Gundlach’s Warning To Corporate Bond Investors

Submitted by Robert Huebscher of Advisor Perspectives

Corporate bonds offer incredibly poor prospects under any scenario, according to Jeffrey Gundlach. If rates rise, prices will drop quickly because their durations are between 7 and 10 years. Falling rates are no better, he said, because they would be accompanied by a bear market in stocks with effects that would extend to corporate bonds.

Gundlach, the founder and chief investment officer of Los Angeles-based DoubleLine Capital, spoke via a webcast with investors on November 13. The focus of his talk was DoubleLine’s core and flexible fixed-income mutual funds, DFLEX and DBFLX. The slides from his presentation are available here.

The problem facing the corporate bond market is excessive debt and an oversupply of bonds. There is a lot of leverage among corporations, Gundlach said, which can be seen in “massive increases” in the size of the investment-grade market and a deterioration in the quality of debt. Spreads are tight, according to Gundlach, but are “tighter than you think, because quality has been systematically going down” in the covenants that are offered by corporate issuers.

Spreads and debt levels are out of sync with one another,” Gundlach said.

That dichotomy is illustrated in the graph below. The shaded area depicts leverage (the corporate debt-to-GDP ratio) and the black line is the option-adjusted spread between high-yield (junk) and Treasury bonds. The two moved in sync from 1994 until 2013, after which leverage increased without a similar increase in spreads.

As a result, both corporate and high-yield bonds are at or close to their most extreme levels of overvaluation historically, based on DoubleLine’s proprietary methodology. That methodology looks at the spreads of those bonds relative to similar-risk Treasury bonds; those spreads are approximately two standard deviations above their normal level.

The BBB-rated market, which has the lowest rated corporate bonds, is two-times bigger than the high-yield market. If those bonds are downgraded to junk, Gundlach said, it will “flood” the high-yield market.

If corporate bonds were rated based on their degree of leverage, then 55% would be rated junk, according to Gundlach. They have not been downgraded by the ratings agencies because corporate issuers have made “soothing statements” to assuage the agencies. Gundlach called those statements “hopeful talk” about addressing debt in the future, which has kept ratings high. But a supply shock would lower junk bond prices, he said.

Gundlach said he doesn’t own a lot of corporate bonds relative to his fund’s normal weightings.

He also commented on the economy, politics and prospects for economic growth.

Deciphering the global stock markets

The driving force behind global economic performance is central-bank monetary policy.

The G4 central-bank balance sheets are now shrinking, largely due to the Fed’s $50 billion per month quantitative tightening (QT), which Gundlach said represents bond issuance that will add to the size of the deficit. On a cash-account basis, he said our $1.3 trillion deficit will increase to $2.0 trillion with QT, plus there is “hundreds of billions” of pending corporate-bond issuance. (By “cash basis,” he includes money which is borrowed to support the Social Security system.)

The global stock market has changed course, Gundlach said. Those markets rose in parallel with rising central-bank balance sheets, but are now falling across the globe, he said.

The NYSE composite is down 4% on a price-basis year-to-date. It peaked on January 26. Since then the U.S. and global equity markets followed one another until early May, at which point the rest of the world fell sharply. The S&P went up until early October, when the U.S. and the rest of the world fell and moved in sync, he said.

Why did the rest of the world fail to keep pace with U.S. markets until October? Gundlach said that it is because tariffs are clearly worse for other counties than the U.S., which has only 8% of its economy reliant on exports. For other counties, that percentage is much higher – he cited 43% for South Korea.

The U.S. has outperformed the rest of the world since 2009, as it has out-earned other countries on an EPS basis, he said. “But the most recent up-move was not justified on an EPS basis,” Gundlach said, in reference to the S&P gains until October.

The midterm election outcome will widen the deficit further, Gundlach said. Democrats will support a 10% middle-class tax reduction, as will Republicans and Trump. “I think that will go through,” he said.

Nancy Pelosi, the likely next speaker of the House, has been talking about infrastructure, he said, as has Trump. This could happen as well, he said, which would “get the deficit growing further.”

The outlook for deficit reform is cloudy. Four of the 2020 Democrat presidential candidates (Cory Booker, Kamala Harris, Bernie Sanders and little-known Andrew Yang) are all campaigning by advocating a form of “free money,” Gundlach said. Their programs range from negative income taxes to straight giveaways to segments of the population.

