to be named due to sensitivity of the issue.

Meanwhile, scrutiny of Evergrande’s obligations continues to mount, with Singapore’s financial regulator the latest to quiz its banks about their exposure, while Fitch Ratings has cut Evergrande’s credit rating further to just one notch above default level.

Finally, on Monday China’s central bank vowed to protect consumers exposed to the housing market, without mentioning Evergrande in a statement posted to its website, and injected more cash into the banking system. Those moves have boosted investor sentiment towards Chinese property stocks in the last couple of days, with Evergrande stock rising as much as 17% on Wednesday and up 50% in the past week.

Despite the torrid bounce from the all time lows hit last week, it is unclear if the momentum can continue. As Bloomberg’s Mark Cranfield writes, “should there be another missed deadline, the read across could be negative for Greater China equities and Asian high-yield corporate bonds. Asian dollar bonds are having their worst month since the peak of market coronavirus fears in March 2020. Evergrande may also be on the hook for a bond issued by Jumbo Fortune which matures on Oct. 3. The risks have spread globally with the Fed questioning several big U.S. banks about their exposure to China Evergrande Group. At least the company is going to raise some funds with the sale of shares in Shengjing Bank. However, to misquote Oscar Wilde, to lose one payment may be regarded as a misfortune; to lose both looks like something else”