All quiet on the recession watch

All of the recession indicators are “flat-out positive” (not signaling a recession) or are not in a flashing-yellow warning zone, Gundlach said.

There has never been a recession without the leading economic indicators going below zero. “We are a long way from that,” he said. Small business optimism is just below its all-time high, CEO confidence is at a very high level and consumer confidence is its highest in 16 years, he said.

High-yield bond spreads over Treasury bonds rose approximately 400 basis points prior to the 2001 and 2007 recessions. Those spreads have recently widened by about 75 basis points, Gundlach said. “It looks a little bit like the 2007 recession, but it is not definitive,” he added.

As the Fed started its QT, the 10-year Treasury yield has risen pretty much in sync with the shrinkage of the Fed’s balance sheet, Gundlach said. When the stock market fell in October, the 30-year Treasury yield went up slightly, he said. It is very unusual for this to happen when equities are in distress, according to Gundlach.

As a result, he said it’s very possible yields could go up in a recession, if for no other reason than the large amount of pending bond issuance.

The deficit suicide mission

Strong economic growth in the U.S. is being caused by the growth in the deficit, Gundlach said. “This is good for the short term, but we are borrowing from the future.” Historically, the Fed has cut rates when economy was bad, and vice versa. That Keynesian view changed after the global financial crisis, according to Gundlach, when the Fed started raising rates while the deficit rose. That was because of Trump’s policies – specifically, the Tax Cuts and Jobs Act. As a result, he said the deficit is now 4% of GDP, “but if you include loans from Social Security it is 6%. This is why interest rates have been stubborn to fall.”

“These are very alarming trends,” Gundlach said. There are $7 trillion of Treasury bond maturities due in the next five years with a 2% average coupon, he said. With yields at 3%, those bonds will have to be replaced with higher cost debt, resulting, he said, in another $150 billion of interest-rate expense given current market conditions.

We are on a suicide mission,” Gundlach said. “This will be an important issue in the next five years.”

How will the deficit crisis be resolved? Gundlach said it will be through devaluation – by entitlement reform “once the nation wants it, once the nation realizes that path we are on leads to catastrophe.”

Problems abroad

Gundlach referenced “underlying problems in the core of the European banking system,” based on the fact that the stock prices of Deutsche Bank and Credit Suisse, two large European banks, have declined precipitously.

Emerging markets have been weak as the dollar has strengthened, he said. “The success and failure of emerging markets are with the fate of the dollar,” he said. “Bullishness on the dollar is extraordinary,” but he said he does not expect the dollar to rise to the level of its high in 1984.

China and the European central bank want to have a role as a reserve currency, according to Gundlach. China is trading oil futures of its own currency, the Yuan. “Once you start trading in global commodities,” he said, “you are taking steps to be a reserve currency.”

Treasury bonds are unattractive to foreign borrowers because of the U.S. trade policies and because hedging costs are too high, Gundlach said; the currency-hedged yields on foreign sovereign bonds are below zero. Domestic demand for Treasury bonds has been higher and has offset the lack of foreign demand.

There is a positive, albeit small, real rate of return on Treasury bonds. Unless inflation goes down (which Gundlach said is likely) Treasury bonds are unattractive to domestic buyers.

The 30-year yield could be 5% or 6%, he said, “but it may take a while. We are on track to hit 6% by 2021,” as per a prediction he made some time ago.

Those looking for a risk-free investment should opt for two-year Treasury bonds, he said, which yield 2.90%. When they mature, he said, there will be better opportunities.

* * *

Gundlach’s full November 13 slideshow is below:

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Trump’s Illegal Border Shenanigans: New at Reason

The right has whipped itself into a mob-like frenzy over “lawbreakers” who come to this country without proper authorization. It has for decades stymied Border babiesevery attempt at immigration reform if it involves even the whiff of amnesty. But where are these lovers of the rule-of-law, asks Reason Foundation Senior Analyst Shikha Dalmia, when this president manufactures a fake national emergency to deliberately and consciously violate duly enacted asylum laws and deny asylum seekers fleeing violence and persecution so much as a hearing?

View this article.

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Largest Oil-Focused Hedge Fund Suffers Worst Loss Ever, Denies NatGas Liquidation

After ‘oil god’ Andy Hall shut down his main fund in 2017, Pierre Andurand has taken on the mantra of the world’s largest oil trader. But the last few years have been tempestuous to say the least.

After facing huge losses in Q1 last year, Andurand blamed his losses on the irrational actions of CTAs and trend-followers. Well its Q3 2018, and as The Wall Street Journal reports, Andurand, who runs one of the last big oil-focused hedge funds, took significant losses in October as petroleum prices cratered.

Pierre Andurand, who earlier in 2018 predicted oil could soon hit $100 a barrel, suffered the largest-ever monthly loss of his flagship fund in October. The $1 billion Andurand Commodities Fund lost 20.9% last month, taking the fund down more than 12% for the year, according to numbers sent to investors and reviewed by The Wall Street Journal.

The last few weeks have seen not only crude collapse but NatGas explode higher and lots of chatter of a ‘behemoth’ fund liquidating (buying back Nattie shorts and selling back WTI longs)…

Andurand confirms it was not his fund…

“It was nothing to do with us,” Mr. Andurand told The Wall Street Journal on Wednesday.

“I do not think the move is related to large funds in trouble.”

In addition to forecasting $100 oil in 2018, he also said that prices could hit as high as $300 a barrel in a few years, although that wasn’t his forecast.

Mr. Andurand’s new fund, the Andurand Commodities Fund, has gained every year since its 2013 inception, helped by bullish bets, including buying one day after oil hit a 13-year low in 2016. That year, the fund gained 22.1%. The fund is still up around 100% since its start.

So it appears his strategy is “buy oil”…

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Alhambra: “This Year Is Proving To Be A Trainwreck In Too Many Important Places”

Authored by Jeffrey Snider via Alhambra Investment Partners,

There was more than enough evidence that QE didn’t work fifteen years ago. The Japanese had accumulated these monetary experiments at the dawn of the 21st century. And there was even a time when US and Western central bankers were skeptical. What happened was 2008; a dislocation so big and widespread they had no choice but to embrace the failure for lack of any other options.

Once they did, what was most charitably ambiguous suddenly became genius. When the Japanese did these things, they were suspect; when Western central bankers did, they were awesome. Same planet, different worlds.

Only, the Japanese central bankers kept doing them, too. It’s much harder to hide in Japan than it has been in the United States or Europe. The decimated economic landscape there leaves little open to interpretation. This is not a positive comparison since Japan is merely our forerunner, a look into our future.

To begin with, the central bank is (largely) irrelevant. QE or QQE is nothing more than a series of tricks, smoke and mirrors glossed up to sound impressive and a little scientific (portfolio effects!) In reality, the world which we share with the impoverished (literally) Japanese, unfortunately, magic tricks can’t replace true economic processes. That’s why QE never worked to begin the millennium and it doesn’t now no matter how many additional letters and numbers are added to it.

The Bank of Japan, like Economists in the West, can’t admit it. They just can’t. To do so would mean to confess decades of incompetence and gross dereliction. It is a binary choice; we keep getting these non-answers until someone forces them to stop. They won’t do it voluntarily.

I wrote in April 2016, more than two wasted years ago:

Central banks have proven by their own actions, not their words, that they will only allow “their” recovery which in the end means none. As I have written before, if they were given a choice of maintaining power and control but only leading to more lost decades, or stepping aside and being guaranteed a full and sustainable recovery, they would choose the former every single time. True global economic recovery is purely a political action now; central banks will not restrain themselves no matter how much their schemes backfire and create only more disruption and havoc.

In Japan in 2018, the Bank of Japan forecasts:

Japan’s economy is likely to continue growing at a pace above its potential in fiscal 2018, mainly against the background of highly accommodative financial conditions and the underpinnings through government spending, with overseas economies continuing to grow firmly on the whole.

But instead that country’s Cabinet Office today reports that Japan’s economy isn’t growing at all, regardless of potential. The passage quoted above was prepared by the central bank at the end of October, meaning a full month after Q3 had ended. Japanese GDP in Q3? Minus 0.3%.

This is the second contracting quarter in the last three, meaning two out of the three so far in 2018. On a year-over-year basis, the economy has ground to a halt. It’s the timing of it that should be our global focus.

Japan’s economy peaked in Q3 2017. This had nothing whatsoever to do with monetary policy or even Japan specifically. That was the quarter when the eurodollar system began showing signs of distress. Japan, as Germany, is uniquely susceptible to trade disruptions; which is where turmoil churning within the global reserve currency system hits first.

Japan’s external slowdown predates any trade war concerns (by a lot). Growth in Final Sales of Domestic Product, for example, a GDP component that includes export sales, peaked in Q2 2017. It has been nearly flat over the last year, too.

QQE has been an utter disaster. Economic growth during its more than half decade run has actually been worse than the overall “recovery” as a whole from the 2009 trough.

The BoJ now practically owns companies and financial markets with what to show for it? GDP growth over the last five plus years since it started has been 0.9% per year compared to 1.5% since Q1 2009. Caught up in the mess are the regular Japanese citizens who are being stuck with the short end of the stick. And it’s not even close.

Since QQE, consumer spending growth has disappeared altogether. The opposite was supposed to happen, what with the inflation expectations supposedly attached to so much “money printing.”

This is because Japan’s economic fate has never been tied to the BoJ one way or another. Every single time the Japanese economy, meaning the global economy, begins to take a step forward (reflation) it doesn’t get very far for very long (eurodollar squeezes). The Japanese people, like Italians, Brazilians, or Americans, can sense these changes at the margins in a way that central bankers just aren’t capable (ideology).

It’s a total disaster not because QQE or the first QE in 2001 was the cause(s), rather by keeping the same ideological blindness in place nothing else is ever tried. There is never an honest search for answers. Central bankers can’t even admit there is a problem, even the obvious one for Japan in 2018.

The whole economic system rots for lack of imagination. And what Japan’s plight proves most of all is that it can go on and on far longer than you might otherwise think possible (a recovery has to happen at some point, right? NO.) It’s something out of Keynes; the economy can go without legitimate growth far longer than any peoples can remain rational.

For good measure, Destatis, Germany’s government bureau responsible for producing that country’s GDP estimates, also reports today a negative number for its last quarter (Q3). It is being dismissed as emissions and climate/weather, but Japan’s concurrent weakness shows otherwise. This is a growing global downturn.

This year is proving to be a trainwreck in too many important places. It was supposed to be the arrival of worldwide recovery. Worse, too many arrows are still pointing down for 2019. But you wouldn’t know it from the Bank of Japan, ECB, Federal Reserve, etc. Not until they are forced into some honest assessments for once.

What I wrote in 2016 still applies. There is plausible path back to full and complete recovery. It just has nothing to do with QE’s or even Economics, except the total purge of any thoughts about QE’s as well as to transform Economics back into economics (starting with monetary economics). It is purely political. And this is why populism becomes increasingly radical (in both directions, left and right) as all this economic pain goes unanswered each and every time.

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Portland City Council Rejects Mayor’s Constitutionally Dubious ‘Emergency Ordinance’ on Protests

The Portland City Council voted 3–2 yesterday to reject Mayor Ted Wheeler’s proposed “emergency ordinance” to crack down on violent protests.

The decision is a win for First Amendment advocates, who had expressed concern that the ordinance curtailed constitutional rights and gave Wheeler too much power.

Two of the city’s five commissioners—Amanda Fritz and Chloe Eudaly—had already expressed their opposition to the proposal. The swing vote was Commissioner Nick Fish. While Fish ended up voting no, he didn’t object to Wheeler’s motives. “He’s right to focus on solutions to the unacceptable violence on our streets and the rising tide of hate and intolerance of a vocal minority,” he said, according to KATU.

But Fish felt there are better ways to keep the peace. “I’m not convinced we’ve done everything we can with the tools already at our disposal,” he said, according to Willamette Week. “That includes arresting people who violate our laws.”

Wheeler proposed the ordinance last month after a series of violent incidents between left- and right-wing demonstrators. The latest of these clashes involved the right-wing group Patriot Prayer and antifa counterprotesters. Some protesters exchanged blows, leading police to intervene with non-lethal ammunition, though no arrests were made.

Following that clash, Wheeler proposed his emergency ordinance, which would have permitted the police commissioner (a position Wheeler holds as mayor of the city) “to issue reasonable time, place, and manner regulations to govern demonstrations” when he “anticipates a high risk of danger and violence.”

Wheeler would have been allowed to issue such regulations if groups with a history of violence against each other plan to protest on the same day, if the safety of “participants and bystanders” is in jeopardy, or if he thinks a demonstration would lead to “interference with the ability to access public property, or the disruption of public services.” He also would have been able to restrict demonstrations based on “substantial likelihood of violence.”

Under the ordinance, a violation of Wheeler’s restrictions could lead to arrest and would be considered a misdemeanor.

The American Civil Liberties Union (ACLU) opposed the ordinance on the grounds that it “grants broad authority to the mayor’s office to regulate constitutionally-protected speech and assembly with no meaningful oversight for abuse,” according to ACLU of Oregon Legal Director Mat Dos Santos.

The National Lawyers Guild also opposed the measure, as did many other groups. Three of those organizations—the Western States Center, CAIR-Oregon and the Oregon Justice Resource Center—proposed a privately funded alternative that would use “education, law enforcement training and creative litigation strategies” to end violence at protests, the Week reports. The groups claim that Wheeler rejected their proposal.

Following the city council’s vote yesterday, Wheeler told KPTV he doesn’t intend to try again, or at least not with the same bill.

Good. Reason‘s Christian Britschgi has explained why simply holding a rally cannot be considered an incitement to violence. There is certainly a history of violence breaking out at Patriot Prayer events, but officials shouldn’t be able to infringe on free speech because they think this might happen.

So how can authorities maintain the peace while also respecting the First Amendment? Well, they could always enforce the laws they already have that prohibit assault and battery. As Britschgi argues:

Enforcing those laws would be a far better way of dealing with the admittedly troubling street violence situation in Portland, rather than passing emergency ordinances that endanger bedrock constitutional freedoms like speech and assembly.

This wasn’t Wheeler’s first attempt to restrict freedom of assembly. Reason‘s Scott Shackford reported last year that Wheeler said the city would stop giving rally permits to some alt-right groups altogether.

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Oil Algos Panic-Buy Despite Biggest Crude Build In 21 Months, Production Surges

Update: The machines saw a dip and panic-bid it…

*  *  *

After bouncing modestly following a record 12-day losing streak into a bear market, last night’s API-reported surprisingly large crude build spooked WTI back down once again. Those losses have been reversed after a sudden plunge at 5amET, since then WTI is a one way street higher (above $57).

“The fact that U.S. crude-oil stocks are still rising sharply shows that the oil market is already oversupplied,” Commerzbank AG analyst Eugen Weinbergwrote in a report.

API

  • Crude +8.79mm (+3.2mm exp) – bigest build since Feb 2017

  • Cushing +726k (+2.5mm exp)

  • Gasoline +188k

  • Distillates -3.224mm

DOE

  • Crude +10.27mm (+3.2mm exp) – biggest build since Feb 2017

  • Cushing  (+2.5mm exp)

  • Gasoline -1.41mm

  • Distillates

This is the eight weekly crude build in a row (and the largest build since February 2017)…

Overall, US Crude inventories have risen for 8 straight weeks, rebounding back to the 5-year average (and well above the 1980-2014 normal range)…

 

After last week’s surge in production (+100k), US is now ahead of both Russia and Saudi Arabia…

 

WTI hovered around $57 as the DOE dats hit and kneejerked lower

Amid oil’s recent slide, trading desks were abuzz with chatter of “negative gamma.” The term describes how traders frenetically sell futures to manage their options exposure, driving down prices and bringing more options into the danger zone.

For now the massive squeeze in the Nattie-Crude pair is unwinding…

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As PG&E Implodes, These Hedge Funds Are Getting Destroyed

One day after investors were stunned when troubled California utility, PG&E, draw down the full available balance of its revolving credit facilities, sending the stock into a tailspin, the pain has continued, and on Thursday, PG&E shares have extended losses, last down more than 21%, and tumbling more than 50% in the past week, with Mizuho the latest bank to cut its price target, saying company could face wildfire-related liabilities of $13 billion

To be sure, things aren’t looking good: as Bloomberg reports, 15 minutes before a fire was reported among the trees north of Sacramento – the spark that would explode into the deadliest blaze in California history – a PG&E power line in the area went offline. A week later, at least 56 people have been found dead – and PG&E Corp. is facing its gravest crisis yet over whether its equipment has ignited another devastating wildfire.

While the exact cause of the fast-moving Camp Fire may not be known for months or even years, in Sacramento and on Wall Street, the reckoning for PG&E is already at at hand.

After limping out of bankruptcy in 2004, California’s largest utility is once again under pressure. Underscoring its financial straits, PG&E said late Tuesday that it had exhausted its revolving credit line. It also said that if it’s held responsible for the fire that destroyed the town of Paradise, the liability would exceed its insurance coverage.

That comes as the company is already facing as much as $17 billion in liabilities, according to a JPMorgan Chase & Co. estimate, from a swarm of wildfires that charred parts of Northern California wine country last year. State investigators have blamed PG&E equipment for sparking 17 of last year’s blazes. A report on the most destructive of those is still outstanding.

The reason the stock is collapsing is that with two sets of devastating and deadly fires within 13 months, Wall Street is confronted with the question how PG&E can sustain billions of dollars of liabilities that could keep piling up. The San Francisco-based company lost about $12 billion in market value since the Camp Fire started through Wednesday, when it the shares plunged the most in 16 years. Holders of $18 billion of bonds that are currently rated investment grade, are bracing for the utility’s credit ratings to be cut to junk, making PG&E one of the biggest “fallen angels” in years.

“Investors are understandably beginning to question the wisdom of continuing to commit capital to California’s investor-owned utilities absent a more comprehensive wildfire liability policy fix,” said Jonathan Arnold, a utility analyst for Deutsche Bank AG.

Some are even bringing up the dreaded B-word amid growing concern about the prospect, however remote, that PG&E might be forced into bankruptcy again.

“The risk of bankruptcy is very real for these guys and with each passing wildfire that risk increases,” Jaimin Patel, a credit analyst for Bloomberg Intelligence, said in an interview. “They will almost certainly need help from the state.”

That is the last thing some of the smartest money on Wall Street wants to hear. As we found out in yesterday’s deluge of 13Fs, in the third quarter a flurry of value investors decided to throw caution to the wind and buy up PCG stock. Some, like legendary value investor Seth Klarman added a whopping 14.5 million shares, bringing its total to 19 million as of Sept 30.  Other prominent names that have gotten crushed by the collapse in PG&E stock include Viking, Blue Mountain, Appaloosa, Millennium, Silver Point, Citadel and many others who added a lot of PCG shares in the third quarter.

Meanwhile, at a time when the market is already punishing most of the 2 and 20 crowd, the following chart – one which strongly hints at an upcoming bankruptcy – is the last thing any of the names shown above want to see…

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Proposed U.N. Test Ban on Gene Drives Is Idiotic

MalariaMosquitoesSuphatphongKoetnamsaiDreamstimeA draft resolution would revise the U.N. Convention on Biological Diversity to call on governments to “refrain from” releasing organisms containing engineered gene drives, according to the MIT Technology Review. A gene drive is a technology that can rapidly propagate a particular set of genes throughout a population, including genes that cause sterility in a species.

Earlier this year, researchers at Imperial College London reported doing just that in malaria-carrying mosquito species. The genetic construct engineered into the mosquitoes caused female mosquitoes to become sterile. Passed along by engineered male mosquitoes, lab-grown populations went extinct after seven to 11 generations. Crashing populations of malaria-carrying mosquitoes in the wild could annually save half a million lives and spare hundreds of millions from the misery of this disease.

The proposed ban is supported by some of the more radical anti-science activist groups. For example, the luddite ETC Group (along with Friends of the Earth) have launched a petition that calls “for a global moratorium on any release of engineered gene drives. This moratorium is necessary to affirm the precautionary principle,* which is enshrined in international law, and to protect life on Earth as well as our food supply.”

To counter this nonsense, gene drive researchers have issued an open letter that strongly pushes back against the proposed ban, which would apply even to experiments:

Closing the door on research by creating arbitrary barriers, high uncertainty, and open-ended delays will significantly limit our ability to provide answers to the questions policy-makers, regulators and the public are asking. The moratorium suggested…would prevent the full evaluation of the potential uses of gene drive. Instead, the feasibility and modalities of any field evaluation should be assessed on a case-by-case basis….

Member States can enable the Convention on Biological Diversity to be a platform for knowledge and experience sharing. We should not decide against the use of a tool before potential costs and benefits can be fully evaluated. We urge governments to ensure the decisions taken at the Convention on Biological Diversity’s next meeting do not amount to a moratorium on gene drive research, but instead offer a balanced and constructive way forward for Parties to learn and monitor this field of research.

The good news is that since decisions require consensus, negotiators are unlikely to approve the ban, since some countries with biotech industries are expected to oppose the measure.

(*The precautionary principle is the idea that we should never do anything for the first time.)

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Treasury To Sanction 17 Saudis Over Khashoggi Killing

In the latest sign that the US government will defer to the Saudis regarding the investigation into exactly who was responsible for the death of Jamal Khashoggi, the Treasury is preparing to announce that it will levy sanctions against 17 Saudi nationals for their involvement in Khashoggi’s killing. That’s roughly equivalent to the 18 men who were initially arrested by the kingdom in connection with the “botched interrogation”.

Khashoggi

Among those who are expected to be sanctioned are Saud Al-Qahtani, a former top aide to Crown Prince Mohammad bin Salman and former Saudi consul in Istanbul Mohammed Al- Otaibi.


The report follows an announcement by the Saudi’s public prosecutor that the kingdom would seek the death penalty against 5 Saudis who played a direct role in the killing. The Saudi prosecutor hinted earlier that a royal adviser had a coordinating role in the killing, and that he was now under investigation. Though he declined to release the name, suspicion immediately fell on Al-Qahtani.

The impending US sanctions also followed comments from NSA John Bolton, who said the US didn’t find any evidence of Crown Prince Mohammad bin Salman’s involvement in the killing from the audio tape of Khashoggi’s death shared by Turkey.

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Nomura: Expect “Even More Insane” Price Action With “Extreme Short-Gamma On Both Sides”

One day after Nomura’s Charlie McElligott pointed out that the long-awaited credit contagion had finally emerged, courtesy of the blow out in GE bonds which has spread to both the IG and junk bond sectors, the market has resumed its turmoil, only this time the risk catalyst is the ongoing chaos over Brexit, and the potential ouster of Theresa May following a flurry of cabinet resignations.

Which is not to say that credit has been fixed: as McElligott writes in his latest note, the price-action in Credit markets right now is a very real “negative” development for risk-assets, and as highlighted yesterday “credit spreads” have previously been a TAME macro factor input for global risk-assets despite the tumultuous returns YTD. This can be seen in the blow out in junk bond spread, which have soared from a 10 year low to the widest since April 2017.

And, as the Nomura cross-asset strategist writes today, “cycle realities” are exposing cracks in Credit, “as the fact that US corporates chose to LEVER into the late-cycle for M&A and stock buybacks instead of DE-leveraging is now driving serious concerns (ratings downgrades, IG trading at HY spreads) and price-behavior asymmetry (stuff trading like the “trapped longs”)—we see this contributing additional downside pressure to risk-assets.

Which then brings us to the ongoing chaos equities, where yesterday we say more of the same performance “slow-bleed” and “death by a thousand cuts” with shorts again generally outperforming longs with Long-Short in a continued de-risk/gross-down mode according to Charlie, “with late-cycle leaders (and shorts / underweights) “Value” and “Quality” again painfully squeezing against legacy length in “Growth” and “Momentum

In short, hedge funds are scrambling for direction, praying for momentum, and can’t find either.

Worse, as we discussed yesterday, instead of participating in tactical “chase” behavior into YE, Nomura finds that the Macro community is now more actively shorting U.S. here on the increasing vulnerabilities, and instead of just looking for a convenient spot to “BTD”, sentiment has flipped with shorts now actively being pressed.

There is one important consequence of this reversal: unlike previously when funds were looking to ride the buying wave higher, many now appear to have given up, and as this market “chop” pushes into the late-month G20 volatility event of the Trump-Xi meeting, funds’ resolve to actually take risk back-UP is effectively “nowhere” with many funds acting “frozen” according to mcElligott.

And since no McElligott update would be complete without a look at the Greeks, here is what the latest Nomura numbers show:

  • S&P options are showing VERY defensive posture change since last week, -$520.5B delta (1st %ile since 2013) and -$18B of gamma per 1% move + or – (also a 1st %ile outcome since 2013)

What are the implications: as McElligott concludes, “this means potential for EVEN MORE INSANE price-action and VIOLENT up / down “chop,” with extreme short-gamma on both sides at a time where we sit near pivot-points for systematic de-leveraging and re-leveraging.”

Then again, as Goldman demonstrated yesterday when it attributed the violent moves in crude to “negative gamma”, this has become a catch phrase to explain pretty much anything in the market that no longer complies with conventional expectations. Whatever the reason, however, in light of the virtually nil liquidity in the market, we certainly agree with McElligott: expect increasingly “more insane” price action as more funds are forced to realize that no central bank is coming to their rescue this time around.

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